This is an updated version of a post originally published on the Strategic Piece blog on October 27th, 2020
As we approach the fourth quarter and the end-of-year target chase heats up, our thoughts turn to next year. Is our vision for the business still valid? Does it need adjusting or extending? What targets should we set?
Stating the obvious: Extrapolating 2022 for another 12 months – which might have worked in previous years – doesn’t sound like a winning approach.
Let’s explore some key questions that every business will have to wrestle as we try to plan. We never have all the answers but starting the dialog sooner rather than later feels important.
For several years, there has been a strong case for scrapping the annual planning process altogether. As the COVID pandemic unfolded, followed by geopolitical unrest and financial crisis, many businesses have been running quarter-to-quarter—if not month-to-month—for almost three years, so why not keep that going?
For starters, it creates fatigue. We just can’t keep working like this forever.
Many of the process and lifestyle changes that we’ve embraced are worth preserving but the overall level of uncertainty, anxiety, and short-termism needs to get dialed back.
We may not be able to plan with the same level of rigor or confidence as we used to in the past, but some degree of long-term strategy and forecasting is needed for our businesses to function healthily.
Time spent planning also forces us to appraise our current reality, juxtapose it against our vision, and get real—to a degree of our choosing—about the situation.
Taking stock is an essential precursor to planning and carries its own worth.
I like to start the annual planning process by reconnecting with our vision for the business.
Where do we want to be in 3-5 years from now?
After a stretch like 2020-2022, your vision statement might require more repair work than usual. What sounded achievable and exciting a couple of years ago might seem far-fetched or irrelevant today.
If so, step back even further and reconnect with your company’s purpose.
Your purpose—the “why” that gets you out of bed in the morning and motivates your team to strive—should endure. If not, you’re in an existential crisis and need to get that sorted out before planning anything else. I’d be happy to offer suggestions, but it’s beyond the scope of this post.
Once you’ve reestablished why you’re in business, get really clear about where things stand today. An honest, realistic, shared understanding of your current situation is the only solid place from which to plan forwards.
Then, craft—or adjust, if your earlier version is still workable—a vision statement that captures how the world will look in 3-5 years’ time when your company successfully executes its mission.
Your vision should be ambitious and attractive enough to get everyone excited but not so grand that they dismiss it as unrealistic.
My favorite metaphor for creative tension is a rubber band, stretched between the status quo and your vision.
If your vision is too close to current reality, there’s no tension in the band and nothing moves. If the vision seems too far from current reality, the band stretches too much and snaps.
Healthy creative tension that propels the organization forwards happens when the gap between current reality and vision is sufficient but not excessive.
So, start by refreshing or redefining your vision statement in a way that fosters healthy creative tension among your team.
No plan of operations extends with any certainty beyond the first contact with the main hostile force. – Helmuth von Moltke the Elder (translated by Daniel Hughes et al)
Armed with a vision of where you want the business to be in3-5 years’ time, break the journey into one-year legs and establish intermediate milestones.
In this way, you’ll be able to tell each year whether the business is on track to realize the vision in the desired timeframe.
How well did that work in 2020? Or even in 2022?
In truth, you’re unlikely to get everything right in a “normal” year, let alone when multiple improbable events conspire to wreak havoc throughout the world of business.
Even relatively limited or transient disruptions can knock your business off track.
For those situations, we can develop contingency plans to be dusted off and implemented under a range of “what if” scenarios.
However, contingency plans are designed to bring the business back onto the original path after something predictable—and usually negative—has been dealt with overcome. For example, if a critical machine fails at our production facility, causing a reduction in output for several weeks, additional shifts can be added to make up the shortfall once the machine has been repaired.
Years like 2020, 2021, and 2022 amount to something much more than a predictable negative event.
Macro events that disrupt the fundamental operation and supply chains of society throw our whole plan – vision, status quo, and rubber band – into disarray.
So, what use is a plan if that’s the state of the world in which we live?
Not much, indeed. But the problem lies with the word “a” not the plan.
In the face of elevated unpredictability, a singular plan makes little sense.
We need a range of plans that we’re ready to follow, depending on the circumstances. Then, we can pick one and see how things go.
We need to discuss scenarios.
A scenario is any sequence of events that we care to dream up.
In the context of annual planning, a useful scenario is a plausible sequence of events that would have a particular impact on our business.
Consultants make a handsome living, guiding management teams through scenario planning exercises. Much like legal matters or investing, please consult an expert before making any significant business decisions based on what follows. These are my general thoughts, not a recipe for guaranteed success.
If you were to chart the course of 2023, what might the negative and positive ends of each axis look like?
I like to start by exploring doomsday scenarios—not because I’m melancholy or fatalistic, but because I think it’s harder to get objectively negative after flooding one’s mind with the positive, Utopian end of the spectrum.
> Pandemic. Will we finally see the back of COVID-19 and allow global supply chains to normalize, or will it—or another variant or virus—continue to ravage multiple nations and disrupt international trade?
> Macro economy. Will major economies slide into a protracted global depression, or will they continue to show resilience and begin to slowly regrow?
> Geopolitics. How long will the Ukraine conflict continue, and how might it end? Where else might unrest create ripples that disturb your business or market?
> US politics. Will the midterm elections lead to a change in power in the U.S. Senate, rendering President Biden a lame duck? How might the run-up to the 2024 Presidential elections—surely one of the most anticipated and feared in history—play out?
> Energy supply. Will the global energy complex maintain a supply-demand balance that allows oil and gas prices to stabilize in regions where they are currently extremely elevated? Or will a regional energy crisis cause widespread hardship and business closures?
> Natural events. How might your business be affected if 2023 is a year of many devastating natural disasters with large-scale effects, versus a quieter year with relatively few, low-impact events?
Add local or market-specific factors that could significantly impact your company’s ability to operate and grow.
These will be as varied as the businesses we each run, having to do with financial constraints, supply chain issues, consumer buying habits, competitor response, macro- and micro- market effects, and so on.
Then, create your scenarios. Pick plausible combinations of positive and negative outcomes across the various axes and write short narratives for each.
The more uncertain the future, the wider the range of plausible scenarios becomes.
If the onset of COVID in 2020 taught us anything, it’s that seemingly improbable scenarios are just that—improbable, but not impossible.
For example, using some of the axes described above:
“COVID-19 stubbornly persists but global and national economies are surprisingly resilient. Consumers find ways to do business despite measures necessary to contain the virus. As we get used to living with the virus, investor confidence solidifies, and supply chains are slowly rebuilt despite losing access to some international sources of supply. Demand for our solution grows steadily, beginning in late Q1 and continuing throughout the year.”
Finally, for as many distinct scenarios as you like, ask yourself how your company would react. What operating plan would you be best to adopt in each case?
Creating a singular plan, with a few embedded contingencies, is an insufficiently robust approach while we are living with elevated uncertainty across many dimensions of life.
The first step is to get clear about where your business stands today (your status quo) and where you aspire to take it in 3-5 years’ time (your vision).
If you struggle to articulate a vision that produces healthy creative tension and motivates your team—either insufficiently ambitious or unrealistically so—revisit your company’s purpose and question why you are in business, who you help, and how.
Next, consider how the year ahead might play out on a series of big-picture axes, identifying the positive (best case) and negative (worst case) ends of each spectrum.
Then, build scenarios from various combinations of those end states and consider how each might affect your business, and how your business would be best to react.
Finally, create a series of plans and budgets that could be implemented in case any of the scenarios you have imagined becomes reality.
Pick and implement the plan that you believe in most strongly but keep the others in mind when preparing your budget and as the year unfolds, ready to change plans if it becomes apparent that macro events are playing out differently from the scenario on which your active plan was based.
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