Our ability to predict the future with any real degree of accuracy is a complete illusion.
Just ask the people who lost a fortune in the dot-com bubble. Or the real-estate collapse. Or the stock market meltdown. There were no shortage of so-called “experts” on TV that continued to forecast sunny skies ahead even as the storm clouds were rolling in and the rain started falling. Of course all the experts now have perfectly sound reasons why the bottom dropped out of everything after the fact, don’t they? But that is not really predicting the future now, is it? That’s writing a history book.
One of my favorite business books of all time is “The Art of the Long View”, by Peter Swartz. In his book Peter deals directly with the concept of uncertainty and provides a fantastic process to help businesses plan for it. It’s called Scenario Planning. I liked the book so much that I hired Peter to come to Hewlett-Packard when I worked there and train our senior staff on it.
Here’s the deal in a nutshell. First, you can’t predict the future with any certainty – deal with it! Second, you wouldn’t want to “bet the farm” on your questionable predictions anyway. Third, why not focus your efforts on creating “multiple possible futures” (scenarios) and plan your responses accordingly as the scenarios unfold in front of you?
Peter says it best “The test is not whether you got the future right. The real test is whether anyone changed his behavior because he saw the future differently”.
I can’t cover Mr. Swartz’ complete scenario planning process in a short article like this. You should buy his book (by the way it is an easy read, what I call a perfect airplane book). But what I would like to do here is introduce the basic concepts, and then cover each area in more detail in subsequent articles.
The future is NOT about continuity -an unbroken series of events each incrementally following another in a clear unbroken line. If it were that easy, there wouldn’t be a problem, would there. The world is full of discontinuities and unpredictable events. It’s too complex for anyone to make sense out of it. Did anyone predict the fall of the Berlin Wall in the early 1990’s? In a matter of days? The answer is no. Theories maybe, but no concrete predictions. It was common knowledge that the Wall would remain in place as it had since the 1960’s until eventually the old-timers in the Communist Party died off. Continuity. No tectonic shift. Everyone was wrong. The Wall fell virtually overnight. What happened? “Discontinuity happened!”. And the world changed.
Let me introduce the basic concepts and terminology so we are all on the same page.
• Industries are driven by a handful of fundamental driving forces. 80% of the results are obtained from 20% of the fundamentals. Example: Real estate is driven by jobs, availability of land and the cost of credit. Everything else is on the margin.
• Driving forces can have different future states. For example the job market can get worse, stay the same or get better, to name a few obvious states.
• Scenarios are possible futures, created from a creative, and internally logical, collection of forces and states. Each scenario (up to 5 maximum) describes a possible version of the future. In real estate we are in a worse case scenario now, which few ever imagined would be possible.
• Signposts are early indicators that, if carefully monitored, can reveal impending shifts in the forces and states that would make one or more of the scenarios more likely to be accurate. A signpost for real estate was the home affordability index – it was out-of-whack for several years before everything crashed.
• Plans are responses the business would take in the event that each of the scenarios started to come true. Plans are “rehearsals” for the future. The collection of plans is proof that business management’s behavior has the potential to change, and hopefully would change, as one of the scenarios appears more likely than the others to come true.
• Response is the execution of the appropriate plan that best matches the reality as it unfolds.
I think that’s it for now. I’m going to leave you hanging. In the next article I will explain how each component is built-out – how it is all done from a practical standpoint.
Again, the key is not to try to get the future “right”. The key is to rehearse for several possible futures and get ready to change your behavior and assumptions accordingly. That is the power of scenario planning.
I “predict” you will find this an extremely valuable learning experience, and probably wonder why it’s not done more today in industry and government.
Tags: business planning, business problems, business risks, online business strategies