Recession High Stakes And How Scenario Planning Can Help Pave The Way Forward

Corporate America is not feeling confident about their next big bet. The reason? Widespread indecision on where the economy is headed. Despite today’s highly unpredictable economy, forward progress is still possible but will require bold CEOs aligned with their boards of directors to succeed.

There’s a management methodology that can help create that alignment: Scenario planning. 

Scenario planning isn’t a new technique – it has origins in military intelligence and has been used frequently in industries that require massive, long-term capital expenditures (like energy, aerospace, and telecommunications). 

It requires time and resources to do properly – but it can be time and money well spent. It’s most useful in situations where multiple factors outside the planning entity’s control will have a material effect on strategy and tactical decisions. 

That’s where we are now economically. Three and a half years after the pandemic began, the economic story remains complex and subtle – and most executives don’t feel confident investing behind “complex and subtle.”  

Without clarity, few companies seem willing to do much of anything. No bold initiatives. No aggressive dealmaking. No visionary strategies. Nothing…interesting. Companies and organizations are not pivoting, rationalizing, investing nor innovating. They’re stuck in the doldrums, as if anything other than closing some locations and marginally cutting headcount is too scary to contemplate. 

Exacerbating the lull, CEOs, even those with enough confidence, rarely have enough board capital to embark on strategies with impacts beyond the next four to six quarters. The result is inaction, and inaction is almost never the right choice in unclear and uncertain circumstances. 

Scenario planning can help organizations prepare to take those first go/no go steps. It is an information gathering and quantification process that forces management teams to consider multiple possible future paths, probabilistically weighted, allowing for the creation of clear decision trees and thoughtful go/no go criteria.

Management teams can start by laying out three to five possible scenarios for their industry and organization, each based on a different economic direction. For example - Significant recession, small recession, flatline, strong recovery, hypergrowth – or whatever might apply to your sector.

For each scenario, list the criteria and leading indicators the team will monitor to confirm that the economy is moving in a certain direction. In effect, you’re saying, “We will believe/act as if we’re in our ‘Hypergrowth’ scenario when we see the following things happen: This GDP growth rate, this industry sales growth rate, this U.S. Fed interest rate action, etc. 

Remember - these are criteria to confirm the scenario for your team of logical, inferential people. The criteria should be easily verifiable rather than some vast sea of detailed and hard to understand econometric data. This part should be easy. 

The harder part is setting the thresholds for making decisions, as well as the strategy you’ll adopt when a scenario is confirmed: “If and when the data confirms ‘Hypergrowth’, we will immediately start construction on two new production lines.” 

Don’t build an infinite number of scenarios. This isn’t a NASA moon landing – this is thinking through your company’s three to five most logical paths in easy-to-understand and -identify scenarios. 

When a scenario becomes evident, plan to execute the related scenario strategy aggressively, but not blindly. Keep observing and keep connecting dots. 

The reason this kind of measured scenario planning works is simple. It reduces huge uncertainty to discrete, manageable risks with corresponding actions that allow observation and learning, all linked to trigger points to inform acceleration or course correction. 

Action and movement in any direction delivers information and, usually, progress. Even steps in the wrong direction can provide guidance – enough wrong-path data points can inform the right one. And a few steps in the right direction can lead to confirmation, iteration, strategy, execution, innovation and gains of market share and earnings.

This summer’s economic environment has felt and looked more like World War I trench warfare than the “shock and awe” moves and investments required to gain an advantage in a new era of technology, workforce composition, and dramatically changed consumer habits.  

But this period of economic uncertainty won’t last forever. Confident management teams can use the next 18 - 24 months to activate, engage and make progress that could create a huge head start on the competition as the economic fog lifts. That in turn could be the difference between a locomotive rolling ahead on the market share tracks for the next year and a half – versus trying to overcome inertia two years from now with your competitors bearing down on you.

In the end, the risks of inaction outweigh the risks of moving forward. The next generation of market leaders will spring from those taking considered and considerable action now.