I recently had the opportunity to speak at a seminar for privately held businesses. The seminar was about ways to use the economic downturn as an opportunity to prepare for the potential future sale of a business. My topic was how to spot new opportunities created by the crisis. I suggested scenario analysis as a good tool for generating and evaluating ideas and offered four specific scenarios to consider
Aventine Scenarios Pres May09
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While this discussion falls into the category of general market and business strategy rather than marketing analytics per se, the creation of the scenarios was a direct result of the work we continue to do in the area of Culture Graphics. We view one of the principal dimensions of potential future change to be changes in consumer culture and whether those changes are temporary or permanent. We have begun work to measure these cultural shifts to enable businesses to anticipate how much their markets may change as a consequence.
Some summary points from the presentation and my current thinking on this topic:
- The economic crisis will create winners and losers. There's no reason not to be a winner, and there are new opportunities because the advantages of incumbents are greatly reduced.
- We got in trouble because we systematically underestimated downside risk. We make the same mistake underestimating upside "risk", which means big opportunities exist and are likely underpriced.
- All markets are changing drastically right now, and the principal value of existing business is that it can fund and transition to new opportunities.
- It's nearly impossible to pinpoint future opportunities, but that's not needed. The key is to establish a presence in the vicinity of the new opportunities.
- Scenarios were popular when decision makers believed they faced a wide range of possible futures. The tool fell out of favor when we became over confident that future paths were clear and we had quantitative tools for managing risk. We were wrong, and it's time to dust off this valuable tool.
- Two dimensions of volatile and important change that will affect everybody are the degree of governmental activity in the economy and the level of consumerism in society. These dimensions can be used to generate four future scenarios.
- The path we are currently on leads to high government involvement and lower consumerism. We can see what this looks like in Europe. However, if we end up there, the world may not comfortably accommodate two big "Europes". Protectionism is the likely outcome.
- Government-driven hyper-consumerism is a very plausible scenario because we don't have a track record for growing this economy that isn't consumer-led. This tempting solution to short-term political problems would ignite the mother of all economic crises.
- A low-government, moderate-consumerist future hasn't been tried, but an America that lets market forces drive the adjustment to an economy that is less consumer-driven is a very promising possibility.
- Regressing to a low-government, high-consumerist "Do-Over" scenario would mean the reestablishment of the East/West, saving/spending relationship. But this time, China and Asia are in the driver's seat. Learn how to orient your business to serve those markets and masters.
This work and perspective were heavily influenced by Nassim Taleb's ideas about risk and how we underestimate extreme upside and downside outcomes. I highly recommend his books Fooled by Randomness and The Black Swan.
The last work I had done using scenarios was in the late 1990s while building a short-lived Risk and Uncertainty Management practice at Deloitte Consulting. I knew from that experience that the seminal thinking on applying scenarios to business was done at Shell in the 1970s. For a quick brush up on the topic, I was delighted to find that Shell now makes available a great deal of information on the scenario process and the content of specific scenarios they use in a robust scenarios section of their website.
Below are some web resources that were helpful in generating the content for the scenarios we constructed. In particular, the first link to a scenarios report by a Finnish business and policy group tied well to our dimensions and provided some useful content and story lines.
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