‘What’s the truth about the profitability of customer retention?’
Q: As we near the close of this year’s first quarter, our distribution company is preparing for a business review using as a base of comparison our corporate strategy plan that we completed end of third quarter last year. We still remember that our strat planning facilitator noted that “the heart of strat planning” is in our anticipating likely changes in our market environment. She classified these market changes as coming from political, economic, social and technological forces (or what she abbreviated as PEST). To help us in this “environmental scanning,” she invited to speak to us well-known political, economic, social and technological analysts.
While we all came out of these briefings feeling informed and even well-informed we also all felt still uncertain about what to do with all the likely market changes we learned. This is especially true with those of us in marketing.
Will you please help us find a way to integrate such market changes into both our strategic marketing plan and sales action plans. By integrating, we include knowing doing something about the predicted market environmental changes.
A: We’d like to start with this useful distinction. There are changes in the market environment that are difficult or even almost impossible to predict. When such changes occur, they can have upsetting and unsettling effects on your marketing and sales plans. An example would be what happened to our Muslim brothers in Sabah and the spill-over of what happened to the southern Mindanao market. On the other hand, there are changes that take place in an evolutionary fashion whose size and timing are more or less predictable like most economic trends are such as inflation and exchange rates.
For the highly unpredictable that are also highly damaging, what can and should you do? Nassim Taleb’s research reported in his 2007 best-selling book, Black Swan: the Impact of the Highly Improbable, tells us first what we should not do. He says that we should not continue spending time and money in continuing predicting or in sharpening our prediction model. Instead, we should give our time and energy to preparing for managing all the undesirable consequences when such a highly unpredictable but damaging change takes place. Of course this is insofar as such consequences had been experienced before from the same or similar change that took place in the past. Read Taleb for a good number of enlightening examples.
In the case of evolutionary changes, we should learn or relearn the practice of scenario planning, a practice pioneered in 1995 by the Wharton School Professor, Paul Shoemaker. There is much insight to gain in one’s sense of being able to do something about the future of one’s business through anticipating future market scenarios and then planning how to respond to each likely scenario. The key is in the idea that the more accurate is the identification of future market scenarios, the greater one’s sense of empowerment over the future.
To clarify, let’s consider this simple but true case of a distribution company like your own and how it started off its scenario planning. This case is about a pharma generics distributor company planning in November 2009 for its 2010 likely sales and profit. All of its generics lines were imported from India.
This generics distributor was hit hard by the economic crisis. It saw its prospects in 2010 negatively affected by more difficult times. From its past experience it saw its difficulties to come primarily from two market environmental trends. The first of these is the likelihood that the banks will start cutting credit lines. The second major trend it saw was regarding the exchange rates. Because it anticipated that 2010 was going to be a more difficult year compared to 2009, it was likely that the exchange rate would fluctuate and become unstable.
With this two market environmental forces unfolding, the company’s scenario planning facilitator helped the top executives identify its likely market scenarios for 2010. This was a simple matter of cross-breaking the two opposing directions of each trend to come out with these four market scenarios:
1. The banks not cutting credit lines and exchange rates remaining stable, an ideal scenario where the two trends both coming out in positive directions.
2. The banks cutting credit lines and exchange rates fluctuation and becoming unstable, a worst case scenario.
3. The banks not cutting credit lines but exchange rates fluctuating and becoming unstable, a mid-way scenario.
4. The banks cutting credit lines but exchange rates remaining stable, another mid-way scenario.
In most strat planning exercises, what a company does is to assume the ideal scenario and the entire exercise is summarized in a projected income statement based on that market scenario. The likelihood that these projected results will actually take place is just one of the four probable results from the four identified market scenarios. It’s an unrealistic and misguided strat and scenario planning. To render your need to realistically do something about your future business, your scenario planning requires you to prepare what’s likely to happen drawn from the four projected income statements monetizing each of the identified four market scenarios. That’s how you can do something about hard-to-predict future market changes.
Keep your questions coming. Send them to us at [email protected] or [email protected]. God bless!
