Planning for Disaster: from Oil Spills to Credit Crises

In preparing for battle I have always found that plans are useless, but planning is indispensable.

Dwight D. Eisenhower

One of the ironies of the recent oil spill debacle in the Gulf of Mexico is that it is the oil industry that is most often credited with devising and putting to use a strategicplanning tool meant to anticipate major changes in the environment – from disaster to depression – and to enable organizations with plans for immediate strategic response. The tool is called scenario planning.

Scenarios are “alternative futures” that cannot be predicted due to uncertainty.  The term is borrowed from the world of drama, since each alternative future is described in the terms of a “story” or scenario.  Scenario planners identify clusters of events that could happen, and imagine how things would be impacted should these events actually occur.  The story is then shared as the beginning of a long range planning exercise.

In order to respond to undesired happenings such as the collapse of credit markets or the recent oil spill, strategic leaders must devise and develop flexible, adaptive, nimble organizations ready to change and respond as circumstances dictate. Noted economist and strategic thinker James Bryan Quinn said that “The essence of strategy – whether military, diplomatic, business, sports [or] political – is to build a posture that is so strong (and potentially flexible) in selective ways that the organization can achieve its goals despite the unforeseeable ways external forces may actually interact when the time comes.”

Scenario planning as we know it today got its start in the 1970s.  Though oil prices had remained stable since World War II, leaders at Royal Dutch Shell worried that disruptive change could happen with severe adverse effects on their business.  Among the disruptive events they feared was a sudden increase in the price of oil sparked by the rise of the Organization of Petroleum Exporting Countries (OPEC).

The price increases did happen in October of 1973.  Many oil companies struggled with the effects of the new competitive dynamics.  Shell thrived.  They had prepared a plan – a scenario plan – for what they would do as these circumstances unfolded, and they implemented their plan while others were just gathering to deliberate on next actions.

Today Americans are deeply concerned with another sort of oil crisis -- the disastrous and seemingly unstoppable gusher in the Gulf of Mexico.  Many are outraged that BP had no apparent contingency plan for dealing with the crisis.  Though the oil industry is known for thinking out plans for dealing with price changes or the introduction of alternative sources of energy meant to challenge dependence on oil and gas, it is now apparent that the hunt for oil at increasingly remote or deep places led to risk-taking without appropriate contingency plans.

Eventually, the unexpected is going to happen.  That, we can expect.

Scenario planning has been the topic of numerous books over the past twenty years.  Numerous companies have been touted for their use of the technique – Novo Nordisk, Electrolux, AT&T, BellSouth, Nissan, American Express, IBM, Cisco, Ford, and on and on.  One survey indicated that as many as 50% of Fortune 500 companies have incorporated scenario planning into their broader strategic planning efforts.  The extent to which these companies have heeded their scenario planning process is likely somewhat less than so many authors would have us believe, but examining possible scenarios as alternate futures is invaluable as one seeks to build strategic flexibility.

Before beginning scenario planning, remember that it is often the planning process per se, rather than the resulting articulated plans, that matter most.  Dwight Eisenhower, as general in charge of the D-Day planning process, said “in preparing for battle I have always found that plans are useless, but planning is indispensable.” By involving a broad swath of people in the planning process, the intent of the plans will be etched in their hearts and minds, allowing people the flexibility to make wise and well-reasoned decisions once a crisis occurs.

The basic steps of scenario planning include:

1. Identify the uncertainties that could affect your company.  Uncertainties can come from the worlds of politics, technology, economics, government & regulation, societal, as well as the cataclysmic or climatic changes that can happen in the natural world.
2. Identify possible futures that would present change from the status quo.  Ask “What events, whose outcomes are uncertain, could have significant effects on the implementation of our strategic plans?”  Drilling down (please excuse the phrase) you may ask “do we know what we’d do if the economy enters a recession or depression?”  “Do we know what we would do if a natural disaster destroys our headquarters?”  Are we prepared for changes in the market should a competitor introduce a new and highly desirable product?”
3. Formulate plans for dealing with each scenario.  Identify key departments and resources throughout your organization who must know ahead of time what would be expected of them.
4. Craft overall strategic plans that will allow your company to stand prepared in case each of the scenarios comes to fruition.
5. Monitor the environment and watch for carefully identified trigger points that will tell you when a given scenario has arrived.  In the classic case of Royal Dutch Shell anticipating the manipulations of the market by OPEC, trigger points were based on the price per barrel of oil.  Obviously, quantitative triggers are easiest to monitor and recognize, but not all scenarios come with neat and apparent warning signals.  Rather, strategic leaders must have thought about each scenario before its arrival, and must learn to observe clues of its arrival.
6. As scenarios become more plausible with time, increase investment and preparation for the scenarios that are becoming more likely.  Embed scenario planning into organizational development and corporate education programs.
7. Continue to assess what you do and don’t know about what will happen in the future, and shape strategic plans accordingly.

Mark Rhodes. Ph.D.  consults on strategic planning and decision making.  He has facilitated dozens of scenario planning exercises for clients in a variety of industries.  See his website, Strategic Thinking.

A Key Strategic Choice: When to Outsource Work by Mark Rhodes

Nike makes shoes, right? Well, not exactly. Nike is a wonderful company with superb marketing capability. But Nike outsources the actual manufacturing process to someone else. So in that sense, Nike does not make shoes. Nike’s competitive work is the design and marketing of athletic shoes. Obviously, the company has succeeded for years at doing just that. Knowing when to outsource work and when to keep it in-house is a key to successful strategy. The underlying principle of business strategy is that you cannot excel at everything since resources are always finite and limited. Instead, you must make strategic choices. Key among these choices is a critical decision: which elements of work must be done by the company itself, and which elements should be outsourced? To make a sound decision of this sort, begin by identifying the work of the organization that is "mission critical." Mission critical work cannot be trusted in the hands of another organization.

As a start toward culling the mission critical work from work that can be outsourced to others, it is helpful to perform and assessment of all the work processes performed by your company and sort each into one of three categories. Once work is categorized, the organization can be aligned to properly support the requirements of each type of work. These three categories are:

Competitive or Strategic Work. This is mission critical work. It is the core competence of the organization. Strategic work is that which creates sustainable competitive advantage and distinctiveness. For example, Nike differentiates itself through its strategic marketing work (sending non-core work such as manufacturing overseas), while Apple excels at product design. Competitive Work is always performed and managed in-house.

Competitive Enabling Work. This work “leverages” the competitive work, or enables the competitive work. Companies that stake their reputation on the excellence of their personnel will often consider employee development and education to be Competitive Enabling work. As another example, while Wal-Mart's strategic differential and competitive work is considered operational excellence -- managing information and keeping stock ever present on its shelves – the company’s competitive enabling work is both the development and maintenance of their state of the art information technology (IT). If Competitive Enabling work is done better, the Competitive Work becomes more distinct in the eyes of stakeholders.

Business Essential Work. This work must be done to stay in business, but is work that customers don't really value. Even if done at a world-class level, business essential work does not create sustainable competitive advantage. Nonetheless, if done below industry standards, the outputs of business essential work can cause disadvantage and/or poor performance. Business Essential work includes “compliance” work which is performed to comply with governmental regulations or to mitigate legal risk to the organization. Designers of high performance organizations should heed this important guiding principle: Business Essential work, if left unabated, will consume the organization’s competitive work. That is, people can get so consumed by the busy work of the company that they put off and lose focus on the organization’s truly strategic endeavors.

It’s critical for leaders to understand that by categorizing work as Business Essential, it doesn’t mean that this work is not important to the organization. On the contrary, it is essential to the organization to stay in business. In fact, if Business Essential work is done below the industry standard, it can lead to disadvantage. At the same time, if leaders invest a lot to get this work above a level at parity with competitors, it will never lead to distinctiveness in the eyes of the customers.

Outsourcing selected business processes has become an important strategic option for companies wanting to maintain a focus on their strategically important or competitive work. Resourcing decisions should be dictated by the type of work and the nature of the individual skills and knowledge required to perform the work.

Work that is not categorized as competitive work is subject to consideration for outsourcing of one sort or another. To determine the best possible distribution of work, we use the following model

——————————————————————————— Mark Rhodes is a highly experienced organizational strategy and design consultant with Strategy By Design. You can reach him via email at markrho@mindspring.com..