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.

Strategic Thinking and the Law of Nemesis

The Law of Nemesis is a useful concept for leaders, strategists and strategic planners. In a nutshell, the law states that if things are going well in your enterprises, you must be aware that Nemesis is lurking, since no successful effort goes unnoticed by competitors. Mark Rhodes of Strategy by Design explains the concept in this short clip of his teaching.

Click here to see Mark explain the law of Nemesis in a short YouTube video: The Law of Nemesis

Does it ever seem to you that just as prospects for your business begin to look brightest, someone will rise out of nowhere to pick off a valued client, or to introduce a product line that matches or trumps your own?  This dynamic is sometimes referred to as the Law of Nemesis: “Find a good thing and count on this: a nemesis will want to snatch it from you.  Nothing good is yours forever because others will always want a piece of it.”

Nemesis was the Greek goddess who meted out divine retribution for wrongdoing…  especially hubris.  If Nemesis believed that some mere mortal was having all the luck – or getting too much credit for things – she would find a way to smite the individual by sending bad luck and ill fortune in the direction of the offending person.  The Romans, too, believed that fate will eventually punish those who have gained unmerited advantage.

All of us, of course, have the notion from time to time that the luck always seems to fall the other way.  But whether these were matters of divine retribution or not, strategists know that one thing is certain:   Every positive situation in life and business bears the seeds of its own reversal.

Count on this:  Competitive advantages will always erode. Find a good corner for a gas station, draw some interest, and someone will open up another station across the street.  Work to craft a new offering of professional services, and copy cats come out of nowhere.  Design a nice blog or website, and find an exact duplicate a week later.  Without question, competitors learn how to imitate sources of competitive advantage.

To stave off the Nemesis, you must find sustainable advantages.  The strategist must slow the erosion of advantages, and continually seek new high ground representing future competitive advantage.  Moreover, the strategist must erect “barriers to entry” to protect present advantages.

Strategic planning must include plans for defending ground, for minimizing the work of Nemesis.  Companies can:

Continue to set up and defend barriers to entry in order to slow the entrance of new competitors and to stay a step ahead on the innovation curve.  This can mean locking in intellectual capital and proprietary procedures.  It can mean staying very close to existing customers and locking  in relationships by establishing mutual trust and dependencies.  It can mean making capital investments in improvements that competitors cannot match.

Another way to stave off Nemesis is through competitive intelligence gathering, so that you, as strategist, are aware of what the competition is up to and how competitors will likely react to your own initiatives.  Because so much information about competitors is now available over the internet and through public domain sources, many companies are empowering their entire work force in seeking information helpful in adapting to changes across the competitive landscape.

A simple way of thinking about this is that strategic decision-making is about putting your army onto the battlefield, your company into competitive space, armed with strategic advantage - a head start of sorts. Strategic advantage is essential.  Some say, as a matter of fact, "if you don't have advantage, don't compete."  Then, once you are in the game and have advantages in place, be aware the Nemesis is watching and that competitive advantages always erode.  Add the Law of Nemesis to your arsenal of thought as a strategic thinker, and enjoy success over the long term.

——————————————————————————— 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.