Planning for the Future: Scenario Planning and Forecasting During Times of Rapid Change

Best Practices to Implement When Scenario Planning: 

COVID-19 has affected the ways companies conduct scenario planning and forecasting and has uncovered many mistakes that companies make in this process.

To build an effective scenario planning model and react quickly to changing scenarios, organizations must consider all factors that could have a significant impact on their business:

1. Consider external environmental changes such as supply chain risk.

For example, COVID has drastically disrupted the supply chain, where a lot of shipping goods that used to come from Asia to North America have now completely stopped, and it has affected inventory levels across multiple industries.

2. Respond and adapt to shifting competitor landscapes.

Understand that competitors will likely release an innovation or new product that can disrupt your business. If this is not a scenario that you have considered in your model, you are likely to put yourself at a disadvantage competitively.

3. Take cues from other industries

People are easily get trapped by the repetitiveness of your industry when there might be a different industry or adjacency that you can take lessons from and apply to your business. Opening your mind to other angles outside your comfort zone will help you be better prepared for emerging trends and potential disruptions to the business.

To avoid bias in decision making around risk, make sure you assess the following for each assumption:

• What is the impact and magnitude of the risk?
• How likely is this event to happen? If it happens, how much of a disruption will this cause your business?

Assessing the risk of each scenario on this 2×2 matrix will inform how much weight to put into each scenario, making sure you avoid bias and assess the assumptions correctly and plan accordingly. After this assessment, you can develop a proper assumption for each scenario so that you can plan accordingly.

4. Keep all the possible factors in the model

Even though they may have low weighting currently, low-likelihood scenarios are still considered. You could change the weightings down the road when/if the environment changes.

5. Scenario planning doesn’t just fall on the finance team.

This type of strategic planning needs to come from the top management across various departments. While each function in a company can contribute micro-level driving forces and risks , they usually cannot identify cross-functional business risks effectively. It’s necessary to have an overarching view of the business to identify risks effectively.
To ensure the plans will not fall short, we need to involve all the top management and key stakeholders.

6. Don’t assume that the future will look just like the past

Have regular reviewing processes in place to review the assumptions that you put into each scenario. Things change every year, and drastic circumstances like the COVID-19 pandemic have changed the weighting of certain assumptions over the long term. Those dynamics of external factors will have to be built into the model, and then the internal teams can adjust that assessment accordingly. If there is no fire drill, you won’t be prepared for the real fire.

7. Have processes in place to define what you are measuring upfront and track performance metrics.

This enables the organization to constantly review their progress and make sure they’re on the right track. You can’t improve what you can’t measure!

How to Identify What Trends Will Affect Your Business and Your Scenarios:

1. Look at both internal and external forces that may affect the business, such as market trends in your industry and adjacent industries.

2. Be open-minded and be aware of the potential Technology trends that may affect your operations and understand the risks associated with them. Technology is everywhere and can cause disruptions in every industry, even in more traditional businesses that weren’t heavily technology-reliant in the past. Some prevalent trends that have emerged in the past couple of years include:

Cybersecurity
The COVID-19 pandemic and adoption of work from home and hybrid workforces have increased cybersecurity risks for all companies. Privacy and compliance concerns were top of mind for leaders across organizations, and leaders needed to be prepared to handle any cyber threat to their business.

Automation
In a recent project, our client’s industry hadn’t been exposed to technological disruption in the past. However, competitors were implementing automation to improve their operational efficiency when the client was still using manual processes. This set them behind and likely exposed them to new competitive risks. TPG helped them make sure their processes were standardized and optimized across the business to make them more efficient

3. Lastly, companies should analyze trends regularly to maintain that organizational muscle memory. The metrics should be measured and reviewed constantly, at least on an annual strategic planning cycle to review trends and risks consistently. Prepare your people, processes and system to understand and react to the results.

How to Use Financial Metrics to Gain Insight into the Current and Future State of The Company:

1. Focus on Leading Indicators instead of Lagging indicators.

A lagging indicator represents the history (i.e., revenue and profit margins). Traditionally, companies have looked at their income statement to see how well their financials are performing and use it to forecast the performance in the next quarter and year. However, what has happened in the past does not predict the future.

A leading indicator looks forward to future outcomes and events (i.e., customer satisfaction). In most businesses, satisfied customers are more likely to repurchase and recommend the services to their friends. Gather and maintain good customer satisfaction data such as an NPS score. This data can tell you which parts of your company the customer is satisfied with, and which areas need improvement to keep them coming back.

2. Focus on more than the financial metrics

Traditionally, a company’s back office or the supply chain have little interaction with the customers. But in a customer-centric environment, the supply chain and customer service response time have become two factors that will affect the customer experience. A company’s ability to meet customer demand effectively will inevitably affect their experience and, therefore, their opinion of the company. Is your supply chain too complex to turn around during a crisis? Do you have an alternative solution to get the products to your customers on time? Companies must prepare for these disruptions in their scenario planning and be able to pivot accordingly to mitigate risks to their bottom line.

Have a proper plan to prepare for customer feedback and dissatisfaction. React quickly to customer requests and respond in a way that meets their needs and diffuses the situation. Excellent customer service and retaining customers are more cost-effective than acquiring new customers.