Action Checklist: Scenario Planning

Can scenarios help you prepare for the future? Almost certainly - and here's how

Scenarios help managers tackle risk, uncertainty and complexity. Scenario planning enables organizations to rehearse the future, to walk the battlefield before battle commences so that they are better prepared. Their value lies not in predicting the future but in their ability to recognise and understand future developments, enabling managers to influence events.

What is scenario planning?

The benefits of scenario planning

Saving billions with scenarios: Pierre Wack and Royal Dutch/Shell

Using scenario thinking

Scenario planning: things you can do

Scenarios: key points

Key questions

 

What is scenario planning?

When establishing a strategic direction and a set of priorities that will guide decision-makers, few techniques are as powerful as scenario planning. Scenarios are perspectives on potential events and their consequences, providing a context in which managers can make decisions. By contemplating a range of possible futures, decisions are better informed, and a strategy based on this deeper insight is more likely to succeed.

Scenarios help managers tackle risk, uncertainty and complexity, enabling better strategy development. Scenario planning enables organizations to rehearse the future, to walk the battlefield before battle commences so that they are better prepared.

Scenario thinking has been used by the military for centuries and by organizations such as Royal Dutch/Shell since the 1960s. According to Kees van der Heijden, Professor of Strategy at Strathclyde Graduate School of Business:

"Scenario planning is neither an episodic activity nor a new technique: it is a way of thinking that works best when it permeates the entire organization, affecting decisions at all levels. However, unlike most popular management initiatives, it does not require major investment in resources or restructuring, simply a commitment for people to take time away from their routine activities to come together to reflect and learn."

Scenarios may not predict the future but they do illuminate the causes of change – which helps managers to take greater control when market conditions shift. An organization’s future success will depend much on how managers react to what they do not know. As Mark Twain put it: "The important thing is not how much we don’t know, as how wrong we are in what we think we do know."

The benefits of scenario planning

Understanding the present. Scenario thinking helps provide a better understanding of how different factors affecting a business effect each other. It can reveal linkages between apparently unrelated factors and, most importantly, it can provide greater insight into the forces shaping the future, delivering real competitive advantage.

• Overcoming complacency. Scenarios should be designed to challenge established views, to overcome business-as-usual complacency and to enable both established formulas and new ideas to be tested. Seeing reality from different perspectives mitigates the pitfalls of groupthink, fragmentation, procrastination, hindsight bias, shifting responsibility and bolstering commitment to failing strategies. As Ged Davis, Vice-president, Global Business Environment, Royal Dutch/Shell Group, says: "Much forecasting consists of little more than optimistic or pessimistic views of developments from a present position. This ‘tyranny of the present’ arises from the fact that we are strongly influenced by those around us."
• Promoting action and ownership of the strategy process. Scenario thinking helps break the constraints on traditional strategic practices, as it enables those involved to discuss the complexity and ambiguity of their perspectives in a wide context. Ged Davis highlights this: "Scenarios attempt to look beyond our more limited mindsets, recognising that possibilities are influenced by a wide range of people and that many views of the world are different from our own."
• Stimulating creativity and innovation. Scenarios encourage the opening of minds to new possibilities and the excitement of how they may be realised. The process leads to a positive attitude that actively seeks the desired outcome.
• Promoting learning. Scenarios help people to understand their environment, consider the future, share knowledge and evaluate strategic options. Information is better evaluated and integrated in the scenario planning process, which enables those involved in it to recognise and react to emerging circumstances.
• Creating a shared view. Scenario thinking works because it looks beyond current assignments, facts and forecasts. It allows discussions to be more uninhibited and it creates the conditions for a genuinely effective shared sense of purpose to evolve. Getting support for strategic decisions requires involving those that matter in the scenario planning process.

Saving billions with scenarios: Pierre Wack and Royal Dutch/Shell

One of the first uses of scenarios in business was in the 1960s by Royal Dutch/Shell, and was largely driven by Pierre Wack, who was Shell’s Head of Group Planning. His view was that: "Scenarios help us to understand today better by imagining tomorrow, increasing the breadth of vision and enabling us to spot change earlier… Effective future thinking brings a reduction in the level of crisis management and improves management capability, particularly change management."

Shell created a unit, managed by Pierre Wack, to overcome problems of cash-flow management and to forecast future cash requirements. When traditional techniques for forecasting cash-flow ran into problems, Wack’s diagnosis was that they were trying to apply statistical techniques to variables that were fundamentally unpredictable.

Wack realised that fundamental uncertainties needed to be distinguished from what could be predicted. So, the group started to discuss what was predictable – in this case, the future of the global oil price and issues of supply and demand. With global demand for oil having grown consistently by 6% to 8 % per annum since 1945, demand was initially assumed to be a predetermined factor. This led the team to focus on supply. Given that the engineers assured the group that availability would not be a technical problem, most people in Shell assumed that traditional price trends would continue.

Pierre Wack was not satisfied. He wanted to know if there were other factors in supply, besides technical availability, that might be more uncertain. By listing stakeholders, they quickly arrived at governments in oil-producing countries. Pierre Wack posed the questions: would they be happy to continue to increase production year on year? Would this be in their interest? By playing the role of such a government, they analysed the policy options available. It soon became apparent that these governments were unlikely to remain amenable to Shell’s business activities. Many oil-producing countries did not need an increase in income. Therefore, they had the upper hand and could exploit the situation to their benefit. The overwhelming logic for the oil producing countries was to reduce supply, increase prices and conserve their reserves.

When Pierre Wack outlined this to his superiors, he was told that there was a lack of unity among oil producing countries and that the oil companies were in practice able to control supply Pierre Wack’s response was to sharpen the scenario to include growth in demand and the increasing realisation of OPEC nations of the strength of their position if they acted in concert. As Wack commented: "Participating in the scenario-building process improves a management team’s ability to manage uncertainty and risk. Risky decisions become more transparent and key threats and opportunities are identified."

Then, the scenario became reality. The 1973 Israeli-Arab War had a dramatic impact and the effect of limiting the supply of oil: prices rose five-fold.

Fortunately for Shell, Pierre Wack’s work had encouraged the company to be prepared for such a change – and when it happened Shell was streets ahead of its competitors, which enabled it to climb from seventh to second place in the oil firm’s profitability league table.

For Shell, scenario thinking is an essential strategic tool. Ged Davis of Shell explains: "It is quite normal in the energy and resources industries… to be dealing with projects that have very long lead times. A typical large-scale gas project might require an investment of $10 billion, take six years from the decision to invest to come on stream, and have a life of at least twenty years. Thus, the review of such a project requires thinking of at least 25 years."

Shell’s experience demonstrates that scenarios provide an effective mechanism for assessing existing strategies and for developing and assessing options. The scenario thinking process helps underpin and develop the strengths of an organization and makes it more sensitive to the early warning signs of trouble ahead.

Using scenario thinking

The scenario thinking process is not one of linear implementation, providing a single snapshot; its effectiveness lies in stimulating decisions and generating the strategic conversation. This is the continuous process of planning, analysing the environment, generating and testing scenarios, developing options, selecting, refining and implementing – a process that is itself refined with further environmental analysis. Steps in using the scenario process include:

- Planning and structuring the scenario process

- Exploring the scenario context

- Developing the scenarios

- Analysing the scenarios

- Using the scenarios

Scenario planning: things you can do

Ask team members for their ‘histories of the future’: how things will look (say in five year’s time) and how we reached that point. Allow one or two days for people to develop scenarios based on existing information within the company. Use scenarios to stimulate debate, develop resilient strategies and test business plans against possible futures.

Hold workshops off-site to allow optimum reflection and absorption time. For a single capital project, try back-of-the-envelope calculations to capture the essential differences in the viability of alternatives. To assess the likelihood of a scenario coming true, use early indicators—events that should be seen in the next year or so.

Communicate scenarios graphically, for example, by imaginary newspapers written as if in the future, day-in-the-life stories, film or glossy booklets.

Regularly read trade and business publications focusing on your industry, finance, business, politics and economics (for example, the Financial Times, The Economist, Fortune, BusinessWeek).

Maintain and review information on economic, social, technological and governmental and regulatory trends.

Deliver to your boss, peers and/or team members a presentation on the major changes (technological, socio-economic, regulatory and commercial) likely to affect your business. This could coincide with the annual planning cycle or contribute to a strategic plan. The presentation should:

- Quantify the potential impact of potential changes.

- Detail your actions to meet these changes.

- Be prepared regularly (twice each year).

Keep informed and up-to-date by joining a professional membership or trade association. These are especially valuable for networking and attending seminars. Also, find a relevant website and subscribe to their email alerts.

Scenarios: key points

• Scenarios don't aim to pinpoint future events but to consider the forces which may push the future along different paths.
• It works best when it involves people at all levels of the organization.
• Scenarios must be relevant.
• Critically assessing each scenario keeps the process focused, relevant and valuable.
• Don’t try to predict the future; instead, try to understand the forces that will shape it.
• Encourage creative thinking, and do not allow existing biases to guide the process. Also, ensure that the process is not over-shadowed by operational pressures, as these can limit energy and creativity.
• Understand the insights, and relate them to the organization’s future.

Key questions

• Do the current strategic approaches typify traditional, ‘business-as-usual’ thinking? Are you prepared to accept that a strategy is failing or is vulnerable?
• Is the organization in touch with market developments and the needs of customers? Are you prepared to challenge your confidence in existing orthodoxy?
• Is any part of your organizational planning weak and lacking clear direction? Do you lack confidence in your ability to engage in strategic debate?
• In your decision-making process do you, as a matter of routine, always consider multiple options before deciding? Is the quality of your strategic thinking limited, narrow and uninspired?
• Is your organization afraid of uncertainty, or does it enjoy thinking about it? Do people see it as a threat or as an opportunity? Is it recognised as a potential source of competitive advantage?