Stress Testing Your Business Model

by

Thomas Schinkel

January 18, 2010

It is now almost a year ago that US Treasury Secretary Timothy Geithner ordered the largest financial institutions to conduct so-called “stress tests” to make sure they could withstand worst-case scenarios.

At the time, many felt that the program was a comfort measure with the primary purpose of bolstering confidence in the economy, and [?the worry was that it would become] an exercise in window dressing. One of the bankers, Wells Fargo & Co. Chairman Richard Kovacevich, criticized the government and called the administration’s plan for stress-testing banks “asinine.”

Asinine or not, what I advocate for the business community is an altogether different kind of stress test, one that is designed to prepare companies for a smorgasbord of events likely to happen by default or by design, but whose timing remains as unpredictable as a Florida hurricane.

In an earlier article, we looked at a paradigm shift in the making, one that shifted senior executives’ focus from planning for growth to preparing for the unpredictable. During the years ahead, the likelihood of a combination of unpredictable events happening in the realm of currency risk, cluster risk, and global fiscal and monetary upheavals is fairly high (see figure, below). These events will have a profound impact on the business models of all but a few corporations around the world.

To get a handle on these issues, I encourage my clients to conduct a specific series of stress tests that ultimately test the vibrancy of their business models in the wake of various combinations of events. One of the most significant challenges companies face is in the realm of value chain management. The globalization fever of the last decades has invited a culture of creating longer and longer value chains, all based on assumptions of cheap energy, cheap labor and free markets.

One of the drivers behind the financial crisis of 2007-2009 was the entire notion – embraced by just about every mainstream economist and financial expert – that real estate markets would always go up. Nobody was prepared or preparing themselves for the seemingly unlikely event that a downward trend might occur suddenly. In the meantime, the list of unresolved issues in the global economy is getting longer, not shorter.

To help my clients with these stress tests, I have prepared ten categories of questioning with numerous subheadings that probe the business model in a three-dimensional way.. This framework of ten categories, including several that address cluster, currency and credit risk, allows us to systematically probe into a business model’s ability to respond to rapid  changes in the environment.

The primary benefit of conducting the stress test is that it prioritizes the key issues where a company needs to strengthen its adaptability requirements. In many cases, stress tests will point to an urgent need to reverse engineer the value chain as it is currently configured. Sometimes stress tests of the type outlined here bring to the surface specific areas in which a company can shine with disruptive new approaches to business.

The outcome of the stress test is different for each company. However, chances are that the test outcome will help senior managers charged with the custody of their companies’ assets to create a smarter, leaner, and more flexible business model that helps them cope more vigorously with the challenging conditions of the second decade of the 21^st century.

Later this month I will be at the Paperworld in Frankfurt. There, I will be meeting with several clients addressing the topics outlined above. If you’d like to learn more about how a stress test could help your company strengthen its business model for success in an uncertain world,  contact us:

Thomas Schinkel

42 8^th Street, Suite 1523

Charlestown, MA 02129

e-mail: Tom@thomasschinkel.com