As the COVID-19 crisis progresses, companies are rushing to find the best way forward. While the ultimate length and depth of the disruptions are, as yet, unknown, detailed scenario planning can help companies to deal with the uncertainties.
While the worst of the health crisis may be over soon, the long-term impacts remain unknown. Industries will be affected differently, but we already know that, in many areas, the change in people’s behavior might become permanent. For example, in retail, decreased consumer purchasing power might shift demand to lower-priced and private label products, while consumers are also likely to focus more on local products and as well as on food boosting immunity. Companies need to prepare for these changes, understand the impact on their business and evaluate which business practices may need to be modified, renewed or even phased out.
Our approach to scenario planning is to create contingency-driven gearbox plans per scenario. The key steps are the following:
- Gain an understanding of the current situation and its effects on e.g. economic, social, regulatory and technological circumstances
- Identify, develop and evaluate alternative scenarios for the short and long terms, and for different kinds of recovery paths
- Identify the potential implications for your business – both the upsides and the downsides
- Define possible actions for both mitigating likely negative impacts of the scenarios and for capturing emerging new opportunities
- Evaluate the financial implications of each scenario and model the key metrics (e.g. sales, cash flow, EBITDA, working capital and gearing)
- Finalize the actions plans and be ready to implement them
Key considerations for scenario identification and contingency plan development
- Develop several alternative scenarios. Don’t limit the scenarios to one or two! Try to visualize at least four distinct scenarios with different kinds of impacts on e.g. industry, suppliers, customers and consumers in the macro-economy
- Accept uncertainty. A scenario can relate to trends either within or beyond our influence. Don’t let the extremes scare you. Big changes and turmoil may happen
- Be creative when developing plans. Consider different alternatives and identify potential upsides and downsides as well as potential contingency plans for each scenario
- Define the actions in detail. Make concrete action plans and also consider the time, cost and execution complexity of your identified actions
- Define external and internal indicators and threshold levels. If the defined levels are exceeded, management should change course and activate the appropriate contingency plans
- Invest sufficient resources in planning. Make sure to use enough resources, as well as data from previous market disruptions, in order to set reasonable parameters within which to plan for similar scenarios in the future
As the coronavirus crisis creates unprecedented uncertainty, it’s critical that companies identify the scenarios that may impact their business, and also the strategic responses necessary in order to mitigate the effects and unlock opportunities. The ability to do so will give leaders the upper hand when the crisis eventually subsides.