Dawgen Global Insights -February 2021

VOLUME 2 | I SSUE 2 | FEBR UA RY 2021 |

PAGES 44

DAWGEN GLOBAL INSIGHTS

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

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INTRODUCTION TO OUR MONTHLY NEWSLETTER DAWGEN GLOBAL INSIGHTS

Welcome to Dawgen Global and our February 2021

succeed that will be different from the pre-Covid

edition of our Monthly Newsletter-Dawgen Global

world.

Insights.

But how will it be different? It is critically important

This Newsletter has been produced to provide you

to try and understand how this new terrain could

with an overview of our firm and the wide range of

look for you, so you can make timely strategic

services offered by Dawgen Global entities; whether

decisions about adapting to the new conditions.

audit, accounting, tax or advisory services.

We also examine Sales Compensation Plan in

Over the past 18 years, I can proudly say that

this issue. “In most companies, Sales is the only

Dawgen has significant experience and expertise

revenue-generating function. Everything else is a

that we draw upon, day after day, helping our

cost center.”

clients to progress. Our Monthly Newsletter will demonstrate the strength of our firm and the unique and innovative approach we engender.

This is communicated through client case studies on how our team have collaborated to help our clients succeed.

The importance of Sales is thus indisputable. For such an important function, it becomes equally as important to design an appropriate Sales Compensation Plan.

Sales Compensation is often simplified to a discussion between fixed-salary vs. commission-

This issue of Dawgen Global Insights explores

based systems. However, to design an effective

several management tools and strategies including

Sales Compensation Plan requires a much more

Scenario planning for a post-Covid world.

holistic and nuanced understanding of the dynamics

The Covid lockdowns have forced us all to rethink

of Sales Compensation.

our methods and needs and find (or invent) new

To better understand the dynamics of Sales

ways to get things done.

Compensation, we should familiarize ourselves with

In general, inventiveness is good. But in the Covid world, this resourcefulness has had an enormous unintended consequence: the many “temporary” fixes that we have put in place have been reshaping our operating terrain – possibly permanently.

Almost everything is undergoing a reset.

The result will be a “New Normal”, i.e. a business landscape in which we will have to operate and

the Sales Compensation Cycle. This article captures the interplay among compensation, motivation, and evaluation—and how these elements drive both effort and results (i.e. sales). In this presentation, we discuss the 5 key elements which comprise the Sales Compensation Cycle.

I hope that you will find the information we provide in this Newsletter helpful.

Dr. Dawkins Brown Ph.D Executive Chairman Dawgen Global

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DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

TA BLE OF CO NTE NT

5 Sales Compensation Cycle

19 Scenario planning for a post-Covid world

About Dawgen Global D

awgen Global is an integrated multidisciplinary professional service firm.

We are integrated as one Regional firm and provide several professional services including: audit, accounting, tax, Information Technology, Risk, HR Solution, Performance, M&A, corporate finance and other advisory services.

Our regional network covers Jamaica, Trinidad and Tobago, Bahamas, Bermuda, the Cayman Islands, the Eastern Caribbean (Barbados, Antigua, St Lucia, Grenada, and St Kitts & Nevis), the Netherlands Antilles (Bonaire, Curacao, and St Maarten), Aruba, Turks and Caicos Islands, Guyana, Puerto Rico, and USA. Our regional focus is to improve services to local, regional and international clients. Through our affiliation and membership in other Global Networks and Associations, we offer a global perspective while maintaining our regional insight by seeking alternatives for you – we tap the power of both.

Our multidisciplinary teams of professionals leverage a wealth of industry-tailored, practical approaches to help you discover opportunities for your business.

Whether your organization is strong and healthy, under stress or facing difficult choices, we work with you to find financial, strategic and operational solutions that improve your liquidity, financial flexibility and stakeholder returns. We are here to help you build a sustainable business – in the short and long-term.

CONTACT INFORMATION: Regional Head Office : Dawgen Towers, 47-49 Trinidad Terrace, Kingston 5 | Jamaica Telephone

(876) 929-2518| (876) 926-5210|

(Caribbean) (876) 630-2011| Fax: (876) 929-1300 USA: 786-456-5990 Email: info@dawgen.global

SALES COMPENSATION CYCLE

THIS ARTICLE ADDRESSES THE 5 KEY ELEMENTS TO DESIGNING AN EFFECTIVE SALES COMPENSATION PLAN

Overview In most companies, Sales is the only revenuegenerating function. Everything else is a cost center.

The importance of Sales is thus indisputable. For such an important function, it becomes equally as important to design an appropriate Sales Compensation Plan.

Sales Compensation is often simplified to a discussion between fixed-salary vs. commissionbased systems. However, to design an effective Sales Compensation Plan requires a much more holistic and nuanced understanding of the dynamics of Sales Compensation.

To better understand the dynamics of Sales Compensation, we should familiarize ourselves with the Sales Compensation Cycle. This article captures the interplay among compensation, motivation, and evaluation—and how these elements drive both effort and results (i.e. sales). In this presentation, we discuss the 5 key elements which comprise the Sales Compensation Cycle: 1 Compensation Plan

Compensation is a powerful tool for management to answer the question, “How do we get our people to do as much as possible of the right kind of work?”

2 Motivation 3 Effort 4 Results 5 Evaluation We dive into each of these areas in detail to better

understand

the

process,

implications,

considerations, and interrelationships among the elements. Additional topics discussed include the Fiaccabrino Selection Process (FSP), Performance Measures, Perceived Rewards, Passive vs. Managed Sales Management, among other topics.

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DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

SALES C OMPENSATION IS A CRITICAL MANAGEMENT DECISION— MOTIVATION, EVALUATION, AND COMPENSATION MUST ALL BE PROPERLY BALANCED Sales Compensation – Overview Sales is the lifeblood of the organization. As such, Sales Compensation is a critical management decision.

Wikipedia defines Sales as “activities related to selling or the number of goods sold in a given targeted time period.” In other words, it deals with the crucial

Sales Compensation is often simplified to a discussion between fixed-salary

function of converting our products into cash.

vs. commission-

To put it more directly, there is an old saying:

based systems.

“In most companies, Sales is the only revenue-generating function. Everything

However,to design

else is a cost center.”

The importance of Sales is thus indisputable. For such an important function,

an effective Sales

it becomes equally as important to design an appropriate Sales Compensation

Compensation

Plan—one that properly balances the proper motivation, appropriate

Plan requires a

evaluation, and fair compensation.

Our Sales Compensation Plan has 4 primary impacts:

much more holistic and nuanced

1 Quantity and types of orders received by Manufacturing

understanding of the

2 Cash flow profile, as managed by Corporate Finance

dynamics of Sales

3 Recruitment and training needs for Marketing and relevant personnel

Compensation.

4 Daily interactions between Sales and other functional areas

Of all Sales issues, compensation is the discussed—and most important to get right.

Source: A Preface to Payment, Cespedes, MIT Sloan Management Review, 1990

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

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TO DESIGN AN EFFECTIVE SALES COMPENSATION PLAN, THERE ARE 5 KEY ELEMENTS TO UNDERSTAND AND ANALYZE Without understanding the fundamental interlinkages among these elements— most notably compensation, evaluation, and motivation—our Sales Compensation Plan cannot be fully optimized and drive the results we intend.

1 Compensation Plan 2 Motivation 3 Effort

a cyclical, linear relationship—in

4 Results

another in numerous ways.

5 Evaluation

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For simplicity, the diagram shows actuality, all elements affect one Source: A Preface to Payment, Cespedes, MIT Sloan Management Review, 1990

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

THE FIRST ELEMENT IS COMPENSATION PLAN ITSELF— THIS SETS THINGS IN MOTION

DETAILS The essence of compensation services 2 objectives:

1

It is a motivation tool

2

It serves as an evaluation tool

Compensation, evaluation,

Sales Compensation Cycle – Compensation Plan The Compensation Plan sets everything in motion.

It provides the salesperson the motivation, so he

and other motivational elements should be linked coherently in the Sales Management System.

The salesperson should be viewed as the agent of the organization’s Marketing

or she can put in the effort, and consequently drive

Strategy.

the results.

• In other words, the salesperson should not be viewed an individual contributor within the organization.

• The Compensation

Compensation is a tool for achieving Sales performance aligned with the Marketing Strategy.

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

Plan should likewise be designed accordingly to this perspective.

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THE SALES COMPENSATION PL AN DRIVES THE SA LESPERSON’S MOTIVATION— WITHOUT THE PROPER MOTIVATION, THE REST DOESN’T FOLLOW

DETAILS Motivation involves 4 core components: Recruitment & Selection • Foremost, our recruitment policies and selection criteria must reflect the characteristics of salespeople we desire for our organization.

• In other words, what personal characteristics (e.g. knowledge, skills, attitudes, values, background) are we seeking to become salespeople in our organization?

• There must be a defined set of personal characteristics that must be deliberately selected, developed, and managed.

Territories & Accounts • The salesperson’s territory and account characteristics define the opportunities availability. Likewise, they will provide direction for the salesperson’s efforts.

Sales Compensation Cycle – Motivation The primary intent of compensation is motivation. It is also a core responsibility for Leadership—to in essence answer the question, “How do we get our

• For instance, some territories or accounts may have an inherent higher sales rate, regardless of which salesperson is assigned to that territory or account.

Perceived Rewards • This component captures the salesperson’s own perception of the relationships among effort, results, and rewards.

• In other words, does putting more work actually drive more results? In some cases, the salesperson may not think so—e.g., due to our pricing policy or the competitive situation.

people to do as much as possible

Perceived Additional Rewards

of the right kind of work?”

• This final component is the perceived value of additional rewards received.

Selection of the right salespeople is arguably the most important factor—after all, in most organizations, 80-90% of sales are generated by only 20% of the Sales team.

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DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

LET’S TAKE A DEEPER LOOK AT RECRUITMENT AND SELECTION— HOW DO WE SELECT THE TOP PERFORMERS Sales Compensation Cycle – Motivation (Fiaccabrino Selection Process) The Fiaccabrino Selection Process (FSP) is a powerful methodology for screening the best people for your organization.

• FSP was developed by Charles Fiaccabrino, while he worked at Hoffman Roche as a Sales Executive and known internally

The core of the framework is to understand 16 critical Humanistic Attributes.

At the end of the day, the candidate must excel across all 16 of the Humanistic Attributes.

as “Mr. Roche.” In the early years of Roche Diagnostics, Charles was responsible for over 80% of the

Intelligence

Organization and planning

Honesty and

Ability to relate to concepts

Competitiveness and drive

Verbalization and communication

Values system

Energy level

Flexibility of thought process

Success factors

Leadership

Team orientation

Empathy

Work ethic

Loyalty (expressed)

Behavioral quadrant (Q4)

national sales. Through his career Roche, “Mr. Roche” earned the President’s Achievement Award an unprecedented 20 times.

integrity

• He credits much of his success to his ability to evaluate people, which he distilled into the FSP framework. The objective of FSP is to select those people who will be the highest performers with the lowest turnover.

Dominant hostile (Q1)

Dominant warm (Q4)

Submissive hostile

Submissive warm (Q3)

(Q2)

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

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KEY TO MOTIVATION ARE PERCEIVED REWARDS— THE REWARDS MUST BE WORTH THE EFFORT Sales Compensation Cycle – Motivation (Perceived Rewards) The final 2 components of Motivation both deal with perceived rewards. It goes without saying, in order for someone to be properly motivated, he or she must perceive the rewards to be worth the effort.

Perceived Rewards The salesperson’s own perception of the relationships among effort, results, and rewards.

Perceived Additional Rewards The salesperson’s perceived value of additional rewards received from

KEY QUESTION

additional effort and results.

Does more work actually drive more

KEY QUESTION

results?

Is the additional effort worth the

KEY CONSIDERATIONS

additional reward?

• Working harder or smarter may

KEY CONSIDERATIONS

In addressing

• In many situations, the salesperson may perceive the additional effort as disproportionately high, relative to the incremental rewards received.

these

not leader to better sales results or higher rewards.

• Due to the organization’s product policy, pricing, or competitive landscape, to name a few factors, a salesperson’s efforts may not drive more sales.

• Moreover, even if more effort does lead to more sales, due to the organization’s measurement, compensation, and recognition systems, it may not lead to higher rewards for the salesperson—in which case, why bother?

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• For instance, many incentive systems are designed to encourage salespeople to develop new business. However, if the salesperson already has a steady anchor accounts in his or her territory, it may not be worth the effort to develop new business.

• Developing new business typically requires significantly more effort than maintaining existing client(s).

considerations, we should assess the “breakeven point” between effort and reward—at what point does the salesperson lose motivation to continue selling?

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

DETAILS There are 2 core dimensions to effort:

1 Quantity • Quantity refers to the amount of effort expended by the salesperson to make the sale.

• E.g., call frequency, number of sales calls, number of accounts, orders booked, meetings booked, etc.

2 Type

WITH THE MOTIVATION SET, THE SALESPERSON GETS TO WORK—I.E. THE EFFORT

• Type can refer to a variety of options, such as the following: • (a) business development activities vs. (b) account

Sales Compensation Cycle – Effort The direct outcome of motivation is effort.

maintenance activities • (a) new products vs. (b) established products • (a) high volume, low-margin

Sales Compensation Plans influence both dimensions of effort.

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

products vs. (b) low volume, highmargin products

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DETAILS • The key to driving the results we desire is in setting appropriate goals that will then guide efforts toward those desired results.

This is complex issue that’s easier said than done.

• There are 2 general approaches to goal setting and getting results:

1 Passive • The passive approach sets a goal and gives the salesperson free reign to go and achieve it.

• Many salespeople are naturally entrepreneurial and thus may prefer this approach, where they have more freedom in the field.

Likewise, they may not like

THROUGH EFFORT, WE GET RESULTS—I.E. THE SALES Sales Compensation Cycle – Results Through the effort put forth by the salesperson, we arrive at the results (i.e. sales).

(and resist) having their field activities being monitored and managed.

• This approach emphasizes product over process.

2 Managed • In the managed approach, the Sales Manager rewards specific activities aimed at achieving the desired results and thus attempts to directly influence those results.

In general, the managed approach is preferred—however, it requires a mature Sales IT system to implement effectively.

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• This approach emphasizes process (and management) over product.

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

NOW, LET’S EXAMINE THE SPECIFIC STEPS INVOLVED WITH THE PASSIVE VS. MANAGED APPROACHES TO GETTING RESULTS

PASSIVE

The passive approach follows these 5 main steps:

1 Define expected end result

(e.g. $1MM annual sales)

2 Set goal(s) 3 Wait for results 4 Evaluate results 5 Reward for results The rationale behind this approach is the salesperson

Sales Compensation Cycle – Results (Approaches)

knows best how to achieve his or her sales goals. Over time, there is natural selection and the best salespeople are retained, as they are rewarded, whereas poor performers leave due to lack of reward.

Lets’ break down these 2

MANAGED

philosophies to goal setting and

The managed approach follows

rewarding results into specific

these 5 steps:

steps.

1 Define expected end result

(e.g. $1MM annual sales)

2 Reward activities leading to desired results

3 Influence results 4 Evaluate results 5 Reward for results The rationale behind this approach is the salesperson

These 2 approaches only differ in steps 2 and 3.

knows best how to achieve his or her sales goals. Over time, there is natural selection and the best salespeople are retained, as they are rewarded, whereas poor performers leave due to lack of reward.

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

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ONCE WE SEE RESULTS, IT’S TIME TO EVALUATE (AND LIKEWISE REWARD) Sales Compensation Cycle – Evaluation Lastly, the results must be properly measured and evaluated.

Compensation is based on this evaluation.

There are 3 key components to an evaluation:

1 Evaluation process • The process for administering evaluations should be clearly defined.

• For many organizations, this evaluation process for measuring results and determining the compensation conflicts with the organization’s formal performance evaluation process.

For instance, the evaluation process may base bonuses on the salesperson’s individual sales, whereas the corporate performance evaluation process may emphasize team selling (e.g. joint presentations, cross-referrals).

2 Performance measures There are many possible performance measures for evaluating Sales Performance.

3 Sales IT systems The Sales IT systems must be able to support the evaluation process by providing the necessary data as required to report the measurement criteria.

Having a poorly defined evaluation process may result in demotivation or even motivation toward the wrong type of sales effort.

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DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

IN EVALUATION, THERE ARE NUMEROUS PERFORMANCE MEASURES WE CAN LEVERAGE— LET’S TAKE A LOOK AT SEVERAL POSSIBILITIES Sales Compensation Cycle – Evaluation (Performance Measures) Sales volume is the most common measurement used for incentive

Here are examples of performance measures besides overall sales:

1

This is a useful metric when the organization sells different items used as a system by customers (e.g. equipment and related supplies/services).

2

PRICING This is a useful metric when negotiations are an important part of the sales process. This can allow the salesperson discretion over price-exception requests by the customers.

3

systems. However, there are many

BAD DEBT-RETURN ED GOODS For many types of businesses, this is a major component of selling expenses and of profitability.

possible performance measures for evaluating Sales Performance.

PRODUCT MIX

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TYPE OF SALE The type of sale can have a major impact on cash flow, the nature of the company’s installed base, and after-market revenues. An example of type of sale is ownership vs. rental/subscription.

In selecting the performance metrics, it is important to be realistic and bear in mind any limitations in what data our IT systems can provide—data must be available and reliable.

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

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TRAINING For many industries, training (or another type of professional service) can be a major source of gross profits. It can also be a source of significant recurring revenue.

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LASTLY, LET’S SEE HOW THE FULL PROCESS WORKS—FROM COMPENSATION PLAN TO MOTIVATION TO EFFORT TO RESULTS TO EVALUATION Sales Compensation Cycle – Putting It All Together Now that we have delineated the relationships between the various levers, let’s re-examine the components of the Sales Compensation Plan.

The Sales Compensation Plan has 2 main components:

TYPE Type refers to the breakdown between base salary and incentive pay (i.e. bonus).

QUANTITY Quantity refers to the both (a) total compensation and (b) compensation provided for performing a given sales task.

It is important to evaluate the compensation against the industry standard and within the Sales Organization.

There are clear links—both intentional and unintentional— among the various elements of compensation, evaluation, and motivation.

In designing the Sales Compensation Plan, we should begin by key decisions around: • What types of efforts do we want our salespeople to

Designing a Sales Compensation

focus on?

Plan is both an art and

• What are the designed behaviors from our salespeople?

science—there is no one

Next, design the specific Compensation Plan aimed at

form that is optimal for all

encouraging these efforts.

organizations.

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DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

SCENARIO PLANNING FOR A WORLD POST-COVID

HOW TO VISUALIZE THE “NEW NORMAL” LANDSCAPE YOUR COMPANY MAY FACE IN THE EMERGING POST-VIRUS WORLD

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

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OUR MI SSION FO R E SEE T H E FU T U R E “NEW NORMAL As managers, we have the important responsibility

of

formulating

a

strategy, not only to assure that our companies will be successful today, but also successful in the future.

Nearly every decision we make today – in planning, product development, marketing, finance, human resources, even a “small” decision addressing some everyday operational issue – is meant, in some way, to improve our future performance.

It follows that, in order to make good decisions and formulate effective strategies today, we should foresee how the business environment might change tomorrow – because it is in this future landscape where those decisions and plans will play out.

However… sadly… “tomorrow” is unknowable: • Even in the best of times, we can never be 100% certain how things will evolve.

• And now, the Covid-19 pandemic has made “tomorrow” even more difficult to foresee.

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DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

Of course many activities will resume

relatively

unchanged.

But overall, almost all of us will encounter some degree of change in our business terrain – perhaps dramatically so – and we will all have to come to terms with the new lay of the land. That may mean

adapting

methods

and

operations, perhaps working with new partners, modifying products and services, managing employees differently, dealing with customers in new ways – the possibilities are legion!

WHY IS T H IS MI SS IO N SO I MP O R T A N T ?

The Covid lockdowns have forced us all to rethink our

The result will be a “New Normal”, i.e. a business

methods and needs, and find (or invent) new ways to get

landscape in which we will have to operate and succeed

things done.

that will be different from the pre-Covid world.

In general, inventiveness is good. But in the Covid world,

But how will it be different? It is critically important to try

this resourcefulness has had an enormous unintended

and understand how this new terrain could look for you,

consequence: the many “temporary” fixes that we have

so you can make timely strategic decisions about adapting

put in place have been reshaping our operating terrain –

to the new conditions.

possibly permanently. Almost everything is undergoing a reset.

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

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WHA T T H IS A R T I C L E WI L L D EM O N S T R A T E • Not just one, but several futures are possible • The

of scenario planning

step-by-step

process

of

scenario planning • How

This is the essence

scenario

It is both structured/systematic and creative/imaginative

planning

is

a

valuable technique for visualizing alternative

futures

you

might

the-sky

realistically face • How

to

apply

Realistic possibilities, not pie-in-

the

scenario

planning process to your own business situation

Realistic possibilities, not pie-in-

• How to use the scenarios as the basis

for

formulating

the-sky

sensible

strategic responses

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DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

1. As if it were a science fiction fantasy.

2 C OM M O N WA YS P E O P L E TH I N K AB O U T TH E FU T U R E:

BOTH W RON G

We are agreed that if we want to make reasonable plans and strategies, we need to visualize how the future might turn out.

The problem is that most of us have no practical tools for thinking about how the future might evolve. Instead, we might romanticize the idea of the future – and that’s understandable, given the thousands of hours we’re exposed to fantasy versions of “the future” in movies and on TV. These fantasy worlds are full of amazing technology so advanced that the laws of physics don’t even seem to apply. Everyday life is a dream.

All good fun. But of very little practical help to anyone responsible for putting together a business strategy that will be implemented in the real world.

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

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Another way people often think about the future seems to have a certain logic behind it,… but it is anything but logical. In fact, it’s dangerously misleading.

This is the idea of being on a “road to the future”, which is like a long, straight highway. This imagery seems to make sense, because a lot of people arrive at their vision of the future merely by extrapolating from present trends.

Assuming that these trends will continue, they “foresee” where they’re headed: why, the destination is right there at the end of the road, clearly visible!

If you extrapolate the future lay of the land based on how things are today, you may not be too wildly off – if the time horizon is very short.

But making important decisions based on a vision of the longer-term future arrived at this way is tantamount to betting that not much of great significance will happen between now and then. Risky.

2. As if the path to the future is like a long, straight highway.

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DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

THE E XTRA P OLATION FALLAC Y , S CHEMATICALLY THE FUTURE

By tweaking the numbers a bit (e.g. making a market grow faster, or an exchange rate move in their favor), the outcome is – of course – better. Voilà! We now have the so-called “best-case scenario”.

This way of thinking simply assumes that “the way things have been going” is the way they will keep on going. The extrapolation may or may not be an actual mathematical extrapolation; it’s more of a “mental

The

extrapolation”.

“future”,

i.e.

the

place

where the extrapolation leads, is erroneously called “the most likely scenario” in the belief that this is how the future is most probably going to turn out. But note: this is nothing more than a continuation of the present.

THIS YEAR

Remember,

all

of

the

so-called

“scenarios” that are created as a result of this way of thinking – most likely,

LAST YEAR

best and worst cases – are really only variations of each other. And ultimately, they are all based on “the way things were going” in the recent past.

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

And then a “worst-case scenario” is defined, simply by tweaking the assumptions in a less favorable direction.

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RANG E OF POSSIB ILITIES The fallacy – the danger – is that if you analyze the

future

this

you

might

mistakenly

convince

way,

yourself

of

three things: First,

since

you

can

actually see where the road is leading, you know where you are going to end up.

And if things don’t work out so

WRONG !

well, and the “worst-case scenario” materializes, we’ll be stuck over here somewhere.

But if different variables shift in our favor, we’ll end up over here, in this

Returning to our metaphor of the path to the

part of the landscape,

future being like a long, straight highway, the

which is our “best-case

so-called “mostly likely scenario” is here, right

scenario”.

where the road appears to be leading.

Second, you know that, by definition, you must end up somewhere between the best and worst-case outcomes. So the range of possible outcomes is fairly narrow. You have all the possibilities covered!

WRONG !

Third, even if you don’t end up exactly at the point where the road leads, you will be in the same general landscape. How different could the terrain be?

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WRONG !

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

ROA D BE N DER S The Coronavirus is the granddaddy of all such road benders. It has had the effect of making the “road” veer off in such a different direction…

CORONAVIRUS New technologies & products New economic developments New competitors

New legislation & regulations

New societal behaviors

Election results

THIS YEAR LAST YEAR

New customer expectations New legislation & regulations

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

In real life, new trends and developments arise, and a variety of external events take place, all having the effect of bending that road away from the long, straight path.

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…that we will end up in another landscape altogether.

How could these terrains be different?

Can we foresee them?

And keep in mind that landscapes are inhabited! Customers, employees and other stakeholders might have completely different expectations and requirements in different landscapes.

I say “landscapes” – plural – because we cannot say with certainty what “the” post-Covid landscape will be like, only that different outcomes – entirely different terrains – are possible.

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DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

HOW THE P OST- COVID FUTU RE LO OK S TO CONV E NTI ON AL PLANNER S

The wonderful

Worldwide

pre-Coronavirus

pandemic +

world

economic crisis

First reports, virus starts to spread

“The” postCoronavirus landscape

An end is in sight They are trying to figure out what “the” future will be like.

How could the landscape be different in this phase?

What could this mean for my organization?

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

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HOW THE POST COVI D F UTUR E LOOKS TO SCEN ARI O P L ANNER S

Several

Worldwide

The wonderful

potential post-

pandemic +

pre-Coronavirus

Coronavirus

economic crisis

world

landscapes

First reports,

An end is

virus starts to

in sight

spread

Scenario planners know that different outcomes are possible – so instead of trying to predict what will happen,

The insights gained by understanding

they aim to envisage

these alternate ways things might turn

a portfolio of realistic

out can help them draw up targeted

alternatives that each

post-Corona strategies.

could materialize.

How could the landscapes be different in this phase?

What could these mean for my organization?

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DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

1

I D E N T IFY DR I V I N G F O R C E S A FF EC T IN G T H E F U T U R E OF Y O U R B U SI N E S S The scenario planning process

“Driving forces” are any trends or events could have an

We usually categorize these driving forces in four different

impact on your future success. They can range from

groups according to what is called the “PEST model”. In

overarching global drivers of change like an economic

other words, the forces that will drive change in your

downturn to specific factors, like a new regulation that

future will all tend to fall into one of these four categories:

would only affect your industry.

• Political

List as many driving forces as you can think of that you

• Economic

believe could have an impact on your future. It’s not

• Societal

unusual to end up with a hundred or more driving forces.

• Technological

Relevant: Try also to include driving forces behind the 1st-order driving forces. For example, for a restaurant located on a Caribbean island, airlift to that island would be a driving force, i.e. the potential number of passengers that can be flown there per week by all the airlines serving our destination.

Indirect: But what factors affect airlift? Airlines don’t decide these things on a whim. One factor is the price of oil. If it goes up, airlines might raise ticket prices, and demand for flights to the island might fall. This could result in the airlines reducing the number of flights – i.e. fewer visitors will arrive. Is this relevant to us? Yes, probably. Worth keeping an eye on.

Too indirect! : What about the factors affecting the price of oil? Aren’t they relevant as well? For example, urbanization in China is increasing demand for gasoline, driving oil prices higher. But somewhere, we have to draw the line. Chinese urbanization is not a realistic driving force for the success of a Caribbean restaurant!

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2a

FR O M T H E D R I V I N G FO R C E S , S E L E C T THE CRITICAL UNCERTAINTIES

Impact

The scenario planning process

Uncertainty Of the dozens of driving forces you will have identified, which ones will play the greatest role in shaping your future business landscape? We call these “critical uncertainties”.

A critical uncertainty must have both of these two characteristics: • It must have enormous potential to make a difference in how your future will unfold and…

• It must also be highly uncertain as to how it will actually evolve.

In other words, you know that this particular driving force could have almost a make-or-break impact on your future, but at the moment you really don’t know how it will develop.

The logic should be clear here: these are factors that matter. These are the factors, depending on how they turn out, that will have the greatest influence your future business environment. All the other driving forces we can now set to one side, and focus on these.

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DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

2b

C R IT I C A L UNCERTAINTIES: A SSU ME C ON T R A S T IN G OUTCOMES

The scenario planning process

Perhaps the hardest part of the entire process is that,

That done, you next make this assumption: Each of the

from all the driving forces, you must now choose only two

two uncertainties chosen will eventually resolve itself in

critical uncertainties to work with from this point on.

either one outcome, or its exact opposite. The reason

Why? Because even though all the driving forces will have some impact, the way the most critical uncertainties turn out is what will shape your future the most.

for this “Either…Or” is to create scenarios that illustrate contrasting futures. This helps you see how differently things might plausibly turn out – and establishes a mindset more open to the idea that things could change rather dramatically.

Examples

Critical Uncertainty

Either

Hotel developer

Access to capital

Easy money

CONTRAST

UK exporter

Brexit

Leave

CONTRAST

Friendly

CONTRAST

Police Dept.

Media attitude

Oil & gas co.*

World fueled by...

Fossil fuels

Oil & gas co.*

Regulations

More onerous

Or

CONTRAST CONTRAST

Tight money Remain Antagonistic Renewables More relaxed

* This is the example used on the following slides!

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3

FORM A S C E N A R I O C R OS S The scenario planning process

The two critical uncertainties now form the axes of a

Critical uncertainty 2

matrix, or “scenario cross”.

Fossil fuels

World fueled by…

Each of the four quadrants represents a different business landscape that could plausibly unfold, depending on how the critical uncertainties play out.

More

Scenario 1

onerous Critical uncertainty 1 Regulatory environment

Scenario 4

Scenario 2 Scenario 3

More relaxed

Renewables

4

I M AG IN E / DE S C R I B E T H E S C E N A R I O S I N MOR E D ET AIL

The scenario planning process

Scenario no. 1: More onerous regulations + Fossil fuel based world

Characteristics of this scenario (good for us)

Characteristics of this scenario (bad for us)

Continued growing demand for oil & natural

Tough regulations keep

gas exploration.

exploration costs high.

Reasonable to assume 5 new platforms will be built between 2020 and 2030.

Competition mainly from our familiar competitive set (who know how to deal with complex regulatory/compliance demands) – i.e. there will be few start-ups in the market.

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Regulatory regime leads to occasional legal action, work stoppages (10 days/year).

We continue to be seen by public in a negative light (polluters, risks, etc.)

The scenario cross is a very useful starting point for envisaging your potential futures. But it is only skeletal. Now you need to add meat the bones.

Obviously, this calls for creativity, since you are describing a future that has not taken place. But based on the combined experience and expertise of the people taking part in the process, what would you realistically expect this scenario to look and feel like as an operating environment?

You can quantify some of your assumptions and run models to determine the scenario’s impact on your market share or profitability, for example.

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5a

ID E N T I F Y K E Y I S S U E S The scenario planning process Fossil fuels In this scenario we will face these opportunities: 1.

2.

3.

4.

5.

In this scenario we will face these opportunities: 1.

2.

3.

4.

5.

More relaxed

More relaxed

In this scenario we will face these opportunities: 1.

2.

3.

4.

5.

In this scenario we will face these opportunities: 1.

2.

3.

4.

5.

In every scenario, it is likely that some opportunities will arise that you might be able to exploit, so you should try to identify what they might be.

Renewables

5b

ID E N T I F Y K E Y I S S U E S The scenario planning process Fossil fuels In this scenario we will face these challenges: 1.

2.

3.

4.

5.

In this scenario we will face these challenges: 1.

2.

3.

4.

5.

More relaxed

More relaxed

Likewise, challenges or threats that would have to be addressed, circumvented, avoided, or overcome.

In this scenario we will face these challenges: 1.

2.

3.

4.

5.

In this scenario we will face these challenges: 1.

2.

3.

4.

5.

Renewables

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6

D EV ISE A S T R A T E G I C “TO DO” LIST The scenario planning process Fossil fuels

If you have a decent idea of what a scenario will look and feel like as a landscape you could be doing business in, and you’ve identified some plausible opportunities and challenges it would present, then you can draw up an action plan. What would you need to do in this scenario to be successful?

STRATEGIC RESPONSE So we will need to…: 1.

2.

3.

4.

5.

More relaxed

So we will need to…: 1.

2.

3.

4.

5.

So we will need to…: 1.

2.

3.

4.

5.

Renewables

N AM IN G T H E S C E N A R I OS The scenario planning process Up

You can name a scenario whatever you want, of course, but familiar names of songs or movies can telegraph the basic idea of a scenario immediately. Snappy is better than dull!

It is recommended to give the scenarios evocative names. A few weeks after going through this process, you and your colleagues might not remember clearly what “Scenario 3” entailed. But if it has a name like “The Long and Winding Road”, you might better recall that this was the scenario that everyone believed would require a lot of stamina and discipline before you were “out of the woods”.

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More relaxed

STRATEGIC RESPONSE

STRATEGIC RESPONSE

A full-blown strategic plan is probably unnecessary. But a basic “To Do” list makes sense – and it could include not only “What” needs to be done, but “By When”, “By Whom”, and “How Much” you’re willing to spend on the action. Milestones for managing progress are helpful, too.

7

STRATEGIC RESPONSE So we will need to…: 1.

2.

3.

4.

5.

Scenario: 1

Scenario: 2

The Thrill

Good

Is Gone

Vibrations None

Lots Scenario: 3

Scenario: 4

We Are The Champions

The Long And Winding Road

Down

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OBSERVING S IG N POS T S The scenario planning process

Alas, it’s very doubtful that you’ll wake up one morning to the unambiguous news that it is your well-imagined Scenario 3 that has materialized.

So if it isn’t obvious, how will you know which scenario is “coming true”? When will you know?

You have to keep your eyes open for signposts and indicators in your business environment that could help you recognize how the big picture is changing.

Continuously monitoring certain potential indicators could be a good idea.

There may be no formal announcement, but that doesn’t mean that there will not be any signals about where things are headed. But you must be aware of the signals, and interpret them.

Remember the 4 PEST categories. News and developments are taking place constantly in each of these areas of life, and if you observe these over time, they will begin to indicate that one of the scenarios appears more likely to be materializing than the others.

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A PPLY I N G THE M E THO DOLOGY TO THE POST -C O V I D “N EW N OR M AL ”

We are here (?)

The wonderful

Worldwide

pre-Coronavirus

pandemic +

world

economic crisis

First reports, virus starts to spread

Several potential postCoronavirus landscapes

An end is in sight

Using the approach outlined above, let’s turn now to visualizing a portfolio of plausible scenarios that could each represent the new terrain your organization will be operating in, once Covid is behind us.

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DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

POST-C OV ID DR IVIN G FORC E S A ND CR ITICAL UNC E RTA I NTIES Following our methodology, we begin by listing driving forces – any developments, big or small, that we believe could have an impact on the shape of our post-Covid “New Normal”. The

NB: These are very generic examples. You will want to make sure to focus specifically on driving forces that will affect your company/industry.

PEST model makes it easier to assemble such a list.

You might reasonably come up with 100 such drivers, but here we’ll only focus on four in each category.

These are the 2 critical uncertainties chosen.

Political 1. Trust/distrust in political leaders 2. “Don’t let a crisis go to waste” 3. US presidential election 4. Media supportive or antagonistic

Economic 5. Unemployment situation 6. Aggressive online competition 7. Investor confidence 8. Office space prices / occupancies

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

Societal 9.

Mobility / open borders

10.

Schools; open, or only online?

11.

Acceptance of privacy intrusions

12.

Civil unrest

Technological 13.

Vaccine: soon, or long wait?

14.

Quality of online platforms

15.

Increased use of AI

16.

Ongoing surveillance / tracking

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“N E W N ORMAL” SCENAR IO S Of course these are just superficial notions of the scenario characteristics that could plausibly materialize. And then by naming them, we make the scenarios easier to remember.

Donald Trump 1: Roaring 20’s • Companies get back on their

2: Shelter in Place • Travel restrictions.

feet quickly.

•

• Accelerated recovery,

reconfigured but not yet

rehiring of unemployed.

•

Supply chains operating.

2-3 year boom.

• Financial markets expect longer recession.

Vaccine early

Vaccine late

3: Adieu Dollar • Launch of a “Covid tax” &

4: The “Old One-Two” • Recovery beginning in 2021,

record stimulus spending.

but economy hit anew by

•

new taxes & regulations.

Mandatory lockdown; many airline/hotel bankruptcies/

• Consumer confidence low.

bailouts.

• More civil unrest & exodus

• US$ sinks & financial

from cities.

markets decline.

Joe Biden

This is the scenario cross that would result from choosing these 2 critical uncertainties. Are these things really the most critical? Generically speaking, yes: • Who wins the 2020 presidential election has repercussions far beyond the US only, as the two candidates will approach many global issues differently.

• A vaccine launch soon means a quicker recovery; delayed availability means extended economic hardship.

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DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

POST-C O V I D OPPOR TUNITIE S Donald Trump In this scenario we will face these opportunities: 1.

2.

3.

4.

5.

Vaccine early

In this scenario we will face these opportunities: 1.

2.

3.

identify in each scenario?

Vaccine late In this scenario we will face these opportunities: 1.

2.

3.

4.

5.

4.

5.

What opportunities can you

In this scenario we will face these opportunities: 1.

2.

3.

4.

5.

Joe Biden

POST -C OV I D CHALLEN GES Donald Trump In this scenario we will face these challenges: 1.

2.

3.

4.

5.

Vaccine early

Likewise, each of these 4 scenarios will be associated with specific challenges or threats that you

In this scenario we will face these challenges: 1.

2.

3.

4.

5.

In this scenario we will face these challenges: 1.

2.

3.

4.

5.

Vaccine late In this scenario we will face these challenges: 1.

2.

3.

4.

5.

Joe Biden

would have to deal with.

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YOUR P O ST- COVID “TO D O ” LI ST Donald Trump What would you need to do in each scenario to be successful?

The items on your strategic “To Do” list might be things you need to do now, to be prepared for the scenario and/or pre-empt the competition. Or they could be actions to take after the scenario has already materialized, for example to take advantage of certain elements you believe will be present in the scenario, like a decline

STRATEGIC RESPONSE So we will need to…: 1.

2.

3.

4.

5.

STRATEGIC RESPONSE So we will need to…: 1.

2.

3.

4.

5.

Vaccine early STRATEGIC RESPONSE So we will need to…: 1.

2.

3.

4.

5.

2.

3.

4.

5.

in the value of the US$, posited in the

Vaccine late

STRATEGIC RESPONSE So we will need to…: 1.

Joe Biden

“Adieu Dollar” scenario above.

“NEW N ORMAL” SIGNPOSTS Lastly, keep your eyes open for

It’s up you to determine if, and when,

personal observations of things like

telltale signposts that can indicate

a particular scenario is materializing.

changing attitudes and values.

which scenario has a better chance of

Of course, when one of the critical

They may also require more nuanced

emerging than the others.

uncertainties is something as easily

judgment on your part: “Does this

identifiable as the results of an

signpost mean Scenario X is unfolding

election, this is not difficult. You’ll

now?” Not always easy to say with

know the next day (usually…) which of

certainty, but if you observe several

the two candidates has won.

signposts appearing around the same

But you may have selected critical

time, you can be more confident

uncertainties that require monitoring

in your judgment that a scenario is

a variety of more subtle indicators,

emerging.

like news items, market or competitor developments, expert opinions – even 42

DAWGEN GLOBAL INSIGHTS I FEBRUARY 2021

THA NK YOU FOR YOUR I NTE REST IN SCENAR IO P LA NN ING !

It would be my pleasure to work with you to develop a meaningful understanding of the scenarios that you may soon be facing in your company. Please contact us. info@dawgen.global

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