I’ve talked about scenario planning several times during this recent financial crisis. Scenario planning is the first step in becoming an evergreen Phoenix Principle organization that can achieve above-average long-term performance. If we overcome our tendency to focus on what we’ve always done, and what we do today, by getting our eyes set forward we can do a lot better job of providing markets what they want, when they want it and at a healthy profit to boot.
First, think about big trends. It was 3 years ago that home values flattened, and the decline in sales started. Using that information, it was possible to think ahead to what it would mean. U.S. consumer consumption would decline (which has now happened for more than a year) as home values flattened, and then declined, because there would be less home equity to be used for buying stuff. Additionally, holding on to higher mortgages meant that consumers would have less debt capacity. Further, falling prices would mean fewer new home creations, which would mean less being spent on carpeting, refrigerators, furniture, and all that other stuff. Furniture retailers and appliance retailers would struggle.
Of course, it wasn’t hard to imagine that some people on a merry-go-round of home sales would see the merry-go-round stop — leaving them with mortgages they couldn’t afford and homes worth less than they paid. That would lead to foreclosures – and then what would happen to all those packaged mortgage instruments being sold by investment bankers? And if banks couldn’t resell the mortgages, where would the deposits come from to support new mortgage creation? And if the bankruptcies rose, what would happen to those who guaranteed the mortgages (like Freddie Mac and Fannie Mae) and those who bought all those bonds (like AIG)?
OK, so it’s easy to see in retrospect. But what about going forward? Well, think about autos. We know that the consumer isn’t going to see their homes going up in value for a goodly while. Nor will there be easy credit for buying cars. So, what would you expect? Why, declining auto sales of course. The next few years are destined to be very tough for the already strapped automakers General Motors, Ford and Chrysler. So even though auto sales have been declining for 11 straight months (which is a 17 years record, and puts sales at a 15 year low [read article here]), and sales are off 26% to 34% versus a year ago for most American manufacturers (read article here) there’s really no reason to expect new car sales to start going up again any time soon. And we can see that GM bonds are now yielding a whopping 21% as people doubt their ability to repay those debts. But also, we can expect the number of auto dealers to decline. And now the news is reporting America’s largest Chevrolet dealer just filed bankruptcy, laying off 3,200 people, as the industry anticpates 600 dealer failures this year (read article here.) Tight consumer credit hurts sales, and also hurts the stocking of inventory on dealer lots.
Picking up on big trends can help us build a picture of the future. That picture doesn’t have to be completely accurate to help us plan. If we plan for the future, we can still succeed.
Back to our auto business. If we don’t buy new cars, we keep our cars longer. That means more maintenance. And more purchases of replacement tires, starters, and all those parts that wear out. It also means people will probably do more auto washing and cleaning to preserve their existing autos. And they are more likely to spend a bit to upgrade the existing car, say upgrading the stereo or the wheels, to brighten up life without the expense of buying a whole new car. And if dealerships are declining, then that maintenance and upgrage work will go elsewhere. So now would be a good time if you are a dealer to improve the maintenance departments to attract new customers, and help them with upgrade sales. And now is a good time for Pep Boys and Auto Zone to do better. The local car wash just might do OK, and if it offers various upgrades to add onto the wash they have the chance to boost the average ticket value of each wash. So while overall auto sales are dipping, this would be a good time to invest in all the support businesses for cars.
Someone once said that in business for every loser theirs a winner. I’m not sure if that is true. But what is true is that if you do your planning by looking squarely into the future, and building scenarios of most likely outcomes, you’ll do a lot better than if you keep planning for the past to continue. And once you have a good set of future scenarios, it can help you to compete a lot more effectively. Dealers that start being a lot nicer back in the maintenance area, and send out mailers to previous customers offering deals on oil changes, transmission changes, radiator tests and replacement tires will compete better than those that just keep running newspaper ads for us to buy the latest new car. Scenarios can help us to not only prepare, but compete a lot more effectively. No matter what our old Success Formula was, we can move to ones that are more profitable if we keep developing those future scenarios and implementing what future markets need.