In the current uncertainty, there’s an opportunity to think more closely about the trajectory of your business by using scenario-planning as a positive action towards developing or expanding the business. Looking at different scenarios in some depth helps you see which strategy would work best.
Scenario-planning used to be the preserve of large multinationals and big business, but the benefits of answering the ‘what ifs’ and modelling financial impacts are now more accessible to small and medium-sized businesses too.
Ask the right questions
What if we increased our prices by 3 per cent? What if we opened an office in Lisbon? What if we upgraded our assembly line? What if we took on a marketing manager? Asking (and answering) the ‘what if…’ questions gives you a real picture of the effect of your decisions on growth and profitability.
A CBI survey in November revealed, however, that fewer of its smaller members had carried out scenario-planning than their larger counterparts (44 per cent versus 76 per cent).
“It’s impossible to know for certain what the future holds, but businesses operating in today’s volatile marketplace can’t afford to sit back and wait to see how their industry, customers and competition will evolve over the next few years,” warns Trevor Parker, director of strategy execution specialists, Northco Management.
“Those businesses that are prepared for every ‘what if’ scenario are the ones boasting longevity and solid foundations for growth.”
These five steps to effective scenario-planning can help you set a direction based on a real understanding of the business and both internal and external factors.
1 Get the facts
You need to understand how your business operates at this moment in time before you can consider how it may be affected in the future. Gather data on sales and turnover, costs, distribution, staffing, cashflow, ongoing projects and current market activity.
2 Explore trends
Once you have a strong grasp of your internal operations, you need to extend your view outwards. Do you understand trends in the market, customer demographics and what your competitors are up to? Add to the picture with data on what’s happening in the industry and in potential markets. What changes are on the horizon?
3 Brainstorm visions of the future
The best scenario-planning is a creative, team-based process. It’s a chance to look at aspirations, opportunities, threats and unknowns.
The timescale under discussion should be one appropriate to your business – a pharmaceutical company may be looking at a 20-year period, while a fashion retailer may want to consider only the next two seasons.
As well as your visions for your company’s future, brainstorm the factors that might enhance or disrupt your plans. This lays the groundwork for how you’ll respond to market and economic pressures, especially with Brexit looming.
4 Focus your scenarios
Uncertain events out of the control of most businesses include exchange rates, demand for products or services and changes to regulation. Planning for every eventuality is beyond the scope of smaller businesses, so it pays to identify two or three scenarios that could have the biggest impact.
Take a five-year plan for a business that exports plants, for example. In one scenario, they may look at the opportunity to expand into Asia. In the second, the market stays stable and they continue to mainly supply Europe. In the third scenario, exports to Europe are no longer cost-effective and the business has to find new outlets.
Creating a detailed narrative for each focused scenario will help you see the realities – or at least the range of realities – involved in choosing that direction.
5 Check your process
- Are you focusing on areas of importance and significant decisions?
- Have you set a clear timeframe?
- Are the scenarios challenging?
- Are you involving a diverse set of people when talking through the scenarios?
- Are the scenario narratives clear and plausible?
- Do they generate useful strategic options and support financial decisions?
All businesses, says Trevor Parker, should be looking closely at their future business strategy.
“What are our aims for the future? What is our competitive advantage? What barriers might we face – both internal and external?” he suggests. “These are the questions we need to be asking to set the scene for planning and decision-making.”
Brainstorm the factors that might enhance or disrupt your plans. This lays the groundwork for how you’ll respond to market and economic pressures, especially with Brexit looming.
Scenarios show cycle retailer a new direction
“We recently worked with a bicycle designer and retailer,” says Trevor Parker. “They operate in a very competitive and pressured market, so it was vital to look at ways to improve operational efficiencies and develop a robust growth strategy.
“During the scenario-planning, we identified that many competitors were buying large volumes of bikes that could potentially leave them with stock they couldn’t sell. Added to this was further threat of the impact of weakness of sterling against the dollar.”
The company decided to operate differently from their competitors, leaving cash in the business rather than having a large amount of stock. They also decided to remove all non-branded products, which put them in control of their stock margins and under no pressure to order from these manufacturers.
“They focused on the most profitable areas of the business, which included reaching a wider consumer base online and expanding the core range of innovative brands,” adds Trevor. “Sadly, other retailers in this market haven’t fared as well. These decisions were made at the start of the year and already they are reaping rewards – a 64 per cent year-on-year growth in profit before tax.”
Support for your ambitions
No matter what Brexit brings, HSBC UK is here to support our customers to overcome the challenges and access the opportunities. Whatever your plans and your ambitions for the future of your business, our £12bn lending fund could help you thrive – through Brexit and beyond.