Scenario Planning: Part 2
Evaluating the factors that influence your future strategy
Overview
In the first blog post on Scenario Planning we went through the overall approach and reasoning. We ended with defining a focal question to use as an example through this series of posts.
How will homeowners complete simple maintenance and repair projects on their home over the next 10 years?
The next step for us is to evaluate the Key Factors and Environmental Forces that will influence the answer to the question over the next 10 years. With the forces defined we’ll evaluate which ones we think are most important. We’ll cover steps 2, 3, and 4 in this post which will setup the next post to define the various scenarios.
Key Factors
These are the factors that are likely included in your business plan or in a competitive analysis (like Porter’s Five Forces — which I’ll cover in a later post). I like to think of these being the forces in your control. For example, you can choose the markets you compete in, where your company is located, which customers to target, and which products to develop.
The importance for identifying the key factors and environmental forces is that between the two you have defined the full set of factors that have the most influence on your business. The delineation does not have a large impact on the end result of the process (see here for article to read more from Jay Ogilvy).
Market Size — For the home services market that is ~$400B per year in annual spend. The graphic below represents the improvement and repair segment. In addition there is ~$50B/year in maintenance + other home services (e.g. insurance, security systems, cable / internet).
Customer Demand — Not only is it a large market, it has also grown at ~6% per year over the past 20 years. Demand for home services through online channels continues to grow at double digit rates. Over the last 3 years the number of monthly searches for the top 100 service types has gone from 6M to nearly 13M searches. Word of Mouth is still the largest source of demand, though online given its ease of use and depth of data is starting to compete for this share.
Competition — Given the size of the market and importance, this is an industry that has lots of competitors. There are many who believe this will consolidate like other industries, e.g. in the home improvement retail side Lowe’s and Home Depot combine to have 41% of the total market. In the services side the largest providers have less than 2% of the total market, though there are some categories like Pest Control that have 3 players controlling ~80% of the market.
There are many other factors that could be evaluated for your company including access to talent, production techniques, process improvements, new suppliers, etc.
Environmental Forces
These are the macro forces that are largely out of the company’s control that play a role in influencing your business.
The first force that comes to my mind when thinking about serving the home services market is “When will the next recession hit and what impact would that have on the market?” Here is a chart showing the impact that the last recession had on home improvement.
As can be seen in the chart the recession from 2007 to 2009 saw a 18% decline in spending and is up 21% from the previous peak. During the same time frame the US GDP dropped 3%, the S&P 500 stock index fell 57% (and is now up 71% over the previous peak) and home values in the US dropped 27% (now up 5% over the previous peak).
Other environmental factors to consider would be:
- Aging demographics: Hard to not hear a story about the Boomers aging and the impacts this will have on society.
- US Workforce: evolved from manufacturing and farming to a services economy (see the BLS data) which has translated into people being less comfortable with DIY projects that involve tools. In 1970 nearly 13% of the US was employed in Manufacturing, now that is 5%. The same trend has happened in agriculture.
- Urbanization / increased population density: US Cities account for 63% of US population and 3.5% of land area. The trend points towards more concentration in urban vs. rural areas. This will likely result in more multi-family dwelling units vs. single family homes.
- Home Ownership: We are at 20-year lows in home ownership rates, 63% vs. 69% peak in 2005. These rates are being depressed due in part to stagnant wage growth and increased home prices. While we are at low rates relative to the 2000’s, these are near the levels we had operated at historically.
- Climate Change: New weather patterns are emerging that are resulting in more extreme disasters, which coupled with increased population density means for higher impact storms. In 2017 there were 16 $1B disaster events that hit the US, which ties 2011 for most ever. Based on climate research this trend should be expected to continue as climate change amplifies the power of storms. This creates an opportunity in home improvement to establish disaster recovery services. Home Depot, Lowe’s, and ServiceMaster all saw large year over year increases in the quarter following the 3 major hurricanes that made land fall.
- Technology Trends — Especially in the home improvement space this is an area that will dramatically change the landscape. One of the lagging industries to technology adoption, but lots of potential. I’ll focus on 3 trends that are having and will have an impact, Mobile, Automation, New User Interfaces.
- Mobile >> 10 years ago we entered the rise of the smartphone. We appear to be at the top of a typical S-curve. Given the large adoption rate of smartphones the next 10 years will likely see increased innovation to make the phones faster with improved software apps. Over the course of the next 10 years we’ll see the introduction of 5G technology which will enable near broadband speeds over mobile networks. These networks will then enable a whole new set of features on phones.
2. Automation / Artificial intelligence (AI) >> There are a number of applications where AI can influence the industry, including automating conversations and system monitoring. Most projects start with a similar conversation between homeowner and contractor that could be automated enabling contractors to serve more homeowners. The rise of internet connected devices also means there is a stream of data that can be used for monitoring home equipment system health, as well as support remote diagnostics. Some of this is already emerging with new security systems that don’t require professional installation or costly subscription plans. The Ring Doorbell sends a notification to you smartphone when someone comes close to your door.
3. New User Interfaces (Voice and augmented reality) >> Voice assistants like Alexa and Google Home are natural entry points for homeowners to engage their next home project. As these systems become more intelligent and connected within the home they will be the hub of the home. Augmented Reality (AR) has the power to make remote diagnostic easier and assist homeowners with their fixes. Drishyam.AI and Streem.pro are two startups that are starting to enter this space. AR use cases are starting to emerge, but could result in large cost savings for diagnostic fees and quoting.
Critical Uncertainties
You may be thinking okay this is a lot of information and I don’t get how this helps us with defining scenarios. If that was a lot of information and you were uncomfortable we are now entering the convergence zone of the process after diverging in the previous two steps. This is where we narrow down the factors to help set the construct for the scenarios.
At this step we want to score the uncertainty and level of impact of the factor on our focal issue. For this exercise we’ll use a short list from the above, though in a normal process you’ll want to have a quick brainstorm to identify ~50–100 ideas. While I have scored each of the items myself. In a real environment you would have taken the ~50 ideas and done the research like above and then come back together as a team and score each of the factors. I recommend that for the second step that you have a cross-functional team, ideally with people from outside your company also included. For my example that would probably include homeowners and contractors.
There are probably other formulas that could be used to prioritize, but for this exercise I just did a basic addition of the impact and uncertainty to identify the highest priority factors. The top items are the ones we’ll focus on for defining our scenarios.
Defining Potential Axes
This is the best part, creating a 2x2. If you have ever met a strategist they love to put things into a 2x2 diagram. While you could generate more scenarios, having 4 scenarios generally does a good job of forcing tradeoff decisions and limiting scope.
Here are a few of the highest priority ones based on the Critical Uncertainties:
- Industry Fragmentation (consolidated vs. fragmented)
- Urbanization (condos vs. homes)
- Climate Change (doomsday vs. sunny skies)
- Economy (housing crisis v2 vs. long bull run)
- Digital Starts (Everything digital vs. Word of Mouth)
Next Steps
In the next post we’ll start to go into detail on defining scenarios and how to construct scenarios from the various uncertainties we have laid out above.
