Scenario Planning in Crisis
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Wars, downturns, calamities, pandemics, and other crises drive businesses into uncertain situations, low turnovers, stagnant growth, unemployment, and even insolvencies.
These crises often arise uninformed. It is difficult to guide organizations through challenging circumstances and envisage the effects and severity of crises.
Financial planners and CFOs, though, try to confront these situations, but at times they remain clueless as to what will work in the near term and what should constitute their Strategic Planning for the long term.
Uncertainties caused by downturns and calamities necessitate immediate actions and adjustments in Business Strategy. Financial planners should work on gauging the effect of the crisis and revisiting business objectives, but they usually lack the tools or data to strategically model a crisis, recommend strategies, and plan immediate interventions. Besides, revising their planning in response to a crisis takes a significant time, revisions, and approvals.
The initial reaction to a distressing scenario is, more often than not, an unplanned response. A crisis or distressing situation necessitates answering a few key questions before jumping on to conclusions and haphazardly executing interventions that could backfire:
- Is it possible to somehow reduce stress during crisis?
- Are our teams prepared to use improvised Scenario Analysis tools?
- Would assumptions and analysis correct to some extent help?
- Can we measure uncertainty quantifiably?
- Should we have enough data to quantify uncertainty, make assumptions?
- Do we have the insights to predict scenarios and recommend course-correcting interventions?
To answer these questions and to ascertain the likelihood of crisis, its impact, and planning viable scenarios, senior executives typically resort to 3 strategic options:
- Do nothing.
- Plan for the worst, hope for the best.
- Consider all possibilities.
Senior executives have to critically weigh in the pros and cons of these strategic options before adopting a crisis planning and management strategy. Let’s delve deeper into these strategic options.
A riskier approach that executives often employ during times of uncertainty, downturns, and calamities is to do nothing but wait and see how things unfold. There is a great deal of risk involved with this approach, and the probable short, medium, and long-term effects during a crisis are too catastrophic not to address as soon as feasible.
A Do Nothing strategy precludes possible, crucial liquidity operations and other near-term initiatives that may benefit in the long run. A wait and see approach to manage a crisis may result in events that could impact and transform a business drastically.
Plan for the worst, hope for the best.
The next strategic option involves anticipating a single adverse situation and not pondering over any consequences beyond it. A number of organizations plan for a single worst-case scenario in the hopes that it will protect them from any unprecedented crisis situation. Such a strategy may lead to disasters.
Most executives fancy worst-case Scenario Planning strategy to manage risks. However, this approach does not work in normal circumstances or once the crisis settles. In fact, such an approach may make enterprises uncompetitive once the market takes an upside. Creating a single worst-case scenario, evaluating banks and asset portfolios on how they might react in various situations, and analyzing strategic KPIs against various situations should not be the only response to a crisis. In fact, ensuring preparedness for one catastrophic outcome is a myopic standpoint and may result in financial losses.
Consider all possibilities.
To deal with a crisis, executives should be able to predict all possible events and calculate their impact, which is not accurately appreciated most of the time until the disaster strikes.
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About Mark BridgesMark Bridges is a Senior Director of Strategy at Flevy. Flevy is your go-to resource for best practices in business management, covering management topics from Strategic Planning to Operational Excellence to Digital Transformation (view full list here). Learn how the Fortune 100 and global consulting firms do it. Improve the growth and efficiency of your organization by leveraging Flevy's library of best practice methodologies and templates. Prior to Flevy, Mark worked as an Associate at McKinsey & Co. and holds an MBA from the Booth School of Business at the University of Chicago. You can connect with Mark on LinkedIn here.
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