Starting a strategy consulting firm (ex-McKinsey, BCG, Bain, Deloitte, etc.)
Hi everyone and welcome to another episode of the management consulting podcast series where we discuss the business of running a consulting firm. In today’s episode I would like to talk about the route behind the creation of most boutique strategy consulting firms and offices of larger firms.
For example, if KPMG wants to open an office in a new territory, it will bring in a consultant who has either worked at KPMG or a consultant with expertise in that local region from a rival firm. If you are launching your own business, the odds are very high that you have already worked at a Deloitte, a McKinsey, Accenture, or even at a tech firm.
In fact, you bring in the skills of your prior firm into your new organization.
Who usually establishes boutique strategy consulting firms and offices of larger strategy consulting firms
A majority of strategy consulting firms and smaller offices are created by consultants who worked at larger firms and larger offices.
One of the biggest challenges faced by such consultants is that they take an idea, concept, toolkit, framework, or some kind of intellectual property which is usually a very narrow set of frameworks that they repurpose for their new role. This is the way all such consulting firms are founded whereby the root of the firm is that they have been exposed to a toolkit of frameworks which the consultants feel they know enough about and feel there is a market for. The challenge is what happens after that narrow set of skills is exhausted in the market.
Every firm is founded this way whereby the founders learn a set of skills and they feel that that narrow set of skills can be the foundation of a new firm.
What is required to build a sustainable strategy consulting firm or office
There will be challenges if this is the sole source of the value in the strategy consulting firm.
Every single strategy consulting firm when it is founded or every single person interested in management consulting looks at books or journals such as the Harvard Business Review or McKinsey Quarterly. So, for example if one wants to learn how to do a corporate finance strategy study, they will most likely go to the McKinsey Quarterly or read a book on valuation and hope to be exposed to a framework or an approach.
Even when consultants think from 1st-principles, they will use this approach to solve a problem and realize that approach is useful across more than one client. This is how a methodology is born. So there are always these tools and techniques sitting at the heart of a firm and/or office.
Strategy publications are intended for executives
When information or publications are written about strategy, there are two audiences. The first audience is executives, people that run Ford, Google AT&T, who are not interested in how to develop a framework. They are not interested in how the study is structured or in the thinking that goes into the development of the approach. They just want to see the overall final picture. A lot of strategy publications cater to this audience.
The other audience are strategy consulting practitioners, the people that put together the analysis and the thinking that serves a client executive. Those are the people who need to know how to develop a framework to figure out, for instance, how AT&T can reduce expenses for the capital needed to rollout a new network.
A lot of the things you read about strategy, if you are a strategy consulting practitioner aka strategy consultant, is not designed for you.
When McKinsey is publishing the McKinsey Quarterly, it is not trying to advise other consultants on how to develop new ways of thinking and develop new frameworks and new ways to solve a problem. In fact, it is trying not to educate you to do that because then you become a competitor to McKinsey. So, its audience is executives and the material it publishes is about how those executives can understand some important insights to manage their business.
But it’s not explaining to the executive “okay if you’re in the telecom sector – how do you go about figuring out the problem you have? How do you go about constructing the framework to solve the problem?” McKinsey does not want to train people to do that neither does Bain neither BCG or the Harvard Business Review.
Although with the Harvard Business Review, maybe 10% of the articles do concentrate on that category but it is a very tiny group and shrinking as well.
As a strategy consulting practitioner you need to figure out how to develop frameworks
A lot of strategy consulting practitioners assume that the content in publications such as McKinsey Quarterly are targeted at them. But the McKinsey Quarterly audience is not that of strategy consulting practitioners, but the end user of the engagement. The client. So, as you are learning how to do things as a strategy consulting practitioner, your job is not to memorize frameworks. Those frameworks are for executives. Your job as a strategy consulting practitioner is to figure out how to develop a framework.
Even today the most sophisticated MBA programs in strategy in the world teach you the Porter’s framework or a corporate finance or corporate strategy framework. I have colleagues who are ex-partners at McKinsey who teach at major MBA schools and they also teach frameworks.
But as a strategy thinker your job is not to source all the frameworks in the world but to figure out how to develop them. For instance, if you go to a telecom client you need to ask yourself ”How do I develop this framework to solve this problem?” And it is a very hard skill.
So, how do I learn how to develop these frameworks?
There are two ways to do it.
One is to look at what we teach in TCO around brainstorming and how to develop structures which are frameworks. The other two areas where you can learn this is in our program called “Follow a full McKinsey, BCG et al. engagement”, which has about 270 videos. My favorite one is the Corporate Strategy and Transformation Study where FC Insiders can go to the beginning of the study to see how we structure the problem.
The reason I like this particular program is because in this study there is no clear objective function and no clear problem statement and nothing that you are maximizing. So, it’s a much harder problem statement to develop and then you have to build out the way you’re going to solve it. That becomes your structure, which is a fancy word for saying framework.
A brilliant concept is not enough to establish a sustainable strategy consulting firm
You will quickly realize that the brilliant concept you have – probably learned from your previous employer – does not have that much traction and quickly loses its luster in the market.
As I mentioned before, developing frameworks is very hard. I know many partners obviously and what I have noticed is that over time they develop a framework of a concept, which they think is incredibly useful, and then just stick to it forever. That means that every single client they go to, they have this framework which they have spent their whole lives thinking about and they use it to solve every problem.
There is nothing wrong with that. In case you have a way of thinking about shareholder value creation, you should take it to every client but it shouldn’t be the only thing you take to every client because shareholder value creation is a big field. You have to manage assets within assets, and you need a way of thinking about how to maximize returns on those assets. You would need to develop another framework because every client is so different, and every issue is so nuanced.
Now if you look at the latest work we do around market entry strategy, you would see that our thinking on market entry strategy is radically different from anything anyone else has out there.
When we explain it to people, it makes perfect sense to them but the gist of that is that the first rule of market entry strategy is not to consider entering a market and when we teach that to people they don’t really see how that makes sense until we explain it to them.
FC Insiders have access to all these programs (email [email protected] to learn how to become an FC Insider). Although, for a limited time only, if you go to firmsconsulting.com/promo and optin for email updates you will get access to sample advanced episodes that we used to teach FC Insiders. But I am also going to teach you some concepts here.
The idea is new. You love the idea. You evangelize it. Clients listen
I have known many people who have left consulting firms at various levels. One of the primary reasons they leave is that they have an idea that they have been exposed to at the consulting firm. They have used it with the client in an engagement or a series of engagements and they love the idea. They think there is a market for the idea. They love the idea so much that when they take it to the client, they evangelize the idea. They think so highly of it and the client listens just because the consultant is so captivated by the idea.
But here is the thing you are going to face.
You develop idea fatigue. You have less enthusiasm. You need to dress up the idea.
Over time, if you are still repeating the same idea to clients, even if the idea is new to a client, it is not going to be new to you. You know the idea is getting old. You know your original employer is coming up with new ways of thinking. Even if the client does not know your idea is old, you are aware that your idea has a sell-by date.
So, whether you like it or not, you develop idea fatigue. You’re so used to repeating the whole song and dance about the framework, structural approach to solving a problem that you go into a mechanized approach whereby you just talk through it not because you’re excited or because you’re following what the client is saying, but because you have an elevator pitch.
You stop thinking and just talk.
When you have an elevator pitch, you always have less enthusiasm and you feel the need to dress up the idea. So over time when you take the approach to 50 clients you think that at least 12 of them need to be more impressed, even though its really you suffering from idea fatigue. So you start expanding the idea even though the idea may make perfect sense and still may be valuable.
You start dressing it up because in your mind the idea does not make a lot of sense anymore or at least it’s tired.
The idea is old. You have no ideas. Your business is built on the original idea. You double down
The idea is now officially old. You have no new ideas because you never learned how to develop frameworks. You just memorized a few that got your business off the ground. Your entire model of being a consultant was to go find a framework and then show it to a client and get paid for it.
Just because you have a new framework that you do not fully understand and do not know how to use properly doesn’t mean you are adding any value to a client. The job of a consultant is not to have a good framework that they misuse, but to have at least an okay framework that generates a good solution for a client. So, focus less on having the best framework and doing more with that framework you have.
We get a lot of emails from people asking for frameworks and I understand that they are under pressure and they want to use a framework but what if you have a framework? How many people have the Porter’s five forces framework? I think we can all agree that Michael Porter probably spent a lot of time thinking through that framework. But I have never seen a strategy developed on the Porter’s five forces framework mainly because people do not know how to use it.
Same with the profitability framework. It is probably the most well-known framework in the world, but most people do not know how to use it.
An older framework used correctly is far more effective than a new framework that you cannot use appropriately.
Coming back to this. You are stuck with the framework you have. You left the firm so you cannot get access to new frameworks, so you double down on the framework aka the type of business you have. I was looking at something developed by a pharmaceutical pricing consultant from McKinsey a few days ago and he has this very detailed approach but that is all he has because it is the only thing he knows.
Every single problem he sees in pharmaceuticals is related to his framework and even if it is not related he will bring it back there. That is the danger you face when you have not developed a skill of building unique frameworks for a particular unique problem. If a client problem arises which could be very lucrative but you don’t have the ability to build an approach to solve it, you will default to the frameworks you already have.
And if problems could be solved with standard frameworks no-one would need to pay consultants millions of dollars. Clients could buy a textbook with frameworks for $50 and use the frameworks from there.
You are older. It’s hard to develop new ideas. You methodize the idea. You make yourself an expert in the idea
Now as you get older, and in consulting we age much faster, it is hard to develop new ideas. Never ever develop age defying serum from the DNA of a management consultant. Its a bad idea.
What I have seen is that all the consultants who have not developed the ability to develop frameworks, and new ways of thinking, double down on the idea that started their business and develop methodologies around it. So rather than approaching every problem as new and building a unique framework around it, they take that framework that they inherited from their previous employer and start building in detailed steps behind it.
Then they will go to clients saying this is their approach and that they know exactly what they are doing. They will then make themselves an expert in the idea and may trademark the framework. They will start saying “My name is Malcolm Peterson who is the founder of the advanced procurement optimization methodology. Registered trademark…”
These things develop with good intentions but indicate bad underlying problem-solving skills. And this happens to all firms. Even firms founded by ex-McKinsey partners. How many ex-McKinsey partners have founded thriving boutique consulting firms? Think about it, how many of them have lasted more than five years, let alone 10 years? I personally only know of one. They all have given up.
Not because they are not smart. They get lazy. Developing a new customized approach to solve every problem takes up a lot of brainpower and nobody wants to do that. It is incredibly hard to really solve a problem from 1st-principles each time. But each time you do, you create a new framework.
And if you could develop that knowledge, which the is the main competitive advantage of a consultant, it is virtually impossible to use. That sounds counter-intuitive, but it is not. (Let us know if you want to know more about this competitive advantage and why consultants fail to maintain it.)
So, for example, if you are an MBA student or you are starting your own firm you’ve been taught that strategy is a set of frameworks. Remember, that is strategy for an audience that are executives. They are interested in frameworks. If you are a strategy practitioner or strategy consulting practitioner, you need to start developing frameworks and approaches and not memorizing them and collecting them.
Self-Assessment: Compare your own performance/planning to where you should be
So, here is a self-assessment. When you are talking to clients, ask yourself this, “I will focus on a problem versus an approach because…” I have explained to you why you will focus on the problem versus the approach. The approach is the framework. You do not focus on the framework because if you only focus on frameworks and never focus on the problem, you never learn how to build a framework to solve the problem. You need to focus on the problem and then develop an approach to solve the problem, which becomes your framework. If you focus on the approach, all you are doing is looking for the right framework.
I use the market entry strategy as an example because it is a classic example where everyone is taken aback when they see why a very conventional framework is wrong for market entry. You must explain this to the client because clients always see standard frameworks. You must be able to explain to them why you are not going in with the standard framework.
Or let us assume that you have a framework that is perfect for the client. In that case use it. But a lot of times what you find is that the framework that the client wants is not correct because they have not assessed their problem correctly. If the problem statement changes, the approach to solve the problem will change. If the approach changes, the framework will change because the framework is the approach.
So how do you lower a client’s resistance to not using traditional frameworks?
So, must get comfortable explaining to a client why in certain situations you are not using a traditional framework. But you need to develop a new way to solve the problem.
How will you lower resistance to this? Well, I’ll talk about it more later but basically you lower resistance by offering them a chance to see how you would do this for free and I’ll show you how this is done in a few more episodes but when I say free I don’t mean working for free completely.
I have done such work when I was at the firm and we charged hundreds of thousands of dollars, but there are times when you do free work. You have to do it strategically and I’ll talk you through that.
Avoid the urge to build long presentations. People always fall for this trap whereby they think that things will just be easier if they can have some long-detailed presentation to support their thinking and talking. It never works that way. It is just going to slow you down and never teach you how to talk to clients. Clients buy on trust. Not the length of a presentation.
If you are interested in more information on how to build a strategy consulting firm, what I would recommend is to write a comment on YouTube under this video. This is because we use the comments on YouTube and Reviews on iTunes to guide future episodes. So, tell me what are the things that you liked about the episode and questions that you want answered in future episodes. Put it in and we will build it into future episodes. As always, I look forward to speaking to you in the next episode.
If you want to see samples of our advanced training materials go to FIRMSconsulting.com/promo and sign up for free to receive sample materials.
Recommended books:
When people think about the business strategy we often think about the field of strategy consulting/management consulting and firms like McKinsey, BCG, et al. If you are interested in learning how to conduct a management consulting engagement, you will likely enjoy this book. Succeeding as a Management Consultant is a book set in the Brazilian interior. This book follows an engagement team as they assist Goldy, a large Brazilian gold miner, in diagnosing and fixing deep and persistent organizational issues. This book follows an engagement team over an 8-week assignment and explains how they successfully navigate a challenging client environment, develop hypotheses, build the analyses, and provide the final recommendations. It is written so the reader may understand, follow, and replicate the process. It is the only book laying out a consulting assignment step-by-step. A great book if you want to enhance your presentation skills.
Bill Matassoni’s (Ex-McKinsey and Ex-BCG Senior Partner) Marketing Saves The World is a truly unique book. Never before has a McKinsey partner published his memoir publicly. This book is a rare opportunity – a true exclusive – to see what shapes the thought process of a partner and learn about marketing and strategy. The memoir essentially lays out McKinsey’s competitive advantage and explains how it can be neutralized. A great book if you want to enhance your presentation skills and communication skills.
Turquoise Eyes started off the groundbreaking new genre developed by FIRMSconsulting that combines compelling narrative while teaching problem solving and critical thinking skills. Set after a bank begins implementing a new retail banking strategy, we follow Teresa García Ramírez de Arroyo, a director-general in the Mexican government, who has received some disturbing news. A whistleblower has emailed Teresa with troubling news about a mistake in the loan default calculations and reserve ratios. The numbers do not add up. The book loosely uses the logic and financial analyses in A Typical McKinsey Engagement, >270 videos.
—
WHAT IS NEXT? Sign up for our email updates on FIRMSconsulting.com/promo. This way you will not miss exclusive free training episodes and updates which we only share with the Firmsconsulting community. And if you have any questions about our membership training programs (StrategyTV.com/Apps & StrategyTraining.com/Apps) do not hesitate to reach out to us at support @ firmsconsulting.com. You can also get access to selected episodes when you sign-up for our newsletter above. Continue developing your strategy skills.
Cheers, Kris
PODCASTS: If you enjoy our podcasts, we will appreciate if you visit our Case Interviews podcast or Strategy Skills podcast on iTunes and leave a quick review. It helps more people find us.
COME HANG OUT WITH US: Youtube / Facebook / Twitter / LinkedIn / Instagram
ENGAGE ON FC FACEBOOK AND LINKEDIN GROUPS: Strategy Skills (FB) / Case Interviews (FB) / Strategy Skills (LinkedIn) / Consulting Case Interviews (LinkedIn)
WANT TO LEARN FROM FORMER STRATEGY PARTNERS? BECOME A PREMIUM MEMBER
Some links above are affiliate links. As an Amazon Associate we earn from qualifying purchases.
What is scenario planning and how to use it
In today’s post we are going to talk about scenario planning, the last technical input that went into the visioning workshop /strategy workshop as part of the Corporate Strategy & Transformation study.
We will discuss what is scenario planning, some reasons why the scenario planning tool is insufficient to make decisions and steps in scenario planning. We will also offer an example of how to use this tool in visioning workshops with clients.
What is scenario planning
Before we discuss how to conduct scenario planning let’s look at what is scenario planning.
So what is scenario planning? Scenario planning is a planning tool used to make flexible long-term plans to deal with major, uncertain shifts in the organization’s environment.
It is also a tool that allows companies to develop a resilient strategy or test the flexibility of the existing company strategy against various possible future alternatives.
In other words, scenario planning is a structured way for an organization to identify and gain a deeper understanding of the underlying major drivers of change, think about how those potential changes may impact an organization, determine what is required for the organization to succeed if potential changes occur and develop the strategy accordingly.
And no surprise, scenario planning has its roots in military strategy, with the use of scenario planning in business pioneered by Shell.
One interesting aspect of running a scenario planning workshop for a client is that as we run a scenario planning exercise we are basically admitting to the client that we cannot predict the future. We just can’t do it. There are too many uncertainties.
No consulting firm anywhere in the world can do this since no analytic technique exists to predict the evolution of a market. This is an important insight to keep with you.
And even of uncertainties we are certain will occur, we can’t predict how those variables will change. They can go up or down, or sideways. For example, the price of oil could go up or down. We know it is uncertain but we don’t know which side it can go.
So in a scenario planning exercise the first thing you are doing is you are admitting to the client that there are uncertainties and, even if you can predict some of the uncertainties with certainty, you can’t predict with certainty which side the uncertainty will go.
Instead, you are helping the client to determine which of these uncertainties are the most important ones. And given the fact that uncertainties can go in either direction, you are helping client to understand what would a market look like depending on the multiple combinations and permutations of the most important uncertainties.
Some limitations of the scenario planning tool
Scenario planning is something that is useful, definitely spurs conversation, yet this tool is by itself not sufficient for client to make a decision. It is just one of the tools in a strategist’s armoury.
There are number of problems with scenario planning.
One, with scenario planning you get these very loose guidelines about the future and you still have to figure out what to do with it.
There is also a risk that the organization’s leadership will act like deer in the headlights if faced with a broad range of uncertainties and possible outcomes. That is one of the reasons why we prioritize uncertainties so it can be displayed on a two-by-two matrix, as explained below.
Scenario planning also runs the risk of executives becoming complacent. Executives can assume that all potential futures were considered so there is no need to keep their mind open and constantly scan the environment for drivers of change, their potential impact on business and actions required to prevent negative impact.
Extreme scenarios are also often ignored as they are deemed highly unlikely to happen. Yet, as financial crises and many other events showed us, this type of limited scenario planning can be very deficient. Instead all extremes, positive and negative, must be considered during scenario planning.
Scenarios are also often viewed as right or wrong, and as static. With this line of thinking “wrong” scenarios are often disguarded. Instead, scenarios should be viewed as something that are a work in progress and which are adjusted over time as more information becomes available and as environment changes. It is crucial to remember that scenario planning is an iterative process.
Despite the limitations of scenario planning, it is still a powerful tool to have in the strategist’s armoury. You need to know this because it is still useful as a staging point for a discussion.
Firmsconsulting’s 6 scenario planning steps
We usually do the scenario planning exercise nearly a 3rd of the way into the visioning workshop. And, unless you have educated the executive team about the issues and you would have done that through the case studies and the industry analysis discussion, they are going to start throwing out issues that are not really issues. So the scenario planning exercise only works well if you have seeded the right concepts in there.
If you haven’t and they are working off with context base that is completely inappropriate you are going to have a problem. The entire exercise will fail.
Once an organization’s environment is well understood after discussing industry analysis and case studies, scenario planning can begin.
Scenario planning is run following a logical sequence of steps, which are actually the same in every single study.
Step 1 – “Brainstorm” major issues impacting the sector
The first step of the scenario planning exercise is to sit down with the executive team and “brainstorm” major issues impacting the sector.
Here we need to do the kind of brainstorming that Alex Osborn (the “O” of legendary ad agency B.B.D.O.) invented in the 1930s and popularized in his 1953 book “Applied Imagination“. The kind of brainstorming where a group of people throw out ideas in a meeting, or in Osborn’s words “using the brain to storm a creative problem”, and do so with the absence of criticism or negative feedback. The kind of brainstorming that, according to Osborn, was central to B.B.D.O.’s success.
However, please keep in mind that usually when we talk about brainstorming within the context of case interviews and management consulting, we are talking about a very different process vs. the type of brainstorming process which we use in scenario planning. Usually when we refer to brainstorming we are referring to a structured, methodical, logical process of identifying drivers of the issue, which ultimately can be showcased as a decision tree.
As the “brainstorming” process gains momentum, it helps to ask executives to look beyond the medium term. If executives only focus on the short- and medium-term they will tend to extrapolate current environment conditions into the future. Asking them to think beyond the medium-term resets their mindset and makes it easier to see what are the major drivers of change, how those drivers may change in 5-10 years and how they can impact the organization.
Issues are ideally listed with a thick marker on separate Post-It Notes and placed on the wall. All the participants should provide input so they feel a sense of ownership. All inputs must be publicly displayed versus being captured on a laptop by a consultant who resembles a squirrel.
Step 2 – Cluster Issues into groups
Once you have listed all these issues, you need to cluster them into two groups.
The one group is what are the predictable things we know will happen. And the other group is what are the uncertainties.
Step 3 – Select top 2 drivers of change
Then we can put aside certainties and we need to determine which uncertainties are highly correlated and can be combined (Post-It Notes stuck to each other and placed on the wall) and which uncertainties are not key drivers of future scenarios (removing Post-It Notes from the main wall to a separate area in case the group wants to go back and reconsider adding back certain variables).
Key independent uncertainties are then prioritized to identify those having the most impact on the business. Specifically, we need to rank independent uncertainties from one that has the biggest impact on organization to the one that has the least impact on organization. So if we come up with 10 independent uncertainties we will list them, one having the biggest impact, two having second biggest impact and so on.
This exercise should help to cut down the number of uncertainties to 3-4, usually because independent variables can be clustered into 3 or 4 groups. And out of top 3-4 we should further prioritize the top 2. And, as stated above, it is a key to make sure such 2 variables are not dependent on each other.
Step 4 – Develop a two-by-two matrix
For those top two independent uncertainties we develop a two-by-two matrix. The base assumption here is that by defining the extreme corners of any given environment one explores the correlation between all relevant uncertainties, recognising that reality will likely be somewhere in the middle. Defining scenarios is not meant to describe the most likely case. It purely explores uncertainty correlation and illuminates the “what might be” to better understand associated risks with any path forward.
As a side note, if, lets say, the four top uncertainties are highly important to consider, we can create additional two-by-two matrixes to depict additional outcomes, but this is usually not necessary as generally key drivers can be prioritized to only two.
Moreover, if the result of scenario planning work is more than 4 scenarios managers tend to just focus on the most important (in their opinion) scenario and ignore other scenarios. Therefore, it is best to prioritize issues to the point that the top two drivers can be selected.
The resultant two-by-two matrix will showcase four scenarios. The most likely scenario should then be selected with a clear understanding of the degree of certainty of such scenario.
Each scenario should be given a catchy name so it can be more easily internalized by executives, such as “All bets are off”, “Sustainable Growth” and “First Frost”. Internalizing scenarios will help executives keep scenarios at the top of their mind, ask better questions and, as a result, better prepare for the future.
Step 5 – Understand each scenario and adjust strategy accordingly in light of scenarios
Each scenario is then analysed to understand what will it take to succeed in such environment.
The two-by-two matrix gives you four scenarios of the future. Scenarios A, B C and D. That is what the market could look like in the future.
Then you need to facilitate a discussion addressing the following types of questions:
- What products and services do we need to offer in each of these four possible future markets?
- What would our pricing strategy be for each of these 4 future possible markets?
- What our channel strategy will look like?
- What sales and marketing will look like?
- What would alliances and acquisitions look like?
- What would our core business be?
- Why would that be our core business?
That is the type of discussion you need to have with the executive team. And this analyses of each scenario should be captured in written form by someone on your team. Again, always in public versus clicking away on a noisy keyboard.
Scenarios can then be used to shape the ongoing strategy of an organization.
Step 6 – Iterate
As mentioned above, scenario planning is an iterative process. While the consulting team can help kickstart the process and run the initial scenario planning analysis, scenario planning exercise should not end at the conclusion of the visioning workshop. Instead the major drivers of change and scenarios generated should be revisited by executives on an ongoing bases to factor in new information and changes in the environment.
An example of using a scenario planning tool in visioning workshops
We are going to pick two uncertainties here for the point of explaining them. Lets assume one uncertainty is market openness and the other one is degree of commoditization of the energy market.
A market can either be highly opened or not open at all. So you get two options for market openness. Markets can also be commoditized or specialized.
Therefore, on one axis you have got market openness, high or low. On the other axis you have degree of commoditization, either commoditized or specialized.
So you can see you have 4 options. Markets can either be very open and commoditized or very open and specialized. Or it could be closed and commoditized and closed and specialized. These are the only 4 options.
For each of those options you then have to figure out what that market looks like and what it means to play in each of those segments. That is the kind of discussion you are having with the client.
You are saying, “If the market is closed and very specialized what kind of skills do we need to play in this market?” So you are basically saying, “What is the winner looks like in this market?” And what you are trying to do here you are trying to determine what is common for these 4 options, because what is common for each of 4 options is the attribute or skill that the client must possess if they are to win in any scenario.
If something is only a requirement to succeed in, maybe, one of those four options, and not a likely one, you can say, “Hmm, may be we don’t really need it. But if we could have it, it would be great.”
If something is needed in 3 of those 4 possible scenarios of the future, and not needed in all four, you can say, “Ok, we need it in 3. So even though it is not needed for every option I think this is a skill we need to have.”
Through the process of attrition you are collecting the skills you need to succeed here. And at the end of the day you say, “Ok, if this is what the market could look like (looking at 4 options) these are the skills we must have to compete and what would a strategy for us look like if we had those skills?”
That is the kind of discussion you are having here. And someone from your team needs to be capturing everything.
The question of how to amass so many skills for so many scenarios is for a different update. This refers to the note at the bottom about the evolution of scenario planning and this is the part most companies get wrong. How does one pick one future and bet on it while remaining flexible to all possible futures?
At the end of the day what you will have is four scenarios. Scenarios A, B, C and D. Only your final scenarios will have catchy names as per above.
Because you are dealing with two axes of uncertainty, market openness and the degree of commoditization and there are only 2 outcomes for both of them, you have got a two-by-two matrix.
And remember it is a role of the partner to keep the group focused. To say, “Even though you think this is highly unlikely, remember that Empire Energy may do the opposite? Do you want to be further away from them or be closer to them? What does it mean to go further away from them?”
At the end of this you are going to get some critical principles. Not hard and fast rules, but you will have some critical principles for what it is going to take to win in the future. These principles are the boundaries of our thoughts. They are like flagpoles with rope around them. We will not stray outside them unless we have a damn good reason to do so.
And one of the critical principles we came up with for this study is that given the amount of turbulence and uncertainty it is far better to be anchored to some large client and work with them, which is a vital, vital principle because going forward that large client is likely to be Empire Energy, which again reinforces this notion that we should only do what is in Empire Energy’s best interest.
Running a scenario planning workshop
That is how you run a scenario planning workshop. It is not difficult once you know the principles and steps to follow. And it is a lot of fun.
The skill level required to run this type of workshop is very high. We have seen junior people do it but they make it too mechanical and wooden. They also usually fail to get the leadership team to see a unique future. Juniors typically generate plans for a company that are evolutionary versus revolutionary because it is far easier to recommend a slight change to the strategy versus a radical change.
It takes an enormous amount of skill to allow the executives to be free flowing yet keeping them focused on the overall objective function, which the partner will know but cannot make obvious.
It is very easy to just go off on a tangent, especially with all this talk about technology and so on. People may go as far as suggesting to put drones in the air to deliver electricity. You have got to keep them focused.
You have got to say, “What is going to happen in a deregulated market? Well in a deregulated market it means competitors arrive and they steal market share. Less market share means less revenue. Less revenue means less free cash flow to do fancy things that could appear in the sci fi channel.”
You have got to be able to tie these logical pieces together. You have got to know where you are trying to get them to go and shepherd them there. This is very hard to do because if the executives raise material differences, they need to be seriously considered and that means the partner needs to re-juggle the workshop structure in his or her head, in real time and while managing the conversation.
If you are leading this kind of workshop this can make or break your career because the impact can be so significant. You get a lot of airtime with senior executives. You get to coordinate the discussion. You get to guide them and shepherd them. And it’s a really big opportunity so don’t mess it up. This is an opportunity very few people get.
In effect, you are being observed and judged by very senior people in industry. It is a live job interview.
And when you get the opportunity you have to make it count, make it exciting. And you need to brace yourself for hard work. Running a workshop like this is incredibly tiring.
Summary of steps for scenario planning
To wrap up, remember that scenario planning is an admission that the future is uncertain. And it means that you are going to present ideally four scenarios of the future to make sure the strategy can operate in all four scenarios.
To do this you have got to rank the issues facing the company, cluster them into two groups, things that are certain (we call them trends) and things that are uncertain (we call them uncertainties).
Then you need to determine which uncertainties are highly correlated and can be combined and which uncertainties are not key drivers of future scenarios and can be removed. Then you rank the remaining independent uncertainties.
For the top two uncertainties you need to build a two-by-two matrix and each quadrant of a two-by-two matrix becomes a potential future scenario.
And then you need to have an elaborate discussion about many vital aspects such as skills, competencies, resources required to succeed in each scenario, what should be company’s core business given each scenario, and those become principles which you will use to shape the on-going strategy for the organization.
Lastly, make it clear to executives that this process has to be iterative.
And, of course, you can see us conducting scenario planning in training videos which are part of the Executive Program.
Final thoughts
We hope you enjoyed this post. We hope that through these type of posts and related podcasts you are more excited about strategy. We hope you can see the power, the impact, just enormous change we can bring to people’s lives.
Because that is what we are doing. We want to go out and we want to help this utility overcome damaging blackouts, shutting down of schools and hospitals, and make them into a successful company that can compete in the future.
This drive to change the world should be the only reason to want to be a strategy consultant.
WHAT IS NEXT? If you have any questions about our membership training programs (StrategyTV.com/Apps & StrategyTraining.com/Apps) do not hesitate to reach out to us at support @ firmsconsulting.com. You can also get access to selected episodes when you sign-up for our newsletter above. Continue developing your strategy skills.
Cheers, Kris
PODCASTS: If you enjoy our podcasts, we will appreciate if you visit our Case Interviews podcast or Strategy Skills podcast on iTunes and leave a quick review. It helps more people find us.
COME HANG OUT WITH US: Youtube / Facebook / Twitter / LinkedIn / Instagram
ENGAGE ON FC FACEBOOK AND LINKEDIN GROUPS: Strategy Skills (FB) / Case Interviews (FB) / Strategy Skills (LinkedIn) / Consulting Case Interviews (LinkedIn)