The butterfly effect
August 20, 2007
We’ve all seen and heard the unsettling headlines pointing to a business slow down in this newspaper and in national news “Home Foreclosures Skyrocket,” “Housing Market Continues Slump,” “Disappearing Sales Tax Revenue,” and “Credit-market Contagion From US Subprime Crisis Affects Global Economy.”
Most of us consider such trends to be too national to have local impact. However, the chatter in our local business community would indicate otherwise as people are citing slower decisions with contracts, capital expenditures, and other big commitments.
It is human nature to ignore the bad news rather than pay attention to it. Whether you think you are immune to this slowdown or not, consider the ramifications of disregarding such an economic change. Would you sleep better if you had a clear idea how to mitigate real risks in your business operations? One way to mitigate the uncertainty of the present is to plan for the future.
You may be familiar with the “Butterfly Effect” which theorizes that something seemingly innocuous, such as the flutter of a butterfly’s wings, may be the catalyst for something larger, such as a tornado. It is well worth your time to have a simple action plan for a couple of potential scenarios that could impact you. So if the impossible happens, all you need to do is implement the plan rather than scrambling to figure out what to do. A scenario plan will help you do just that.
Scenario planning is a way of simplifying a complex future by providing you the opportunity to ask the “what if” questions and to rehearse how you may respond should a certain event or trend happen in the future.
Scenario planning was first developed and used by the U.S. Air Force during World War II. It gained acknowledgement from the business world when Shell Oil utilized scenario planning techniques to predict the oil crisis of the 1970s. For organizations, scenario planning provides an invaluable opportunity to have a strategic discussion around key drivers and critical uncertainties in your operating environment.
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You may not always have time to do scenario planning, but consider doing a scenario analysis to push the bounds of your thinking. You never know what you might come up with!
The most significant trends likely to affect the larger world are those forces that are the big what ifs the driving forces. These cases tend to push your thinking and are usually classified as the big unknowns. The forces generally come in four flavors:
* Social dynamics: This area includes specific demographic issues such as how influential youth might be in 10 years, the growth of the Hispanic community, the tight labor market and the aging Baby Boomer generation.
* Economic issues: Macroeconomic trends and forces shape the economy as a whole, such as those headlines about the credit market, the bond market and the local housing market.
* Political issues: Outcomes of the legislative session impacted many local businesses as government cut back on spending due to lower sales tax receipts. Legislative changes can affect tax policies, regulatory issues, employment laws and the like.
* Technological issues: The key trends identified by research firm Gartner include mobile computing, change in telephony, the tight IT job market, business-process outsourcing, and regulatory compliance issues.
Identifying which of the big what ifs might impact your firm is the key to scenario planning for these forces. Some of these may seem farfetched, while others are quite a bit more likely. Consider, for example, how lenders have been raising requirements for home loans following the flood of defaults and late payments on homes purchased with subprime mortgages. This, combined with still falling prices across most of the United States, has deterred home buyers, leading to a string of poor results and losses for major U.S. homebuilders. Home ownership rates directly correlate to the economy and facilitate economic growth. Without economic growth, sales tax revenue decreases and results in less funding for government agencies. As mentioned above, most local governments did not increase spending, which affects everyone with a government contract and impacts the quality of services delivered by the agencies.
Although driving forces may present an array of opportunities and threats, there are also a number of smaller scenarios that hit closer to home. Calling these smaller scenarios is a bit of a misnomer because when they happen, they can happen quickly and with devastating consequences, so they don’t seem too small.
* What if sales are flat this year or if sales decline by 20 or 30 percent? Toll Brothers reported that sales declined 21 percent during the second quarter with “hesitant customers remaining on the sidelines.”
* What if sales increase rapidly, such as 25 percent or more? One local tech company is growing faster than they can fill positions to meet customer demands.
* What if accounts receivable collections slow by an additional 30 days? Like a local manufacturer that experienced significant problems with his customers, making it very difficult to pay his suppliers.
* What if banks increase interest rates by several percentage points? Nevada has held one of the highest foreclosure rates in the nation over the past four months 1 of every 232 households. This is a huge ripple effect for numerous industries.
* What if our biggest customer goes out of business or if we lose our biggest client? Most every business has a handful of key accounts that are critical to business success.
* What if we have a major public relations crisis such as a bad product or a lawsuit? These are crises that often come out of nowhere and could happen to any business or organization.
Here are the steps to running your own scenario planning. One suggestion this exercise need not be exhaustive. Begin by identifying the risks from the list of big “what-ifs” and smaller “what-ifs” and create a one-sheet for a few realistic, possible scenarios that your organization might face in the next few years.
* Define a timeframe for each scenario. Some events may occur in 20 years, some in two. But you can’t work with indefinite, open-ended scenarios.
* Establish the primary variable in your scenarios. Assess ways in which these variables may present opportunities or threats to your business. Check out the NNBW website for some great business statistics that highlight local current and future trends.
* Clearly articulate the scenario with a problem statement. On a white board, write down “What if ____?” and fill in the blank. For example, “What if we lose our biggest client this year, resulting in a 50 percent decrease in revenue? Or what if new housing starts decrease this year by 20 percent?
* Flesh out the details of the scenario. Clarify exactly the situation your company would be in.
* Develop a trigger point and an action plan if the scenario in Step 5 should occur. Know when to execute the action plan by having a clear trigger point. Then detail the top five steps you will take in the event the trigger occurs. These are designed to work regardless of how the future turns out.
Many of these choices otherwise go unnoticed if you focus obsessively on your organization’s present-day situation. With scenario planning, you’re imagining not just one, but a variety of future possibilities. All the great opportunities in the world aren’t enough unless you have contingencies in place. And remember, you’re not only preparing for unexpected threats but also trying to foresee unanticipated opportunities.
That butterfly’s wings may be a catalyst for a bright clear day that drives an unexpected increase in business for you.
Erica Olsen (Erica@m3planning.com) is a principal of M3 Planning of Reno. Her company runs MyStrategicPlan.com, a web-based strategic planning site for small and medium businesses. She is also the author of “Strategic Planning For Dummies.”