Greg Kitzmiller04.01.03
Scenario Building
Too often companies leave out important pieces of the strategic planning process when major decisions are at stake.
By Greg Kitzmiller
Plan your work and work your plan. This is a saying that a former boss of mine used to encourage us to plan and not just react. In the current state of the market it appears that many firms are planning and reaping the benefits, while some are getting tossed about by the wind.
Nearly two years ago I wrote a column on strategic planning. That column was picked up by one of the major trade shows and I was asked to present the content of that column at the show. I will not repeat what I said in that column, or that talk, but I want to point out some of the positives and negatives of nutraceuticals today and how proper planning can be beneficial.
Scenario Building
One of the keys to planning is to imagine what will happen if a firm or the industry takes a particular action. Engaging in “scenario building” can help us understand future reactions to certain actions. This means we should consider several scenarios that may take place if we take a particular action. In other words, if a firm is about to raise prices it should consider various scenarios of outcomes. What will competitors do? How will customers likely react? Will the price increase be passed to final customers or if retailers are involved, will they feel squeezed by not being able to increase their price? These are examples of possible scenarios that may help better plan certain actions.
A relevant example to the dietary supplement industry is the long battle that has been fought to keep ephedra on the market. Given the current situation, industry planners should be asking themselves, “What is the worst thing that can happen if ephedra stays on the market?” or “What is the best thing that can happen if ephedra is pulled from the market?” Perhaps they should also be asking, “What do regulators think and what will regulators do?” or “What will Congress do given current available information?” In doing this, the desired outcome is not one opinion. Rather the desired outcome should reveal a number of possibilities for the answer to each question. Each possibility is one possible future outcome. Once this has been done, it becomes possible to assign a probability of occurrence to each of the outcomes. Sometimes it is best to assign the probabilities by involving a number of persons involved to assign their level of probability and then averaging or weighing those probabilities. By discussing a number of possible outcomes and assigning probabilities it often becomes clearer what the real consequences of any action will be.
One way of enhancing scenario building is to ask those opposed to a particular action to outline what they believe should happen. In a recently published article it was suggested that DSHEA (the Dietary Supplement Health and Education Act) may need to be revised, and it also suggested the controversy over ephedra may be the stimulus for revision. While I am not commenting about the truth or possibilities of such action, I am suggesting that perhaps asking those in Congress their feelings can add to building realistic scenarios.
On the other hand, it has been recently reported that PepsiCo’s Propel fitness water may reach $100 million in sales for the year. This is among one of the many reasons that it is interesting to watch PepsiCo in the marketplace. It was recognized first in reports in 2000 that carbonated soft drinks in the U.S. were becoming a mature market. PepsiCo jumped on the opportunity to buy Quaker and get Gatorade to add to their vision for a nutraceuticals platform originally based on Tropicana. Propel is an excellent example of fine planning within the beverages market. We can’t claim that they have used scenario building but surely the company considered options in the future of the beverage market and most likely what were the paths to success. PepsiCo has become a firm that is very adept to shifting as the market shifts. Normally such ability comes from playing out various scenarios and being prepared when there are changes.
Is Strategic Planning Dependent on Company Size?
Larger firms are often more likely to use strategic planning tools. In fact, a recent survey of small to medium-sized firms that ship internationally found that no planning was involved for most of the firms in their entry into a foreign market. Small to medium-sized firms often enter a foreign market through one of two methods. Either these firms are contacted by a distributor or customer from another country or they attend a trade show, sometimes an international trade show, and then start doing business with those distributors or customers that express an interest in their products. This process seems logical to the small business owner until they start shipping to four or five non-related countries, dealing with several different languages and many sets of forms and laws. Scenario building in this case would have been very useful.
Assume the firm is approached about doing business in another country. Also assume that the deal looks interesting. That is the time to stop and consider alternatives, such as, is this a country that would represent a reasonable long-term market? What will happen if the company accepts the offer from this firm? Are there other customers or distributors better suited to the company’s needs? If they enter a particular country, will there be expansion opportunities (e.g. all of South America, more of Eastern Europe, etc.)? There are a number of documented cases where going with the first distributor in another country was not the best long term partner. Perhaps they needed a stronger partner capable of growing with their business and representing them in a larger region. In other cases it has been found that the first distributor to approach a firm already carries lines from a competitor. Had the manufacturer or exporter been able to consider several longterm options they would clearly have chosen another route to market.
Summary
This column is not necessarily about doing business in a foreign land, or about beverages, or about ephedra. The point is that far too little planning often takes place when major decisions are at stake. Plan your work and work your plan. Allowing for changes along the way, scenario building can be a great way to plan out various options and think ahead of the competition.NW