Scenario planning

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'''Scenario planning''' or scenario thinking is a strategic planning method that some organizations use to make flexible long-term plans. It began as an adaptation and generalization of classic methods used by military intelligence; it has since been widely adopted and modified for use in the private sector.

Scenario planning is an alternative to standard strategic planning approaches that are based on extrapolation from the past. Although it uses information such as demographics, geography, military, political, and industrial information, it begins with the assumption that there are no known facts about the future. Its aim is to plot out the broadest possible "future space," the universe of all plausible alternative futures; to divide that space into mutually exclusive, collectively exhaustive "sectors;" and by analyzing these "alternative futures," to offer planners early warning of the broadest possible array of potential future opportunities and challenges.

Scenario planning, while quite rigorous and "left-brain," can include systems thinking elements that are difficult to formalize, such as subjective interpretations of facts, shifts in values, new regulations or inventions. Scenario planning might best be summarized as "a left-brain approach to achieving a right-brain result."

Contents

[edit] Types of Scenario Planning[1]

[edit] Quantitative Models

Some notion of “scenarios” is found in nearly all forms of mathematically based market forecasting and financial models. (Microsoft Excel itself contains a “scenario” function, which allows users to input alternative assumptions to generate alternative results). In such modeling and forecasting functions, “the answer” is expressed in mathematical terms, such as revenue projection, return on invested capital, market share, etc. Among the most common “strategic” uses of this tool is in the field of investment banking, and, in particular, mergers and acquisitions, where an integrated financial representation of two independent businesses models is examined for synergies, costs, and – for publicly traded companies – share price accretion or dilution. These financial models are said to enable scenario analysis when they allow for the presentation of “Base Case”, “Best Case”, and “Worst Case” versions of the model outputs based on altering a limited number of variables that can be readily manipulated. These versions are referred to as “scenarios,” as in “this is the best case scenario for this transaction.” In the world of investment banking, such a model is considered strong or elegant to the extent that changes in the driving variables dynamically alter all of the model’s outputs allowing for rapid “scenario analysis”. “Quantitative scenarios” are also widely used to develop annual business forecasts. These models implicitly assume that (a) the key variables are known, and that (b) the relationships between them are fixed.

Applications

Many firms have quantitative cultures and are comfortable only when they see a hard number attached to an option or goal. Since most of the inputs to quantitative models are also the variables used in daily business activities (cost of capital, cost of product distribution, competitor spending on R&D, taxes, etc.), firm leadership typically embraces the results with little argument. Results tie well into operating plans and provide an aura of accuracy. Also, there is a definite need to create dynamic financial statements to meet financial reporting requirements – for example, pro forma financial statements. Thus, these models are a necessary and powerful tool for managing the financial intricacies of the modern corporation.

Limitations

Even the best, most sophisticated quantitative models make assumptions about the future state (or values) of key independent variables. For many short-term forecasting activities (for instance, up to a few fiscal quarters), these assumptions are often reasonable to make. But farther out in time (or even in some near-term situations), when complexities increase and discontinuities grow more likely, quantitative models tend to grow less reliable. Most mathematical models simply cannot reliably handle unanticipated market discontinuities, such as a new consumer fad, an unprecedented financial event, or a natural disaster. Therefore, these kinds of “scenarios” do not challenge conventional wisdom or force you to consider new business models or new or unprecedented customer needs. Additionally, quantitative models tend to take on a life of their own, with hidden assumptions and inner workings known to, or understood by, just a few individuals who most frequently interact with the models, and not necessarily all those involved in making the decisions the models are intended to support. As such, overextending the application of this approach and lack of transparency with its use can both give rise to flawed assumptions about future market dynamics, and result in a false sense of confidence about model precision and reliability.

[edit] Probability-Based Scenarios

Assigning probabilities to “scenarios” is unusual in the business world and is found only with quantitative models and with scenarios in this category. Probability-based scenarios are a hybrid form of scenario planning whose foundation is a mathematical treatment of all variables; yet a deliberate effort is made to identify all assumptions and to force a wide variability on the key trends and variables. This approach uses a large cross-impact matrix to form the scenarios. All the key business drivers are listed as both row and column headings. Every cell of the matrix is examined for likelihood and for the business impact of the business driver cross-impact that forms that cell. If there are 50 business drivers, then there are 50 columns in the matrix and 50 potential “scenarios” to be summed. Each column is made up of slightly different sets of trend cross-impacts. The columns are “summed” for the highest probability combinations and the top four or five are used in subsequent analysis.

Applications

Engineering firms and utilities have tended to be the principal users of probability-based scenarios, although this form of scenario planning has been little used since the 1980s. They are drawn to the quantitative expression of business futures and find that this approach can make use of quantitative trends and business statistics that they use in their daily work. The effort taken to make decisions about each trend cross-impact stimulates participants’ thinking about unlikely combinations of events that may form their future operating environment. In industries such as utilities, where (at least before deregulation) just a handful of numbers actually did define the critical business parameters, this is a comfortable method of planning that seems firmly rooted in “business realities.”

Limitations

Probability-based scenarios contain most of the weaknesses of quantitative or spreadsheet models (but do a better job of mitigating the over-simplifications of pure extrapolation). The quantitative output often masks the plethora of subjective qualitative judgments involved in setting the probabilities. In addition, executing a trend cross-impact matrix can be a time-consuming and somewhat mechanical process that is at odds with energized creative thinking. The process relies on the assumption that many of the trends of today are the important trends of the future and therefore the cross-impacts will unearth all critical challenges. Because probabilities are assigned to the scenarios, there is a tendency to assume that the highest-scoring scenario is the most likely future and to place uneven bets on the characteristics of that one image of how the future will turn out. Finally, there is seldom a narrative developed with the scenarios. Without the power of a story to carry the scenarios it can be very difficult for people not involved in the cross-impact assessments to understand or believe the scenarios.

[edit] Interactive (“War Gaming”) Scenarios

This version of scenario planning is more commonly referred to as “war gaming” or simply, “gaming.” In its purest form, gaming does not so much describe a potential future as it does the rules of interaction among select variables or actors that help shape the future. Games tend to be highly “action oriented.” There are two sides or opponents (often playing in separate rooms), there are referees who moderate the game, and both follow a play book that sets the initial conditions of the game – the scenario – and unanticipated events that are introduced to the players throughout the game. Each team acts and reacts to defeat the other team. The military and intelligence communities tend to use gaming more extensively than does the business community.

A game is generally based on one description of a single future operating environment. Typically, gaming scenarios are only a few years out (sometimes a few months out) and are used to examine a narrow strategic, operational or tactical set of issues. Therefore, they tend to be narrow in scope, although not always. Over several years, many different gaming scenarios may be developed and thus over time many interpretations of the future may be used to challenge thinking. In some applications, a set of strategic management scenarios (described in following pages) might set the backdrop for situational gaming scenarios.

The most common use of games in the private sector, however, is not in strategic planning, but in the marketing, business intelligence or competitor analysis arenas. A company intends to introduce a new approach to product distribution next year, for example. Before launch, even before the new approach is finalized, it may develop a set of games to better evaluate how the competition, the consumer, or perhaps the government will respond. Game results might steer the company to do things in a slightly different way that might, for example, foreclose a competitor’s response options.

Applications

Gaming can bring the competitive landscape to life. With proper referees and rules, the game can mimic the future market conditions that the firm may face and executives can gain important tactical insights. Gaming can also be a valuable training tool. If the competition is “played,” then the scenario can contain the give and take of the marketplace and decision-makers can see the results of their decisions in near-real time. Once the game is developed, it can be run with many different players or with slightly different assumptions – all options offer the opportunity for learning more about the sensitivity of a decision to be taken. Regardless of the nominal reason for the game, players often find that they have gained a greater degree of understanding about their business and about the qualities of the other players. They can also develop the ability to respond more nimbly to competitor initiatives.

Limitations

Games are about interactions within an existing marketplace or “mission space.” “Played” in a vacuum, they tend to miss consideration of potential shifts in the broader operating environment. Games do not always make a good foundation for strategic thinking. If games are to be repeatable and rigorous, then they have to have a well-developed rules structure that is followed carefully each time. Game players, however, often find that memorizing the rules is more work than the game and the rules tend to destroy the sense of “reality” that the games hope to mimic. Games are typically complex. To make them more manageable, there is a tendency to limit the amount of uncertainty the players will face. That means that the gamers are relying on a base of common knowledge about how the business works today. In other words, just making the game work often means that you cannot introduce significantly challenging interpretations of your background operating conditions. (Note: These “weaknesses” apply to gaming as “strategy scenarios.” These same weaknesses do not apply to the use of gaming for more operational or tactical decision making and analysis, for which games are often superb tools.)

[edit] Event-Driven (or Operational) Scenarios

Event-driven scenarios are among the most common form of scenario planning that organizations undertake without external assistance. Event-driven scenarios and strategic management scenarios (see below) can be easily confused in discussion and literature; yet they are profoundly different. Event-driven scenarios fall in the gap between gaming and strategic management (or alternative futures) scenarios and share common elements with both. Event-driven scenarios tend to be about the impact of an event, action or dilemma within the context of the immediate or near-term business setting. However, the impact of that event may have definite strategic implications. The operational context of event-driven scenarios is typically near term, but the strategic context can be long term. For example, an event-driven scenario might be crafted about the merger of two rival firms or the marketing of a new technology-based product by a competitor. In the public setting, an event-driven scenario might be, “What happens if a class five hurricane hits New Orleans?” The intent of this approach tends to be about how to anticipate, prepare for, react to, or prevent such an event. The questions asked can be, “How do we react if such an event happens to us?” or “What are the implications for our products if this event happens?” As long as the time horizon for action is short (that is, as long as you can reasonably assume that fundamental business conditions will remain as is), this can be a very valuable decision-making tool.

Applications

Event-driven scenarios tend to be tied directly to “real-world” problems and narrow ranges of uncertainty. There is seldom any dispute among executives that the scenario is relevant and that the decisions taken as a result will be executable. Since event-driven scenarios are typically near term and the subject matter is usually the industry sector in which the firm operates, specialized expertise in larger global forces for change is not required. Therefore, firms can choose to do this using internal resources and in-house expertise. Event-driven scenarios are generally easy to produce once the “event” is agreed upon; therefore, project scheduling and budgets are seldom an issue.

Limitations

Event-driven scenarios are not always well suited to be strategic tools; yet, because the implications of the work can be strategic, they are often used to help formulate strategy. There is a critical pitfall with this practice. Event-driven scenarios cannot provide overlapping coverage of the uncertainties and ambiguities required to capture the full range of future uncertainty. They cannot do this because they are typically selected to illuminate one familiar (albeit difficult) problem. Mistakenly, some firms believe that using five or six event-driven scenarios will “cover the strategic waterfront.” Event-driven scenarios tend to operate within the organization’s “comfort zone.” That is not to say that the problems addressed are comfortable ones, but rather that the scenarios do not challenge conventional assumptions about how the industry works. (Note: the limitations discussed here refer to the use of event-driven scenarios for strategic planning purposes only. Event-driven scenarios have had a long and successful history in the tactical/operational arena. However, most of those uses are confined to military, public health and public safety organizations. Their use can provide a decision maker with a set of potentially applicable pre-digested policy and operational options.)

[edit] Normative Scenarios

Normative scenarios are less frequently used today than was the case in the 1960s and 1970s. In some ways a normative scenario can be thought of as a cross between a scenario environment and a vision statement. Normative scenarios describe what an organization wants to be or the environment that emerges. Normative scenarios are less of an objective planning document than a goals statement. However, instead of the internal company goals in a vision statement, the goals are usually cast in terms of the changes in the operating environment that the organization would like to see come about. A normative scenario provides a target list of activities for manipulating the organization’s operating environment. Sometimes firms will combine some other form of scenario planning with normative scenarios. When an organization thinks it has learned (from other types of scenario planning) where the leverage points are in their business setting, it may craft a normative scenario that provides a kind of summation document of the changes that it might be able to influence.

Applications

Normative scenarios can provide a useful “story” that brings alive the vision and goals of a company – in that sense they are an excellent communications tool. As an adjunct to a vision statement, a normative scenario can focus attention on those things in the external environment that are within corporate “reach” and will have an impact on realizing the vision. It can also help focus an organization’s lobbying efforts. Normative scenarios can be developed easily with internal resources and, indeed, only a few people.

Limitations

It is difficult to make anyone not part of the initial scenario development take normative scenarios as a serious planning tool. There is no “objective” mechanism or process to co-opt others into the vision. One person’s very serious normative scenario is another person’s silly fantasy and it is hard to get over that hurdle. Normative scenarios are about articulating the “what.” They have very little to contribute to the “how” or “why.”

[edit] Strategic Management (or Alternative Futures) Scenarios

This is, by far, the most comprehensive form of scenario planning used in the private sector and among military and other government organizations. Strategic management scenarios are alternatively used to create strategy, stress test existing strategic plans, and/or serve as a learning tool and framework to infuse a sense of “strategic intent” in an organization. Strategic management scenarios are developed out of permutations of the macro-level forces for change that define the boundary conditions of an organization’s operating environment. In other words, the scenarios are typically defined by trends and forces that are outside the control of the company. Ideally, for planning purposes, these scenario “stories” say as little as possible about the company or its industry. For example, if the planning company is an automotive manufacturer, the scenarios will discuss the role of personal transportation in the consumer’s life. They will discuss the attitude of regulatory bodies. They will discuss other modes of transportation. They will not mention cars or trucks. Then, the scenarios are used in planning workshops in which it is up to the participants to imagine how their products/services and their firm will accommodate a surprising and unanticipated set of future business conditions. “What must our products and services be like to answer consumer demand in this future?” Or “What must our business model look like to compete successfully?” These are the most challenging scenarios to construct since they must allow the planners full freedom of decision and invention and yet describe a business setting that is meaningful to them.

Applications

Strategic management scenarios are the best scenario approach for challenging the conventional assumptions of an organization or for dealing with high levels of uncertainty and ambiguity. They offer the planners the greatest opportunity for creativity within a rigorous analytical setting. Since they are written about the macro-level forces for change, they remain a relevant planning tool for many years and because they say as little as possible about the industry, they can be customized to many different uses. In almost all ways this type of scenario planning is the most flexible. Strategic management scenarios make an excellent companion to event-driven scenarios (previously discussed). Let us say you have an event-driven scenario about the merger of two competitors. You can stress test that “event” within all of your strategic management scenarios. In that way you are not locked into assuming today’s operating setting. You can look for the implications of that merger in a future scenario with a sluggish economy and heavy regulation, a war economy with significant security challenges, a hot economy with little regulation, etc. The combination of the two types of scenario planning can give you a far greater and more in-depth understanding of strategic issues. Generally, strategic management scenario planning can be extended to cover many of the purposes and goals behind war gaming and event-driven scenario planning.

Limitations

Strategic management scenarios tend to take the most fully challenging look at the uncertainties and ambiguities of your business environment. Therefore, they may cause considerable discomfort as they stretch and alter your understanding of what is critical to your growth and success. (Strategic management scenarios are usually an inappropriate planning tool for companies struggling with short-term survival issues.) Many companies find strategic management scenarios difficult to use because of the leap of faith involved in accepting the premise of the planning technique – that a portfolio approach to strategic thinking is better than a forecast. Furthermore, the initial investment in strategic management scenarios is high. The scenarios take more time to develop and usually require significant consulting help. And even with consulting support, the need for a dedicated client “core team” to partner with the consulting team represents a significant commitment of executive time. The scenarios cannot be used piecemeal. If a company stays true to the premise of the technique, then only when all scenarios are used can it be certain of capturing the range of potential opportunities and challenges.

[edit] Zero-sum game military scenarios

Strategic military intelligence organizations also construct scenarios. The methods and organizations are almost identical, except that scenario planning is applied to a wider variety of problems than merely military and political problems.

As in military intelligence, the chief challenge of scenario planning is to find out the real needs of policy-makers, when policy-makers may not themselves know what they need to know, or may not know how to describe the information that they really want.

Good analysts design wargames so that policy makers have great flexibility and freedom to adapt their simulated organizations. Then these simulated organizations are "stressed" by the scenarios as a game plays out. Usually, particular groups of facts become more clearly important. These insights enable intelligence organizations to refine and repackage real information more precisely to better-serve the policy-makers' real-life needs. Usually the games' simulated time runs hundreds of times faster than real life, so policy-makers experience several years of policy decisions, and their simulated effects, in less than a day.

This chief value of scenario planning is that it allows policy-makers to make and learn from mistakes without risking career-limiting failures in real life. Further, policymakers can make these mistakes in a safe, unthreatening, game-like environment, while responding to a wide variety of concretely-presented situations based on facts. This is an opportunity to "rehearse the future," an opportunity that does not present itself in day-to-day operations where every action and decision counts.

[edit] How military scenario planning or scenario thinking is done

  1. Decide on the key question to be answered by the analysis. By doing this, it is possible to assess whether scenario planning is preferred over the other methods. If the question is based on small changes or a very few number of elements, other more formalized methods may be more useful.
  2. Set the time and scope of the analysis. Take into consideration how quickly changes have happened in the past, and try to assess to what degree it is possible to predict common trends in demographics, product life cycles et al. A usual timeframe can be five to 10 years.
  3. Identify major stakeholders. Decide who will be affected and have an interest in the possible outcomes. Identify their current interests, whether and why these interests have changed over time in the past.
  4. Map basic trends and driving forces. This includes industry, economic, political, technological, legal and societal trends. Assess to what degree these trends will affect your research question. Describe each trend, how and why it will affect the organisation. In this step of the process, brainstorming is commonly used, where all trends that can be thought of are presented before they are assessed, to capture possible group thinking and tunnel vision.
  5. Find key uncertainties. Map the driving forces on two axes, assessing each force on an uncertain/(relatively) predictable and important/unimportant scale. All driving forces that are considered unimportant are discarded. Important driving forces that are relatively predictable (f.ex. demographics) can be included in any scenario, so the scenarios should not be based on these. This leaves you with a number of important and unpredictable driving forces. At this point, it is also useful to assess whether any linkages between driving forces exist, and rule out any "impossible" scenarios (f.ex. full employment and zero inflation).
  6. Check for the possibility to group the linked forces and if possible, reduce the forces to the two most important. (To allow the scenarios to be presented in a neat xy-diagram)
  7. Identify the extremes of the possible outcomes of the (two) driving forces and check the dimensions for consistency and plausibility. Three key points should be assessed:
    1. Time frame: are the trends compatible within the time frame in question?
    2. Internal consistency: do the forces describe uncertainties that can construct probable scenarios.
    3. Vs the stakeholders: are any stakeholders currently in disequilibrium compared to their preferred situation, and will this evolve the scenario? Is it possible to create probable scenarios when considering the stakeholders? This is most important when creating macro-scenarios where governments, large organisations et al. will try to influence the outcome.
  8. Define the scenarios, plotting them on a grid if possible. Usually, 2 to 4 scenarios are constructed. The current situation does not need to be in the middle of the diagram (inflation may already be low), and possible scenarios may keep one (or more) of the forces relatively constant, especially if using three or more driving forces. One approach can be to create all positive elements into one scenario and all negative elements (relative to the current situation) in another scenario, then refining these. In the end, try to avoid pure best-case and worst-case scenarios.
  9. Write out the scenarios. Narrate what has happened and what the reasons can be for the proposed situation. Try to include good reasons why the changes have occurred as this helps the further analysis. Finally, give each scenario a descriptive (and catchy) name to ease later reference.
  10. Assess the scenarios. Are they relevant for the goal? Are they internally consistent? Are they archetypical? Do they represent relatively stable outcome situations?
  11. Identify research needs. Based on the scenarios, assess where more information is needed. Where needed, obtain more information on the motivations of stakeholders, possible innovations that may occur in the industry and so on.
  12. Develop quantitative methods. If possible, develop models to help quantify consequences of the various scenarios, such as growth rate, cash flow etc. This step does of course require a significant amount of work compared to the others, and may be left out in back-of-the-envelope-analyses.
  13. Converge towards decision scenarios. Retrace the steps above in an iterative process until you reach scenarios which address the fundamental issues facing the organization. Try to assess upsides and downsides of the possible scenarios.

[edit] Scenario planning in military applications

Scenario planning is also extremely popular with military planners. Most states' departments of war maintain a continuously-updated series of strategic plans to cope with well-known military or strategic problems. These plans are almost always based on scenarios, and often the plans and scenarios are kept up-to-date by war games, sometimes played out with real troops. This process was first carried out (arguably the method was invented by) the Prussian general staff of the mid-19th century.

[edit] Development of scenario analysis in business organizations

In the past, strategic plans have often considered only the "official future," which was usually a straight-line graph of current trends carried into the future. Often the trend lines were generated by the accounting department, and lacked discussions of demographics, or qualitative differences in social conditions.

These simplistic guesses are surprisingly good most of the time, but fail to consider qualitative social changes that can affect a business or government.

[edit] History of use by academic and commercial organizations

Though the concept was first introduced, as 'La Prospective', by Berger in 1964 and the word 'scenario' itself was reportedly first used by Herman Kahn in 1967, the theoretical foundations of scenario forecasting were mainly developed in the 1970s, especially by Godet (between 1974 and 1979). By the early 1980s these approaches had developed into a sophisticated forecasting technique which was primarily recommended for the integration of the output from other sophisticated (qualitative) approaches to long-range forecasting. Although it was inevitably based upon judgmental forecasts, its use typically revolved around forecasting techniques which brought together groups of experts in order to reduce the risk involved. These included Delphi and, especially in the context of scenarios, Cross-Impact Matrices, which were popular at that time.

Possibly as a result of these very sophisticated approaches, and of the difficult techniques they employed (which usually demanded the resources of a central planning staff), scenarios earned a reputation for difficulty (and cost) in use. Even so, the theoretical importance of the use of alternative scenarios, to help address the uncertainty implicit in long-range forecasts, was dramatically underlined by the widespread confusion which followed the Oil Shock of 1973. As a result many of the larger organisations started to use the technique in one form or another. Indeed, just ten years later, in 1983 Diffenbach reported that 'alternate scenarios' were the third most popular technique for long-range forecasting - used by 68% of the large organisations he surveyed.

Practical development of scenario forecasting, to guide strategy rather than for the more limited academic uses which had previously been the case, was started by Wack in 1971 at the Royal Dutch Shell group of companies - and it, too, was given impetus by the Oil Shock two years later. Shell has, since that time, led the commercial world in the use of scenarios - and in the development of more practical techniques to support these. Indeed, as - in common with most forms of long-range forecasting - the use of scenarios has (during the depressed trading conditions of the last decade) reduced to only a handful of private-sector organisations, Shell remains almost alone amongst them in keeping the technique at the forefront of forecasting.

There has only been anecdotal evidence offered in support of the value of scenarios, even as aids to forecasting; and most of this has come from one company - Shell. In addition, with so few organisations making consistent use of them - and with the timescales involved reaching into decades - it is unlikely that any definitive supporting evidenced will be forthcoming in the foreseeable future. For the same reasons, though, a lack of such proof applies to almost all long-range planning techniques. In the absence of proof, but taking account of Shell's well documented experiences of using it over several decades (where, in the 1990s, its then CEO ascribed its success to its use of such scenarios), can be significant benefit to be obtained from extending the horizons of managers' long-range forecasting in the way that the use of scenarios uniquely does. [1]

[edit] Critique of Shell's use of scenario planning

In the 1970s, many energy companies were surprised by both environmentalism and the OPEC cartel, and thereby lost billions of dollars of revenue by misinvestment. The dramatic financial effects of these changes led at least one organization, Royal Dutch Shell, to implement scenario planning. The analysts of this company publicly estimated that this planning process made their company the largest in the world. (See Schwartz, below). However other observers of Shell's use of scenario planning have suggested that few if any significant long term business advantages accrued to Shell from the use of scenario methodology. Whilst the intellectual robustness of Shell's long term scenarios was seldom in doubt their actual practical use was seen as being minimal by many senior Shell executives. A Shell insider has commented "The scenario team were bright and their work was of a very high intellectual level. However neither the high level "Group scenarios" nor the country level scenarios produced with operating companies really made much difference when key decisions were being taken".

The use of scenarios was audited by Arie de Geus's team in the early 1980s and they found that the decision making processes following the scenarios were the primary cause of the lack of strategic implementation, rather than the scenarios themselves. Many practitioners today spend as much time on the decision making process as on creating the scenarios themselves.

[edit] Use of scenario planning by managers

The basic concepts of the process are relatively simple. In terms of the overall approach to forecasting, they can be divided into three main groups of activities (which are, generally speaking, common to all long range forecasting processes):[2]

  1. Environmental analysis
  2. Scenario planning
  3. Corporate strategy

The first of these groups quite simply comprises the normal environmental analysis. This is almost exactly the same as that which should be undertaken as the first stage of any serious long-range planning. However, the quality of this analysis is especially important in the context of scenario planning.

The central part represents the specific techniques - covered here - which differentiate the scenario forecasting process from the others in long-range planning.

The final group represents all the subsequent processes which go towards producing the corporate strategy and plans. Again, the requirements are slightly different but in general they follow all the rules of sound long-range planning.

[edit] Scenario planning

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Please improve this article if you can. (November 2006)

The part of the overall process which is radically different from most other forms of long-range planning is the central section, the actual production of the scenarios. Even this is though, at its most basic level, relatively simple - as derived from the approach most commonly used by Shell - requiring just six steps:

  1. Decide drivers for change/assumptions
  2. Bring drivers together into a viable framework
  3. Produce 7-9 initial mini-scenarios
  4. Reduce to 2-3 scenarios
  5. Draft the scenarios
  6. Identify the issues arising

[edit] Step 1 - decide assumptions/drivers for change

The first stage is to examine the results of environmental analysis to determine which are the most important factors that will decide the nature of the future environment within which the organisation operates. These factors are sometimes called 'variables' (because they will vary over the time being investigated, though the terminology may confuse scientists who use it in a more rigorous manner). Users tend to prefer the term 'drivers' (for change), since this terminology is not laden with quasi-scientific connotations and reinforces the participant's commitment to search for those forces which will act to change the future. Whatever the nomenclature, the main requirement is that these will be informed assumptions.

This is partly a process of analysis, needed to recognise what these 'forces' might be. However, it is likely that some work on this element will already have taken place during the preceding environmental analysis. By the time the formal scenario planning stage has been reached, the participants may have already decided - probably in their sub-conscious rather than formally - what the main forces are.

In the ideal approach, the first stage should be to carefully decide the overall assumptions on which the scenarios will be based. Only then, as a second stage, should the various drivers be specifically defined. Participants, though, seem to have problems in separating these stages.

Perhaps the most difficult aspect though, is freeing the participants from the preconceptions they take into the process with them. In particular, most participants will want to look at the medium term, five to ten years ahead rather than the required longer-term, ten or more years ahead. However, a time horizon of anything less than ten years often leads participants to extrapolate from present trends, rather than consider the alternatives which might face them. When, however, they are asked to consider timescales in excess of ten years they almost all seem to accept the logic of the scenario planning process, and no longer fall back on that of extrapolation. There is a similar problem with expanding participants horizons to include the whole external environment.

Brainstorming

In any case, the brainstorming which should then take place, to ensure that the list is complete, may unearth more variables - and, in particular, the combination of factors may suggest yet others.

A very simple technique which is especially useful at this - brainstorming - stage, and in general for handling scenario planning debates is derived from use in Shell where this type of approach is often used. An especially easy approach, it only requires a conference room with a bare wall and copious supplies of 3M Post-It Notes!

The six to ten people ideally taking part in such face-to-face debates should be in a conference room environment which is isolated from outside interruptions. The only special requirement is that the conference room has at least one clear wall on which Post-It notes will stick. At the start of the meeting itself, any topics which have already been identified during the environmental analysis stage are written (preferably with a thick magic marker, so they can be read from a distance) on separate Post-It Notes. These Post-It Notes are then, at least in theory, randomly placed on the wall. In practice, even at this early stage the participants will want to cluster them in groups which seem to make sense. The only requirement (which is why Post-It Notes are ideal for this approach) is that there is no bar to taking them off again and moving them to a new cluster.

A similar technique - using 5" by 3" index cards - has also been described (as the 'Snowball Technique'), by Backoff and Nutt, for grouping and evaluating ideas in general.

As in any form of brainstorming, the initial ideas almost invariably stimulate others. Indeed, everyone should be encouraged to add their own Post-It Notes to those on the wall . However it differs from the 'rigorous' form described in 'creative thinking' texts, in that it is much slower paced and the ideas are discussed immediately. In practice, as many ideas may be removed, as not being relevant, as are added. Even so, it follows many of the same rules as normal brainstorming and typically lasts the same length of time - say, an hour or so only.

It is important that all the participants feel they 'own' the wall - and are encouraged to move the notes around themselves. The result is a very powerful form of creative decision-making for groups, which is applicable to a wide range of situations (but is especially powerful in the context of scenario planning). It also offers a very good introduction for those who are coming to the scenario process for the first time. Since the workings are largely self-evident, participants very quickly come to understand exactly what is involved.

Important and uncertain

This step is, though, also one of selection - since only the most important factors will justify a place in the scenarios. The 80:20 Rule here means that, at the end of the process, management's attention must be focused on a limited number of most important issues. Experience has proved that offering a wider range of topics merely allows them to select those few which interest them, and not necessarily those which are most important to the organisation.

In addition, as scenarios are a technique for presenting alternative futures, the factors to be included must be genuinely 'variable'. They should be subject to significant alternative outcomes. Factors whose outcome is predictable, but important, should be spelled out in the introduction to the scenarios (since they cannot be ignored). The Important Uncertainties Matrix, as reported by Kees van der Hijden of Shell, is a useful check at this stage.

At this point it is also worth pointing out that a great virtue of scenarios is that they can accommodate the input from any other form of forecasting. They may use figures, diagrams or words in any combination. No other form of forecasting offers this flexibility.

[edit] Step 2 - bring drivers together into a viable framework

The next step is to link these drivers together to provide a meaningful framework. This may be obvious, where some of the factors are clearly related to each other in one way or another. For instance, a technological factor may lead to market changes, but may be constrained by legislative factors. On the other hand, some of the 'links' (or at least the 'groupings') may need to be artificial at this stage. At a later stage more meaningful links may be found, or the factors may then be rejected from the scenarios. In the most theoretical approaches to the subject, probabilities are attached to the event strings. This is difficult to achieve, however, and generally adds little - except complexity - to the outcomes.

This is probably the most (conceptually) difficult step. It is where managers' 'intuition' - their ability to make sense of complex patterns of 'soft' data which more rigorous analysis would be unable to handle - plays an important role. There are, however, a range of techniques which can help; and again the Post-It-Notes approach is especially useful:

Thus, the participants try to arrange the drivers, which have emerged from the first stage, into groups which seem to make sense to them. Initially there may be many small groups. The intention should, therefore, be to gradually merge these (often having to reform them from new combinations of drivers to make these bigger groups work). The aim of this stage is eventually to make 6 - 8 larger groupings; 'mini-scenarios'. Here the Post-It Notes may be moved dozens of times over the length - perhaps several hours or more - of each meeting. While this process is taking place the participants will probably want to add new topics - so more Post-It Notes are added to the wall. In the opposite direction, the unimportant ones are removed (possibly to be grouped, again as an 'audit trail' on another wall). More important, the 'certain' topics are also removed from the main area of debate - in this case they must be grouped in clearly labelled area of the main wall.

As the clusters - the 'mini-scenarios' - emerge, the associated notes may be stuck to each other rather than individually to the wall; which makes it easier to move the clusters around (and is a considerable help during the final, demanding stage to reducing the scenarios to two or three).

The great benefit of using Post-It Notes is that there is no bar to participants changing their minds. If they want to rearrange the groups - or simply to go back (iterate) to an earlier stage - then they strip them off and put them in their new position.

[edit] Step 3 - produce initial (seven to nine) mini-scenarios

The outcome of the previous step is usually between seven and nine logical groupings of drivers. This is usually easy to achieve. The 'natural' reason for this may be that it represents some form of limit as to what participants can visualise.

Having placed the factors in these groups, the next action is to work out, very approximately at this stage, what is the connection between them. What does each group of factors represent?

[edit] Step 4 - reduce to two or three scenarios

The main action, at this next stage, is to reduce the seven to nine mini-scenarios/groupings detected at the previous stage to two or three larger scenarios. The challenge in practice seems to come down to finding just two or three 'containers' into which all the topics can be sensibly fitted. This usually requires a considerable amount of debate - but in the process it typically generates as much light as it does heat. Indeed, the demanding process of developing these basic scenario frameworks often, by itself, produces fundamental insights into what are the really important (perhaps life and death) issues affecting the organisation. During this extended debate - and even before it is summarised in the final reports - the participants come to understand, by their own involvement in the debate, what the most important drivers for change may be, and (perhaps even more important) what their peers think they are. Based on this intimate understanding, they are well prepared to cope with such changes - reacting almost instinctively - when they actually do happen; even without recourse to the formal reports which are eventually produced!

There is no theoretical reason for reducing to just two or three scenarios, only a practical one. It has been found that the managers who will be asked to use the final scenarios can only cope effectively with a maximum of three versions! Shell started, more than three decades ago, by building half a dozen or more scenarios - but found that the outcome was that their managers selected just one of these to concentrate on. As a result the planners reduced the number to three, which managers could handle easily but could no longer so easily justify the selection of only one! This is the number now recommended most frequently in most of the literature.

Complementary scenarios

As used by Shell, and as favoured by a number of the academics, two scenarios should be complementary; the reason being that this helps avoid managers 'choosing' just one, 'preferred', scenario - and lapsing once more into single-track forecasting (negating the benefits of using 'alternative' scenarios to allow for alternative, uncertain futures). This is, however, a potentially difficult concept to grasp, where managers are used to looking for opposites; a good and a bad scenario, say, or an optimistic one versus a pessimistic one - and indeed this is the approach (for small businesses) advocated by Foster. In the Shell approach, the two scenarios are required to be equally likely, and between them to cover all the 'event strings'/drivers. Ideally they should not be obvious opposites, which might once again bias their acceptance by users, so the choice of 'neutral' titles is important. For example, Shell's two scenarios at the beginning of the 1990s were titled 'Sustainable World' and 'Global Mercantilism'[xv]. In practice, we found that this requirement, much to our surprise, posed few problems for the great majority, 85%, of those in the survey; who easily produced 'balanced' scenarios. The remaining 15% mainly fell into the expected trap of 'good versus bad'. We have found that our own relatively complex (OBS) scenarios can also be made complementary to each other; without any great effort needed from the teams involved; and the resulting two scenarios are both developed further by all involved, without unnecessary focusing on one or the other.

Testing

Having grouped the factors into these two scenarios, the next step is to test them, again, for viability. Do they make sense to the participants? This may be in terms of logical analysis, but it may also be in terms of intuitive 'gut-feel'. Once more, intuition often may offer a useful - if academically less respectable - vehicle for reacting to the complex and ill-defined issues typically involved. If the scenarios do not intuitively 'hang together', why not? The usual problem is that one or more of the assumptions turns out to be unrealistic in terms of how the participants see their world. If this is the case then you need to return to the first step - the whole scenario planning process is above all an iterative one (returning to its beginnings a number of times until the final outcome makes the best sense).

[edit] Step 5 - write the scenarios

The scenarios are then 'written up' in the most suitable form. The flexibility of this step often confuses participants, for they are used to forecasting processes which have a fixed format. The rule, though, is that you should produce the scenarios in the form most suitable for use by the managers who are going to base their strategy on them. Less obviously, the managers who are going to implement this strategy should also be taken into account. They will also be exposed to the scenarios, and will need to believe in these. This is essentially a 'marketing' decision, since it will be very necessary to 'sell' the final results to the users. On the other hand, a not inconsiderable consideration may be to use the form the author also finds most comfortable. If the form is alien to him or her the chances are that the resulting scenarios will carry little conviction when it comes to the 'sale'.

Most scenarios will, perhaps, be written in word form (almost as a series of alternative essays about the future); especially where they will almost inevitably be qualitative which is hardly surprising where managers, and their audience, will probably use this in their day to day communications. Some, though use an expanded series of lists and some enliven their reports by adding some fictional 'character' to the material - perhaps taking literally the idea that they are stories about the future - though they are still clearly intended to be factual. On the other hand, they may include numeric data and/or diagrams - as those of Shell do (and in the process gain by the acid test of more measurable 'predictions').

[edit] Step 6 - identify issues arising

The final stage of the process is to examine these scenarios to determine what are the most critical outcomes; the 'branching points' relating to the 'issues' which will have the greatest impact (potentially generating 'crises') on the future of the organisation. The subsequent strategy will have to address these - since the normal approach to strategy deriving from scenarios is one which aims to minimise risk by being 'robust' (that is it will safely cope with all the alternative outcomes of these 'life and death' issues) rather than aiming for performance (profit) maximisation by gambling on one outcome.

[edit] Use of scenarios

It is important to note that scenarios may be used in a number of ways:

a) Containers for the drivers/event strings

Most basically, they are a logical device, an artificial framework, for presenting the individual factors/topics (or coherent groups of these) so that these are made easily available for managers' use - as useful ideas about future developments in their own right - without reference to the rest of the scenario. It should be stressed that no factors should be dropped, or even given lower priority, as a result of producing the scenarios. In this context, which scenario contains which topic (driver), or issue about the future, is irrelevant.

b) Tests for consistency

At every stage it is necessary to iterate, to check that the contents are viable and make any necessary changes to ensure that they are; here the main test is to see if the scenarios seem to be internally consistent - if they are not then the writer must loop back to earlier stages to correct the problem. Though it has been mentioned previously, it is important to stress once again that scenario building is ideally an iterative process. It usually does not just happen in one meeting - though even one attempt is better than none - but takes place over a number of meetings as the participants gradually refine their ideas.

c) Positive perspectives

Perhaps the main benefit deriving from scenarios, however, comes from the alternative 'flavours' of the future their different perspectives offer. It is a common experience, when the scenarios finally emerge, for the participants to be startled by the insight they offer - as to what the general shape of the future might be - at this stage it no longer is a theoretical exercise but becomes a genuine framework (or rather set of alternative frameworks) for dealing with that.

[edit] Scenario planning compared to other techniques

Scenario planning differs from contingency planning, sensitivity analysis and computer simulations.

Contingency planning is a "What if" tool, that only takes into account one uncertainty. However, scenario planning considers combinations of uncertainties in each scenario. Planners also try to select especially plausible but uncomfortable combinations of social developments.

Sensitivity analysis analyzes changes in one variable only, which is useful for simple changes, while scenario planning tries to expose policy makers to significant interactions of major variables.

While scenario planning can benefit from computer simulations, scenario planning is less formalized, and can be used to make plans for qualitative patterns that show up in a wide variety of simulated events.

During the past 5 years, computer supported Morphological Analysis has been employed as aid in scenario development by the Swedish National Defence Research Agency in Stockholm (Eriksson & Ritchey, 2002). This method makes it possible to create a multi-variable morphological field which can be treated as an inference model – thus integrating scenario planning techniques with contingency analysis and sensitivity analysis.

[edit] References

  1. ^ Adapted with permission from Charles Thomas, The Futures Strategy Group, "Types of Scenario Planning"
  • Liam Fahey and Robert M. Randall, "Learning from the Future", Wiley 1998,
  • Peter Schwartz, "The Art of the Long View", Doubleday, 1991,
  • Herbert Meyer, "Real World Intelligence", Weidenfeld & Nicolson, 1987,
  • National Intelligence Council (NIC), "Mapping the Global Future", 2005,
  • Eriksson, T. & Ritchey, T.: Scenario Development using Computer Aided Morphological Analysis. Adapted from a Paper Presented at the Winchester International OR Conference, England 2002.
  • David Mercer, Scenarios Made Easy, pp81-86, Long Range Planning, Vol 28 No 4 (1995) [3]
  • G. Berger, Phénoménologies du Temps et Prospectives, Presse Universitaires de France (1964).
  • H. Kahn, The Year 2000, Calman-Levy (1967).
  • M. Godet, Scenarios and Strategic Management, Butterworths (1987).
  • M. Godet, From Anticipation to Action: A Handbook of Strategic Prospective. Paris: Unesco, (1993).
  • J. Diffenbach, Corporate Environmental Analysis in Large US Corporations, Long Range Planning 16 (3), (1983).
  • P. Wack, Scenarios: Uncharted Waters Ahead, Harvard Business Review September-October (1985).
  • P. Wack, Scenarios: Uncharted Waters Ahead, Harvard Business Review September-October (1985).
  • R.W. Backoff and P.C. Nutt. A Process for Strategic Management with Specific Application for the Non-Profit Organization, in Strategic Planning: Threats and Opportunities for Planners, Planners Press (1988).
  • Adam Kahane, Solving Tough Problems: An Open Way of Talking, Listening, and Creating New Realities (2007)

[edit] External links