A step-by-step framework for adjusting your strategic business plan for a possible downturn
Here are the steps to running your own recession plan. One suggestion – this exercise need not be exhaustive. Begin by identifying the risks from the list of big “what-ifs” and smaller “what-ifs” and create a one-sheet for a few realistic, possible scenarios that your organization might face in the next few years.
- Define a time frame for each scenario. Some events may occur in 12 months, some in two years. But you can’t work with indefinite, open-ended scenarios.
- Establish the primary variable in your scenarios. Assess ways in which these variables may present opportunities or threats to your business. Check out the SCORE website for some great business statistics that highlight local current and future trends.
- Clearly articulate the scenario with a problem statement. On a white board, write down “What if _____?” and fill in the blank. For example, “What if we lose our biggest client this year, resulting in a 50 percent decrease in revenue? Or what if the mortgage crisis continues for the next year?
- Flesh out the details of the scenario. Clarify exactly the situation your company would be in.
- Develop a trigger point. What key metric will you use to trigger putting a plan of action in place? It might be an external metric – interest rates, economic growth rate, etc – or internal such as profit margin, gross margin, profitability per employee, etc.
- Flesh out an action plan if the scenario in Step 5 should occur. Know when to execute the action plan by having a clear trigger point. Then detail the top five steps you will take in the effect the trigger occurs. These are designed to work regardless of how the future turns out.
Below are some ideas about potential big what ifs and smaller what ifs
Thinking about the big what ifs . . .
The most significant trends likely to affect the larger world are those forces that are the big what ifs — the driving forces. These cases tend to push your thinking and are usually classified as the big unknowns. The forces generally come in four flavors:
- Social dynamics: This area includes specific demographic issues such as how influential youth might be in ten years, the growth of the Hispanic community, the tight labor market and the aging baby boomer generation.
- Economic issues: Macroeconomic trends and forces shape the economy as a whole, such as those headlines about the credit market, the bond market and the local housing market.
- Political issues: Outcomes of the legislative session impacted many local businesses as government cut back on spending due to lower sales tax receipts. Legislative changes can affect tax policies, regulatory issues, employment laws and the like.
- Technological issues: The key trends identified by research firm Gartner include mobile computing, change in telephony, the tight IT job market, business process outsourcing, and regulatory compliance issues.
Identifying which of the big what ifs might impact your firm is the key to scenario planning for these forces. Some of these may seem farfetched, while others are quite a bit more likely. Consider, for example, how lenders have been raising requirements for home loans following the flood of defaults and late payments on homes purchased with subprime mortgages.
This, combined with still falling prices across most of the US, has deterred home buyers, leading to a string of poor results and losses for major US homebuilders. Home ownership rates directly correlate to the economy and facilitate economic growth. Without economic growth, sales tax revenue decreases and results in less funding for government agencies. As mentioned above, most local governments did not increase spending which affects everyone with a government contract and impacts the quality of services delivered by the agencies.
Planning for the smaller what ifs . .
Although driving forces may present an array of opportunities and threats, there are also a number of smaller scenarios that hit closer to home. Calling these smaller scenarios is a bit of a misnomer because when they happen, they can happen quickly and with devastating consequences, so they don’t seem too small.
- What if sales are flat this year or if sales decline by 20 or 30 percent? Toll Brothers reported that sales declined 21% during second quarter with “hesitant customers remaining on the sidelines”.
- What if sales increase rapidly, such as 25 percent or more? One local tech company is growing faster than they can fill positions to meet customer demands.
- What if accounts receivable collections slow by an additional 30 days? Like a local manufacturer that experienced significant problems with his customers, making it very difficult to pay his suppliers.
- What if banks increase interest rates by several percentage points? Nevada has held one of the highest foreclosure rates in the nation over the past four months – 1 of every 232 households. This is a huge ripple effect for numerous industries.
- What if our biggest customer goes out of business or if we lose our biggest client? Most every business has a handful of key accounts that are critical to business success.
- What if we have a major public relations crisis such as a bad product or a lawsuit? These are crises that often come out of nowhere and could happen to any business or organization.