Management SummaryStern Stewart Research // Volume 45
“Turbulence is nothing more than a change that planning could not handle,” Henry Mintzberg once wrote. Although this proposition has always been valid, the recent crisis exposes the true depth of the shortcomings in typical internal planning systems when confronted with market uncertainties.
Most companies lack the systems necessary for the identification of future market swings within their own industries and markets. The common “single scenario” planning approach is particularly inadequate in an economic environment characterized by a high degree of volatility. Although no company will be able to develop strategies or systems that take into account all potential uncertainties, surprisingly many companies do not consider any alternative scenarios: scenarios that would encompass a range of plausible developments and effects and that would more fully prepare a company for sudden performance slumps and changes in the market environment.
The recent crisis reveals an urgent need for a continuous scenario-based planning approach that reflects the volatility inherent in the current market environment. Two dimensions must be considered in such an approach:
- Financial health of the company
An assessment of the company’s financial health that does not aim to forecast potential external developments but rather to detect the critical performance thresholds necessary for maintaining a targeted level of internal financial strength. For this dimension, the financial analysis must focus on crucial performance indicators such as profitability and liquidity.
- Market assessment for each sales market
An early warning system based on key industry-specific and macroeconomic indicators that identify trend reversals within target business markets in a timely fashion.
A “scenario matrix” based on these two dimensions enables management to more adequately prepare for uncertainties and to determine the best response. Within this framework, management will be able to better organize crisis responses, set priorities within the capital allocation process, and make strategic decisions in a more informed and effective manner. We call this Crisis Management 2.0.
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