I was talking to a restaurant waiter this week. He was bemoaning his fate. He had a large van, complete with overstuffed chairs, movie player – the works – for his family to drive in comfort and his children to enjoy. But when gasoline hit $4.00 a gallon he thought it unaffordable. So, as he told me, when he paid $150 to fill it one day he quickly sold it for almost nothing. He took out a loan and bought a car that used less gasoline. Now gas is under $2.00, and his family is tired of his smaller car. But he's locked-in to the payments, so now he can't afford to switch back. (Read about low oil prices here.)
He didn't plan for oil to go over $100/barrel, and he was caught with too costly transportation. But he didn't do a careful analysis of the fixed versus variable cost of trading for a higher gas mileage car – and now he's unhappy with oil at less than $40/barrel. Because he didn't think about the future possibilities he was unprepared for BOTH scenarios – and he's "one unhappy camper" these days.
But like my waiter, most businesses don't do enough scenario planning either. Instead, they simply plan for the future to be mostly like the past. When things shift, they simply try to Defend & Extend old business practices without thinking about what is most sensible. Most were unprepared for higher energy prices when they came along – even though analysts had been saying for years that America was primed for supply chain shocks from natural events or refinery problems. So too many made investments on the short-term price run-up, investments that are likely to take a lot longer to pay off with lower energy prices.
Likewise, most businesses aren't planning for unexpectedly low energy prices. Instead of investing these savings on new innovations that could make them big winners when the recession subsides, most are using what's likely to be a fairly short-term windfall to subsidize old business practices that are rapidly becoming obsolete. Instead of using the gains to create a new future, they are using them to subsidize out-of-date business models at a time when investing is likely to have enormous future payoffs. They are acting like cheap oil will be here forever – a situation we know isn't likely to occur from all we've heard the last 2 years!!!
Planning isn't about doing more of the same – and trying to figure out how to preserve past practices. Planning is about looking into the future and asking "what if something unexpected happens? Am I prepared?" We don't have crystal balls, and for that reason it is incredibly important to plan for situations which aren't like the past – because those are the ones which create competitive opportunities for us, and against us.
Scenario planning isn't done by many organizations. Instead, planning is designed to whittle down the number of potential options. As a result, the forecast is for something most like what is occuring today. Six months ago, everyone was planning for $150 oil. Now they are planning for $35 oil. And the answer is to plan for both! By understanding the impact of both options it allows us to be far better competitors, and to guide our businesses toward opportunities. And never had that been more true than in the chaotic competition characterized by our currently shifting global markets!