Last Updated on Thursday, 15 April, 2021 at 10:43 am by Andre Camilleri
Dr Edward Firman is an independent economist and management consultant
The Cheshire cat in Lewis Carrol’s Alice in Wonderland remarked that “if you don’t know where you are going, any road can take you there”
In a more sombre mood, Winston Churchill warned that “he who fails to plan is planning to fail”.
In modern times, most public and business organisations have realised the value of forward planning to set out a direction for the organisation and monitor its success in achieving its goals. However, due to the many recent unexpected and unforeseen developments in the business environment such as the recent financial crisis and the current Covid-19 pandemic, the question arises as to whether it is useful or indeed possible to prepare business plans in such a volatile business environment, contradicting Lewis Carrol’s and Churchill’s views expressed above.
Management practitioners have coined the acronym Vuca, which recognises that the business environment today is Volatile, Uncertain, Complex and Ambiguous. The environment is Volatile since it demands that organisations react quickly to changes that are unpredictable and out of their control; it is Uncertain insofar as it requires them to take action without any certainty of the outcomes; Complex since it is dynamic, with many interdependencies and Ambiguous as it can be unfamiliar and outside their expertise.
Is it therefore useful or indeed possible to prepare business plans in a Vuca environment? In view of many management practitioners, it is even more essential to engage in business planning in a Vuca environment, provided that one does this in a flexible and creative manner – scenario-based business planning is a proven tool to achieve this.
In scenario-based business planning, a public or business organisation would recognise that its environment is indeed volatile, uncertain, complex and ambiguous and seek to identify some possible future scenarios and opportunities and threats, which may exist for it in each scenario.
The main steps an organisation should take to carry out a scenario-based business planning exercise are to first examine its external environment and internal situation and identify the main factors which can affect its future activities. The probability that each of the factors will happen, and the impact upon the organisation if they do happen, should next be assessed.
The organisation should then determine which factors have the highest probability of happening and the highest impact upon it if they happen – these are the critical uncertainties. One can next construct three to, at most, four future scenarios taking a base case, optimistic and pessimistic view of the likely future development of the critical uncertainties and develop business plans outlining the organisation’s response to each of the scenarios.
It is important to maintain flexibility in the scenario-based business planning exercise and revise the assumptions upon which the three or four scenarios are based as frequently as necessary as circumstances change. It is also important to ensure the full participation of the organisation’s staff members by involving them in workshops to construct the scenarios and by communicating the results of the exercise to them.
As we are all aware, Covid-19 has created an unprecedented business situation in so far as it has created an extraordinary Vuca situation with the business environment becoming volatile, uncertain, complex and ambiguous to an extreme.
How can scenario-based business planning help in this situation? Following the steps outlined above, the main critical uncertainties, which need to be considered in constructing three or four possible future scenarios may be considered to be:
• How long will the Covid-19 pandemic last? This clearly depends upon when the majority of the population will be vaccinated and community immunity achieved.
• How long will it take till the business world returns to pre-pandemic activity levels?
• What will the post-pandemic business world look like?
Nobody can give accurate answers to these three questions – one may take the view that the pandemic may last well into 2021, that the business world will return to pre-pandemic activity levels in 2022 and that in the post-pandemic business world there will be a far greater utilisation of digital and remote working systems, as well as much greater environmental awareness, but nobody can be certain of how and when these events will take place.
In this situation, flexible scenario-based business planning is the only way for business enterprises to move forward purposefully, with the base case, optimistic and pessimistic scenarios being rapidly revised as situations develop.
Risk and probability analyses are key tools to utilise in scenario-based business planning whereby an organisation would identify the main factors which can affect its future activities, assess the probability that each of the factors will happen and the impact upon it if they do happen. The organisation would then determine which factors it considers to be the critical uncertainties, namely those which have the highest probability of happening and the highest impact upon it if they do happen.
Following this analysis, the organisation can proceed to develop three or four scenarios based on different outcomes of the critical uncertainties and prepare outline business plans for each scenario. Thus Scenario 1 could represent the most optimistic outcome of the critical uncertainties while Scenario 2 represents the most pessimistic outcome; Scenarios 3 and 4 would represent intermediate outcomes.
In conclusion, there are several benefits in adopting a scenario-based business planning approach, a major benefit being that of identifying the critical issues facing the organisation and evaluating possible responses in a realistic but flexible manner, thus enabling public and business organisations to survive and progress in an uncertain environment.
Dr Edward Firman is an independent economist and management consultant providing strategic advice to public and business organisations seeking to map their way forward in the current uncertain business environment. He represents London Economics, the international economics consultancy firm in Malta and is a member of Malta Business Network International (BNI). BNI is a global business networking organisation which fosters stronger collaboration between businesses and the creation of new commercial opportunities.
