Scenario Planning

March 1, 2004

Take your future in hand

Your previously working-class neighborhood gains such cachet that only high-income households can now think of buying there. A major employer in your area folds, throwing hundreds of workers out of work and chilling household confidence throughout the area.

An article on toxic mold in your local newspaper prompts a lawsuit against your company by recent buyers who claim to have found mold in their home.

How well you respond to such scenarios depends on how well you’ve planned for “what ifs.” That’s why some brokers are turning to a strategic planning process called scenario planning. Its aim: to ensure your business decisions hold up well in a changing environment.

The classic example of scenario planning is Royal Dutch/Shell group’s anticipation of the oil crisis in the 1970s. As part of a range of scenarios for which it planned, Shell contemplated what was then unthinkable: that oil-producing countries might band together and demand higher oil prices. When members of the Organization of the Petroleum Exporting Countries (OPEC) did just that in 1973, Shell was prepared; it had the jump on its competition because it had already secured long-term oil supply contracts.

Businesses and other major organizations, such as the military, now use scenario planning regularly. The military uses it, among other things, to decide how many troops it needs to fight two regional wars simultaneously.

It makes sense for real estate brokers to use it, too, according to strategic planning consultants. Take the scenario in which your market is appreciating beyond the reach of working-class prospects. A scenario plan, anticipating such an imbalance, might explore moving into different markets that fit your traditional base, getting involved in starter-priced condo development, or targeting your marketing and services toward a higher-end customer. In anticipation of a major area employer folding, a scenario plan might look at opening an office in a part of your market less dependent on a single company or industry. Recognizing the country’s mold frenzy, a scenario plan might outline procedures to reduce your company’s risk—before a mold article hits the local paper.

“You should spend some time thinking about what isn’t right in front of you,” says Harold (Hal) Kahn, CRB, CRS®, broker-owner of Kahn Inc., REALTORS®, in Newburgh, N.Y., and chair of NAR’s Research Committee in 2002. “Timing is the critical component in executing any business plan, so forecasting a change in the marketplace is crucial.”

The basics of creating a plan

What does it take to embark on scenario planning? Here are a few essential steps:

1. Analyze. Start by identifying your company’s areas of strength and vulnerability, says David Doeleman, CRB, CRS®, a senior vice president of Bend, Ore.-based Real Estate Champions, a management and sales coaching company. He recommends organizing your evaluation around four basic elements in what’s called a SWOT analysis.

  • Strengths. For example, do you have strong name recognition? Do your management practices help you retain top talent?
  • Weaknesses. Perhaps you haven’t invested as much as your competition in technology. Are you lagging on the Internet compared with others in your market?
  • Opportunities. Are you well positioned to tap into a new market opportunity? For example, is a strong condo market emerging in your area, with no one company yet establishing itself as a condo specialist?
  • Threats. Has a deep-pocketed broker entered your market, with plans to launch a media campaign to boost its name recognition?

2. Identify probable future events. Look at what may happen over a specified time frame through different perspectives—economic, social, legal, and political—and try to assign some rough probability to each scenario.

There’s no rule for determining a level of probability, says Kenneth P. Riggs Jr., CRE®, CEO of Real Estate Research Corp. in Chicago and a member of the Commercial Real Estate Research Subcommittee.

Make your best guess on the basis of your knowledge of the market and historic trends in your area. “The assigned level of probability is subjective,” he says.

Here are hypothetical examples of economic, social, legal, and political scenarios affecting real estate practitioners, with assignments of probability.

Economic

  • Scenario 1: Your area is heavily dependent on warehousing, and, thanks to stagnant retail growth, warehouses are closing or scaling back operations. Probability: 50 percent
  • Scenario 2: Retail growth recovers somewhat, strengthening the warehouse market slightly. Probability: 25 percent
  • Scenario 3: Strong economic growth fuels retail sales, including over the Internet; warehousing sees strong growth, with new facilities coming on line. Probability: 25 percent

Social

  • Scenario 1: Your market is seeing an influx of immigrant households, fueling rental growth but not yet translating into home sale opportunities. Probability: 85 percent
  • Scenario 2: Homebuyer programs with strong outreach spur stronger-than-expected homeownership demand among immigrant buyers. Probability: 5 percent
  • Scenario 3: Business closings and job losses mount. As a result, growth in immigrant households slows, driving rental vacancies, lowering rental rates, and dampening entry-level home sales. Probability: 10 percent

Legal

  • Scenario 1: Your company is hit with several lawsuits when recent homebuyers, sensitized by mold stories in the media, seek compensation after discovering mold. Probability: 5 percent
  • Scenario 2: Your company is hit with a single mold-related lawsuit, which gets dismissed as having no merit. Probability: 65 percent
  • Scenario 3: No mold-related lawsuits are filed against your company. Probability: 30 percent

Political

  • Scenario 1: A new mayor is elected to office on a strong smart-growth platform that seeks to channel new residential and commercial development into older developed areas and to curb growth in the suburbs. Probability: 30 percent
  • Scenario 2: Smart-growth candidates fare poorly in elections, and developers discuss plans to build in former pasture area. Probability: 30 percent
  • Scenario 3: Election results deliver mixed representation on the city council with both pro-development and smart-growth lawmakers. Probability: 40 percent

3. Plan your response. Once you’ve sketched out scenarios, develop a course of action that aims to address each possible future event. Shoot for plans that address events in multiple scenarios. For example, implementing a plan to curb liability against your company for mold-related claims would be helpful across several scenarios, because it could help keep your E&O premiums down and potentially result in fewer mold-related lawsuits against your associates.

In the case of a new competitor in your market, implementing a plan that boosts your bottom line—internal cost-cutting, for example—would benefit you whether or not a deep-pocketed brokerage actually enters your market.

As you get into the planning process, you’ll come to realize that scenario planning isn’t about predicting the future. It’s about extending control over it. As events change, you can change your scenarios and adjust your plans accordingly, and in that way, keep unpleasant surprises at bay.

Should you hire a scriptwriter?

In developing your scenarios and your plans, you need to decide whether to bring in a consultant or do it yourself. “You should strongly consider engaging a consultant when you can’t see any plausible scenario other than business as usual,” says Harold (Hal) Kahn, CRB, CRS®, broker-owner of Kahn Inc., REALTORS®, in Newburgh, N.Y.

You can hire a consultant for the entire process or just for specific assignments. Costs will differ by region and level of expertise, but it would be reasonable to pay about $5,000 for a few days of a consultant’s time, says Kahn.

Also, be prepared to approach planning regularly. “Planning is a process, not an event,” says David Doeleman, CRB, CRS®, a senior vice president with Real Estate Champions in Bend, Ore. He advises clients to review scenarios every year to see whether conditions remain in line with expectations and to adjust their planning accordingly.

How do you identify consultants? Contact an association of scenario planners, such as the Association for Strategic Planning (www.strategyplus.org) or the Association of Professional Futurists (www.profuturists.com). Ask staff there about resources for finding planners with relevant business experience. Or ask business-planning instructors with the NATIONAL ASSOCIATION OF REALTORS®-affiliated Council of Real Estate Brokerage Managers (www.crb.com) for leads.

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