Why “Scenario Planning is Critical”
A few years ago, I was working with a group of dealerships that were seeing record equipment sales, service shops were backed up, parts were hitting record sales and oh did the profits keep coming. What a great place to be or is it? Depends on how much you are paying attention and the experience depth of your leadership team.
When I met this team, they were all very happy about the business environment, they were patting themselves on the back for all the great things that were happening and yes, they were getting “Spend Happy”. New trucks, a better sign, building expansions, pay increases, big discretionary bonuses, lots of free giveaways for the sales team, big dinners with clients, and so on and so on.
In my initial conversation with the leadership team they all seemed to believe the good times would never end. I simply said so what if it they do and it’s a more serious market correction then we have seen before. The markets were at unnatural highs so is this a sign for a severe correction? That’s when they looked at me like I was a little out of touch with their reality, and this is when I introduced the senior team to “Scenario Planning”
Over the next week we started to discuss what could go wrong in the market, with sales volumes, our customers markets, etc. How big of a market correction could we stand before we were in very serious trouble? In the “Scenario Planning Exercises” we took our current operating statements and we modeled what they would look like if something happened. We call this “Stress Testing” the Operating Financials and Balance Sheets.
Once we had agreed on a worst-case scenario, I plugged the numbers into the financial model and guess what? Yes, the results were dismal under today’s cost structure and expense culture. The General Manager, who was an experienced operator, realised at that moment he made the wrong assumption about his young team. This team of excellent young managers had never been through a market correction or a recession. How could they be expected to see the dangers a head with all this great success!
Over the next few weeks each of the managers was asked to meet their teams and explain the “Scenario Planning” exercise and the outcomes. They were tasked with developing a team plan that would ensure the health of the business under adverse market conditions. When we had our next “Scenario Day” as they called it, what an amazing change in thinking appeared. In the process they found lots of unnecessary financial fat that they just carved out and they all had a moment of self-reflection that saw their “Spend Happy” culture as a poison creeping in.
Once we agreed on and finalized the plans, we agreed to put the “Scenario Plan” in the drawer and revisit the exercise as a regular part of the annual budgeting process. The most important two messages I left with the team were: when things go bad having a thought through plan prevents a lot of dumb decisions when panic sets in, and always build your cost structure so you can still make money at the bottom of the market.
Fast forward six months and what happens, the 2009 Global Financial Meltdown!! When this hit our markets, the drop-in sales volume was a catastrophic -65%!! Because we had experienced the “Scenario Planning Thought Process” we had adjusted our spending habits, brought more discipline to our cost structure and most importantly had a plan ready, and yes, we managed our way through without losing any money that year and the following. We actually came out the other side a better and stronger team and a stronger business.
So, can the “Good Times” kill your business? It sure can and it did to many during the 2009 meltdown. But it doesn’t have to!
Scenario Planning is an extremely effective way to build strategy, test your strategy and test your current operations, financials and balance sheet. It is also a very effective way to teach your teams about risks and opportunities that they may not have in their experience toolbox yet. That’s adding real health to your business.
If you’d like to discuss how we can assist you and your business, get in touch with John Higgins, the author of this article, at jhiggins@scpg.ca