Hi! Managers: Navigating a turbulent economy

While much of the news these days suggests the worst of the recession may be over, don't expect a smooth recovery. A weekly mix of good and bad news has stock markets and public sentiment bobbing up and down. Such turbulence makes it nearly impossible for chief executives to plan strategy using traditional methods of predicting the future based on the past.

In today's uncertain world, a more appropriate method for creating business strategy is scenario planning. With scenario planning, strategic alternatives are developed to cope with a range of possible future scenarios for the business.

Unlike traditional strategic planning, which is based on creating strategy by extrapolating trends from the past, scenario planning is based on creating strategic alternatives by trying to understand how certain variables affect the current business environment.

Take, for example, the case study of a European manufacturer of floor cleaning machines doing business here in Asia. This manufacturer has three customer segments across the region - five-star hotels, shopping centres and office buildings.

These three customer segments are affected by several variables, including the threat of swine flu, unemployment rates and business tax incentives. How these variables play out will shape the scenarios that emerge for this manufacturer.

In one scenario, suppose swine flu becomes a major health issue for travellers? This might adversely affect the five-star hotel industry and force the manufacturer to redeploy its resources to other segments.

In another scenario, a boom in business tax incentives might mean growth for floor cleaning machines in the office building segment, as new businesses rush to set up shop.

Finally, let's say unemployment goes down and job security goes up. Consumer confidence improves, which encourages people to spend more. This in turn could make shopping centres an attractive growth segment for the manufacturer.

Whatever outcome plays out, effective scenario planning prepares the manufacturer to pivot its organisation quickly and take aim at the best opportunities first.

Success for scenario planning is based on three conditions. First, the manufacturer must pick the right variables that influence the markets and shape potential scenarios.

Second, scenario planning requires thinking through the likely strategic responses for each scenario, not simply updating previous strategies.

Third, there must be a practical way of measuring the impact of these variables, knowing when different scenarios are emerging, and deciding when it is appropriate to launch the right strategic response.

During these past few months, chief executives have been preoccupied with fire-fighting short-term operating issues to preserve cash flow. Survival has been the name of the game. Scenario planning can help organisations deal with these short-term challenges, as well as to pivot quickly to gain longer-term advantage.

Larry Chao is the managing director of Chao Group, a strategic organisation-change consultancy based in Bangkok and New York.