Uncertainty is high in 2021. In its outlook for 2021, the Economist stated 2021 will be a year of unusual uncertainty. At the same time, the VIX index that measures market volatility has almost doubled in a year. It is worth noting how many companies currently avoid making future predictions or issuing any guidance on their 2021 outlook.
Why Does Uncertainty Matter?
The future is rarely predictable, but in hindsight it is always easier to claim things went as expected. When the future is especially clouded the more unlikely scenarios can become more plausible. In unpredictable environments, what previously was considered unthinkable, may just have become an outlying possibility. To counter the risk of being caught unaware in business turbulence, future scenarios need to be built and tested to ensure readiness.
How to Deal with Uncertainty
Planning future scenarios starts by deciding what kind of development is both plausible and possible. The plausible scenarios are the ones to get prepared for. Both positive scenarios that accelerate business and negative scenarios that cause difficulties should be considered. Actions derived from the scenarios can be divided into 2 categories:
- Measurement actions to determine which scenario is likely to happen
- Proactive actions to create mitigate effects of a negative scenario or amplify an effect of positive scenario.
Strategic Scenario Planning
At times of uncertainty and turbulence, the ability to adapt is critical. This requires both measuring the right elements to determine that a scenario is likely to happen and having an action plan for each scenario. Building strategic scenarios drives the organization to establish a framework to define these adaptation plans.
From a commercial excellence point of view, one of the most important aspects of adaptation is related to business models. When considering the adaptability of a business model, we need to consider all its elements:
- Value Proposition
- Profit formula
- Key processes
- Key resources
To be adaptive on the strategic level, consider how to deal with a situation where your customers completely change their perspective on your current value proposition. That can be a good base to model scenarios. The next question is, what would be the relevant path forward? It could include restructuring key elements of the business model, changing the playing field through merging with competition, or leaving that business completely.
Taking Scenarios to the Tactical Level
Scenario planning also offers support for tactical decisions. Future business models and the corresponding profit expectations are heavily impacted by pricing tactics. Pricing operations can benefit in numerous ways from scenario planning.
One of the key elements is the price update process. An organization can ready itself for different market situations by preparing several pricing approaches fitting to the strategic business model scenarios. For example, introducing more market-driven pricing in a scenario where the unique value proposition is beginning to erode through competitors catching up either in technology or service.
Tactical Scenarios for Pricing
When and how to activate scenario-based actions in pricing is a question well worth considering. An organization can prepare in advance by creating pricing models that are stored and ready for use. Having the time to carefully plan and multiple pricing models is a significantly better and more effective practice than reacting to market changes after they have started to take effect.
Establishing measurement and alert criteria to prompt decision-making can be an effective way to ensure that it actually gets done, eliminating the human tendency to ignore negative indicators. One beneficial analysis is a review of Price-Volume-Mix that provides insights into the changes in the business environment. If, for example, product mix is trending towards lower-margin products, that can indicate a change in customers’ value perception.
Scenario Planning Builds Strategic Agility
Strategic agility is a core competence that can be learnt and systematically put into practice. This agility can be achieved through strategic scenario planning as a key element of the organization’s business model. Within the business model, there are certain elements as pricing that are highly effective tools of managing change.
Creating scenarios on all levels of the business, from tactical pricing and sales operations to strategy, and making that part of operational process will align an organization with whatever the future might bring. Whether it is the increasing uncertainty or a year of déjá vu, as the Economist predicted.