Scenario planning is a powerful tool to manage strategic risks and opportunities.
Scenario planning is about being aware of what the future might be, without buying into how you want it to be. Good scenario planning enables you to have leaps of intuition that allows you to tap into the possibilities of the future, and then to put in place strategies that will be so rigorous that, no matter what actually does happen, you and your organization will be in good shape.
It is the process in which managers invent and then analyse several scenarios of plausible futures, then filter strategic decisions through these scenarios to ensure the strategies will survive any of the plausible futures, making amendments to strategies as part of the process.
The point of scenario planning is not to select the best single scenario and hope for it to become the future, nor is it to fund the most probable scenario and adapt to the changes as time goes on.
ONCE CONSTRUCTED, SCENARIOS CAN BE USEFUL TO:
· develop strategy
· test existing strategy
· encourage cohesion and direction
· initiate dialogue with stakeholders about possible or preferred futures
Typical misuses of scenarios include:
· The assumption that scenarios are forecasts
· Scenarios constructed on too simplistic a difference, such as optimistic vs pessimistic
· Scenarios are not global in outlook
· Scenarios are not focused on the key areas of potential impact on the organization
· The process is treated as informational or educational rather than for participative learning
HISTORY OF SCENARIO PLANNING
The scenario planning concept first emerged as a military planning tool after World War 2, primarily by the U.S. Air Force. In the 1960’s, Herman Kahn, who had been part of the Air Force team developing these scenario planning tools, refined the process for business application. In the early 1970’s, scenario planning took on another dimension through the work of Pierre Wack, a planner in the London office of Royal Dutch/Shell. Pierre Wack and other planners were looking for environmental factors that might affect the oil price other than known factors such as contacts being renegotiated. They wrote up two scenarios, each with a complete set of stories, and projected financial impacts.
The first story depicted the prevailing wisdom at Shell that the oil price somehow would remain the same. The story line however emphasised that a miracle would have to happen, such as new oil fields appearing in non-Arab countries. The second scenario depicted another future, where the newly created OPEC sparked an oil price crisis, in which OPEC countries would take over Shell oilfields. This got their attention, and management revised strategies to take this possible future into account.
In October 1973, after the Yom Kippur war in the Middle East, the oil price shock occurred, and only Shell was prepared. It moved from the weakest of the 7 major oil companies to the second largest but most profitable in a few years. This got the business worlds attention, and some of Shells planners created a business advisory organization (Global Business Network:GBN) that is now one of the best known in the world for scenario planning.
Although widely used as a strategic tool over the last 20 years, a recent survey (Bain & Co, 1999) reported a decline in the number of companies who use scenario planning, with the main reason being traditional scenario planning models take too long a time frame, and that the rate of change and level of uncertainty in the immediate and short term operating environment precluded long range planning. The latest approaches to scenarios combine high depth and high quality assessments with the speed and agility required to make them more operationally useful.
A Practical Nine Step Scenario Planning Process
Step 1: Choose the Scenario User Groups
There are three distinct users of scenarios. The first step is to define which User Group is to be addressed.
User Group 1: The Global organization, Corporate Centre, or National body. This user group is responsible for the global or national strategy, and the use of scenario planning enhances strategic conversation across the Group and informs the development or revision of Board approved strategy. The types of scenarios developed with this user group are highly researched, and provide the foundations for other types of scenarios at the business unit level. The scenarios are typically developed every 2-3 years, and provide major input to strategy development.
User Group 2: Business Units or Departments. This user group has a focus to aid business-unit strategy at the departmental, regional, country or project level. These scenarios are more focused within the context of the global scenarios, and are customised as needed. Riska and opportunities are identified and impact more heavily on the operational plans. These are typically developed as required.
User Group 3: External Stakeholders This user group has a focus to structure and provide input to public debate and image management of the organization. The scenarios crafted for this user group will typically be global in nature, and will be similar to those created for the Global organization, Corporate Centre, or National body. These scenarios are used to facilitate and communicate global, country or industry specific possible futures, and have the added benefit of positioning the company as a thought leader in their industry.
Step 2: Choose the Scenario application
There are a number of potential applications for scenario analysis. Each of these applications will use similar processes, but will have a different focus
Sensitivity/Risk Assessment application. This application is for when you need to evaluate a specific strategic decision such as a major building investment or a new business development project.
Strategy Evaluation. This application of scenario planning is used to test existing strategies and to make any amendments that would strengthen the strategy as well as deal with the issues raised within the scenarios.
Strategy Development. This application of scenario planning adds value to the more traditional strategic planning process by ensuring the planning group is actually looking to the future to assist in developing strategies now. More detail of the steps required to undertake these applications and examples of how nonprofit organizations have used them can be found in our Strategic Planning Workbook
Step 3: Choose the participants
It is essential to create a scenario planning team that is able to suspend “prevailing wisdom” and be willing to create possible futures based on trends and critical uncertainties.
This team should consist of two or three key decision makers (usually the Chief Information Officer as well as the key strategic thinkers in the organization, sometimes the CEO and Board Chairman), and some relevant staff. It has been suggested that sometimes a new staff member is useful, as they don’t yet know the “prevailing wisdom”. A functional scenario planning team would be between four and six people.
Some of the criteria to consider include:
People with comprehensive knowledge of the organization and its environment
Men and women with varied roles
People of different ages
Suppliers, strategic partners and major customers
Step 4: Information search and Plausible Futures Analysis
This step requires high quality information and research to determine the driving forces of change and critical uncertainties at work in the organizations working environment. It is assumed that the people participating in the scenario planning are at the leading edge of knowledge about the industry or issue at hand, or at least have done extensive research prior to the scenario planning process.
One of the simplest and most effective ways of tapping into the possible futures is by using a modified backcasting process (what we have termed a Plausible Futures Analysis). This involves the scenario planning team asking questions and posing possibilities about the external environment now, in five years, and in ten years. We tend to go no further than ten years as most people have difficulty imaging possible plausible futures in ten years, let alone any longer time frames.
Step 5: Identify Key Driving Forces
Based on the information search, the first task in writing the scenarios is to look for driving forces of the macro-environment that become evident from the information search. Look for the common themes running through your information search. Look for predetermined components, those features that look as if they are going to persist under any scenario. They might include population statistics, demographics, and technology components. There are likely to be four or five of these key driving forces.
Step 6: Identify critical uncertainties
One of the key benefits of scenario planning is in identifying those factors that do not seem obvious and can’t be discerned just from looking at trend analysis. Critical uncertainties are important as they form the basis for writing the scenarios, where you say “Oh wow, if that happened what would we do?” One method to identify the important critical uncertainties is to rank the key factors and driving forces on the basis of two criteria: the degree of potential to occur, and the degree of impact if it does occur.
The point is to identify those three or four factors and trends that are most important and most uncertain. These factors then form the basis for the scenarios.
Step 7: Write scenarios
Identify the three or four key critical uncertainties, and give them a short name that describes the underlying issues eg Global Impact Scenario, Mobile Future Scenario. Brainstorm the possible future that may be, under each of these scenarios. Suspend any judgement about good, bad, preferred or disastrous. Look at that scenario from different viewpoints of your Board, your leadership team, customers/clients, funding agencies, other key stakeholders. What might the future look like under these circumstances?
The goal is to select plot lines for the scenarios that lead to different choices and actions and then relate these to the strategic plan. The scenario can be anything from one page to three or four pages of description, with a summary of the key aspects of that scenario.
It is recommended that there be either two scenarios or four. If there is an uneven number, there is a great tendency to choose the middle scenario as the most likely.
Step 8: Analyse implications of scenarios for strategies
The scenarios can now be used to test the strategies of the organization. This is best done done as part of the strategic planning session whilst the strategies are being developed, and also after the strategies have been developed. The aim is to develop actions that make the strategy robust across all scenarios. If the strategy looks good in only one or two scenarios, then it is a high risk.
Step 9: Select leading indicators and measures
A few indicators should be chosen to monitor the scenario and its impact on the strategies. The logical plot lines built into the scenario should allow relevant leading indicators to be identified and measured.
Scenario planning is the development of several varied scenarios of equally plausible futures with the aim to bring forward surprises and unexpected leaps of understanding. The point is not to select one preferred future and hope for it to become true. Nor is the point to fund the most probable future and adapt to it. The value of strategic planning lies in the process of making strategic decisions that will be sound for all plausible futures. No matter what future takes place, an organization is more likely to be ready for it and influential in it, if it has seriously considered scenarios.