By Cari Tuna
Each spring, executives at JDS Uniphase Corp. plan for three potential sales scenarios for the coming fiscal year, which begins in July. Last year, rattled by financial-market turmoil, they included an extremely pessimistic sales outlook and outlined potential cost cuts.
The planning proved useful when the economy stalled and customers began delaying orders later in the year. "We knew what levers to go pull," says Dave Vellequette , chief financial officer at the Milpitas, Calif., maker of fiber-optic telecommunications equipment.
The experience highlights the value of scenario planning, or preparing responses to imagined changes in conditions. "It's not about predicting the future," says Peter Schwartz , a partner at Monitor Group, a Cambridge, Mass., consulting firm. "Scenario planning is a tool for learning" and making better decisions.
The practice was pioneered by the U.S. military in the 1950s and gained popularity among companies -- including General Electric Co. and Royal Dutch Shell PLC -- in the 1970s, says Mr. Schwartz, who led scenario planning at Shell in the early 1980s.
Mr. Schwartz says scenario planning helped Shell weather the oil supply disruptions and price shocks of the 1970s better than competitors. Scenario planning also prompted the New York Board of Trade, now a unit of InterContinentalExchange Inc., to build a second trading floor outside the World Trade Center in the 1990s, allowing the futures exchange to continue operating after the September 11 attacks.
Use of scenario planning rose following the 2001 attacks, to about 70% of executives surveyed by consultants Bain & Co. /zigman2/quotes/201813666/delayed FR:SGO +0.21% in 2002, up from 30% in 1999. Since then, Bain's surveys have found fewer executives using the tool, though the consulting firm expects heightened interest this year, because of the recession.
"It's sort of like flood insurance," says Michael Raynor , a corporate-strategy expert at Deloitte Consulting LLP. "Everybody runs out and buys flood insurance the year after the flood."
At JDS, scenarios have been part of the annual planning process since 2004, says Mr. Vellequette, the finance chief. Early last year, as stock prices fell and banks tightened lending, JDS executives began planning a month earlier than usual. They crafted a worst-case scenario in which sales would fall about twice as steeply as they normally considered.
At the time, JDS appeared to be doing fine. In the quarter ended June 28, 2008, revenue climbed 11%, to $390 million. But Mr. Vellequette says he was concerned by salespeople saying customers had turned cautious. "A sales guy is usually the last guy to call a downturn," he says.
More tangible signs of trouble emerged in the quarter ended Sept. 27, when JDS shipped more orders than it booked. "With that, we started to pull the levers," the finance chief says.
In October, the company announced it would kill some products, combine two of its four segments, shift more manufacturing to contractors, and shut three factories along with seven research-and-development sites, eliminating 400 jobs.
Mr. Vellequette says executives had identified those steps when planning earlier in the year, allowing them to move more quickly. "We didn't wait for it to come and get us," he says.
In the quarter ended Dec. 27, revenue fell for the first time in the downturn, by 11%, to $357 million. In January, the company said it would shut operations for one week each quarter, suspend its matching contribution to employee 401(k) plans and require senior managers to take extra unpaid days off. In February, JDS said it would sell a factory in China and shift more U.S. production to contract manufacturers.
In all, the moves cut roughly one-third of JDS's 6,700 employees and reduced annual operating expenses by $120 million. The company continued to generate cash, despite a projected 15% decline in revenue in the fiscal year ended June 27.
Mr. Vellequette says JDS executives are now using scenario planning to plot potential responses to a business upturn.
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