Don't Let The Recovery Catch You By Surprise

It might be hard to imagine now, but a recovery will follow the recession in which our economy has been mired for the past 18 months. And, just like the onset and the severity of the recession caught many business leaders by surprise, so too will the extent, nature, and pace of the recovery. Is your business prepared?

It is impossible to predict the future, and any business that sets its strategy on a single vision of future market conditions knows one thing: that strategy will not withstand the uncertainty inherent in the future, because the hoped-for conditions will not materialize in the ways your company wants them to. Trying to predict precisely when the economic recovery will begin, how resilient it will be, and how competitors, customers, and other players will behave when it starts is foolish. A scenario planning mindset to the recovery will most likely better
position your company to benefit when it occurs.

Scenario-based strategic planning is a tool that enables organizations to create strategies by considering multiple plausible future environments in which the organization could be forced to participate. It operates under the premise that the future is unknowable and unpredictable, and setting strategy for a single-point vision of a “desired” future is risky. Doing so locks a company into pursuing a set of goals and objectives that may be out of sync with future conditions, and hampers a company’s ability to adjust to future market realities. Fundamental questions surround the nature of the economic recovery, and multiple answers exist to each of
them, underscoring the need for strategic resiliency and flexibility that a scenario-based approach can provide. For instance:

• Will consumer attitudes toward thrift remain post-recession, or will consumers revert to the mass consumption lifestyles that characterized the 15 years before the recession?
• Will long-term investment strategies become more risk-averse, or will investors assume the recession is a "once-in-a-lifetime" occurrence and quickly revert back to high-risk, high-reward strategies?
• Will business trends that were in vogue before the recession, such as environmental sustainability and corporate social responsibility, return? Or, will companies shy away from activities they perceive as superfluous to their core business?

More broadly, how will your business even know when the recovery is in full force? The severity of the recession has led some economists to believe that the recovery, by necessity, will be long and slow, and that there will be several head-fake economic improvements that will not, in fact, represent an honest recovery. The prospects of a “W” shaped recovery could be very real; have you considered the implications of a second downturn to your business strategy?

Our scenario planning work at Outward Insights has recently confronted these and other questions, and has helped our clients prepare for a range of circumstances. For instance, a financial services industry client has explored the conditions that would suggest a consumer
and investment “return to normal” -- with pre-recession mindsets toward risk, consumption, and spending returning -- alongside scenarios that build a case for a lasting thrift mentality long after the recovery is in full swing. By strategizing for both circumstances, the firm is
discovering strategies resilient under both sets of conditions -- suggesting that they will work almost no matter how the future unfolds -- while also preparing contingency plans to be deployed once there is greater clarity as to actual future industry and economic developments.

Don’t be caught unprepared by the economic recovery. Employing scenario planning to set a post-recovery strategy now can make your company more well equipped to thrive when the economy improves.

Good Reasons to Survive

Competitive intelligence functions are in a fight for survival. While competitive intelligence has always seemed to require an above average dose of justification to top management, it is now in a life-or-death battle with other corporate functions for an increasingly limited pool of budget dollars.

Over the past several months, I’ve written about the need for CI functions to make fundamental changes to what they produce and how they operate so that the can demonstrate value and survive the economic crisis. This month, I want to highlight what a few corporate CI functions are doing to not only weather their organizations’ budget cuts, but to thrive and expand their impact. Most of the examples that follow are taken from a lively discussion currently underway in the CI social networking platform Ning (http://competitiveintelligence.ning.com).

First, ensure that competitive intelligence is embedded in multiple, critical business practices and operations. At one European-based multinational company, the competitive intelligence function is interlinked in several crucial business planning processes, including pricing programs, marketing planning, customer relationship management procedures, and the like. The company’s Key Intelligence Topics are defined by standard business planning processes and are integral to the company’s market monitoring and early warning systems. These CI activities have become so crucial, 93% of its users have said that they cannot do without them, according to an internal survey conducted by the CI team. The result? Despite a 30% head-count reduction in the Corporate Marketing Group, the CI function has experienced no staff reductions and no cuts to its six-figure budget.

Second, CI programs may have to temporarily suspend their focus on the long-term and shift attention to current needs. Just like there are no atheists in foxholes, there is no “long-term” in severe global recessions. One CI practitioner who contributed to the discussion described how he identified where current external uncertainties are the greatest, and intervened immediately. Doing so requires a high degree of flexibility. For his CI function, identifying the most urgent, current needs has CI supporting pricing programs one day, and then supporting deliberations regarding a prospective M&A opportunity the next.

Third, CI needs to stay close to the company’s revenue stream and help management focus on serving existing customers. Cost cutting alone won’t help most companies weather the economic downturn; protection of the top line is critical. Two CI functions are helping their organizations manage the top line by helping protect and secure more revenue from existing customers. CI functions can do so by examining whether current customers and revenue sources are threatened by competitive or other external forces, and whether existing rivals have any immediate weaknesses that can be exploited in ways that capture revenue from customers.

Fourth, CI functions should reexamine the utility of their CI products in the eyes of their C-level consumers. If top-level CI users find your existing deliverables too long, not actionable, or simply unusable, the perceived value of the entire CI function is damaged. I have a consumer products industry client that fortuitously transformed its CI reports from long, ponderous market studies to short, warning alerts that provide actionable insights on emerging competitive and industry trends. The CI function aggressively marketed these products to the C-suite and within a matter of weeks had the company’s entire strategic leadership team addicted to these reports.

The current economic crisis need not spell the automatic decline of competitive intelligence. The examples offered here illustrate opportunities for CI functions to not just survive but thrive, and emerge from the current turmoil even more integral to the success of their organizations.

Change and Innovation

Innovation is a competitive advantage that even the worst economic conditions in decades can't take away. Want proof? Take a look at the movie theater industry. Pundits for years have predicted the death of movie theaters as they came under threat from cable movies on demand, Netflix, pay-per-view, and Apple TV.

However, the movie industry today is on a tear. Ticket sales this year are up 17.5 percent, to $1.7 billion, according to Media by Numbers, a box-office tracking company. And, this surge is not due just to increased ticket prices. Attendance has also jumped, by nearly 16 percent. If that pace continues through the year, it would amount to the biggest box-office increase in almost 20 years.

Movie theaters have been able to defy their own death predictions and thrive in a deep recession by installing stadium seating, high-quality sound systems, better food, and abundant parking. They are also renting out theaters for other uses, such as comedy clubs and major sporting events. Answering complaints about cell phones ringing during movies, the industry is also looking into cell phone jamming and emergency-call-only technologies.

Creativity and innovation are corporate assets that can't be taken away, either by competitors or tough economic conditions. You cannot hope to succeed without being open to change.

Is The CI Industry In A Rut?

More than 500 CI professionals have gathered in Chicago for the 2009 Society of Competitive Intelligence Professionals Annual Conference and Exhibition. On the program are sessions on how to build a CI process, common analytic models, ethics -- the usual fare. Which begs the question, are we in a rut?

Earlier this year, a question was posted to an online competitive intelligence network asking this very question. Few participants in that discussion -- and at an "active dialog" session that I led yesterday at the SCIP09 conference -- could point to any new innovation in our field in the last 20 years.

Does that mean that innovation is not occurring, or that it is occurring but not being shared within the profession? In some sectors -- consumer products, for example -- CI practitioners seem more willing to share their new tools and techniques than others, such as pharmaceuticals. Different industry norms regarding the nature of competition, assumptions about how industry participants operate, and other factors seem to influence the openness of CI innovation.

Still, forums do exist where CI practitioners come together in small groups to learn from each other. Examples include the Conference Board's Competitive Intelligence Council, and the Intelligence Leadership Forum. The existence of these groups, and the experiences of many seasoned CI professionals, suggests that innovation is shared only among small, semi-formal networks, not in large conference sessions. To innovate, then, is to be a superior networker, making personal connections with other practitioners with whom you can share and learn innovative ideas and practices.

Still, after 20+ years, isn't there a need for some new innovation that would benefit the entire CI profession? The answer is yes. The holy grail of CI innovation, I believe, is in determining a method to accurately measure CI's value. Several sessions at this year's conference have addressed this, but the general consensus is that our profession does not have a credible methodology for communicating the quantitative value CI brings to an organization. Whoever can offer such a model will truly advance our profession's innovation.

Scenarios for the Legal Industry

The 23rd Legal Marketing Association annual meeting begins April 1, 2009 at the Gaylord Conference Center on the Potomac. Conference attendees will be tweeting from the conference at #LMA. LMA has asked speakers to share some of their materials with those who will be following these tweets. Good idea! And so . . .

On Wednesday morning, April 1, 2009, Bill Fiora of Nixon Peabody, Ann Lee Gibson (of Ann Lee Gibson Consulting) and I (Ken Sawka of Outward Insights) will lead a three-hour workshop on scenario-based strategic planning for senior law firm marketing professionals. Below is a summary of four possible futures we have developed for participants' use during the session. Working in small groups, they will identify core and contingent strategies for success under the different scenarios and challenge their own and others' assumptions and strategies. In doing so, they will explore how scenario-based strategic planning enables organizations to develop strategies for future competitive success that start with the premise that the future is unknowable and unpredictable. Instead of basing strategy on a single, preferred vision of the future (which has a zero percent chance of actually coming true), scenario-based strategic planning enables organizations to explore multiple, plausible futures, and to set strategies that address numerous threats and opportunities.

Each of the following scenarios describes a possible future for the legal industry intersecting somewhere between two dimensions: (1) timing of economic recovery (early 2010 vs. 2011-12) and (2) legal services delivery models (aggregated vs. disaggregated). The scenarios are summarized below.

Note to workshop participants: You will receive and work with scenarios that are much more detailed than the following summaries.

Scenario #1 -- The Great Pretenders describes a world where economic recovery begins in early 2010, the earliest anyone now hopes for. Global M&A activity, one of the earliest indicators of the recovery, surges as market-leading companies and those with large cash reserves acquire competitors and suppliers weakened by the recession. The strong are eating the weak and getting even stronger.

In this world, law firm leaders feel they have made it through the tough times and look forward to life as they once knew it. The recession was tough, but it encouraged necessary discipline and weeded out the weak. 2010 promises to produce the most law firm mergers and acquisitions ever recorded.

Scenario #2 -- Shattered! describes a legal industry dramatically altered by a perfect storm of events that created a PR nightmare for BigLaw. In this possible future, the recession’s impacts on the legal industry pale in comparison to other events that also grabbed the public’s attention. Inside BigLaw, the survivors of the 2008-09 layoffs still suffer from depression and guilt. In 2009, a runaway bestseller and a summer HBO TV series set the stage for a Wall Street BigLaw disaster fueled by debauchery and hubris. One of America’s most respected law firms has been brought very low, rocking New York society and BigLaw to its core. Law firms may never be the same.

As a result, the legal industry is reversing its bigger-is-better trend. Dozens of start-up law firms, prospering mid-sized and regional firms, mega-networks of telecommuting lawyers, and new legal vendors leap into the breach. It’s possible the growing economic recovery will allow BigLaw to repair its embattled reputation and rule again, but one thing everybody understands is that for the first time in a long time BigLaw has many serious competitors.

Scenario #3 -- The Big Chill is a future where the hoped-for 2010 recovery has not appeared and does not seem imminent. All governments and economists now agree the recovery will not appear until 2011 or later. Federal stimulus plans have dramatically slowed home foreclosures, but failed to thaw banks’ lending practices. The only bright spot in the corporate legal services market comes from the huge corporate M&A deals being struck in pharma, transportation, real estate, and energy at enormous fire-sale prices.

Corporate legal clients have much smaller legal budgets, but still face an overwhelming burden of legal issues, including bankruptcy, financing, litigation, and regulatory changes. In response, all firms survive by cutting costs to the bone and learn to compete on price. The largest companies discover they have no energy to deal with scores of smaller firms. The exchange of large amounts of commodity work for law firms and the BigLaw promise of safety for corporations becomes the two-ingredient glue that keeps big companies with big law firms. It is a painful time, particularly for legal vendors. Competition becomes cut-throat, pitting firm against firm—and in a surprising twist, some firms against some clients.

Scenario #4 -- Davids vs. Goliaths sees corporate legal clients having a radically different response to the continuing economic deep freeze. In a world already full of risk, they see little extra risk in moving from one law firm to another. All relationships are up for grabs. Some clients cancel their convergence programs, turning to procurement agents or consultants to deliver the best combination of price and expertise on each matter.

The legal industry is rapidly disaggregating. The fiction that big firms could develop and benefit from economies of scale is now seen for the naked emperor it always was. In BigLaw, some of the biggest rainmakers decide they’d rather not share their pie, and form their own boutique firms. In fact, new firms of all kinds are sprouting up all over. Technology vendors reorganize to provide turnkey services and compete directly with firms. Many law firms outsource everything but their most core legal services. Clients are buying legal services directly from India and China. The only certainty is that this is a time for pragmatists, not purists. Everyone who hopes to survive this era is now brutally scrutinizing their beliefs, styles, processes, and goals.

Surprise: Strategic Planning's Achilles Heel

Think of all the ways your company manages its internal information – sales forecasts, ERP systems, and so on. Now, think about the resources spent tracking external events. If your company is like most, it is spending a fraction of its time and effort on the external as it is on the internal. Yet, isn’t the greatest source of strategic surprise found in the events and conditions that lie beyond the corporate walls?

Strategy guru Peter Drucker once said, “ninety percent of the information used in organizations is internally focused and only ten percent is about the outside environment. This is exactly backwards. “ At the heart of Drucker’s comments is the notion of competitive surprise. By failing to monitor external information, companies raise the likelihood of being surprised by external developments.

Research conducted by the Wharton School of Business found that two characteristics of surprise affect companies’ responses: the source of the surprise and the company’s ability to react. The source of the surprise can be looked at in two ways – is it from unknown sources (for example, terrorism) or is it a familiar surprise, such as the timing of a recession? While known threats such as recessions can be anticipated better than sudden ones, successful companies are the ones that can adapt to both.

Surprise acts as a risk-multiplier. It’s bad enough for companies to be confronted with an external development that complicates their strategy. However, if companies at least have an indication that such developments could occur, they can focus on remediation. When such developments happen by surprise, the company’s ability to act in a thoughtful and effective way is compromised. Surprise takes what could be a manageable – though perhaps unpleasant – situation and makes it almost completely unmanageable.

Why do companies do such a poor job of keeping tabs on information that has the potential to cause severe strategic disruptions? I believe there are two causes.

First, companies have a hard time knowing what to monitor. Given the wide range of industry participants and conditions that can be at the root of external threats, firms struggle just determining what is significant. As a result, many companies attempt to monitor everything, and build elaborate “environmental scanning” systems that crumble under the weight of the mountains of information they accumulate.

Second, even if companies are able to isolate those external conditions that pose a threat, there are few effective means by which to monitor those conditions. News alerts and filters usually are not precise enough to capture information that is truly diagnostic for assessing a developing threat. At the same time, knowledge management efforts that attempt to encourage employees to share information and observations related to strategic threats have for the most part been a failure.

The solution, I believe, lies in a system that combines structured analysis of plausible threat scenarios with a simple and effective approach to information monitoring. Both elements form the basis of a business early warning system that can allow strategy analysts to provide credible warning of external threats, thereby minimizing the effect that surprise has on executives’ ability to respond.

To start, a company’s strategic planning process should include a scenario-planning component, whereby the company can depict plausible future conditions that could confront the company within the planning timeframe. It’s important that companies follow a structured scenario development approach that identifies current industry variables and uses them as the “ingredients” for thinking about alternative future worlds.

From there, the scenarios play two roles. First, they create a planning context, enabling executives to game different strategic approaches in different conditions, and choose from among a set of resilient strategic options. For the purposes of building the early warning system, companies can also use the scenarios to identify indicators – industry developments, events, and circumstances that would have to occur for the conditions depicted in any one scenario to actually occur. These indicators then become the basis of focused external information monitoring.

The early warning indicators a company will monitor may include areas such as technology disruption, competitive shifts, regulatory changes, environmental factors, consumer or social changes, economic conditions and political influences. Analysts should collect industry information from a mix of published and human sources. The information collected can be further synthesized through an IT application designed for just this purpose.

As analysts determine that certain indicators are behaving in such a way so as to present a developing threat, they can generate early warning alerts that argue for a particular strategic option – ideally one considered during the scenario-planning phase. This way, the element of surprise is almost completely eliminated from the equation, and managers can focus on deploying a response.

Why Now Is The Time To Consider Scenario Planning

Gotta love The Economist.

"With even short-term horizons as obscure as the San Francisco skyline during a summer fog, companies are finding their standard budgeting and forecasting of little use. The usual trick of plugging figures from operating units into spreadsheets appeals to number-crunchers, but can often generate misleading targets, especially when conditions change fast." ("Managing in the Fog, February 26 2009, at http://www.economist.com/business/displaystory.cfm?story_id=13184837)

Companies today are paralyzed. Most managers have never seen economic conditions like these. Short-term thinking prevails. From the same Economist Article:

"Faced with exceptionally volatile business conditions, senior executives are finding it harder than ever to gauge how their companies are likely to fare in the months ahead."

The risk, of course, is not having a clear strategy for growth once the recession ends, or worse, failing to position now for future opportunities. That's why cogent strategy development is more important now than ever before. With forecasts deemed virtually meaningless, and the future harder and harder to envision, managers need a tool for flexible and realistic strategy development.

"What can companies do? A few forward-thinking firms can provide inspiration. Hugh Courtney, a professor at the University of Maryland’s Robert H. Smith School of Business, thinks more companies should be using “scenario planning” alongside their financial models, which do not produce a large enough spread of possible outcomes to capture the flavour of today’s uncertainties. Sten Daugaard, the finance chief of Lego, a Danish toymaker, says his firm generated a number of different scenarios as part of its 2009 budget, the first time it had used such an approach. It has developed contingency plans for each scenario so that it can react swiftly whatever the coming months throw at it."

Scenario-based strategic planning is one such tool. Unlike most planning approaches, scenario planning starts with the assumption that the future is unknowable. Strategies designed for one vision of the future are almost certainly destined to fail, and managers usually cannot change course fast enough when the future they envisioned fails to materialize.

Instead of forcing managers to plan for the future they want, scenario planning forces corporate leaders to consider multiple, plausible futures that taken together represent a full range of threats and opportunities an organization may face in the future. Currently, we are using scenario planning to help a client develop a strategy centered around environmental sustainability, and to help another client set strategy for a major project category.

Too much short-term thinking now will make companies unprepared for the recovery. A little time spent thinking strategically now will pay dividends in the future -- whatever the future looks like.