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Scenario Planning – How to steer into the future

More of the same

Most, if not all, companies prepare strategies to deal with a foreseeable future. These strategies are prepared and reviewed on a regular basis, and generally making use of assumptions, available data and actual trends. The assumptions tend to be based on recent history with an extrapolation into the future, which will lead to ‘more of the same’. Many businesses are highly specialised and adapted to the current business environment, while using the assumption that we will have ‘more of the same’ coming our way (Roxburgh, 2009) in their strategies.

By now, roughly 6 months into the COVID-19 crisis, we all understand clearly that ‘business-as-usual’ is gone forever. The pandemic, sustainability movements, trade wars, social unrest, and many more disrupting events make it clear that we are dealing with a future that is volatile, uncertain, complex and ambigous (VUCA). A future that can not simply be extrapolated from the past, and which requires a more flexible approach on a strategic business level to deal with it, which can be done with scenario planning.

Scenario planning -as we know it- originates from Shell, who started an initiative in 1965 to perform long term studies as a way to help the executive team with long term commitments they had to make. It allowed Shell to identify unforeseen downsides and also opportunities that no one so far has thought of.

What are scenarios?

As stated in (Blau, Billa, & Willigmann, 2020) “Scenarios are stories about what the future may look like, created through a structured process to stretch thinking, challenging conventional wisdom, and drive better decisions today. They are not predictions about what will happen. They are hypotheses about what could happen, designed to open our eyes to new opportunities or hidden risks.”

No one can predict the future with a 100% certainty. Maybe parts of what will happen in a future that is a year out can be ‘best-guessed’ with some reliability. As such scenarios do not serve as a sure path into the future, but merely provide plausible options of what a future might look like.

“The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic”

Peter Drucker

Why scenario planning?

Scenario planning is very helpful in the strategy process (Roxburgh, 2009) because it helps us to expand our thinking beyond the obvious. As a natural tendency people believe that the future will look like the past with some minor tweaks here and there, but it won’t. Scenarios help us to gain insight into change drivers and which ones of those matter, which ones don’t and which ones matter enough to be  considered.

Additionally scenario planning helps to identify inevitable, predetermined near futures. These futures will happen, only we do not know for sure when that exactly will be. Four types of these predetermined futures can be identified:

  1. Demographical trends – for example baby boomers stepping out of the work force because of their age
  2. Economic laws – for example the ‘pork cycle’ which describes the phenomenon of prices going up when pork supply is short, causing farmers to breed more pigs and pork supply goes up, this in turn causes prices to fall, and farmers stop breeding pigs, then the cycle starts over again
  3. Reversal of unsustainable trends – economical trends are cyclical in nature (long term) and thus will reverse some time in the future
  4. Scheduled events beyond the typical planning horizon of 18 to 24 months

Next to that scenario planning will help you to overcome ‘group think’, whereby people tend to agree with the opinion of the most senior person in the room. In scenario planning people are allowed and even encouraged to think differently.

And lastly scenario planning allows you to challenge current strategies. Having invested much time, energy and even money in it, the current strategy is generally not challenged. Scenario planning however describes alternate futures purposely diverting from the current strategy.

Scenario planning helps you to get prepared for the unknown, but plausible future. When that future sets in, the decision making cycles required to adjust to that specific future are tremendously shortened. You have already developed the necessary strategic plans, which gives you a considerable headstart to the competition (Toner, Ojha, de Paepe, & Simoes de Melo, 2015).

How do you create valuable scenarios?

There is always going to be a specific context for which you want to create scenarios (Ogilvy, 2015), and scenarios will therefore be customised to that context. When you build scenarios you will need to clearly understand what you want to achieve with building the scenarios.

A good number of scenarios to create is two to five scenarios, whereby four is viewed as ideal. In this case you have no ‘middle’ scenario that people can stick to as a ‘safe middleground’.

The process of scenario planning takes roughly four months and consists of interviews, data gathering, workshops, research, story writing and presenting the outcomes. It can be split up in two phases:

I. Developing and choosing the scenarios, consisting of the first five process steps
II. Telling the story with the associated implications, consisting of remaining three process steps

The process steps (Ogilvy, 2015) combined with some rules of thumb (Roxburgh, 2009) are:

  1. Describe the focal issue of your scenario planning: why are you engaging in this scenario planning?
  2. Identify the key uncertainty factors that can have an effect on the focal issue. Generally after 30 to 40 obvious factors you will identify the less obvious ones. Stop with this step as soon as the factors become obscure.
  3. Identify the external uncertainty factors, like geopolitical, economic, social, technological, demographic, cultural, epidemics, etc. Don’t forget to look for opportunities or breakthroughs. This will add another 30 to 40 factors.
  4. Assign the level of importance/impact of these factors in light of the focal issue, and in addition assign the level of uncertainty for each of the factors. Filter through these rated factors and a short list of critical factors emerges. Generally there will be three to five critical uncertainties.
  5. Using the method developed by Pherson Associates (Roxburgh, 2009) the focus can be on two critical uncertainty factors from which at least four scenario logics can be derived. As mentioned before four to five scenarios is optimal.
  6. The involved team then writes ‘newspaper headlines’ that help with the narrative for each of the scenarios.
    The scenarios should be given appealing names so that they can easily be refered to. Using two to four words would be optimal (for example “rising moon”).
  7. Each scenario is worked out and appropriate strategic options are defined. Some strategic options will be present for each or most of the scenarios. These are the ‘no-brainer’ options, which should be worked on no matter what, and these tend to be linked to predetermined futures (see above).
  8. Keep your eyes open for early indicators that a specific scenario will become more likely. Once you have sufficient proof that you will be heading into the direction of that specific scenario, you can start to implement the strategic options belonging to that scenario.
    Of course you also have the possibility that you have to rewrite scenarios, because of uncertainty factors are emerging that you hadn’t foreseen. Note that there is no harm in being wrong, as it helps you to learn and improve.

What do you need to consider when creating scenarios?

When you create scenarios there are a number of pittfalls that you need to avoid (Erdmann, Sichel, & Yeung, 2015) (Roxburgh, 2009):

  • Availability bias – while gathering data assure that you avoid blind spots by including data that is not limited to your industry or geography only.
  • Probability neglect – low probability events either are completely ignored, or receive excessive weight. Given that not everything can be quantified, using intuition to assess the relative materiality of an uncertainty factor is allowed
  • Stability bias – there is a natural tendency to assume that the future will look like the recent past when plotting out a scenario. Involving senior leaders in the process will assure that they understand, accept and properly act on the scenarios that are different from what their perceived stable reaility.
  • Discarding scenarios too quickly – scenarios are not right or wrong, instead they are kept useful so adjust when and where needed
  • Overconfidence and excessive optimism – strategic planning efforts should be taken for all plausible scenarios including the extreme ones, not only for the ‘base’ or ‘central base’ case.
  • Social bias – making scenario planning part of normal business, instead as a one-off exercise will avoid ‘group think’
  • Paralysis – pick scenarios that are most likely and base your strategic plans on them
  • Don’t let scenarios muddy communication – understanding the various scenarios will allow leaders to communicate convincingly without making statements that could prove wrong
  • Remember when to avoid scenarios altogether – when uncertainty is so great that a plausible scenario can’t be created then don’t use scenario planning.

Summary

We live in a world that is becoming increasingly more VUCA in nature. Merely extrapolating history into the future and doing more of the same has created businesses that are highly specialised and effective in non-changing business environments. These are the businesses that have not been preparing for a future we are seeing now, and they will not survive or at least will loose their advantages to competitors.

Companies that can make the future (and not taking it as it comes) will be those that can embrace uncertainty and turn it into their advantage (Toner, Ojha, de Paepe, & Simoes de Melo, 2015). These are the companies that fully embrace scenario planning as part of their strategic planning process.

References

Blau, A., Billa, G., & Willigmann, P. (2020, Apr 6). The world remade by COVID-19 – Scenarios for resilient leaders | 3-5 years. Retrieved from www2.deloitte.com: https://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/COVID-19/Thrive-scenarios-for-resilient-leaders.pdf

Erdmann, D., Sichel, B., & Yeung, L. (2015, Jun 1). Overcoming obstacles to effective scenario planning. Retrieved from www.mckinsey.com: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/overcoming-obstacles-to-effective-scenario-planning

Ogilvy, J. (2015, Jan 8). Scenario Planning and Strategic Forecasting. Retrieved from www.forbes.com: https://www.forbes.com/sites/stratfor/2015/01/08/scenario-planning-and-strategic-forecasting/

Roxburgh, C. (2009, Nov 1). The use and abuse of scenarios. Retrieved from www.mckinsey.com: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-use-and-abuse-of-scenarios

Toner, M., Ojha, N., de Paepe, P., & Simoes de Melo, M. (2015, Aug 12). A strategy for thriving in uncertainty. Retrieved from www.bain.com: https://www.bain.com/insights/a-strategy-for-thriving-in-uncertainty/

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