Platt Perspective on Business and Technology

Strategic planning and the process of strategy 5: contingency and scenario planning as a strategy methodology

Posted in strategy and planning by Timothy Platt on October 3, 2012

This is my fifth installment in a series on the strategic process and on strategic decision making per se (see Business Strategy and Operations – 2, postings 314 and loosely following for parts 1-4.) I have up to here, written about strategic planning and the strategic process, and how they fit into a business. But I have not really looked into how they are carried out. My goal for this posting is to at least begin that discussion, and one logical place to start is by outlining a basic process framework that is commonly employed: contingency and scenario-based planning and modeling.

Pick a variable factor that can be considered pertinent to your business’ success and that you can use for distinguishing a set of scenarios that your business might have to address. As a working example here, consider a farm that raises produce, as it considers its actions and how to prioritize them depending on rainfall for fields that would be difficult to irrigate from well water sources.

• The preferred crops that this farm’s owners would want to plant do best if their fields receive rainfall levels within some known range and especially during a crucial early growth period when newly sprouted seedlings would be most vulnerable. So one scenario for what to plant and when, and at what planting density might depend on rainfall falling in that sweet spot range as a “just right” alternative. Think of this as Scenario I.
• But what should this farmer and his family do if their fields receive much less rain? Then, depending on severity and timing of this rain deficit, they might have to plan for the extra expenses of at least supplementing with well water, which I assume here means filling water trucks and bringing them to the affected fields with the additional expenses that would involve. And this means reduced overall cash liquidity and a need to strategically reallocate and rebalance the farm budget as a whole, in still meeting priority and essential expenses. Think of this as Scenario II.
• Now consider Scenario III and in this case there is plenty of rain – too much and coming down in flooding downpours and causing erosion problems and damaging the crop.

Historically, all three have happened, along with variations such as strong winds and even stronger hail falls and just as new leaves are opening and those plants are at their most vulnerable for that. I perhaps arbitrarily group this in with Scenario III and because the outcome of this type of weather fits that same pattern.

Strategic planning with these three scenarios and their basic variations in mind would go into overall planning. And that might mean planting seed in those fields with early season storms and late frosts in mind and it might mean holding back some seed if at least partial early replanting is needed, depending on the crop and the normative season length for growing it to harvest. If this is an operation that under ideal or even just good conditions could grow out two crops in a season, that would be taken into account in this planning too. And so would allocation of cash reserves as a cushion in case the scenario that actually plays out calls for extra spending. And yes, this is a cartoon example where I do not, among other things allow for anything like irrigation systems, but my goal here was simply to develop a semi-realistic case in point.

And I make two basic observations here from this farm example:

1. It follows a three scenario model approach as is commonly used, but it does not employ a perhaps more standard worst case, normative case and best case three scenario schema.
2. Quite simply, the numbers of scenarios that are pursued and considered in strategic planning might or might not be three. And the criteria that are differentially planned in terms of in setting up these scenarios need not always fit that one single worst/normative/best case design.

So do not automatically start with that and then try and shoehorn your business and your planning into fitting it.

• Start by determining precisely what the most pertinent factors are that you have to account for in your strategic planning.
• Understand which are dependent on which as a matter of cause and effect, and which might simply be correlated but without being causally connected.
• Look at the causal factors in this as a starting point and at how their values would vary, and categorically where differences at that level would dictate different strategic and operational decisions. At this point you want to look for qualitative differences in business outcome depending on what values empirically arise for these factors.
• Develop your scenarios for your planning accordingly, and
• Keep this simple with the smallest number of scenarios you can work with to cover likely or significantly possible outcomes.
• The more scenarios you consider and the more finely nuanced the differences between them, the less value they actually bring to your planning; distinctions that do not make a difference are useless.

In this case this farmer would turn to long range weather forecasts and past weather history in assessing what scenarios to pursue in their planning, and which ones to set aside as too unlikely. And they would turn to their own farm’s history and to the experience of their neighbors, and the test case examples of prior years for predicting likely weather conditions this coming year. They would then consider their options and I have not even briefly mentioned some of them – insurance policies as one possibility and whether they would or would not be cost-effective to employ.

• Local experience and expertise would be vital here, and that applies to strategic planning and actually carrying out the strategic process in general.

And as a final point here, I note that you have to strategically plan ahead for the scenarios that would make sense to plan for. But you might not know which scenario if any is actually going to become your reality until you and your business are substantially into it with its outcomes and its challenges and opportunities.

I began a discussion of strategy in the face of change in Part 4: planning for and through the unexpected and I am going to return to that general topic area in my next series installment too, there looking at those issues in terms of specific processes deployed. Meanwhile, you can find this and related postings at Business Strategy and Operations – 2 (and also see Business Strategy and Operations.) And I also discuss strategy and how it point-by-point connects to operations at Startups and Early Stage Businesses too.

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