Most businesses plan by using two very simple processes. First, managers try to extend the past into the future. Planners build a track record of data on everything from sales and market share to prices and economic variables, and then they extend that into the future. Works well if nothing changes. To consider if something might change, to fine-tune the plan, managers take out a crystal ball and guess about the future. The result? Businesses end up planning for a future that is pretty much like the past.
Then stuff happens. And the business finds itself in the middle of competitive situations they didn’t plan for, and don’t understand. Usually at that point the executives say "no one could have expected this" and make excuses for their poor performance. Not very for the investors who see their share price drop – or employees that lose bonuses, pay raises, benefits or jobs – or vendors that lose orders.
This is exactly how Ford is acting (see chart here). Ford is now saying it won’t turn a profit until 2010! After years of substandard performance, and hiring an extremely highly paid new CEO, the company is still losing money, sales continue declining and no brightness is offered for the future. And the company is blaming this all on what they claim is the unpredictable increase in the price of oil and gasoline (read article here). Full of excuses, Ford is saying that it simply could not predict the decline in large truck sales and growth in small car sales and they could not have shifted production quickly enough to meet market need. So they are going to lay off more workers, take more losses, and put the company in increasing peril of complete failure as they wait for the marketplace to turn around.
Yet, if we look at Toyota, Honda, Kia and many other auto companies they do not have this problem. Is it due to them being small-car only? Of course not. Look at the Honda Ridgeline, a full size truck, as well as the complete line-up of luxury cars offered by these offshore competitors. Somehow, for the last 35 years, these companies seem to have always been able to make the cars customers want when they want them, thus growing revenues, market share and profits.
Rather than simply extend the past, there is a better way to plan. Use scenarios. If every year business leaders sat down and thought up 10 future scenarios, they could plan for them. Would it have been unrealistic, and without merit, for the top brass at Ford in 2006 to have said, "What if the price of oil doesn’t fall or flatten, but instead keeps going up? What if it goes to $90? $100? $150? $200?" And would it have been unrealistic for them to ask "what happens if Tata Motors of India starts exporting their $2,000 auto into Europe and Asia?" Now, I didn’t say these things would happen. But what would the impact be if they did? And what would Ford be able to do if leaders seriously considered these options in advance?
Businesses need to stop trying to plan using past extensions and crystal balls. Instead, they need to create scenarios about the future. Then really explore the impact. These scenarios can open avenues to consider better plans. Plans that don’t require the past perpetuate (or return). Better options can be developed that cover multiple scenarios. And then each year, growth and profits can continue as the organization adjusts to real world conditions and tactics can be utilized based upon the scenarios discussed.
It’s too bad Ford doesn’t try this. If it did, the company might be able to walk away from the brink of disaster and start developing a set of plans that can make it more competitive. And we wouldn’t be waiting to see if 2010 brings small profits, or bankruptcy.