Managers hate uncertainty—and for good reason. It complicates plans and often triggers performance-eroding stress.
Unfortunately, this environment of uncertainty shows no signs of going away any time soon. If anything, the interconnected global economy has actually increased the likeliness of amplified economic shocks. For example, financial exposure to foreign economies has played a role in doubling the number of financial crises in developed countries since the post-war period.
These events often surprise managers because they seemed so unlikely. People tend to assign low odds to things that stray from "normal" and that often sets them up for crippling surprises. If stock market returns, for example, followed a normal curve, they would move more than 7% in a single day only once every 300,000 years. Between 1916 and 2003, they did so just 48 times.
By adapting the strategic tool of scenario planning, managers can effectively size up, and work through, periods of business uncertainty. This method provides a structure for stretching managers' views of the possible and pressure-testing decisions within their parts of the business. Managers who anticipate hidden weaknesses and inflexibilities within their organization, and address them long before they become real problems can significantly reduce the potential negative impact to their business.
Selecting Change Drivers: What might drive changes in the future environment relevant to your business? Good places to start include:
Political issues; and
Creating a Framework: Which drivers are most uncertain and most potent? Select a pair from your list of drivers and create a simple 2 x 2 formula.
Brainstorming Possible Outcomes: What could happen in each combination of drivers? Be daring and aggressive in imagining worst-case scenarios here.
Provided by Corporate Executive Board —What the Best Companies Do™