Eddielogic

– Thoughts on Strategy and Management

Planning ahead for an unexpected crisis

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Strategic planning is about preparing a business for the future. As we all know, a strategy should put a business in a position to maximally exploit potential chances and to minimize the damage of potential threats.

We all witness the worst financial crisis most of us would have thought of in these days. We also witness the breakdown of more and more financial institutions. With every such breakdown, the remaining banks and financial institutions get into more problems and the risk of even more breakdowns increases. We can safely assume that all those banks in trouble have (or had) some sort of strategy. Banking regulators and capital markets explicitly require that. Hence, we can also safely assume that those banks have (had) some intelligent, well educated and highly paid strategists. Many may also have hired strategy consultants who are even more expensive. According to the above definition, wasn’t it the job of those strategists to prepare their employers or customers for hard times, even for a financial crisis? Have they all failed?

To my opinion – yes and no. 

Why ‘no’?
As it seems, many banks are not really prepared for a severe worldwide financial crisis. However, is it really possible to prepare for a crisis like this? The latest events at the financial markets are the worst, many experienced bankers could think of. What we see these days is a worst-case scenario that comes true. With this in mind we come to the point. I bet there is more than one bank which has a description of a crisis very similar to the current one somewhere in their strategy folders. This will be labelled “worst-case scenario” and it will probably sit right beside a similar paper labelled “best-case scenario” which describes a bright future with booming financial markets and increasing real estate prices. No manager in his right mind would develop a strategy for his business based on only one of these two extremes. Scenario planning is about developing a set of different scenarios. By nature, some of them are more probable than others. Than, you decide for one scenario which potentially has a high impact on your business and a fairly high probability of occurrence. Of course, you may also go for a combination of two or three scenarios, that all have a high impact and considerable probability. This scenario or combination of scenarios becomes the basis for your strategy. Following this procedure, it is not advisable to develop a strategy for a worst-case scenario. Though it might have an extremely high impact on the business, its probability of occurrence is very low.

So far, the strategists are not to blame. They have prepared strategies for a more likely course of events than a worldwide financial crisis which includes the breakdown of banks that were considered “too big to fail”. Imagine a bank had prepared and executed a strategy that expected this type of financial crisis two years ago. They would be very lucky today. Before the beginning of the crisis, however, they would have been criticized for being overly risk averse. To guard against any thinkable risk would simultaneously limit any options to generate returns. To loosely quote from the movie “War Games” – The only way definitely not to lose anything in this game is not to play it. Therefore, half of my above answer is no, strategists haven’t failed.

Why ‘yes’?
Nevertheless, if that was the right thing to do, what would than be the point of preparing a worst-case scenario at all? As I see it, a worst-case scenario is there to sensitize planners and managers for very dangerous developments which ware although unlikely not impossible to come. They should at least have thought about their options under that scenario. So they would have some ideas how to react and what to do. If they all had done their homework, how could this crisis have taken anybody so much by surprise? Is there any bank that can refer back to their strategy folder because they discussed a scenario of a worldwide financial crisis and brainstormed some things to do in this unlikely case? If you look at the apparently completely unprepared financial market players, the other half of my answer is yes, strategists have failed.

To be honest, this last statement might be a bit unfair. Only failing banks hit the news these days. So I really don’t know if there aren’t any banks that do exactly that – look at their worst-case scenarios and their prepared plans for those so that they have a nice set of ideas to start with. If there are some, maybe we will read about them in some strategy textbook case studies after some years.

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