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Michael Taplin
Michael Taplin
realkpis.com is the home of The KPI Bible and offers the lowdown on KPI modeling

Corporate Dynamics Ltd
Principal Consultant

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Playing with KPI Models to Explore Strategy Scenarios

Posted over 8 years ago

In times of great uncertainty building strategy scenarios offers a preferred way of crafting a set of strategic options to deal with different but possible versions of the future.
What do we mean by strategy scenarios and options?

A strategic scenario is a set of assumptions about a possible future situation. To develop a useful scenario you need to think about the key question you want answered. A possible starting point could be “What would be the worst (or best) thing that could happen to our business in the next 2 years?”

What is likely to make that happen? Trends, driving forces, stakeholders, key uncertainties, extreme outcomes probably need to be considered before you define the scenarios you want to explore in depth.

Then you write the scenarios.

A well crafted scenario and option set says:

“If this happens, do that, but if that happens do this.”

Of course it will only work for you if you have tested the feasibility and the possible range for this and that.

To be confident about this and that, it helps to have tested in advance the range of situations where you can reasonably expect it to work.

Modeling the business consequences of a range of options at a basic level is easy when you use a KPI model. A really sophisticated planning unit will probably use a “Monte Carlo simulation” and programs like @Risk. Even small organizations can do it though with a basic spreadsheet using the KPI modeling techniques described here.

It’s all about the thinking process. Get that right and the range of answers is easy to find. You can avoid painful errors if you have checked the feasibility of a strategy by creating a KPI model.

This article will not explore how to create scenarios because there are many excellent resources available on that topic. You could start with http://en.wikipedia.org/wiki/Scenario_planning.

“Why bother. It may never happen.”

As Colonel Robert Baden Powell said to the fledgling Scout movement in 1908 “Be prepared.”

He never said what we should prepare for because he knew how uncertain the future is. He knew that the prepared mind responds to contingencies much better than the unprepared.

We know the truth of disaster response planning. It is no accident that the international teams reported that the management of the recent Christchurch (New Zealand) earthquake disaster was the best they have ever encountered. Everything was organized and they were able to fly in and hit the ground running. The well-organized response saved lives.

No-one said “Why bother? It may never happen. Even if it does it won’t happen to us.”

As the ancient Arab proverb states “A lazy man is never lucky.”

Back to the KPI modeling.

Untested scenarios are just dreams in disguise. We cannot rustle up an earthquake to test our strategy. We still need to know what to do, and work out how we can know that it will work.

Any well-crafted scenario will have a set of assumptions about what will change, and will define the logical links between the bits of the jigsaw. It will define which parts of the organization will change and which will be left alone. It will suggest how it will change.

Scenario planning deals with really big changes so it will be pretty obvious which parts of the KPI model will change. Which parts of the present structure will disappear and what will replace them? Which functions will change and how?

Now you can start to change your KPI model in the same way that you built it in the first place; on paper with a pencil. When you have finished your view of the likely form of your KPI model, you can change a spreadsheet copy of your present model.

Now you are ready to play.

Think about the most important input variables and how far they are likely to change. Always think about best, worst, most likely.

Let us examine a hypothetical example to illustrate the approach.

If you are dealing with a major price hike for a vital raw material (say x5 or x10), a need to make radical changes in processes and product designs, then the need to define the new KPIs and explore the feasible limits of input cost ranges will be exposed in stark clarity.

Doing this work is great fun for the strategic planner or team, and the outcomes are not predictable. In many cases, the process leads to radical new thinking about how the problem can be turned into an opportunity.

You will clarify the interactions between different parts of the organization and the effects on functions like marketing and sales of what may seem at first to be a simple input cost problem.

You can search for opportunities to change the rules of the game. This is as simple as asking "What if …? questions, again and again and again.

Put Peter Senge’s “Five Why’s” technique into practice to explore a new set of root causes. (The Fifth Discipline Fieldbook, Senge et al, Nicholas Brealey Publishing, London 1998.)
You will find quite quickly where the potential breakthrough solutions lie and you can chase them down. If you are really lucky, you will find something that you can do right now to change the rules of the game and steal a march on the competition.

I am sure that this is the real Steve Jobs’ secret; the hard thinking and the ability to find the answers to the hard questions. The real entrepreneurs, the game changers, don’t stumble over their breakthroughs while taking a random walk. They find them by asking different questions then thinking through the analysis to find a way to make them work.

You cannot do it without a model. Why not play with your KPI model to get you to the right answer faster?

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