Test your Strategy using Scenario Planning

OMG! The government has closed another tax loophole! I didn’t see that coming, and now we’ll all be ruined!

At least, that’s what Australian car manufacturers, car dealers, car leasing companies, and salary packaging companies would have us believe. The Australian government moved last week to rescind the right of people who receive company cars through salary sacrifice to use the statutory method of calculating their fringe benefit tax (FBT) liability. Under the statutory method, regardless of the actual proportion of private use of a company car, the user is only ever charged as if they used the car for work 80% of the time, and privately 20% of the time, which makes the deal quite affordable. In the future, everyone will be required to keep a logbook for three months out of every five years, and record their actual proportion of private usage–which will affect their FBT liability accordingly.

Apparently, this will result in armageddon as the salary packaging industry will struggle, nobody will be able to afford an Australian-built car any more, and car leasing companies will be going out of business like it’s going out of fashion.

Of course, none of this will really happen. What will happen is that businesses that built their business model on the premise that a tax loophole would remain open forever will struggle. Businesses that failed to analyse external risks–such as a government changing a tax regulation–may be in trouble. In reality, businesses that developed their strategy without making adequate plans to mitigate the consequences of that risk will be suffering from their own lack of planning, not from government capriciousness.

A little scenario planning by the affected companies may have prevented them from being in the position they now find themselves.

Shell scenario planning

Shell has used scenario planning for more than 40 years to build flexibility into their strategies.

In developing scenarios, Shell asks “what if?” questions to explore alternative views of the future and creates plausible stories around them. They consider long-term trends in economics, energy supply and demand, geopolitical shifts and social change, as well as the motivating factors that drive change. Shell looks forward 30-50 years when developing their scenarios. In doing so, they help build visions of the future.

They use the scenarios to test conventional wisdom and identify potential weaknesses in their strategies which would not withstand the potential developments identified in their scenarios.

Very few organisations have Shell’s resources in terms of money, cash flow and minds. So, it is not anticipated that a medium-sized national Australian company will have the investigative power and long-sightedness of Shell. However, even small- to medium-sized organisations can do their own version of scenario planning to their advantage.

A Tool for Scenario Planning

A simple tool is PESTLE analysis. The acronym stands for:

• Political
• Economic
• Social
• Technical
• Legal
• Environmental

Let’s consider a leasing company with 50% of its business involved in salary sacrificing cars on a novated lease. As I analyse each of these in turn, even at the simplest level with little or no research, I might conclude:

Political: Governments in Australia since Peter Costello’s times have been wed to the idea that deficits are bad and surpluses are good in any given year. In times of low or negative growth, they are likely to look for budget savings to avoid a deficit or repeat years of deficit. Tax breaks are a likely target.

Economic: Australia has had 22 years without recession. Global recessions occur about every 8 to 10 years. It is likely that Australia will suffer low growth or a recession. A recession or low growth is a risk to sales and a double risk to government taking actions on tax rebates which are not seen to be genuine.

Social: Australian public opinion has increasingly been galvanised only against new measures seen to hurt the national economy. Galvanising public opinion requires association with lobby groups with powerful media groups aligned to their cause or deep pockets for national advertising. Successful lobby groups are highly visible, seen to represent something good about the Australian psyche and acting in the national interest, not personal interest. The best lobby groups we have are the state automobile clubs. New powerful lobby groups using social media, such as Get Up are unlikely to be sympathetic to protecting our business model.

Technological: Technology advances in cars make it more attractive to our target market to replace their cars often although the cars operate at high levels of efficiency for longer. A large pool of good quality second hand cars exists, the average age of the fleet having climbed from 6 years in the 1970’s to 10 years now. Any change making new cars less attractive may be reduced by the availability of good-quality second-hand cars.

Legal: Regulations with regard to FBT changes which we rely on for our business model to be successful, need to be passed by parliament. We are unlikely to get other than short-term politically-motivated support in parliament. Governments across the world have legislated for congestion taxes and it is possible here. Much of our market relies on the city worker taking their car into work.

Environmental: Novated leasing arrangements encourage replacing cars more often than may be the case without the tax break, with the number of cars per head of population rising by ten percent in the last five years. We may be susceptible to an argument for car pooling and use of public transport in the future.

Obviously, I have completed a superficial analysis in the time it has taken me to write an article, but who cannot see a scenario where a government trying to balance the budget would try to ensure that all deductions for company car use was genuine? Who could not see that it might be difficult to find enough connected and well-thought of lobby groups to mount an effective social and political defence?

Further analysis undertaken by organisations with good internal data about their market, their customer base, their political environment etc. would of course, do a much more thorough job.

Other tools that may be of use include but are not limited to:

• Key man risk analysis for small companies or companies highly leveraged on a technology guru or figurehead (think Apple).
• Review news headlines from the last twelve months to see what is forming public opinion or is a counterpoint to existing thinking, for example conventional wisdom that oil prices will always rise but the US will now be self-sufficient in oil and an exporter of liquefied natural gas to rival Australia by 2025.
• SWOT analysis.
• ‘Day in the life of’ analysis, for target customers and other stakeholders.
• Brainstorming and negative brainstorming.
• Mind mapping: allows you to follow divergent thoughts to completion pictorially.
• Storyboarding: just like in designing eLearning, it helps to tell a story.

So What?

When you have enough data, or all the data you can gather, build at least two scenarios at either end of a spectrum of likely events. Create a story about each. Make up characters. Give your visions of the future a real-life feel. Test them for realism. Don’t fall into the trap of creating a pessimistic or optimistic view. Try to create situations which are internally congruent.

Then test your strategy against the scenarios. Ask the question, “Does our strategy survive equally well under each scenario?” If not, ask “What can we do, cost effectively, to either ensure that our strategy stands up to either scenario or that we receive early warning about which scenario seems to be unfolding, so that we may make early decisions?”

Scenario planning helps you build in flexibility into your strategies. It appears that the leasing companies that are suffering had no flexibility. They seem to be operating as if there was no scenario in which a government might tighten eligibility to a tax break worth hundreds of millions of dollars in order to fund what is seen as a more politically sensitive issue they have to be seen to fix. That seems a little short-sighted.

Don’t be blindsided by the obvious probabilities in life. Think about the future, not as good and bad, but as serious alternatives that could occur and ensure your strategy can survive either scenario unfolding.