Scenario Planning

M&A and Strategic Change

Posted on Monday, 30 November 2009. Filed under: Business Intelligence, Commentary, Scenario Planning |

Dr Robert Davies, in his fascinating blog on strategy (see weblink at the bottom of this page in the blogroll or check it out here), has written an interesting article on what he sees as the eight major issues that will drive corporate strategy and behaviour over the next several years (see his blog: ‘2010 AND BEYOND: The real issues and trends‘).

These issues range from the drive toward localisation (and away from globalisation) to the increase in stress in society (and on individuals).  It certainly is worthwhile considering whether these will impact the M&A market if several of these actually do turn out to be correct.   Briefly, the eight issues are (in Robert’s very conversational and catchy style):

  • ISSUE #1: GOODBYE GLOBALISATION, HELLO LOCALISATION. There are too many forces pushing against globalisation for you to bet on the end of history and a harmonised world.  Even academics are divided upon the issue of the sustainability of a single global society. Remember too that we have not suffered a global recession, we are in the midst of a series of localised depressions, recessions, recoveries or in some cases, just mere slowdowns.
  • ISSUE #2: CHANGE COMES IN PHASES. Unlike some, I don’t see a simple ‘bounce back’. The real effects of the recession in terms of your markets and the behaviours of your customers will take between three to five years to appear. Understanding and monitoring four key phases of change must be a central task for any customer focused organisation.
  • ISSUE #3: FROM LUXURY TO SECURITY. FROM CONSUMERISM TO REPLETION. Customer needs (both in consumer and business markets) will change. How they change will largely be determined by the direction taken by globalisation. For some, purely Web based customer management strategies may prove problematic in at least one future new where new consumers seek more personal inter-action.
  • ISSUE #4: BIG BROTHER, MY FRIEND. Some large corporate brands have been tarnished – especially in the financial sector. There is some emerging evidence that new consumers may trust central government more than large corporates.
  • ISSUE #5: CSR – A NEW GENERIC STRATEGY? In the face of new regulation, many especially in financial services, will find it difficult to gain competitive advantage. Is corporate social responsibility the answer?
  • ISSUE #6: BACK TO THE PAST – THE FRUITS OF CREATIVE DESTRUCTION. Within all the doom and gloom there is the prospect of quite massive levels of innovation, bringing with it opportunity.  But you may have to move quickly. So, in what shape are you to innovate?
  • ISSUE #7: THE DEATH OF ‘WHAT WORKED BEFORE’. Be careful about extrapolating from the past. The datasets and variables have changed.
  • ISSUE#8: BEWARE OF STRESS. It’s going to take time to get through this. So are you taking care of your staff?

Now, what does this imply for those who are interested in M&A?  Could these issues be influencers on M&A generally?  (Actually, think about these as ‘trends’, which they areally are (aren’t they?), as most have already begun in some fashion and even have antecedents from years ago.

I’d be interested in the views of others, but first let me say that I agree with most of these issues — especially their application to the next several years.  On a longer-term basis, I do believe we’ll find ourselves largely back on the same trajectory that we’ve been for the past two or three decades and that the past 18 months won’t be considered quite the sea change that many other pundits believe.

Nevertheless, these issues will impact the M&A market.  Some positively:

  • Localisation means that there’s a greater need for local presence, which can be obtained by purchasing a local company already knowledgeable about the local markets and recognisable to the people there.
  • Creative destruction will drive the purchase of distressed and bankrupt (or insolvent) companies.  (See as well the M&A discussion of distressed deals.)
  • It may be easier to have an appreciated impact on CSR issues if the organisation is large and able to afford high-impact, high-cost CSR programmes.  How do companies get scale?  They go out and buy another company…

But others negatively, such as the ‘big brother’ trend of increased trust in governments which implies lower trust in corporations, especially the largest ones.  (But the flip side of this may be increased M&A activity as companies downsize and refocus back to the core, thus divesting divisions:  one company’s sale is another company’s acquisition!).

We’ve discussed before the need to incorporate appropriate business intelligence into the M&A process, which otherwise often seems opportunistic at best and ‘me-too’ at worst.  These trends discussed by Robert in his blog should be used by all M&A corporate development teams and their advisors in stress-testing their proposed mergers and acquisitions.  (See our writings on scenario planning as well.)

Your thoughts?

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Scenario Planning in M&A

Posted on Monday, 1 October 2007. Filed under: Business Intelligence, Commentary, Mergers, Scenario Planning |

An acquisition or merger is difficult to get right, and the other alternatives should be vigorously considered before a deal is contemplated.  Those alternatives include organic growth, strategic partnerships, joint ventures, partial ownership of the target, joint shareholdings, or even ‘doing nothing.’ 

But when acquisition or merger is necessary, it must be entered into carefully and after much consideration – not hastily or only in response to the actions of competitors.  This is a principal premise of our book, Intelligent M&A:  Navigating the Mergers and Acquisitions Minefield, and scenario planning is one very important tool that should be used.  No military planner would even consider going into battle without conducting detailed scenario plans, yet many business leaders will engage in a merger or acquisition without such planning. 

Military and business intelligence techniques can be used in an M&A deal – and not just in the due diligence stage when such techniques have traditionally been employed to uncover confidential information. 

Scenario planning should start at the very beginning when the merger is just an idea floated by the CEO, one of the planning team, or an outside advisor.  It will help to determine if the longer-term future is being properly considered, and not just – as is too often the case – the immediate future where deals are made in response to a recent and short-term change in the market.  At Shell, for example as we noted in an earlier post from May and in our book published in June, their scenario teams are tasked to ‘help charter routes across three interrelated levels:   the Jet Stream of long-term trends, uncertainties, and forces;  the Weather Systems that reflect specific features of key regions; and the Turbulence of market level factors.’  By forcing management to consider all three, they avoid making long-term decisions in response to short-term issues – turbulences.  Shell has kindly put its Jet Stream level scenarios on-line at www.shell.com/scenarios, which benefits those companies not positioned to conduct such macro-level research themselves.

Many CEOs, especially at small and medium-sized companies, find planning a lonely activity at the top of their organization. Most of their managers and indeed the rest of the company is appropriately focused on the conduct of the day-to-day business and therefore not looking much beyond the next sale or production target.  Joint decision-making, brainstorming, and other group planning activities are a luxury unfortunately relegated to at most a few days at an annual off-site meeting.  Consultants can clearly help in this regard, but another tool – straight out of scenario planning and business intelligence – is to use the power of the bookmaker.  There can be great wisdom in the masses, especially when the people in those ‘masses’ have their own hard-earned money at stake.

Where can this be found?  Where people or companies have ‘bet’ on the future, either literally (through bookmakers) or figuratively (in hedging risks in the markets).  The former is useful if the company’s markets are affected by events where there are established betting odds continually updated, which today go well beyond whether Germany will win the next World Cup or the Yankees the World Series.  The futures markets can tell a lot about prices months and years ahead for energy and other commodities including foodstuffs (which give an idea about future weather conditions).  Risk management markets exist in some very unexpected areas affecting business.  Check out www.cantorindex.com and www.intrade.com for some examples. 

As mentioned in another earlier post on scenario planning, to give an idea of just how far these can go, consider that in 2003, a smart – but perhaps insensitive – analyst in the Pentagon proposed setting up a speculative futures market on terrorist attacks.  Nothwithstanding the obvious temptation for real terrorists to be able to financially benefit from their actions, the idea was sound.  Getting people to bet real money on future events focuses the thinking of those people, attracts those who are expert in an area and may actually know more, and saves replication of planning in multiple locations.  

Yes, there really can be wisdom in crowds.  In the right situation, of course, and selectively.  There’s danger in always following ‘conventional wisdom’ and remember that many great idea have been heckled when first proposed.  That’s where leadership comes into play – recognizing when to use the power of scenario planning and when to be ‘bold, daring, and different,’ to paraphrase Anita Roddick, the founder of Body Shop.  

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More on the need for Scenario Planning

Posted on Monday, 11 June 2007. Filed under: Business Intelligence, Commentary, Mergers, Scenario Planning |

I’ve received a lot of e-mail traffic on the topic of scenario planning and the M&A process — and some postings on this blog — with much of the discussion focussed on the agreement that use of this technique (originally from the military) would yield better results for M&A practitioners.  Please see the earlier posting on this topic (M&A Frenzy and the Need for Scenario Planning). There are also some excellent websites (shown in the Blogroll at the bottom of this page) which cover this topic well in other fields.

This need not be done in the traditional sense of ‘scenario planning’ which is relatively formulaic.  Think perhaps about the following:

Because humans find it difficult to calculate probability rationally, a company’s intelligence function can use the power of the bookmaker.  Daymon Runyan, paraphrasing Ecclesiastes, said that ‘The race might not be to the swift, nor the battle to the strong but that’s where the smart money goes.’  By using trading (e.g., http://www.intrade.com) and/or spread-betting (e.g., http://www.cantorindex.com) sites, a company can see how the world really views the likelihood of specific events and, significantly, how their own company is viewed by the market. 

In 2003, an insensitive but smart analyst at DARPA (the Pentagon’s Defense Advance Research Projects Agency) proposed setting up a speculative futures market on terrorist attacks.  Notwithstanding the obvious temptation for real terrorists, the idea was sound.  Getting people to bet real money on future events focuses the thinking of those people and saves the inordinate costs of expensive computer models.  There really is wisdom in crowds.

Companies could actually create their own internal speculative markets to leverage the knowledge contained within the organization.  By allowing employees to bet on specific questions (using company money for real returns), an efficient market for ideas can be created.  More real, more relevant, and more fun than a ‘suggestions box.’  Apparently, the pharmaceutical company, Eli Lilly, has used this approach to predict the success of drug research with remarkable accuracy, and there is no reason to doubt its applicability to the M&A market as well.

Just think how this might have helped Multiplex – the Australian developers of England’s Wembley Stadium, which was delivered late and with large penalties (over A$200 million).  The result of their problems was the announcement today that they would be purchased by a Canadian infrastructure specialist.  Or another example:  Did Barclay’s (or, for that matter, ABN AMRO) do adequate scenario planning in the lead-up to their proposed merger?  Certainly, one very likely scenario would be the entrance of another bidder, in this case, a formidable one (Royal Bank of Scotland who joined forces with Santander Bank and Fortis – this forming a British / Spanish / Belgium consortium).  And if that wasn’t enough for Barclays, they now have Atticus Capital challenging them on the deal, saying that they do not want Barclays to enter into a bidding war.  Hedge funds and their like are becoming more activist – just look how they brought down both the CEO and Chairman of the Deutsche Börse when they targeted the London Stock Exchange in 2005.  All very predictable, and not even with 20/20 hindsight but rather with scenario planning.

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M&A Frenzy and the need for Scenario Planning

Posted on Monday, 28 May 2007. Filed under: Business Intelligence, Commentary, Mergers, Scenario Planning |

This past week has seen many articles about the continue growth of the M&A market (see, for example, the Financial Times for a discussion of European M&A, or other articles on the Asian market).   It is difficult to walk down the street in the City of London or Canary Wharf and not overhear people talking about M&A deals.  The higher equity prices in the market generally are attributed to the continuing number of deals being announced.  The trend is global.  It makes front page news — and in fact, some days the front page of the Financial Times has all three or four of its major stories being M&A deals (this happened on Wednesday of this week with the only exception being a picture of the charred ruins of the clipper ship Cutty Sark)

It make me, and many of those I speak with, wonder about the hype.  Yet the M&A market continues to defy anyone’s predictions of when it will end.  I thought in 2005 that it might be the peak, but 2006 certainly exceeded my expectations.  My foundation is in history (I actually have two degrees from university in history and only one in business).  History DOES repeat itself.  At some point the market will begin to decline.  But just as the trough between the 5th merger wave (late 1990’s) and the current one (started in 2003) was higher than the peak of the 4th merger wave (late 1980’s — and for anyone else who lived through that merger wave, we thought it was going to be a record level of deals for a VERY long time to come), so the downturn that will happen sometime may still be at higher levels than we think.  M&A is here to stay.  One cannot be global as a company and not do deals (although there are some notable exceptions, the few number of such exceptions does prove the rule).

And I hear that Goldman Sachs is predicting a 30 year bull market.  I do think that different perspectives and forecasts are critical in planning what to do at this point in the M&A market.

Where can military and business intelligence techniques fit into this?  In our book, we discuss the need for scenario planning — a key military intelligence tool.  One section of our book, we discuss scenario planning as follows:

The first thing to realize is that the process of scenario planning is the consequence of a culture obsessed by the future – its risks and opportunities.  At Samsung, for example, scenario planning is enshrined in what is referred to as their VIP House (Value Innovation Programme).  The house is where the Samsung product managers, researchers, engineers, and assorted others ‘live’ while solving problems and/or planning projects.  The reason that this house is considered so important is because Samsung believes that 70-80% of ‘quality, cost, and delivery time is determined in the initial stages of product development.’ Samsung’s CEO and Vice Chairman, Jong-Young Yun, is clear about one thing, ‘the race for survival in this world is not to the strongest but to the most adaptive.’  Like the tsunami tribes and animals, he views the business world as an environment of existential threat and potential disaster.  The VIP house provides his disaster avoidance radar.

Another company famed for its extensive usage of scenario planning is Shell.  Using their own jargon, Shell’s scenarios team are tasked to ‘help charter routes across three interrelated levels; the Jet Stream level of long-term trends, uncertainties, and forces; the Weather Systems that reflect specific features of key regions; and the Turbulence of market level factors.’  To get a feel for the Jet Stream level, go to www.shell.com/scenarios.  Whether a scenario planning function is structured as a Samsung hot house or a highly centralised Shell-like group, the point is to monitor simultaneously the past, present, and future.  In all instances in addition to the expected, it is essential to attempt to imagine the unimaginable.  From those imaginings, scenarios must be built such that when a ‘new’ scenario presents itself, it is recognisable.

I wonder what Samsung and Shell are thinking now about future deals…

 

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