Throughout the COVID-19 pandemic, news headlines have frequently focused on the plight of small businesses, many of which experienced temporary or permanent closures, furloughs, or pivots to a new operating model. As bad as those headlines sounded, however, actual business exits — or “deaths,” as the Federal Reserve calls them — were surprisingly not as common as we might have expected. An April 2021 report by the Fed shows that the pandemic resulted in the permanent closure of approximately 200,000 U.S. businesses above historical levels, which consist of about 7.5 percent of firms and 8.5 percent of establishments each year. At the same time, the rate of new entrepreneurs in 2020 increased, with an average of 380 of every 100,000 adults starting a new business in a given month, according to the Kauffman Foundation’s 2020 Early Stage Entrepreneurship National Report. Among those starting new businesses were “necessity entrepreneurs” — individuals who became entrepreneurs after losing their jobs.
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The pandemic is a perfect example of a scenario that many businesses didn’t see coming and weren’t prepared to withstand. As the economy reopens, businesses of all sizes are reflecting on lessons learned and considering how to plan to prevent being caught by unforeseen circumstances in the future. But businesses can fail for any number of reasons, including personal, environmental, regulatory, and market-based factors. How can you anticipate potential problems before they happen? Scenario planning, a way of visualizing different futures for your business, can help you plan for both good news situations and bad.
What We Can Learn from the Military
Scenario planning, part of a discipline called strategic foresight, has its roots in the military, and took hold after World War II, as the U.S. contemplated the possibility of nuclear war. Herman Kahn, a military strategist and systems theorist at the RAND corporation (a nonprofit research organization created by the Air Force), developed and refined scenario planning to plan for the uncertainty associated with nuclear proliferation among the world’s biggest powers. A more simplified version took hold in the private sector after an executive at Royal Dutch Shell modified the military’s approach for business use in the early 1970s.
In an article for the Harvard Business Review, author J. Peter Scoblic writes that although Royal Dutch Shell used scenario planning successfully to ride out the 1973 OPEC oil embargo, the idea of institutionalizing scenario planning as part of an effort to achieve strategic foresight hasn’t really caught on among businesses that have conducted such exercises. However, Scoblic describes how the U.S. Coast Guard uses scenario planning as part of a “cycle of strategic renewal,” and suggests that it could offer a learning model for the business world.
How Scenario Planning Works
Scoblic argues that the best scenario planning embraces a decidedly nonlinear conception of time. In the Coast Guard example, Scoblic says participants in the scenario planning process came to understand that the demands of the past and the future didn’t compete with each other. Instead, they were seen as complementary. Scenario planners identified present trends and imagined how those trends would create plausible future situations. Then, they worked backwards to build stories of how those situations occurred and worked forward to develop strategies.
The process, according to Scoblic, should include seven steps: inviting the right people to participate; identifying assumptions, drivers, and uncertainties; imagining plausible, but dramatically different, futures; isolating strategies that will be useful across multiple possible futures; implementing those strategies, and ingraining the process to keep the organization continually focused on the future. As Scoblic points out, establishing an iterative cycle helps prepare planners for how quickly needs and assumptions can change.
The beauty of Scoblic’s model is that when a crisis such as the pandemic occurs, there should be far less scrambling and far more deliberative decision making, because the business has already considered the same or similar scenarios that could affect its ability to operate. Theoretically, a business may have already made decisions -- in nonemergency situations -- that reduce the number of systems and processes that would need to be upended in a crisis.
At this point, you may be thinking, “But my business is very small, and scenario planning seems both complicated and daunting. Do I really need to go through an exercise like this?” An interpretive adviser -- one who considers both your personal financial goals and your business goals -- would say yes. That’s because, as an entrepreneur, your personal and business lives are directly linked, and what happens in your business can easily affect your personal plans for retirement, philanthropy, or creating an inheritance for your children. In short, you can’t afford not to think about it. The good news is you don’t have to be alone in the process.
How An Interpretive Adviser Can Help
While small businesses may have few or no employees and no board of directors, entrepreneurs still have options when assembling a scenario planning team. Beyond those directly involved in your business, you may have industry peers whose opinions you respect, vendors with whom you have a good relationship, and perhaps even customers or clients who depend on your business for their own success. Your adviser can also provide a unique perspective because he or she understands how one side of your life affects the other. In addition, an adviser who is a CPA can create financial models that can put best and worst-case scenarios into perspective, or audit your processes to realistically assess how different scenarios could interrupt or otherwise affect them. An adviser who specializes in working with businesses, or with your industry, can also expose you to best practices in other organizations as well as act as a trendspotter, pointing out the drivers that could lead to future scenarios.
If we learned anything from the pandemic, it’s that crazy, unimaginable things could happen anytime. Scenario planning can help you be ready, by future-proofing your business.
