Assumptions about the future – scenario planning
I recently read a science fiction book written in the 1940’s. At one point in the story a spaceship arrived from another plant bringing with it, among other things, the mail. Isn’t it wonderful that a book set in the distant future has the mail arriving like a stagecoach from the 19th century? It illustrates that things change, often in ways that are beyond our imagination. We need to keep this in mind when making assumptions about the future.
When making forward forecasts we have little choice but to base these on what has happened in the past. It’s all we have. This lends a linear character to our assumptions. They describe what will happen if nothing much changes. Now, when did that ever happen?
The future is non linear, meaning our assumptions about it will always be wrong. This isn’t a big deal. In fact we should expect it. The challenge is not to make accurate forecasts but to know what you will do if they prove wrong.
A lot of press stories are driven by whether results are ahead of, or behind, the forecasts of companies and policy-makers. The implication is that inaccuracy is evidence of incompetence. Well, maybe. It is common currency that this approach is harmful because it encourages companies to focusing on short-term goals at the expense of the long-term. This, I’m afraid, is well-meaning but wrong. Firstly there is the challenge from Jack Welsh that ‘You have to eat short-term to survive long-term’. Secondly it assumes long-term targets are a good idea (see above). But mostly, it misses the point. It isn’t the missing a target or assumption that’s the problem, it’s the lack of plan of what you’ll do in the circumstances.
The important thing is to be alive to the possibility your assumptions about the future might be wrong and that therefore you should be poised to react quickly should this be the case. In such circumstances you want your focus to be as short-term as possible.
Instead of giving forward guidance to markets about expectations of growth or profits I often think it would be more honest for companies to say ‘This is what we expect, and this is what we’ll do if we’re wrong’. It is painfully obvious sometimes that management don’t know what to do when their assumptions prove wrong, and this, not short-termism or innaccuracy, should be the proper focus of our criticism.
If companies seem paralysed by unexpected changes in direction, it’s most likely they had not taken scenario planning seriously. Few do. What passes for scenario planning in many cases is a superficial tweak of a few variables up or down 10%. Rare is it to consider changing assumptions by 50% or 100%. Rarer still to give serious thought to what the company might do in the circumstances. And never do you hear about scenario plans of the kind that involve a change in leadership, exiting a market or even selling the company. Yet this is often what eventually happens.
Taking scenario planning seriously is difficult. If you can’t imagine oil at $30 a barrel it’s impossible to persuade yourself to work through what you’d actually do. When we reach scenarios that seem ridiculous, we stop listening. Of course, that doesn’t mean they won’t happen, it just means we will be unprepared if they do.
If however we can make the imaginative leaps required, we will find ourselves better prepared for the inevitable surprises the future has in store for us. It might not change the outcome or indeed our response, but it will mean we respond quicker, offering the opportunity to shape events rather than be shaped by them.