The Oxford Approach to Scenario Planning can help small businesses adapt to turbulent environments.
Traditional forecasting methods are useful when the environment is reasonably stable, but empirical evidence suggests that such an approach is unhelpful when preparing strategy in business storms.
Underestimating uncertainties is intrinsic to most traditional forecasting models,and this causes decision-makers to either be unprepared for extraordinary events or unable to capitalize on extraordinary opportunities. In business storms, when the landscape is perceived to be too chaotic to make predictions, many managers blindly follow an urge to act and react, thinking that making one decision is better than making none. However, flying blind or by instinct is not a strategy .
The novel coronavirus was largely unexpected, outside the boundaries of normalcy, and was not predicted by businesses using forecasting methods and their customary planning cycles. However, contrary to popular belief, it was not necessarily a Black Swan event as something like this could be visualized, and prepared for, through the lens of scenario planning. That is how companies that used such an approach were much better prepared to seize opportunities during the severe economic contraction caused by COVID-19.
We know that Scenario Planning embodies the proactive engagement with uncertainties in the design of plausible futures, thus helping firms achieve desirable outcomes. Smaller organizations - firms with 500 employees or less – may believe that only the resources of large enterprises can afford this disciplined method to look beyond the horizon. In my practice as an advisor with smaller firms I have learnt that this is a common and dangerous misconception, especially for startups where unexpected turbulence may prove fatal.
The Oxford Scenario Planning Approach (OSPA), which promotes value co-creation and learning of new business opportunities in a timely fashion can be adapted to respond to the peculiar dynamics of growing companies. Here I offer two examples I have been involved with of how scenario planning has enabled startups to graduate to successful organizations.
Clean Program (“Clean”) is a health and wellness company with an unparalleled community of engaged customers. It is the brainchild of Alejandro Junger, a medical doctor and a New York Times best-selling author. During the first few years, Clean’s management relied on traditional projection models, which consistently indicated it would enjoy explosive growth. This was partly caused by their use of historical data to predict a probable future. In 2012, I helped Clean to embrace an adapted version of the OSPA. The scenario planning development process took approximately six weeks, and four plausible futures were presented within two months.
One of the scenarios depicted a future in which: (a) the market would rapidly become crowded; (b) operational effectiveness would make products more homogeneous; (c) the industry would be affected by adverse publicity and potential lawsuits; and (d) consumer skepticism of diet pills and detox programs would negatively impact both the industry and the company. Scenario planning played a critical role in defining the company strategy for the US market. When the above scenario began to materialize in late 2015, Clean was well prepared to strengthen the company’s competitive advantage, which eventually led to a partnership with Organic India.
A second example is Lazykey, a firm providing tech-enabled management of luxury properties. The company had developed a proprietary artificial intelligence system that extracts actionable data from videos and sounds to provide autonomous property monitoring. With my help, CEO Metiu Metev and his team deployed the Oxford approach to scenario planning in 2018 , and the collaborative learning process produced four plausible futures: (a) one with cataclysmic event causing business travel to plummet by 2021; (b) one where short-term rentals supply increased faster than hotel supply; (c) a third in which hotel lobbies won the battle against the short-term rental industry in three out of five US metro areas; (d) and finally a scenario in where regulations requiring the use of non-intrusive monitoring devices for public safety arise. This process prompted management to depart from the industry -dominant master lease model in favour of a more agile operating framework. Lazykey was thus able to navigate the current economic conjuncture successfully, and was named as one of the top three hospitality innovation firms in the United States by the largest industry intelligence platform in 2020 .
Financial forecasting methods generally rely on past performance, available information, and are influenced by certain expectations of the future. Under such a paradigm, futures become enunciations of a stochastic process, and in complex environments this may lead to dangerous outcomes.
Scenario planning instead enables firms to evaluate, and prepare for, plausible futures, thus promoting a thinking process that moves away from likelihood methods typically used in finance. Our Oxford colleague Rafael Ramirez writes that “scenario planning is about plausibility and not at all about probability. Percentages are not assigned to scenarios as the focus is on developing a richer understanding of the present possibilities afforded from multiple views and about possible futures”.
In complex or turbulent environments, firms need to rapidly assess the landscape and evolve. We understand that during challenging times managers cannot afford lengthy deliberations, and that is why we invite decision-makers to adapt the Oxford Scenario Planning Approach to consider plausible futures for small firms as well as larger ones. As we saw above, the OSPA can be deployed as an expedited, cost-effective process that helps managers to seize opportunities and mitigate risks in short time horizons.
Comments are welcome via email to firstname.lastname@example.org
The author has no equity, or other financial interest in the companies named. He wishes to express his thanks to Rafael Ramirez and Trudi Lang for their continued guidance and incisive comments.