Strategic Framing

When I give short workshops on managing change, I focus on five key aspects of change planning.

1. Identify stakeholders
2. Align arguments to generate stakeholder momentum
3. Create an engagement strategy
4. Identify trigger events
5. Plan to be wrong

Prefacing all of this is the step of clearly defining your change.

Here is a a video where I explain trigger events and illustrate it with an example from the story of Branch Rickey’s efforts to desgregate Major League Baseball in the 1940s.

One often heard criticism of scenario planning is that,by itself, it does not lead to strategic action.  This is true and the true power of scenario planning is in the follow up.  How will you use the insight gleaned from the scenario building process?

At DSI, scenario building is not the primary end point of a planning process.  The scenarios are simply one input into a strategic options and monitoring process.  Depending on the needs of the client, the strategic options could focus on short-term risk mitigation, organizational design implications, or longer-term product innovation.  In all cases, we use the scenarios to help build adaptive capabilities into the planning process.  Scenarios also build a framework for environmental monitoring.  Such monitoring also provides a natural way to keep decision makers honest about changes they are seeing in their industry…even changes they would prefer to ignore.

Here are some questions your group can work through for each scenario after completing a scenario planning exercise:

1. What actions can your company take today to prepare to navigate the future as depicted by this scenario?
2. How can the your company reduce our strategic risk exposure and capture some of the emerging opportunities?
3. How does your company succeed in this scenario?
4. What is the winning business model?
   -Where do we source our revenues from?
   -What are our significant expenses?
   -Where do we invest our resources?
5. What types of products and services are most in demand?
6. What business lines are most attractive?
7. What is the appropriate HR strategy? Who do we hire and how?

Was it possible to predict the current financial crisis as far back as 1997? It turns out at least one group of planners did describe the current state of the world with eerie accuracy.

Look at this chart from a 1997 scenario planning project and see more details about the Global Malaise scenario below.

Fast forward to October 23, 2008 and Alan Greenspan testifying before congress:

“I mean, you point out quite correctly that the Federal Reserve had as good an economic organization as exists, and I would say, in the world. If all those extraordinarily capable people were unable to foresee the development of this critical problem, which undoubtedly was the cause of the world problem with respect to mortgage-backed securities, I have to — I think we have to ask ourselves, why is that?

And the answer is that we’re not smart enough as people. We just cannot see events that far in advance. And unless we can, it’s very difficult to look back and say, why didn’t we catch something?“

Global Malaise

In 1997, the Dow was at 7,000 and well into a steady rise to 11,000.  The sky seemed to be the limit.  A group of scientists,  planners, engineers, and government managers assembled for a scenario planning project facilitated by Decision Strategies International.  The group identified four future scenarios explaining the arc of events leading to 2020.

Here is an excerpt from one of the future scenarios, entitled Global Malaise, created by that group in 1997:

“Several western governments had initiated tax cuts favorable to big business.  This policy concentrated wealth and lowered income into government treasuries.  Bank credit became ever tighter.  Stocks and real estate prices fell sharply. Governments hungry for reelection panicked as asset [price] deflation gathered force.  They attempted to counter the contraction with easy money.

The United States Federal Reserve and other central banks, especially the Bank of Japan, bought up the bad debts of insolvent institutions, including some major banks and corporations.  Central banks around the world become holding companies of insolvent institutions.  They ended up owning many banks, a few insurance companies, and a great deal of real estate. . . .

By 2008 the country was in recession. The middle class diminished as millions lost their life savings in the market crash.  The poor grew desperate as many social programs such as energy support, housing, medical, and childcare was eliminated or reduced to token levels.”

“The Democrats won the 2012 president election, bringing the first minority to the office of Vice President. The election reflected continued voter demands for social reform.”

To be fair, the planning group did not conclude that the Global Malaise scenario was the most likely scenario. However, the group’s ability to describe a future that few were predicting at the time demonstrates the real power of the scenario planning methodology when done with rigor.

Below is a slideshow put together by Michael Mavaddat, Executive Vice President of DSI and one of the facilitators of the scenario planning project.

Webinar on Managing Uncertainty.

February 24, 2009
11:00 a.m. to 12:00 p.m. (EST)
FREE – RSVP at https://www2.gotomeeting.com/register/367870545

Sponsored by Decision Strategies International

As Darwin observed, it is not the strongest or smartest who survive but those who are most adaptive to change. What has your company done to increase its adaptiveness? Have recent world events caused you to accelerate your efforts?

This webcast will provide practical ways to manage uncertainty by showing you how to:

• Use scenario planning to improve your organization’s insight and foresight
• Devise adaptive strategies with sufficient flexibility to deal with the unexpected
• Implement a dynamic monitoring system to track the external world in real time
• Improve your organization’s agility in terms of structure, processes, and rewards
• Enhance your information and decision making procedures to remain vigilant
• Foster strong leadership at multiple levels

Dr. Paul Schoemaker, Founder and Chairman of Decision Strategies International, Research Director of the Mack Center for Technological Innovation and Adjunct Professor of Marketing, The Wharton School, University of Pennsylvania, will review key points of the attached article “Are You Ready For Global Turmoil?” and best practices for managing uncertainty.

Bernardo Sichel, Managing Director of Consulting at Decision Strategies International will give practical tips and advice for applying scenarios to near term decisions and risk management.

Commander Steve Kelly, United States Navy OPNAV Planning Group, and Sandra Thompson, Global Director, Strategic Growth, Johnson & Johnson Diabetes Care Franchise, will share their experiences incorporating scenario planning and adaptive strategies to manage uncertainty.

Dr. Scott Snyder, CEO and President of Decision Strategies International, will moderate this interactive discussion and summarize key take- aways and best practices for participants to take back to their own business today.

RSVP:
Space is limited. Reserve your Webinar seat now at: https://www2.gotomeeting.com/register/367870545

The layoff announcements keep coming and are unlikely to stop anytime soon.  This week,among other news, we learn Alcoa will layoff over 13,000 employees and Macy’s is closing stores.  Most of the media attention focuses on the plight of those who lose their jobs.  This is appropriate since those laidoff due to industry-wide economic forces have a difficult time finding new jobs, as those in the financial services industry can attest.

Another group of people with a challenge after layoffs are the managers left with the task of motivating and focusing the nervous and possibly demoralized remaining employees.  Managers can act to can make the post-layoff period a time of momentum building and innovation.

1. Vision and Mission work.  Every employee knows times are difficult and everyone is asking themselves the question ‘Will our organization survive?’  Don’t pretend this private questioning isn’t happening.  Confront it head on with a conversation about the mission of the organization.  What makes the company special?  How do the economic difficulties create opportunities to re-ignite the vision?  How can each employee contribute to the mission? A vision is not a luxury during a time like this.  Employees are looking for a reason to believe in the future of the organization.  Give them one or, even better, create one with them.

2. Invite Innovation through Flexibility.  Your employees know the business as well as anyone.  Give them the autonomy to help solve the organization’s challenges.  Share what you know about industry headwinds and future trends.  Invite your employees to find solutions or new market niches to exploit the changes in the industry.

3. Initiate new Communication Channels. Find a way to institutionalize new internal communication modes.  Make it clear that employee ideas are welcome and create a new forum to report out to your employees and hear back from them.  This could be a weekly video conference, a monthly meeting, a company wiki.  The structure the works depends on the culture of your organization.

4. Start a new strategic planning exercise. A good strategic planning process trains participants to think strategically and think differently about their industry.  If your goal is to get employees throughout the organization to innovate, then you want them to be able to innovate in a strategic manner.  Initiate a strategic planning exercise as a training and employee development task.  The main goal is not to create a new strategy but to get your employees to better understand the current strategy, help modify the strategy to match the new environmental constraints, or  help guide their innovative thinking.

5. Build an internal expertise and knowledge development network. The destruction of informal knowledge networks is a hidden cost of any layoff.  Often the informal knwoledge is not even recognized until it disappears after the layoffs.  The post layoff time is ideal for building a snapshot of the expertise network within the organization and using this to identify mentors and opportunities for employee development.

The bottom line is to give employees a sense that they have some control over the future of the organization and that the future of the organization is strong.  Since the recent past of the organization did not go so well, the only way to create some positive momentum is to take real, visible action demonstrating why the future will be different.

I’ve received a few inquiries about layoffs and future financial performance.  Several years ago I did research in this area and my general findings were that layoffs tended to have more negative than positive results.  The real driver of a link between layoffs and future firm performance is found in management reaction to the layoffs as well as in the way in which the layoffs are implemented.  My general rule was to avoid investing in companies which layoff more than 5% of their workforce in a given year.   Such large scale layoffs introduce a complex array of firm level risk.  It is often wise to wait and see how well executives manage that risk before jumping in as an investor.  In today’s recessionary environment, I would consider shifting that rule of thumb up to 10% of the workforce but I’d still be wary of any large scale layoffs.

In a study of Fortune 500 firms, Peter Chalos & Charles Chen (Journal of Business Finance & Accounting, 2002) found evidence that different types of downsizing strategies have different performance implications. Layoffs related to plant closing led to slightly negative market reactions, layoffs related to cost cutting (renengineering processes, aligning cost structures with market realities, etc.) did not show a significant market reaction, while layoffs related to revenue refocusing (dropping underperforming or unrelated product lines) led to positive market reactions.

Most public announcements of layoffs (and discussions in 10-K footnotes) state one of these 3 reasons for the layoffs. This research suggests that you can use this information as a preliminary guide when assessing impact of the layoffs on future performance.  Most recently announced layoffs fit the second type of layoff, aligning cost structures with market realities.  These types of layoffs are frequently industry wide events and do not reveal much firm-specific information valuable to outside investors.

In a forthcoming post, I’ll outline some ways companies can use layoffs as a springboard for strategic change.

What do you do when financial market modeling based on past performance does not work because the market is acting in a fundmentally different way?

An article in today’s Wall Street Journal explains how one Philadelphia money-management firm, Glenmede Trust, turned to scenario planning.  As someone who works with scenario planning on a daily basis, this does not surprise me.  Scenario planning is an excellent choice when facing a highly uncertain future.  When you feel past trends will not continue into the future, scenario planning offers a disciplined way to set strategy.

Using scenario planning as an investment tool is not a totally new idea.  See the 2005 article in The Journal of Wealth Management by Anne Shumadine.

At DSI, we have a team of scenario planning experts with experience in the financial services industry.  If you have more questions about how this process could work for your company, please contact me.

There is an excellent article at skeptic.com that ties in to my previous post about how cognitive biases contributed to the Madoff investment fraud.

Stephen Greenspan, author of the new book Annals of Gullibility, describes how he was taken in by Madoff.  He describes four factors which contribute to gullible action: situation, cognition, personality, and emotion.

The article is a wonderful read and nicely links these four factors to the author’s personal Madoff experience.  I’ve spent much time focusing on the connections between cognition and situation and enjoyed Greenspan’s discussion of the important roles of personality and emotion.  His arguments are persuasive and have inspired me to dig deeper into the research on the emotional factors.

I’ve also been inspired to buy his book so I guess I am one data point to demonstrate the effectiveness of articles as marketing for books.

Well played Mr. Greenspan!

Ah New Years!  A time for predictions.

Predicting pop culture trends, new technologies, political changes….and of course, the economy.

Am I the only one who feels these predictions are particularly quaint this year?  I get the sense journalists and columnists are just going through the motions.  They know as well as we that 2009 is fraught with uncertainty. No one has a clue.  Once you realize that no one has a clue, the television pundits become particularly entertaining because it seems on TV you need to pretend you actually know something that other people don’t know.  Nevertheless, the ‘2009 Predictions’ stories are fun holiday reads.

In the best of times, we are notoriously bad at predicting the future.  Here at the start of 2009 we face an inflection point.  A moment when the recent past does little to help us predict the future. At such moments, rather than trying to predict the future we can focus attention on identifying the boundaries of our uncertainty.  Let’s figure out precisely what we don’t know rather than trying to look into the crystal ball and fool ourselves into believing we can see the future.  Once we identify the range of our future uncertainty, we can begin to monitor the areas of uncertainty to spot weak signals and we can design flexible strategies that enable us to thrive regardless of how the future unfolds.

This whole ‘embrace uncertainty’ thing not for you?  No worries!  I’ll be glad to refer you to an excellent pyschic who will tell you exactly what will happen next year.

One aspect of international travel that I truly enjoy is reading about the business world from a different perspective.  On my trip to Sydney, Australia earlier this month, I dug through local papers and The Australian Financial Review to get a sense of how the current economic challenges where being felt and understood in Australia.  I look forward to getting a different perspective next month when I head to South Africa.

I found in interesting article in an insert magazine in The Financial Review.  The insert magazine is rather amusingly called Boss.  In the article, Mike Hanley did a wonderful job explaining the limits of the efficient markets logic.  A key limitation is that markets consist of human beings and human perception of risk is predictably irrational.  These pervasive cognitive biases were revealed in the research of Nobel Prize winners Daniel Kahneman and Amos Tversky.  Kahneman and Tversky demonstrated how we can be easily manipulated to become risk-seeking or risk-averse, how we over value confirming data and discount disconfirming data, and how we are overconfident in our knowledge and decisions.

I find it interesting to consider the implications of Kahneman and Tversky’s work for the financial markets.  Because these biases are so ingrained and pervasive, we cannot rely on the ‘wisdom of the crowd’ to save us.  A majority of the crowd will suffer from these same biases and it is folly to simply hope these biases will counteract each other.  Rather, what is needed is a system designed to offset these human cognitive tendencies.  I certainly do not pretend to have the answer of what that system would look like.  However, it would surely include mechanisms to limit considerations of sunk costs, counteract confirmation biases and reveal limitations of investor information.

No worries eh?