In this series of blogs we will be looking at how scenario planning can help organisations produce better and more agile plans and forecasts. In this blog we look at the differences between planning and forecasting.
The problem with forecasts…
Before we start, it’s important to realise the business world is complex and as such, cannot be easily forecast. In fact, we would go as far as to say it’s impossible to forecast accurately although sometimes organisations get ‘lucky’ with their forecast ‘guesses’. This is because the business world is affected through a range of unknowable (such as competitor actions, fashions) and uncontrollable events (such as the weather, social media comments), as well as being impacted by illogical customer ‘feelings’ that can change rapidly on a whim.
To cope with this, the only things an organisation can actually control are the actions it performs, framed by the resources at its disposal, and the way its message is crafted and then delivered. It should be no surprise then that forecasts are just as likely to be wrong as they are right, but that doesn’t mean to say we should do away with them. Far from it, we believe that organisations should do more, but always with the understanding of what they are designed to achieve.
The real value of a forecast is in the process of preparing one. Of course this assumes that the process is not one of guessing a number, but of a more considered approach as to what actions are to be performed to get the right future response.
However, forecasts tend to give one view of the future – and it’s bound to be the one that doesn’t materialise. For this reason, scenario planning becomes a far more valuable process, as we will outline in this series of blogs.
Planning Vs. Forecasting
Bloodhound SSC (www.bloodhoundssc.com) is a project that has the mission ‘to confront and overcome the impossible using science, technology, engineering, and mathematics’. This statement may not be that interesting, but the way they plan to achieve the goal is: to create a car that will travel at over 1,000 miles per hour.
1,000 mph cars are not easy to build. At that speed the drag on the car is over 20 tons, the force on the wheel rims is greater than 50,000g. To achieve the vision the team is using a Rolls Royce EJ200 jet engine coupled with a Falcon rocket, which together will produce over 135,000 HP – 25,000 more than the Queen Elizabeth 2 ship liner. The immense physical forces involved are conspiring to either destroy the car, or make it take off literally like a rocket, both of which are undesirable.
To do the seemingly impossible, the team have a plan to manage the three factors they can control. First are the business processes that bring different members of the team together to fund, create and run the car. Second is the amount and quality of work that will go into those business processes. Third are the resources that each business process will consume in delivering the work, which includes money, talent, and a lot of fuel.
These three factors – processes, workload and resources – when put together as planned will produce an outcome: a stable car with an incredible amount of thrust. It is hoped this will be sufficient to achieve the team’s objective. However, although these factors are under the control of management, the team operates in an environment that is both uncontrollable and sometimes unknowable. For example, the surface on which the car will run has to be perfect, but that is subject to the uncontrollable vagaries of the weather. Similarly, permission has to be granted by the federal government of the country where the car will run (currently scheduled for South Africa in 2016), and they must ensure local population support or they could prevent the record attempt. Although contracts and agreements can be made to manage these areas, the reality is that they are outside of the team’s control. As such they are assumptions that carry a certain level of risk.
The role of planning for the Bloodhound project, as it is for any business, is to consider all facets of the mission to ensure its success. This involves relating workload and resources to the complete range of interconnected activities, to the outcomes that are to be achieved.
For example, a commercial manufacturer will produce goods it can sell to make a profit by taking raw materials and adding value by shaping, combining, and transforming them into things customers are willing to buy. For a service company the business processes could include training people in skills and techniques that enable them to pass on knowledge for a profit to clients.
Some business activities will be based on assumptions about those things that are not predictable or knowable, and where the plan needs to ensure that the risk they pose are either eliminated or minimised.
All these relationships can be coded as mathematical formulae, or judgements based on experience that can be represented as a range of ratios. From these, planners can create a business model that can be used to ensure resources are allocated realistically, that goals are achievable, and from where progress can be monitored. See our white paper ‘Rethinking the planning process’ for a more complete example.
Once a plan has been set, the role of forecasts is to check that it is on track and to highlight any areas where there are deviations or weaknesses that can threaten overall success. From a preparation view there is little difference between planning and forecasting, except that forecasts challenge the interconnected business relationships and the assumptions that were made when the plan was created.
But what if the assumptions behind the plan or forecast are wrong? What should an organisation do if the forecast was different from what was planned? Do they wait to see if the plan gets back on track by itself, or do they make a change now that may possibly threaten future success?
This is where Scenario Planning has a role to play.
In our next blog we will look at how scenario planning helps organisations to deal with uncertainty. If you can’t wait then you can download the complete set of blogs as a White Paper by registering here.