Short-term Scenarios

In his speech and conversation with Stuart Crainer, Christian Rangen talks about how transformational companies build their ability to understand what is happening around, industry shifts, and rapidly shifting scenarios. We are facing the biggest crisis anyone in our generation will ever experience. For the last year and a half, we were working on a project named “Building the transformational company”. We identified principles of transformation, types of transformation, and so on, but one thing we saw was that companies were generally not that good at following weak signals, or the outliers, what is happening around, and at understanding industry shifts and rapidly shifting scenarios. Short-term scenarios: Strategy in turbulent times Turbulence: Turbulence in nothing new. For business leaders today, turbulence is something we should be more familiar with and more comfortable with than we currently are. Many research works in the past that have dealt with management in turbulent times, which say that turbulence has been around for a long while. Many companies are not prepared for it. One thing that we have seen in our work surrounding turbulence is the strategy shocks. We define strategy shocks as sudden, unexpected, wildly unlikely events, or series of events that fundamentally challenges the key assumptions that you have had about your company’s strategy. Strategy shocks have a really interesting response because whenever you face a strategy shock, all your existing strategy documents will be ripped to shreds. Overnight, they become invalid, which is very difficult to adjust to. With the implementation of the lockdown, it was seen that when companies and executives get exposed to these strategy shocks, they go through the three distinct phases of shock, cut and transform, where there are a few weeks of shock and denial, and then the next instant step, the reflex is to cut and downsize. The good companies can go through a transformation, which is very hard and challenging to do in that shock phase. We have seen this before, albeit differently, but with a similar pattern that we can lean on. For example, the oil crisis in 2014 pushed companies, regions, and countries exposed to the shock to build their transformational capacity in the next couple of years. With the implementation of the lockdown, it was seen that when companies and executives get exposed to these strategy shocks, they go through the three distinct phases of shock, cut and transform. Black swans The Middle East, the US, Norway, and a few other oil-based countries are facing an unprecedented double black swan. The first, of course, is COVID-19. Bill Gates in 2015 had already warned about a pandemic in the near future which would be a bigger threat than wars and nuclear weapons and had laid a roadmap, but few paid any attention and fewer did something about it. The second black swan is the ongoing oil war or the oil situation. The oil industry is facing its biggest crisis in 100 years and we are now looking at a potential scenario with oil prices falling to 10 USD a barrel. The pandemic and the oil crisis should not be labelled as impossible events. On the contrary, they were both foreseen and discussed in advance, but they were not picked up and understood by policymakers, decision-makers, and many companies. Short-term scenarios I propose to companies to develop a 30-day, a 90-day, and a 180-day scenario framework. It is fiscally and legally irresponsible not to be doing so. In each of those frameworks, one should have a best case, medium case, and worst-case scenarios using a tool called Scenarios Map. For each of the three types of scenarios, the tool allows you to fill out the name of the scenario, its description, the first signals to recognize it, the impact it could have, and the likelihood of it happening. It can be done online in a collaborative fashion with your teammates through different whiteboards available online. We use and recommend Miro; there you can upload the scenario’s map and start developing your first scenario. Next is the Scenarios Strategy Map, which helps you to ideate what to do about the potential scenarios, by allowing you to build a strategy for each scenario, starting from the financial impact to what kind of options do you have and what are the execution strategies you should focus on. It also allows you to discuss current contexts and strategic assumptions in one of its sections. We need to clarify our strategic assumptions because everyone is carrying bits and pieces of a larger puzzle and if we jump into decisions without aligning assumptions, we quickly run into some mismatches. Why this matters? This is important for the following reasons: As a management group and as the decision-makers, we need to take a step back and think about the future.We need to clarify our strategic assumptions because everyone is carrying bits and pieces of a larger puzzle and if we jump into decisions without aligning assumptions, we quickly run into some mismatches.These exercises help you to align your team, and you can do this on a 30-day, 90-day, and 180-day timeline.There is a need for this kind of exercise so that we can get the worst-case scenario on the table. As we have been working with this for the last couple of weeks, we have seen companies being able to expand their worst-case scenarios, and now they are doing an impressive job of getting those honest, frank, and disruptive worst-case scenarios on the table, and at least try to develop a response and a strategy for them.Finally, this matters because we need to find options and execute them. We cannot just sit and hope for this to pass or wait for a government bail-out. So, good companies and even quite large companies need to come up with new strategic options. This is very challenging but it has to be done. Stuart Crainer in Conversation with Christian Rangen Stuart Crainer: What is the biggest mistake big companies make in scenario planning? Christian Rangen: Everything we know around scenario planning is built on this idea that scenario planning is something you do for the future, five years, 15 years, 20 years out. There’s a lot of study material on how to do that. It is important now to have short-term scenarios, and we don’t have a lot of books and insights on that because it is pretty new. Two things are critically important- one, make sure we have a frank and honest discussion where these outlying ideas are allowed to come forth, and second, make sure that we have a broad set of perspectives in the room. Many times, it’s pretty much group thinking on steroids and there is very little external input and external information flowing into the process, so if a group is close to identical it makes sense to try to get some sort of external input. Crainer: Traditionally, scenario thinking and scenario planning have always seemed to be complicated. It involves a lot of data, a lot of complex scenarios; it is quite an esoteric discipline. What you are presenting is simple, practical, and down-to-earth. Rangen: That has been important for us in all of our work developing the strategy toolkits. We strive for simplicity and ease of understanding, and then we recognize that the complexity will always emerge in the content, in the uniqueness of the information that is being put in, but if we can have the frameworks clean, simple, and easy to use, that will help more companies at least get started and be successful on the way. Crainer: What kind of reactions are you getting from organizations when you go to them now and you tell them they need 30-day, 90-day, and 180-day-scenarios? Rangen: During the initial days of the pandemic, most just wouldn’t respond. They would still be in that early shock stage. Gradually, some CEOs were starting to get into it and get out of that little shock bubble. Now, there are a large majority of CEOs, board members, government representatives, and also Chief Strategy Officers who find them extremely helpful, but then they struggle with how they can apply them within their organization because the organization, at large, is now in a state of shock as well. Crainer: If you do a 30-day, 90-day, or 180-day-plan, how much would the plans differ from each other? Rangen: First, before doing the plan, we need to make sure that we do the scenarios. If you have a good case, a medium case, and a bad case but those three aren’t really that far apart, you need to understand and map out how wide do we see these scenarios going, and then your plans would just have to follow, and they can be significantly different. For most companies doing this today, they should end up with three extremely different paths. For example, one path is we will be able to maintain our workforce, a second path is we will have to lay off 30% of our workforce, and the last scenario is we will probably have to lay off 85% of our workforce. Crainer: How and where do you apply external trend drivers and influences in this internal process? The business doesn’t live in a vacuum so how do you weave in the context? The context now is very complicated, often unknowable. How do you relate the situation within the organization to the outside world? Rangen: First of all, it is very advisable to bring in outside voices because if the management team is doing this in a vacuum, you get this group thinking-on-steroids effect. If you are doing this properly, you need to make sure you have external input, you bring in maybe some of your partners, some analysts, some customers, some government representatives, so you make sure you have enough internal and external input. Energy companies are doing this now. They are much more actively reaching out to a large number of analysts, taking a step back and reading some of these pandemic playbooks, because there are a lot of playbooks out there, and some governments have really good ones but nobody bothered to read them. Now, they are taking a step back, reassessing the information that has always been there actively, seeking out all the facts, and trying to separate the emotion from the intelligence. Crainer: I can see the perception from within an organization, especially in a time of crisis. It is very difficult to know who to turn to. Rangen: I guess that varies. Some organizations would probably be happy enough with just their ideas and thinking, but there are also a growing number of organizations that are actively reaching out. There is an interesting observation around the role of the boards, and it is seen in the last few weeks that boards aren’t working. They are not doing what they are supposed to be doing, and they are not able to respond swiftly. For those who are working with or interacting with the Board of Directors, it is good to ask questions about how you can help and how you can enable the board to do its job in times like this. Crainer: What should a board be doing? Rangen: Depending on the situation, every board has a different set of challenges, but some of their tasks should be more frequent meetings, daily calls, managing liquidity for all its worth, and finally, making sure that they are working on the right assumptions, right scenarios, and right strategies. Crainer: It reminds of the 10th man rule. When nine people agree on an approach, it’s the duty of the 10th person to assume the exact opposite will happen and begin to build that plan. To some extent, are you fighting with human nature? Isn’t human nature to assume that a crisis is not going to happen and not plan for it? Corporate history is full of companies that didn’t plan for a crisis. Rangen: I think the 10th man rule is very applicable now. The 10th man rule should not be applied only after a crisis has revealed itself. By then, it’s too late, so you have to have that 10th man on good days as well as bad. We are seeing a complete failure of government in Western countries. As we have seen most Asian countries dealt with this well. We all know that Korea and the US had the report of the first COVID-19 breakout on the same day, but how differently they responded. The signals can be as clear as you want, but if the organization isn’t agile enough to listen, understand, and respond, it does not matter. Thus, the big question here is, how do we build more organizational agility versus challenges, big and small? Crainer: You talk about three types of transformation- shock, shift, and evolution. I presume your tools are equally applicable, and the more dramatically applicable when there is a shock, but I presume that you’ve got other tools that you would use in a shift situation or an evolution situation. Rangen: Our work has been going on for many years, and we have found there are three distinct types of transformations- the shock, the shift, and the evolution. The shock is what happens when there is a massive external shock, so one example would be Nokia, and by the time they respond, it is pretty much too late already. They call for a massive disruption internally but it is almost impossible to pull off. The shift requires foresight and bold leadership, so Adobe’s shift to the cloud is a good example of that, but it’s still a process that takes five to seven years. The evolutionary path takes between seven and 12 years, 10 being an average, but it is a much more managed, well-executed, step-by-step process. The traditional tools that we have around transformation are really hard to apply when in the shock stage that we are at today. Crainer: In your experience, how fit are most organizations in dealing with turbulence? Rangen: We have seen some people discuss what companies have been doing in terms of share buy-back. The airline industry is a really good example. They have spent so much of their available cash from their share buy-back, that as soon as they get a little bit of a bump, they can’t handle it, so we have these massive structures in terms of productivity and employment but from a balance sheet point of view and the financial strategy point of view, they just can’t take even a little bit of resistance. Therefore, I think this crisis is going to uncover a few things, one is the financial risk that we have seen happen as a consequence of share buy-back and the second is the integration of global supply chains. There is going to be a lot of home shoring and back shoring as a consequence of this. We are also going to see more scrutiny around the resilience, or what Roger Martin calls, having flexibility in the system, having some more resources in place to handle rapidly changing situations. Crainer: What is the one thing you would like for everyone to take away from this? Rangen: This is probably the biggest crisis and economic shock of our generation, and I fear for the economic and political consequences in both the medium and long term. Like any situation and any crisis, it can be managed, so I would encourage people to have a goal at the scenario maps and see if these can help you get through. If even one company gets a better grasp of the situation because they have applied these scenario maps, it would be amazing. It would mean they have gotten the decision-makers together and they have discussed and worked through it. So, even if it is a massive crisis, one can navigate through it by thinking about different short-term scenarios.

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