Strategic planning and forecasting tend to use projections of past events to develop future plans. These approaches rely on historical data and assume a continuation of past business practices and environmental stability. Scenarios are used to develop plans for significant changes in the environment, personnel, or processes for which data are limited and uncertain. The premise is that the best way to prepare for radically different situations is to think through various events that could occur and consider alternatives for responding to those situations if they should happen.
Major corporations such as Shell and General Electric redefined scenario planning in the 1970s to meet specific company needs. These companies realized that traditional planning, which is based on forecasts, was becoming strategically dangerous as they moved out of the relatively stable 1950s and 1960s. Traditional planning assumes that tomorrow's business world will be quite like yesterday's. Scenario planning, on the other hand, involves creating a variety of possible future scenarios that may play out despite past patterns. As Peter Schwartz, an early pioneer of scenario planning, put it in his seminal 1991 work, The Art of the Long View, “scenarios can help people make better decisions—usually difficult decisions—that they would otherwise miss or deny.”
Firms can use scenario planning in one of two ways. First, firms may examine each scenario and determine whether the organization's current strategy would help them survive and succeed in those situations. Or, firms can examine a desired future state and see what they must do to get to that point. The purpose of this planning is to try to understand how the underlying dynamics of an industry can change and how the organization could best respond to a change that could happen or to make a desired situation occur. The organization identifies certain events that could change the industry's structure and studies the present and future driving forces that might come into play that could cause such events. Scenario planning is effective for large organizations and small organizations alike. The organizations that utilize the plan the best are the ones that make scenarios relevant to long-term needs, which may require a more focused approach. The ultimate purpose of this method seems to be the same for large and small organizations: to analyze the consequences of present actions and decisions; to identify and avoid problems before they occur; to identify the present consequences of future events; and to envision aspects of possible or desired futures.
Scenario planning is different from other forms of strategic planning, such as forecasts and trend analysis. Scenario planning, in fact, uses both of these techniques, but also identifies how these can be upset and thus cause different outcomes. Some scenarios may seem nonsensical or highly improbable, but considering them can actually help organizations deal with major changes. In the past, only businesses in energy-intensive sectors, such as trucking companies and airlines, would consider scenarios where gas prices would double or triple in a short period of time. With the sharp spike in oil prices in 2007 and 2008, and with crude oil prices breaking the $80/barrel mark for the first time and then heading suddenly above $130/barrel within a six-month period, many firms in a broad spectrum of industries—from automakers to agri-business—had to scramble to consider what would happen to their business and how they should respond if gas prices were to reach $10 or even $15 per gallon. These firms would have been better prepared for the sudden price shocks in the energy sector had scenario planning been employed sooner.
Scenario planning helps organizations understand that business decisions are not just about submitting numbers and creating budgets, but about recognizing a wider context of events that might happen. Scenarios are created around uncertainties in the business or its environment. The goal is to move from one predicted outcome to understanding how multiple uncertainties will impact an organization. Although every organization is different, success is higher when the company's strategy is correlated to changes in the environment, which can create opportunities for prepared organizations while creating threats to those less prepared.
In creating a scenario plan, these driving forces can be categorized into external and internal factors. External factors could include: market forces, which shape the needs and behaviors of consumers and suppliers; cost forces, which depend on the economics of the business; government forces, which are out of the hands of individual organizations but set the rules of the game; and, most importantly, competitive forces and uncertain strategic considerations. The need to match or beat competitors can determine the opportunities and threats of an organization. Internal factors could include planning for turnover of critical top managers, responding to major accidents, or significant changes in stock prices.
One pitfall of scenario planning is that organizations tend to make scenarios too broad or too narrow. When scenarios are too broad, people tend to dismiss them because they feel the scenarios are unrealistic or highly improbable. When they are too narrow, scenarios are usually minor variations of the existing strategy or the same theme.
There are many different approaches firms can use to develop meaningful scenarios. Schnaars and Ziamou suggest the following:
- Optimistic vs. best guess vs. pessimistic scenarios. This approach looks at the most likely (best guess) future situation based on current information. The optimistic scenario introduces question as to what things would or could happen to result in a better than anticipated outcome and how can the organization make those things happen? The pessimistic scenario looks at many of the things that could go wrong and tries to help decision makers plan responses to deal with these problems should they happen.
- Good vs. bad scenarios. This approach avoids the tendency to focus on the most likely alternative of the “best guess” and forces managers to give more attention to both extremes.
- Arrayed scenarios. These scenarios look at alternatives associated with a continuum along a single criterion or dimension. For example firms could plan their response to a slight, moderate, or severe change in the price of gasoline, or other key resource.
- Independently themed scenarios. This approach looks at different aspects of the future. One scenario could look at possible technological breakthroughs, another at environmental concerns, and a third at potential market changes. Each scenario is conceptually independent of the others.
After scenarios are created, strategies are developed by first determining the direction in which the organization should (or wants to) be going. The group then decides on the events that support this vision and the outcomes the organization wants for this event. This is sometimes difficult because the world is rapidly changing, and one designs his or her organization to deal with the change. Scenario planning is a valuable tool for an organization because it gathers the clues a company has and puts them together in different ways to allow people to think about them without making judgments.
Why should organizations implement scenario planning as opposed to other planning techniques? First, the company can use the method as an approach to risk management. The method attempts to answer questions like, “How do we come up with a strategy that's possible in a wide range of different futures?” The organization can also use the method to upset the rules that everybody understands, to create new rules of competition. Scenario development causes firms to deviate from a linear projection of past business practices by developing potential situations that question traditional assumptions about the firm's relevant industry, processes, markets, and people that may make it necessary to significantly alter the current strategy.
Scenario planning is effective when used properly by managers with good business judgment; it is not a substitute for business judgment. The process does not help an organization become better than they might be ordinarily, but helps utilize professional judgment across a wider range of alternatives.
SEE ALSO Forecasting; Planning; Strategic Planning Tools
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Throughout most of the 20th century, business moved at a relatively slow pace. By the early 2000s, however, the business climate had changed significantly. The widespread adoption of the Internet and other communication devices allowed information to travel more quickly, and enabled consumers and companies to do business with one another across the globe. Along with the brisker pace came greater complexity. Combinations of many different factors impacted the success or failure of a company or industry in a short period of time. Among these factors were pressure from investors, the demands of customers, the impact of new technologies, domestic and international government regulations, legal issues, the environment, and even the cost of shipping products. In this more complex, uncertain environment, it became increasingly difficult for corporate executives to make important decisions and position their companies for success.
While it is not possible for executives to totally predict what impact factors such as these will have, it is possible for them to develop simulations or scenarios that paint pictures of what future conditions might be like if certain things were to happen. This approach is known as scenario planning. The purpose of scenario planning is to identify several different stories about, or visions of, how large-scale forces will have an impact over time. It is not used to predict specific future events. It is in this regard that scenario planning differs from other kinds of forecasting or trend analyses that companies use to assist them in the decision-making process. Instead of forecasting only one version of how things might evolve or develop, scenario planning involves painting several different pictures and takes into consideration the fact that the future is uncertain and can't be predicted.
Because of its large-scale focus, scenario planning often is used to study issues surrounding entire industries or nations. However, the approach also can be used to focus on smaller issues that are important to specific companies or organizations. Among those who have used scenario planning are the United States Postal Service, Levi Strauss, National City Corp., General Electric, Ericsson Inc., British Airways, IBM, Motorola, AT&T, United Distillers, Royal Dutch/Shell, and numerous retailers.
HOW SCENARIO PLANNING WORKS
Generally speaking, the process of scenario planning begins with leading executives at a company, who first identify a certain issue or focal point. For example, an e-commerce company may try to decide whether to expand the scope of its offerings new arenas. Before doing so, it may want to determine the likely long-term impact of different conditions and variables before significant resources are invested. Based on this central issue or focal point, different social, economic, political, and technological forces are taken into consideration. When considered along with current conditions, some of them may be quite easy to foresee or estimate, while others are more difficult. Those forces that are both uncertain and critical to the central issue or focal point serve as the basis for exploration in each scenario or story, several of which are developed. Each scenario shows a different possible end result based on how the different factors play out.
Darwin magazine provided an excellent real-world example of how one company used scenario planning. In 1996, National City Corp. was faced with several business challenges, including figuring out what role the Internet would play in the banking world, increasing competition for market share, and the need to increase earnings. The bank was about to invest $40 million in a new customer information system. However, there were many unanswered questions about the direction in which the company was headed. Jon Gorney, who was in charge of information systems at National City, needed answers before making such a big investment.
Gorney hired Northeast Consulting Resources Inc. (NCRI) to conduct a three-day scenario planning workshop at the cost of $500,000. His staff interviewed 50 executives from each of the bank's divisions to obtain information, including their visions of the bank's strategic direction and how they used technology. After many interviews, three different visions emerged. One vision (which was consistent with industry trends) saw the bank heading in a direction where many of its different services were tailored to meet the needs of individual customers. A second vision saw the bank focusing on the development of its financial products, instead of its customers. Finally, a third vision saw the bank launching a second online-only bank that would compete with its physical banks.
After these three visions of the future were developed, 150 events (both internal and external) were identified which could impact each vision. During the workshop, these events were ranked by executives from different National City banks, based on how likely each one was to occur. Later, different groups investigated how the different scenarios would be impacted by the events that had been ranked. After a great deal of debate and discussion, the ultimate decision was left to National City's chairman and chief executive officer, who opted for the customer-focused vision. Scenario planning helped the information technology and banking professionals to understand one another. It also helped everyone to share and agree on a common vision, and made Gorney more comfortable about spending $40 million.
THE HISTORY OF SCENARIO PLANNING
Scenario planning was originally developed during the Cold War years as a way of considering what might happen in the event of a nuclear war. The approach caught on in the corporate world in the planning department at Royal Dutch/Shell. There, Pierre Wack and Ed Newland led a department consisting of managers from several different countries and disciplines to develop the new approach, which helped Shell respond to the oil crisis of 1973. Peter Schwartz, chairman and co-founder of the Global Business Network (GBN), was responsible for scenario planning while working at Royal Dutch/Shell from 1982 to 1986. He too was instrumental in the approach's development. Along with Jay Ogilvy, Lawrence Wilkinson, Stewart Brand, and Napier Collyns, Schwartz eventually formed GBN. According to GBN, the organization is "a community of individuals and organizations committed to thinking broadly and collaboratively about the future and to pioneering tools for organizational learning, planning, and innovation." Companies from many different industries pay handsomely to receive scenario-planning consultancy from GBN. Among them are American Express, Lucent Technologies, Nokia, Campbell Soup, Disney, Nissan, Rubbermaid, Procter & Gamble, and Sun Microsystems.
THE FUTURE OF SCENARIO PLANNING
Although scenario planning has been around for many years, and interest in it has fluctuated, the approach holds a great deal of potential in a business world where changing market conditions and consumer preferences can spell disaster for e-tailers and other organizations. In Serious Play, Michael Schrage indicated that global business is being transformed by the exploration of new ideas through simulation and modeling, explaining that "Tomorrow's innovators will invest more in playing with prototypes, modeling marketplaces, and simulating scenarios because that will become the best way to create new value and profitably deliver it to customers."
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Schrage, Michael. Serious Play. Boston: Harvard Business School Press. 2000.
Wilkinson, Lawrence. "How to Build Scenarios." Wired, 1998. Available from www.wired.com.
SEE ALSO: Simulation Software