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Harbottle Consulting
Effective Planning & Risk Management in an Uncertain
Business Environment
Risk Management & Scenario Planning
Terry Harbottle
University of Lethbridge
Harbottle Consulting
Key Objectives of the Evening
• Understand the purpose and role of scenarios in strategic planning and risk management
• Understand the types of issues and problems for which scenarios are most valuable
• Understand the basic methodology / process in developing scenarios
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Strategic -technology & information - knowledge management -industry value chain transformation -business model Environmental Risk -environmental disasters -changing environmental regulations
Operating Risks -distribution networks -manufacturing –gas processing
Commercial Risks - new competitor(s) - customer service expectations - new pricing models - supply chain management
Market & Credit Risk -price - interest & fx. rate -commodity price
Organization wide
Con
nect
ivity
Risk
Identification Impact Response
A Framework for Integrated Risk Management
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Strategic Management - Context
Social
Economic
Political
Technological
Environmental
Financial
Organization
Forces(Little or noInfluence )
Factors & Actors
(Some Influence)
Customers
Regulators
Competitors
Politicians
Suppliers
The World
The IndustryCommunities
InternalResources, capabilities &
competencies
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Scenarios & Planning … A History
Do we need a strategic plan?
1950 1960 1970 1980 1990 2000
Denial Acceptance Frustration Solution Integration
Leave it to the Kremlin
The importanceof looking
ahead
The impossibilityof predicting
The rise ofscenarioplanning
Integrationwith strategic
changemanagement
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Strategic Planning Process
VisionMission &
Values
Goals & Objectives
Strategic Options
StrategyDevelopment
Implementation &Evaluation
Feedback & Learning
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Scenarios In Strategic Planning
VisionMissionGoals
Future Business
Environment(Scenarios)
CompetitionCompetencies
Learning& Change
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Scenarios in Strategic Management Process
BusinessEnvironment
Analysis
StrategyFormulation
StrategyImplementation
PerformanceEvaluation
LearningManagement
of ChangeManagementof Business
Scenarios 5 Year BusinessPlans/Budgets
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Why Plan?
• Is the future predictable?•How do you think about the future?
•How do you plan for an uncertain future?
But plan you must …
“Failure to plan is planning to fail”
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The Illusion of Certainty
• “The phonograph is of no commercial value” Thomas Edison, 1880
• “There is no reason for any individual to have a computer in their home.” - Ken Olsen, President of DEC, 1977
• Internal sales forecasts for PCs for the 1980s: 295,000. Actual sales for PCs in the 1980s: over 25,000,000 - IBM, 1979
• “Anyone who thinks the ANC is going to run South Africa is living in cloud cuckoo land.” - Margaret Thatcher, 1987
• “They couldn’t hit an elephant at that dist…” - Last words of General Sedgewick, 1864
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The Challenge of Uncertainty
Who would have guessed?
• The rise of the Internet?
• That long distance telephone calls would cost 5c per minute?
• That electricity would be deregulated and unbundled?
• That the “Standard Oil Trust” would be reunited?
• That a WTO meeting would lead to passionate riots?
• That Nortel faces de-listing from the NYSE?
• That Enron would vanish in 6 months?
• Recent Geo- political events
The future is not predictable, yet we must make decisions & act.
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Decisions and Consequences
“…Strategic planning does not deal with future
decisions but with the futurity of present
decisions…”
—Peter
Drucker
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Expectations and Decisions
1970s Oil a declining resource$100 / bbl inevitable
1980s Electricity demand growth
1990s Mexican growth expectedJapan recoveryAsian growth inevitableInternet business
2000s Electricity & gas pricesTechnology “bubble”Ethics & Leadership
Shale Oil Barents Sea
Nuclear
’94 Crash Barings demise Thailand AOL/ Time Warner
California / Alberta Dot.com Collapse Enron / World Com
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Two Perspectives on the Future
Future Uncertain
Range of Futures
Insight
Robust Strategies
Decisions based on Expectations
Future Predictable
Consensus Future
Accuracy
Optimal Strategy
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Predictability & Uncertainty
ForecastingScenario Planning
Degree
Time
Predictability
Uncertainty
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Scenarios… Examine Alternatives
Area ofImplausible
Futures
Area ofPlausibleFutures
Wildcard Scenario X
Wildcard Scenario Y
Scenario A
Scenario BScenario C
Today
Today Tomorrow
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Scenario Planning
‘Risk Management and Opportunity Identification
at the Strategic Level’
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A Scenario Is...
A story, an image, or a map of the future
and
An interpretation of the present
projected into the future
and
An internally consistent story about the path
from the present to a future horizon
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Scenarios = Alternative Futures
•Multiple– views with different logics
•Qualitative– dealing with complex structural change
•Objective– plausible and internally consistent descriptions
•Focused– key issues and uncertainties
•Open-ended– outlines, not precise details
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Scenarios Involve Outside-In Thinking
Social
Economic
Political
Technological
Environmental
Financial
Organization
Forces(Little or noInfluence )
Factors & Actors
(Some Influence)
Customers
Regulators
Competitors
Politicians
Suppliers
The World
The IndustryCommunities
Resources, capabilities &competencies
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Scenarios and Systems Thinking
Events
Patterns
Structure
Systems Scenarios
Visible Manifestations
Trends andCombinations
Causal Relationships
Scenario Logic
Characteristics & Storylines
The Story
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Scenarios - Part of a Strategic Process
Key Strategic Issues
Focal Question
Scenario Development
Implications
Strategy Development
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Value of Scenarios
• Shared articulation of alternative futures
• Coherent “mental maps” of the future
• Analysis of current environment
• Context for developing and evaluating strategy
• Encourage adaptation to change
• Emphasize uncertainty and the need for flexibility
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Features of a Good Scenario
• Plausible
• Recognizable from the signals of the
present
• Creative in exploring new ground and ideas
• Relevant and significant to the organization
• Internally consistent
• Challenging
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Developing Scenarios
5. Scenario Logics
6. Scenarios
3. EnvironmentalForces
4. CriticalUncertainties
8. Early Indicators
7. Implications
1. Focal Issue
2. Key Factors
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Scenarios Ask the Right Question...
“The only relevant discussions about the
future are where we succeed in shifting the
question from whether something will happen
to what we would do if it did happen.”
Arie de Geus
Shell Group Planning
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Key Points
•Scenarios are descriptions of alternative futures
•Scenarios are focused on key issues and uncertainties facing the organization
•Scenarios are the output of an interactive and creative process designed to gain insight not prediction
•Scenarios are part of a larger strategic process contributing to enhanced strategic thinking, learning, and decision making
•Scenarios planning is particularly valuable in turbulent environments facing structural change
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Future of the Railway Industry – A Case Study
The purpose of this case study is to provide an example
based on a real scenario project. It is not a model case.
Timing and logistics force modifications in the 8-step
process. Some worked, some didn’t. All were valuable
in learning more about the challenge and reward of
developing and applying scenarios to organizations.
The viewgraphs to follow trace through each step in
the process.
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Is a Railway Example Relevant?
• The railway industry has a number of distinctive characteristics. Do these have any relevance to other industries?
– The industry is very capital intensive– The industry is concentrated into a small number of major
companies and independents– The industry is driven by the economy and subject to political
intervention– The industry competes across RR’s and with other “modes” (e.g.
truck vs. rail) both domestically and internationally– The industry is increasingly impacted by technological change
and lack of skilled workers– The industry has much to learn from the experience of others
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Scenario Interview Questions
• Past Changes – What has changed over the past 10 years that has had a significant impact on the industry / company?
• Lessons from the Past – What has made the company successful in the past? What lessons do we need to remember? What do we need to forget?
• Current Constraints – What things need to be changed for the company to be successful in the future? What are the barriers to innovation and change?
• Critical Decisions – What important decisions are on the immediate horizon? What important decisions are being ignored that should be addressed?
• Dark Spot – There is a dark spot on the horizon. It is not here and now but could have a major impact on the company / industry in the future. What is it?
• Good Future – If you looked back 10 years hence and the company had been very successful, what went right? What does a good future look like and what needs to happen for that good future to occur?
• Oracle – If you could spend time with an oracle or clairvoyant who knew the future, what question would you ask? What would you really like to know?
What are the issues on the minds of managers? What are the strategic issues the scenarios should address? Try some of these questions in your company.
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Developing the “Focal Question”
The focal question identifies:
• The key strategic issue facing the company / organization.
• The key decision facing the company.
• The key question you would like to answer.
The focal question should:
• Focus on the company specifically (not the future of the world).
• Highlight the key strategic question (e.g. growth, profitability, industry structure, competitive position, customer relations, etc.).
• Focus on a single concern (not compound issues).
Examples
• How can ABC penetrate and gain dominance in market W?
• How can LMN maximize growth opportunities?
• How can XYZ strengthen customer relationships?
• How can increase long-term profitability?
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Interviews & Focal Question - RR Example
• Issues Emerging from Interviews– Railroad mergers
– New transport regulation
– New trade flows
– Truck competition
– Agricultural policies
– Customer industries (coal, paper, grain, steel, autos)
– Union power
• Focal Question– Can Railco improve its competitive position and capture
growth?
Dilemma: Short term cost or long term growth? Unable to resolve.
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Factors and Forces
All organizations are embedded in a larger context. The accompanying chart distinguishes the contextual environment (forces & factors) from the transaction space (actors). A key step in scenario development is to identify the forces driving change in the external environment. One approach in identifying major driving forces / factors in a workshop involves 3 steps.
1) “Take 4 or 5 minutes by yourself and identify 4 or 5 factors or forces (no real distinction is needed) which could impact the focal question.”
2) Go around the room and have each person describe the forces / factors they identified. Summarize to 4 or 5 words and write them on large post-it notes.
3) Using volunteers, sort the post-it notes into clusters around common themes. Do not use a pre-defined framework. Select notes randomly and look for another with a common connection, etc. Build up between 7 and 10 clusters. There should be no more than 10 post-it note ideas per cluster. Name the clusters reflecting the underlying theme.
The cluster themes may be interpreted as the “forces” driving future change. They also represent a framework for describing the future. Each “force” must be included in all of your scenario descriptions although with varying interpretations and importance.
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Context of the Firm
Social
Economic
Political
Technological
Environmental
Financial
“Firm”
Forces(Little or noInfluence )
Factors & Actors
(Some Influence)
Customers
Regulators
Competitors
Politicians
Suppliers
Contextual Environment
Transaction Space
Communities
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Key Factors & Forces - RR Example
Process• Brainstormed factors and
forces• Grouped into clusters• Clusters labeled to reflect
major theme / force
Factors & Forces (from clusters)
• Macro-economics• Global / Asian growth• Rail performance & competition• Customer industries• Rail industry restructuring• Truck competition• Labour• Regulation & Politics• Ports & Water• Environment
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Importance and Uncertainty
Forces Importance Uncertainty
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
This chart shows one approach to identifying “critical uncertainties”. These are forces which are both important and uncertain. Uncertainty means either that they have a wide range of possible outcomes, and hence are uncertain, or the impact of the driving force has a number of different possible impacts (e.g., technological change may be uncertain because there is a range of possible new technologies OR because the impacts on society are highly uncertain)
The task is to rank (or rate) the forces on importance and uncertainty. This can be done in a group by allocating votes among participants (e.g., 3 votes for each participant) or by rating each force (1 – 5 scale) to identify the two which are most important and uncertain. The vote should narrow the choice but you should leave room for discussion before selecting 2 forces as the critical uncertainties.
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Critical Uncertainties - Rating Importance & Uncertainty
Participants allocated 5 votes each for importance & uncertaintyImportance Uncertainty
Macro-economics 6 14
Global / Asian Growth 3 2
Rail Performance & Competition 8 0
Customer Industries 11 6
Rail Industry Restructuring 5 4
Truck Competition 3 1
Labour 4 6
Regulation & Politics 2 9
Ports & Water 2 1
Environment 1 2
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Critical Uncertainties - Refining the Definitions
• Macro-economics (rate and structure of growth) was immediately identified as a critical uncertainty; Global / Asian growth could be incorporated into this dimension.
• Customer industries was a second candidate, but this appeared to be closely linked to macro-economics / growth
• Was rail performance and competition predetermined (I.e. zero uncertainty)? When we unpacked this cluster it became evident that performance pressures were “inevitable” but not so clear.
• A second critical uncertainty emerged around competition and industry structure, which appeared interesting and challenging.
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Example of a Cluster
Rail Competition and Performance• Improving asset utilization• Railroad reliability• Seamless intermodal service• Ability to handle information• Rail track / operation separation• Seasonal operating difficulties• Rising customer expectations• Increasing rail to rail competition• Move to schedule services• Info systems in railroads
Clusters help focus the process but can suppress critical factors
A wide array offactors grouped
into a single cluster
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Scenario Logics
The dimensions are the critical uncertainties: label the 2 axes. Then describe the ends of the spectrum (2 – 3 words or phrases)
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Scenario Logic Framework - RR Example
Economic Growth & Structure
Ind
. S
tru
ctu
re C
om
peti
tion
Restrained CompetitionMarket Power
Scale & Consolidation
Open CompetitionCustomer Driven
Market Share & Open Access
High GrowthGlobal
TechnologyProductivity
Low GrowthVolatile
NationalisticInterventionist
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Scenario Logics - Railway Industry
Economic Growth & Structure
Ind
ustr
y S
tru
ctu
re C
om
peti
tion
Restrained Competition
Open Competition
High GrowthLow Growth
Dinosaur Park
•Contraction•Stable Regulation•Excess Capacity
Riding the Momentum
•Global Trade•Consolidation•Bulk commodities
Stagnant Growth
•Desperate Customers•Nationalistic•Interventionist
Technology Forced
•Customer Demands•Seamless Service•Internal Pressure
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Other Examples – NA Mining
High GrowthPrices & Productivity
Low GrowthPrices & Productivity
ClosedDivisiveConflictDistrust
Self-Interests
OpenInclusiveHolisticTrust
Respect
MoneyDivides
New Horizons
PerfectStorm
PhoenixRising
Societal Values
Econ
om
ic P
erf
orm
an
ce
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Other Examples - Future of NAIT
Open Competition
Limited Competition
Public Private
• Political conflict• Government directed• Public driven• Education controlled
• Open markets• Consumer driven• Expanded training• Leading edge technology
• Corporatist• Business driven• Partnerships• Structured Learning
• Government driven• Social Responsibility• Stability• Education Integration
PROZACTIVITY COMPETITIVE EDGE
CONTROLLEDGROWTH
DALLAS
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Developing Storylines
Scenarios are stories, engaging, logical and challenging. Stories need a plot through time. One way of developing the story through time is to have participants describe events consistent with the scenario logics in 3 time frames: near term, medium term and long term. Writing these as newspaper headlines is one approach which can add fun and creativity to the exercise (but can become trivial if you are not careful).
The descriptions should reinforce the overall logic of the scenario. They provide useful material in writing the stories and in developing material. A useful tool in developing the logic and story of a scenario is to map out the logic. An example of a “logic map” for the railroad scenario “Riding the Momentum” is shown in the next viewgraph.
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Logic Map for “Riding the Momentum”
Global Growth
RisingTransportDemand
Growth inTruck Traffic
& Profits
RailConsolidation
Lower Costs& Market Power
IncreasedProfitability
Increased InvestmentShip / Rail Technology
Long Haul Focus
Constrained Competition
RestrainedCompetition
Mapping thelogic helps in
developing thestory through
time
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Writing & Communicating Scenarios
Scenario writing is an art. The written scenarios are intended to engage the mind of the reader. To draw them into the future. To encourage them to explore new ideas. To think differently. The stories must be logical, internally consistent and believable. The writer does not need to think through every detail. Indeed, this is counterproductive. The scenarios are necessarily incomplete to let the reader add ideas and examples from his / her experience.
There is tremendous opportunity to be creative in writing scenarios. Experiment. Try new things. Some have used dialogue; some have used “newspapers”; some prefer “bullets” to written prose; some have written in the future tense, present tense and past tense. (I prefer the past tense because stories seem more real and believable when written as if they have already occurred. )
Some include the logic leading up to the critical uncertainties in their reports; some include an overview before the stories (my preference); and others plunge right in. Some include both stories and “bullets” using a “summary comparison table” to encourage comparison across the scenarios (see next viewgraph). Scenarios should be grounded in recent events. The same event(s) may appear in all scenarios but with different interpretations leading to distinctly different futures. This links the future to alternative interpretations of the present and anchors the stories in reality that readers are currently experiencing.
Written documents are only one form of communication. Presentations are another form. Others have developed videos; and others have used actors to bring the scenarios alive – literally. The only limit is writing and communication is your imagination (and budget).
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Summary Comparison Table
Scenario A Scenario B Scenario CCharacteristics Scenario D
+++ + - - 0
Growth
Prices
Tech Impact
Globalization
Policy
Values
Rapid Protection Slowing Stable
Volatile Flat Rising Falling
Regulated Free Mkt Reregulated Regulated
Authoritarian Liberal Tolerant Intolerant
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Scenarios to Strategies
Implications
Scenarios
StrategicPlans
ExistingStrategies
NewStrategies
StrategicObjectives
Windtunnelling Windtunnelling
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Scenarios as a Tool - Implications
Questions
• What are the threats and opportunities in each scenario?• What factors are critical for success in each scenario?
Deepen understanding of the scenarios
Provide a broad context for more specific questions
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• Who will be the major competitors in each scenario?
• How will these competitors respond to our new strategy?
• Could completely new competitors emerge in our business?
• What will be the impact on our relationship with suppliers?
• How will our customers change? What new needs will they
have in each scenario?
Explicit consideration of key actors
Scenarios as a Tool – Competitors, Suppliers & Customers
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Scenarios as a Tool – Existing Strategies
“Windtunnelling” – How will our current strategies fly in the future?
How would our existing strategies perform in each of the scenarios?What are the pros and cons?What are the risks? Where are we vulnerable?Will our current strategies meet our strategic objectives?
Ensures articulation of existing strategies and objectives Forces managers to think through the consequences of current strategies Encourages discussion of risks and rewards
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Scenarios as a Tool – Generating New Strategies
If scenario A (B, C, ..) occurred, what should we do?What strategies should we pursue?
ScenariosGenerate
NewStrategies
Evaluate(Windtunnel)
ReviewObjectives
Forced generation of different strategies (lateral thinking) Active discussion of the consequences of specific choices