Expertise and Experience in Scenario Planning

Introducing Analysys Mason

Amrish Kacker

Q3 2007

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Summary

Reliance on market predictions is risky. The pace and complexity of telecoms development make long-term forecasts very uncertain

Analysys Mason offers scenario planning as a means of tackling the diversity of future possibilities, in order to:

gain a fundamental understanding of the forces that are shaping the future

assess the risks and rewards of different business options

develop flexibility in responses to unforeseen change

We combine in-depth knowledge of the telecoms sector with process consulting skills, working with clients to reach practical business decisions

The following slides present:

the benefits of our approach

the principles of scenario planning

the scenario-planning process

checklist for success

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Benefits of scenario planning

Scenario planning helps you to develop the agility required to gain business advantage from changes in the telecoms environment. The benefits include:

early warning of business risks and opportunities

objective decision support which balances the risks and returns of business options

innovative business ideas

challenge to any assumptions of business-as-usual

common language for strategic debate which helps to capture divergent views across the business

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Our approach

We go beyond descriptive scenarios to explore the details of business options

We help our clients by:

designing an efficient planning process that is tailored to meet each client’s needs

facilitating workshops to engage, stimulate and challenge the client team

analysing the risks and rewards of options in order to support decisions

managing the process to deliver results on time

The aim should be to embed scenario planning in the everyday business management process

We therefore like to work closely with our clients in a single integrated team, to encourage skills transfer and total transparency

We encourage the client team to take ownership of the process and the results

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The principles of scenario planning

“Too many forces work against the possibility of getting the right forecast … accept uncertainty, try to understand it, and make it part of our

reasoning.” Pierre Wack (Harvard Business Review 1985)

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The maze of future possibilities

Telecoms is subject to rapid and unpredictable change, driven by a wide range of issues such as:

fixed–mobile convergence

merger activity

growth in emerging markets

broadcast–telecoms integration

fast growth in data traffic

new value chains for the Internet

development of regulation

impact of satellite

new technologies

development in competition

These drivers interact not only with each other but with any number of macro-economic, technological, regulatory, political and social issues. The interactions generate yet more complexity. The telecoms business environment could evolve along a myriad of different paths

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The dangers of relying on one forecast

Deeper research tends to reveal more complexity. The temptation is to stop gathering detail and select one path forward that seems the most likely

There is a danger, however, that this forecast will become a straitjacket for strategic thinking. Significant business risks could be ignored

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Understanding uncertainty

Scenario planning combines possibilities to form a manageable set of scenarios

It broadens, rather than narrows, the vision of the business planning team

It endeavours to:

capture all the uncertainties faced by the business

highlight the issues that may have a significant impact on the business

study the relationships between these critical issues

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Drawing on forecasts

Scenario planning addresses issues beyond the time horizon of predictable events. The scenarios make sense of changes across the whole business environment and provide a basis for strategic debate

On the other hand, forecasting and mathematical modelling are necessary for developing a detailed understanding of specific issues over shorter timescales. They can be used to:

underpin the scenarios with detailed information on specific issues

explore the value of specific options

test the performance of the business plan in each scenario

understand which parameters have a critical effect on the business

The two techniques work together for business planning

Timescale

Scope

Forecasting

Scenarioplanning

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What is a scenario?

Describes a possible future business environment, but is not a prediction

Explores the extremes which challenge the existing business model

Engaging, interesting, challenging and credible

Logically consistent with the known facts

A set of scenarios is mutually exclusive and collectively exhaustive

A set of scenarios describes a range of possible futures

Ideally, develop no more than four scenarios, or it becomes difficult to manage them

Scenarios can be presented in many different forms, such as in a script or a timeline, or within a discussion

“An outline of future development which shows the operation of causes.” Chambers English Dictionary

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Underpinning scenarios with analysis

The descriptive scenarios need to be supported by numerical analysis, which should:

test the credibility of each scenario

explore the magnitude of changes in the environment

evaluate the impact of those changes

Drivers of change

Uncertainty

Impa

ct Scenarioscripts

________________________

__________

New businessproposal

________________________

__________

Cashflow by scenario

Time

$ ca

shflo

wMainassumptions

______________________________

Criticalparameters

___________________________________

Risk versus reward

$ value

Ris

k

Business plan

Systems dynamics model

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Using scenarios for business planning

Scenarios are used to challenge existing business models and stimulate new ideas. They form the basis of a strategic debate which is radically different to the traditional business planning cycle

Scenario planning creates a flexible plan for the business which is composed of a variety of options. The business moves forward by shifting its weight between these options. This enables the business to adapt its plans to the evolving environment. The aim is to maintain a balance between risks and rewards

Present

Option A

Option C

Option B

Option E

Option D

Scenario 1

Scenario 2

Scenario 3

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The process of scenario planning

This diagram shows our basic process for scenario planning. We work within this framework to tailor solutions to suit our clients’ needs

Build scenarios

Create options

Refine options

Maintain learning Identify key issues

Set objectives

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Set objectives

Setting the objectives is the essential starting point for scenario planning, in order to define boundaries and establish focus

A client-side strategy manager should be appointed at this earliest stage of the process. This manager will provide the point of communication between Analysys Mason and the stakeholders

The objectives for the scenario planning project must be clearly stated and agreed with the key stakeholders. They should include the following:

time horizon for the scenarios

geographical scope of the scenarios

business units or product areas to be addressed by the project

unavoidable constraints on future plans

definition and deadline for deliverables

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Identify key issues

The main threats and opportunities facing the company need to be explored in preparation for the scenario-building activities

This is best achieved through interviews with the key stakeholders, either individually or in small groups. These interviews provide an opportunity to:

secure the stakeholders’ acceptance of the scenario-planning process

gain the stakeholders’ trust

listen to their views and concerns

locate important sources of information for later analysis

choose participants for workshops

The interviews follow a simple process:

prepare an interview script containing a provocative survey of markets, technologies, competitors, etc, expressed in terms of dilemmas and choices

use this script to gently guide interviews with the stakeholders

collate the information and analyse the results to identify the key issues

feed the analysis back to the stakeholders for review and agreement

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Build scenarios [1]

Brainstorm the drivers of change, in workshops held with stakeholders. These drivers may include:

business factors

technology factors

socio-economic factors

Agree upon the impact and likelihood of each driver

Establish what is inevitable and, therefore, must occur in all scenarios

Impact

Uncertainty

Inevitable

Insignificant

Significant

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Build scenarios [2]

Identify the critical uncertainties, and group them to understand how they may act together to split the future into different scenarios

Check:

the inter-relationships between the drivers with simple causal networks

that the scenarios are mutually exclusive and collectively exhaustive

that each scenario constitutes a challenging view of the future

Develop engaging descriptions of the scenarios supported by research and analysis

Inevitable change

Uncertain change

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Create options

The next step is to use the scenarios to brainstorm business solutions

Additional workshops are held to examine each scenario in turn and generate many possible business solutions

From these we derive one simple plan for each scenario. The set of plans for each scenario are then compared:

the common elements form the core business plan

those differentiated by scenario become options for the future

Brainstorm solutions for

each scenario

Outline simple plans for each

scenario

Compile series of options

Establish core plan for all scenarios

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Refine options

The core plan is now established. This next stage refines the options and finalises the overall business plans

There is a choice of attitude to take towards the options:

focused drive for one future?

cautious experimentation?

low-risk contingency planning?

The approach chosen will depend upon the balance between risk and reward that the stakeholders wish to maintain

The various business options are tested in the different scenarios to evaluate their performance. Tests can involve script-writing, war-gaming or mathematical modelling

The options are synthesised in one plan and the decision points defined, in order to achieve the business objectives

Establish parameters for each scenario

Check core plan in all scenarios

Check options in relevant scenarios

Synthesise and test

complete plan

Refine decision points

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Maintain learning

Scenario planning should not be a one-off exercise: the greatest benefit is gained by continually developing and applying the scenarios

Long-term, scenario planning will capture ongoing business learning as it evolves

In the short term, an effective early-warning system can be created by establishing processes such as:

short-listing critical parameters

summarising significant scenario events

defining how to track critical parameters and significant scenario events

agreeing management process for tracking

maintaining a strict schedule of reviews

allocating clear responsibilities for tracking

establishing processes for rapidly assessing consequences of events

keeping the stakeholders up-to-date with regular bulletins

adjusting business plans to keep pace with change in the business environment

Review scenarios

Track critical factors

Adjust plans

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What is the checklist for success?

Set a clear objective for the scenario-planning project in close consultation with the stakeholders in the business

Build a creative and diverse team integrating client personnel with Analysys Mason team members

Appoint a champion for scenario planning within the business, to lead the project with support from the Analysys Mason team

Gain the commitment of key stakeholders, including board-level sponsorship

Agree and follow a sound process, based on our experience but tailored to the client needs