Strategic forecasting – a valuable tool for all business leaders
If there is one thing that Covid19 forces us to have, is a strategic crystal ball to gaze into the future to let us know what else is coming ahead. We want to know how long the recession is going to last; we want to know what will happen to our customers; we want to know when they will buy from us again; we want to know the volume of consumption; we want to know if their tastes remain the same or whether they have changed; we want to know if we will be able to receive our goods that we ordered from our overseas suppliers; we want to know… we want to know… we want to know…
Indeed, we are in unchartered waters today. Covid19 has forced the whole world to adopt new behaviours – working from home is one example – and that might radically change our customers’ behaviours. Public health considerations may sound the death knell for some businesses as social distancing may not allow for a critical mass of customers to ensure that the business remains viable; restaurants are a case in point.
In fact, I recently got to talking to a restaurateur. Needless to say, Covid19 has changed her business landscape significantly, and she is worried that, despite the financial support that the government has poured onto businesses, that would not be enough to pull hers out of the doldrums. The truth of the matter is that while the government has given financial support for employee wages (only 50%) and, to some extent, for rent, there are still other overheads to bear, like the recent renovation loan payment, the equipment maintenance and insurance. Even CPF contributions continue!
Food costs have risen somewhat – though thankfully not too much - and it is very hard to predict demand. The takeout business has only generated less than 30 percent of her normal turnover, and she is seeing that slowly decline as well since the start of the lockdown. She fears that once the government financial support is pulled (the Jobs Support Scheme ends in August 2020), she might have depleted all the reserves in her account, and the business would not be able to restart. She is now at a difficult crossroad – to stay open and hope for the best, or to call it quits now. This, needless to say, is a very difficult decision and she called for a coaching session (we offer coaching for business owners who want to play a more strategic game and earn twice the revenue in one year!).
Her question to me was as simple – and as difficult - as this, “What should I do?”
As a business coach, you will know better than to answer this question. Our role is not to solve their problems, but to help our client get clarity. So, I asked, “What would you need to answer that question?”
“I will need to know what is going to happen to the business over the next 2 years,” she replied. “But,” she continued, “no one knows what’s really going to happen. Not even the government. So, better to be safe than sorry, right?”
“Not necessary,” came my response. “Certainly, your business will not be the same. But therein also lies the opportunity. If you can change the way you do things, and create a new normal for yourself, you can still thrive. And to help you with that, I am going to introduce you to ‘strategic forecasting’.”
And what follows in this article is a summary of our coaching session. I hope you find it as useful as my restaurateur coachee had…
WHAT IS STRATEGIC FORECASTING?
Some people call it scenario planning, but scenario planning is just the means to perform strategic forecasting. Basically, it is the combination of environmental scanning and scenario planning to create the most likely outcome. The aim of strategic forecasting is to be able to paint the most-likely picture of the business environment in order for us to make strategic business decisions like upsizing or downsizing headcount; modifying or totally abandoning our product or service offerings; or investing in technology to meet capacity changes; or positioning ourselves for demographic changes. Indeed, strategic forecasting is a KEY business tool in times of uncertainty, as it is now.
There are 9 steps in this process:
the strategic aim
centres of gravity
implications and opportunities
preparing for the future
Here is how we applied it for the restaurant business
STEP ONE: STRATEGIC AIM
In strategic forecasting, we are not casting a very wide net and building scenarios like that of Shell or McKinsey. We are also not answering existential questions like, “How do we solve the world’s hunger problems?” (We can do it, but that is not our role.) We can be more targetted, and in this case, we are very clear what we want: to answer the question, “What will post-Covid dining look like?”
STEP TWO: CENTRES OF GRAVITY
Readers who are familiar with our strategic thinking methodology understand how to do this. We basically brainstorm all the factors that affect the restaurant business, with the intent on driving more business to it. These can range from proximity to high foot fall, food quality, ambience, seating capacity, customer experience, reviews, marketing, value for money, staffing, etc. Indeed, there can be as many as 50 different factors in a business. After we have brainstormed all the factors, we apply our system mapping process onto it to identify the centres of gravity. For her case, these were value for money, food quality and customer experience.
STEP THREE: EXTERNAL INFLUENCES
After examining the internal drivers, we turn our attention to the external drivers. We use PESTLE for this. Basically, PESTLE looks at the impact (positive or negative) of external factors that affect the business. P refers to Political, meaning the impact of political change in Singapore, especially since the General Election is coming soon. E refers to Economic factors, including the economy (which is not doing well), interest rates, exchange rates, unemployment rates etc. S is Social, and looks at the demographic impact on the business. With the current global lens on racial discrimination started in the US, any business that shows any hint of such may well be badly affected. T is Technology which examines the impact of technological change on the business. L refers to the Legal framework, which to the restaurant business would include licensing, foreign worker quota, and the like. The other E refers to Environmental factors, and this would look at sustainability issues in general, and more specifically for restaurants, food wastage and recycling.
The discussions we had around this is too long to reproduce here, but we identified the likely positive impacts on the business would be P, T and L. The two E’s were deemed to have a negative impact on the business going forward – the shrinking economy is one, and the more stringent focus on food waste. While the latter would seem to be a positive impact, but what it also means is that the restaurant would have to err on the side of caution, thereby lowering order quantities for ingredients. Finally, the S was uncertain because the restaurant did not collect any information on demographics.
The result of this step caused my client to pay more attention to the two E’s.
STEP FOUR: KEY UNCERTAINTIES
Based on all the internal and external factors, there is now a need to rank order these uncertainties to identify the top two. Some of these uncertainties can be clustered together, while some can be expanded for greater clarity. Next, all important team members need to be called together and they can either do a forced ranking of all the concerns from most important to least important, or individuals will be given a pen to put a dot on the factors that are most important (or in their mind has the greatest impact) on the business. Once done, the number of dots are tallied and the two factors with the highest number of dots are chosen to build the scenarios. The top two uncertainties are the length of the recession and (changing) customer expectations.
STEP FIVE: SCENARIO PERSPECTIVES
With the top two uncertainties, the business leaders create fours perspectives. This is done on a 2 x 2 grid. The two ends of one perspective will occupy the vertical grid, and the two ends of the other perspective will occupy the horizontal grid. (It does not matter which takes the vertical and which takes the horizontal). For example, after a lot of discussion and haggling, the restaurant identified the length of the economic slowdown as one uncertainty, and the variability of customer expectations as the other.
This allows us to create the 2 x 2 grid as such:
You will notice that the vertical axis is the length of time for expected recovery, and we polled to ask what was the least amount of time they reasonably expected the economy to recover (since MTI was already predicting -7% to -4% growth for Singapore for 2020). Hence, we will probably not see any economic recovery in the next 6 months; at best, only a glimmer of hope in 12 months, and then another two more quarters to confirm that. Hence, the most optimistic is 18 months. The most pessimistic is 36 months for the recovery, but with some discussion, it was moderated to 30 months. Indeed, the group felt that if it would take more than 30 months to recover, there might well be a significant shift in economic dynamics and that would have a huge impact on the whole region, not just the country.
On the horizontal axis, it was the customer expectations regarding pricing and service quality. On one end of the spectrum lie expectations of a price increase (since social distancing will put paid on the number of covers) and by using more technology, the service level is less personal. This is viewed as the best outcome from customer expectation. The other end is that customers expect the same price and same service quality as it was pre-Covid. This is the least favourable because, with social distancing, that would mean a downward pressure on revenue, something that a restaurant is particularly sensitive to.
With these two axes identified, we can give a title to each of the scenarios. This is normally a creative exercise which the whole team participates in producing.
STEP SIX: PAINTING SCENARIOS
In this step, members will work together to flesh out the scenarios, painting the stories based on the 2 x 2 grid. This is very much an act of creativity and experience. There is no right or wrong here; it just builds the story based on the grid portion. For example, the “Back 2 SQ1” scenario basically means “Back to Square One”. And in this scenario, business will normalize and fall into a steady state in within 18 months, with customers expecting pre-Covid conditions to remain despite social distancing. They even expect their favourite menu to be available with quick service turnaround. In a way, they are still expecting Business as Usual, while business will be anything but pre-Covid usual.
STEP SEVEN: IMPLICATIONS AND OPPORTUNITIES
The first key implication – and this is for all scenarios, not just “Back 2 SQ1” – is the ability to stay afloat for at least the next 18 months. While we realise that high-end F&B establishments can survive the economic downturn because their customers are not adversely affected by the state of the economy, and who will definitely be out for “revenge eating” once dining in is allowed, F&B establishments that target the less well-heeled may not see their customers come in in droves. If the restaurant believes that they have a good value proposition and should still remain in business, then the first order of business is to secure an 18-month to 24-month working capital loan; be it from current investors, the financial institutions or even venture capitalists. The loan can be structured with a balloon payment at the end so as to stretch out liquidity, allowing for a higher lumpsum settlement perhaps two to three years ahead; or just interest-servicing in the beginning one year and then interest and princpal from year two onwards.
If the business is already leveraged, and financial institutions will not want to add to your debt burden, then it is time to dig into your own pocket to loan to the business or bring in new capital. Sometimes, it makes sense to sell some shares, dilute your ownership, to keep the dream alive. You may be able to buy back your stake when the business is thriving again, of course, at a premium. Yet, better that, than to close down the business, right?
Another key implication of “Back 2 SQ1” is that it would crimp revenue as well as margins. With social distancing, the seating capacity is severely limited, and wait staff also have to be thinned down. Cost of ingredients and supplies would go up, because supply chains have been affected by Covid, and these put a pincer effect on margins. If customers expect pre-Covid pricing and level of service, there is a need to change certain things. For example, we will probably need to reduce portion sizes. This also has the added positive of less food wastage. But we will need to manage the perception of this by the customers. If the portion is reduced too much, and too noticeably, there will be a negative reaction by customers. Hence, this can help, but to a limit.
Second, we might have to impose seating time limits; each seating to last 90 minutes. This will allow us to turn the table twice per seating. Hence, lunch will be served from 11.30am to 1pm; and from 1pm to 2.30pm. Dinner would start at 630pm to 8pm; and 8pm to 930pm. This is highly controversial, and we will have to trial it just to see how the customers react to it. There may also be a need to price the seatings differently to encourage the earlier seating.