I find it difficult to watch oil gush from the bottom of the Gulf of Mexico. It’s an enormous tragedy that people died, wildlife is dying, our waters and beaches are turning dark, and the livelihoods of so many people are getting crushed. Further, it’s an outrage when you hear this disaster was preventable. The people responsible neglected a key business principle: planning for all possible disaster scenarios with deep-water drilling.
Businesses that avoid planning for the worst cases are taking chances in order to save time and money. Yet, when the worst case becomes reality—especially on an oil rig 40 miles from shore—the costs are far higher and can extend far beyond money.
I’ve written before about the Market Scenario Planning approach we take to deal with uncertainties. The process is based on military scenario planning concepts that were first developed by the Romans. Of all people, it was an oil executive who adapted scenario planning to business and developed the planning system implemented by Royal Dutch/Shell in the late 1960s. By preparing for all possible scenarios, including some of the absolute worst possibilities, the company was able to effectively deal with the oil shock of late 1973.
There are news reports indicating that the BP disaster has roots in lax government regulation. This may be true. However, lax regulation is no excuse for taking undue risks. Excessive risk without contingency planning is a recipe for disaster.
Some might say markets can be a disaster. If the price of commodities is a factor that drives you out of business—as it was for many dairy producers in the past 18 months—it becomes a personal disaster.
Have you prepared for every possible scenario with your marketing? Remember that profits are lost in both worst- and best-case scenarios. When corn was $8 not too long ago, if you weren’t prepared to sell, you suffered a loss of profit opportunity. Losing profit, while not a worse fate than losing equity, is no less frustrating.
Losing out on $8 corn should have served as a wake-up call for the need to be prepared. You never know when the markets are going to give you opportunity or take opportunity away. In either case, when you're prepared to act, price matters less than the actions you take. You can't control price; you can prepare for it.
This week, we heard that President Obama wants to take somebody out to the woodshed, so to speak. His words were a little harsher. If and when that happens, will it make other corporate executives rethink their companies' planning?
I encourage you to think about your planning. Think through all the possible prices scenarios and what you will do should they be reached. The ongoing news from the Gulf is a good reminder to position yourself for opportunities and risks the markets will bring down the road.
Scott Stewart is president and CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at email@example.com.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2010 Stewart-Peterson Inc. All rights reserved.