Scenario planning is a strategic planning system that can be used by organisations, large and small, to make flexible long-terms plans.
Scenario planning is a strategic planning system that can be used by organisations, large and small, to make flexible long-terms plans.
It is derived from methods used by military intelligence and uses multiple hypothetical future events or circumstances to inform your decisions.
Scenario planning follows six stages to first understand the current environment and where the business sits within it, then discover which key factors influence the best and worst outcomes of the scenario at hand, and finally build a picture of what the world could look like over the next few years to respond in the best way possible.
Unlike other planning processes which businesses undertake, in scenario planning all levels of a business can be involved, giving staff a much greater level of empowerment, and a sense of control in a world which is often unpredictable.
As we navigate the current economic environment with rising interest rates and inflation, combined with the war in Ukraine, we’re using scenario planning as a valuable tool to inform our decision making, and to ensure we able to act swiftly or change direction, depending on circumstances.
This is the third in a series of scenario planning exercises for our business, an investment house providing private finance to the property sector.
The first iteration of scenario planning for our business was in 2017, where the emergence of non-bank lending in property was explored together with the amount of regulation in the space.
In 2020, with the onset of the COVID pandemic, scenario planning was a perfect tool to tackle the uncertainty and uncharted waters.
During the height of the COVID pandemic, which was rapidly evolving and full of uncertainty, scenario planning helped us manage the disruption and we emerged much stronger than we might have otherwise.
How inflation will progress over the coming years, what the RBA will do to combat this inflation, and how interest rate changes will impact the economy and affect investor expectations, and the housing/property market, are key concerns for us.
So, how are we approaching the scenario planning process this time? The process has six distinct steps.
1. Company analysis
The first step is to break down the values a company stands for, its leadership mechanisms, and the virtuous circle that allows it to operate and grow. This stays the same over time and should guide any company reactions.
2. Situation analysis
From there, especially in the current economic environment, it’s vital to examine economic data and indicators, industry/government reports, overseas economic news and trends, and anecdotal evidence, to build a picture of what is happening economically, politically and socially.
3. Polar axis outcomes
To solidify this vision, we develop polar outcomes and choose the two factors that have the highest impact on the situation. Unsurprisingly, we’ve chosen interest rates and inflation.
4. End states
With these factors as our axes, we create a matrix with four possible end states or potential worlds, projected out over several years. We named ours creatively, to reflect what we thought might happen.
- Stuckflation: Australia experiences stagflation with economic growth slowing, unemployment rates rise, combined with an increasing cost of living.
- Mo Money, Mo Problems: In a growth end state, energy and fuel prices continue to rise, along with the ASX 200. The unemployment rate is stable, rents increase and housing affordability continues to decline.
- Sea of Tranquility: Australia has a soft landing as the war in Ukraine ends peacefully, housing affordability improves, inflation eases and there’s steady economic growth.
- Smash your own avo: Australia experiences a recession, with consumer sentiment and discretionary spending declining, layoffs, business failures and interest rate rises.
5. Implications
To gain some foresight into which end state we are entering, we develop best and worst-case outcomes in each, creating a complex and interconnected network of factors that are continually tracked. The longer a company spends at this stage, the more nuanced and accurate this network becomes.
6. Responses
While it’s difficult to predict which end state we will end up in, and realistically the real-world situation will shift between them, scenario planning allows us to develop responses to all possibilities in advance. We can assess multiple futures that may happen, not what it is hoped will happen and find that with creative thought, there are always opportunities as well as threats.
Additionally, the process and outputs from scenario planning are designed to avoid step change, which can be damaging, and instead promote incremental changes in business strategy to adapt to the unfolding future.
While scenario planning can initially feel like a daunting undertaking, the outcomes and process can be invaluable to maintain focus, remain agile and bring your team on-board with any required strategic changes.
By Thomas McClung, Co-Founding Managing Director, Dorado Property
