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The power of Scenario Planning (Executive Newsletter August 16th, 2019)
Friday, August 16th, 2019
A planning tool that’s been around almost forever is Scenario Planning. Depending on the industry you’re in, you may or may have not heard of this tool, but in industries with a long-term planning window such as oil and energy it is part of everybody’s toolkit.

It is well known that companies like Shell and BP are heavy users of this technique, but I have good reasons to believe that top executives at well-known tech organizations like Apple, Microsoft, and Tesla also use the technique to test their long-term strategy and measure their bets on key technologies.

Let’s take Apple as an example. We know from previous newsletters that Apple has been seriously pressured to find new sources of growth, and we even ran a growth checklist for them and found that most of the things they can do they are doing.

But one key technology that could unleash a lot of iPhone upgrades is 5G, the fifth generation of the mobile cellular network that promises a new wave of applications and mobile capabilities.

However, while most phone makers have rushed to launch 5G devices, Apple has surprisingly announced that a 5G iPhone will not be available until late 2020.

We know from credible reports that one of the reasons why Apple has been delaying their 5G phone is because the technology is not there yet.

As of today, mobile 5G modems take a lot of space and the power they consume ends up making bulkier, chunkier phones, something that obviously doesn’t play well with Apple’s design team.

Now, I can’t imagine Apple’s top executives making such a bold decision (not launching a 5G phone until later) without a good scenario planning exercise where they see how all the options could play out.

They know that all of their competitors will rush to try and take a chunk of Apple’s leadership in the mobile space, and they feel the enormous pressure for growth, yet they decided to sit on the decision.

Instead, they went ahead and acquired Intel’s 5G business so that they can make their 5G technology in-house.

To me, that decision seems to have been the result of extensive scenario planning.

In the book, I suggested that companies must retain control of any combination of activities that drive performance along dimensions that matter to customers and outsource the rest.

If you apply that rule to Apple, the fact that they are trying to internalize the design and manufacturing of their 5G components is an indication that they believe the technology will be a key differentiator for Apple in the upcoming years.

So, Apple understands the importance of 5G for their future, but they are taking the time to do it right, because they know that the next few years can only go a handful of ways and in none of those a new market leader could arise on the shoulders of 5G, because the technology is not there.

From the outside, it may seem that Apple has been slow to react to 5G, but I believe that what is truly guiding their decisions is close monitoring of how different scenarios could play out, a clear use of scenario planning on their decision making.

That’s why I keep supporting the use of scenario planning as part of your strategist’s toolkit since the tool can give you the ability to test your strategy against potential outcomes (uncertainties) over which you have no control.

How to use Scenario Planning
While an environmental analysis seeks to understand how the direction of identifiable trends may affect a company’s ability to profit in the future, there are, unavoidably, some "uncertainties" that no one can predict with accuracy.
For example, things like the results of a presidential election, the content of new legislation, or the standards that an industry will adopt.

There’s no way to predict the future, but as executives we still have to make decisions even if important factors are not well known.

To deal with these uncertainties and make better educated decisions, you can test your strategy through the lenses of different scenarios, based on the things that you DO know about the future, and the potential outcomes of those uncertainties.

In its simplest version, you would start by coming up with a pair of uncertainties and define two potential outcomes for each that could happen by the end of the period of evaluation – usually five, ten or fifteen years.

When you cross the two variables against each other (each with two possible outcomes), it results in four different combinations.

These four combinations, along with the trends that you identified in your environmental analysis, each form a potential scenario which is just a probable version of the future.

For example, let’s say that as part of an environmental analysis you have some doubts about whether or not electric vehicles will get national approval to operate in self-driving mode within the next five years.

The penetration of electric vehicles (EV) in the US is advancing increasingly fast, and there’s no doubt that these will become more and more popular over time. That makes EV penetration a trend, because you can accurately predict where it is going: up.

However, getting national approval for driverless circulation in the next five years is an uncertainty, since no one can provide a definitive answer for it.

To complete the analysis, let’s pick oil prices (whether they will be high or low) as your second uncertainty.

By crossing your two uncertainties against each other, you get four combinations of things that could happen by the end of the fifth year:

  1. National approval with high oil prices,
  2. National approval with low oil prices,
  3. No national approval with high oil prices, and
  4. No national approval with low oil prices.

The final step is to think about the implications of each of the combinations above and complement those with the future state of the known trends.

For example, if the EV industry gets national approval for driverless cars, AND oil prices are high (case 1 above), then you could assume that under that scenario the penetration of EV charging stations across the US will be extremely high, and that leading vendors of enabling technologies such as Lidar sensors and other vision equipment used in driverless navigation will become powerful.

Next, you follow the same process for each of the remaining combinations, and document each scenario based on the known information and the implications of the particular intersection of uncertainties.

You can now use these scenarios to test your strategy against each and adjust your plans accordingly if needed.

For example, from scenario 1 above, an EV manufacturer may conclude that they need to invest in a promising Lidar startup now to mitigate the negotiation power that vendors may have if that case materializes.

Scenario planning exercises can be highly complex and take months to complete, even years for companies in the oil and power industries. Because of this labor intensity, there are industries where the benefits don’t justify the effort.

But in cases where an uncertainty could make or break the business, it can be a powerful tool to help you make good strategic decisions.

From around the web:
A lot of things happening this week, so let's get right to it:
Nike Launches Sneaker Subscription Service for Children
Nike is debuting Nike Adventure Club, a sneaker subscription for kids. A great example of using price as a tool to retain existing customers, tackle new segments and even create new markets.

Three Years of Misery Inside Google, the Happiest Company in Tech
Sexual harassment. Hate speech. Employee walkouts. The Silicon Valley giant is trapped in a war against itself. And there’s no end in sight.

The ultimate guide to whether you should go to business school or not
According to successful CEOs, founders, and execs who've had to make the choice.

From Bill Clinton to Julius Caesar, here are 12 world leaders who were left-handed
Though left-handers make up just 10% of the world, many of them have very important jobs.

How Scale Changes a Manager's Responsibilities
As small companies grow to around 100 employees, the skills of their managers are challenged in new ways.

That's all for this week. Thanks for being a subscriber and happy summer.

Sun
 
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