Scenarios Strategy

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Introduction

Scenarios were first developed and used as businessplanning tools as long ago as the 1960s and 1970s.Since then they have been adopted andpermanently embedded in planning cycles andprocedures by some long-term believers like Shell(the Anglo/Dutch Global Oil Group), but havenot become a widely used technique in businesses

generally. Governments, NGOs, countries andthink-tanks publish their scenarios, whereas themajority of companies usually do not, making itdifficult to judge how widespread their use truly is.A survey in 1979 (Klein and Linneman, 1981)estimated that between 8% and 22% of theFortune 1000 had made some use of scenarios.

Another survey in 1983 among Europeancompanies (Malaska et al., 1983) showed a higherpercentage of users, when it was also noted thatthe definition of scenarios varied widely as well asthe way that scenarios were used.

Consultants and futurists, however, report theirfrustrations with managers who do not maximisethe return they might get from using scenarios

more widely in their organisations. Among MBAstudents and executives, there is a general lack of exposure to scenario thinking compared with thegenerally well-known ‘five forces’ model fromMichael Porter of Harvard and the ubiquitousPEST framework (i.e. political, economic, socialand technological drivers of environmentalchange). This apparent lack of use of thetechnique is not due to poor support in books andliterature. In fact Michael Porter wrote positivelyand in some detail about what he called IndustryScenarios at the same time as he was publicising

his other strategy models (Porter, 1985), whichhave become widely adopted and used bymanagement.

Scenario techniques are very flexible. They canbe applied to almost any business issue thatcontains degrees of uncertainty. They are bestknown for their corporate, high-level, global andlong-term use, but the techniques can be used toanswer very specific issues of competitive strategy,marketing and organisational capability. Theparadox is that this very flexibility and widespread

185

Scenario planning as a strategytechnique Julie Verity

EUROPEANBUSINESSJOURNAL

Scenario techniques have been available as strategy tools for 30 years. However,despite their ability to help managers distinguish critical signals from generalenvironmental noise, they have failed to become widely adopted in companies’

planning processes. This paper will consider some reasons for this failure and will argue for greater use of what is a very relevant tool in business environments

that are increasingly complex, changing and global.

Address for correspondence: Cranfield School of Management,Cranfield, Bedford MK43 0AL, UK.E-mail: [email protected]

Julie Verity,Cranfield School of

Management

© European Business Journal 2003



186EUROPEAN BUSINESS JOURNAL

applicability seems to limit their generalacceptance in everyday organisational use. It is adifficult technique to define and describe.There are different schools of thought aboutwhat scenarios are for, how scenarios should bebuilt and when they should be used. There arereasons why managers will resist or reject using thetechnique.

This paper explores the potential of scenarioplanning as a strategy tool. It highlights theobstacles to its use as well as the benefits of adopting the practice. The aim is to help managersmake an informed decision about if and when toinclude scenario thinking in their strategy process.

What is scenario planning?

It was Herman Khan and his associates at the UScompany the Rand Corporation, in the 1950s and1960s, who first started building scenarios. Theirobjective was to explore how nuclear war mighterupt between the USA and the Soviet Union bydescribing possible logical paths to differentoutcomes in the future. Khan pioneered thetechnique of ‘future-now’ thinking, aiming throughthe use of detailed analysis plus imagination, to beable to write a report in the present as if it wasbeing written at some date in the future. The name‘scenario’ was given to these stories by the writerLeo Rosten, which he suggested on the basis of Hollywood terminology. Khan was attracted to the

term because of its emphasis on creating storiessince he was trying to avoid his future reportsbeing seen as a series of forecasts (Ringland, 1998).Into the 1970s the technique was extended, byKhan at Rand Corporation and later at theHudson Institute (an American think-tank, whichKhan set up) for corporate use and for applicationto thinking about societies in general.

General Electric (the US conglomerate) wasone of the first companies to use the technique inthe 1960s and 1970s, but it was Pierre Wack atShell and Peter Schwartz at SRI International

(Stanford Research Institute at StanfordUniversity) during the 1970s and 1980s who reallyintroduced scenario planning to management as astrategy tool. Pierre Wack’s classic Harvard BusinessReview articles describing Shell’s work during thisperiod were published in 1985.

Intuitive styleThe approach taken by Shell and SRI mirroredKhan’s philosophy that scenarios were not forecastsor predictions about the future, in fact quite the

opposite, they were built from the belief that thefuture was uncertain and unknowable. As PeterSchwartz (1991) emphasises in his book, ‘The endresult is not an accurate picture of tomorrow, butbetter decisions about the future’. The idea was toconstruct credible pictures of a point in the futurethat could be used to test the robustness of longer-term strategies. The concept was predicated on theexperience these thinkers had of the poor accuracyof forecasts. They argued that forecasts wereextensions of past experience and trends which wereonly reliable in relatively stable environments andthat these were increasingly irrelevant in thebusiness world. Also, forecasting had no mechanismfor searching for discontinuities or major changes,which were of significant interest to strategists.

Shell and SRI developed Khan’s original ideaand espoused a specific approach to buildingscenarios, one that favoured storytelling, creativethinking, imagination, informal methodology andthe use of qualitative, subjective information. This‘school’ of scenario planning has been described as‘intuitive’ (as compared with ‘formal’) (van Nottenet al., 2003). Practitioners and proponents of thisschool acknowledge that at least part of theirscenario process is ‘art’, as can be witnessed in thetitles of their books and papers: The Art of the Long View (Schwartz, 1991), The Art of StrategicConversation (van der Heijden, 1996) and ‘Thegentle art of reperceiving’ (Wack, 1985).

Peter Schwartz defined scenarios as:‘alternative, plausible stories of how the world maydevelop’. He emphasised that the outcome was notan accurate forecast of future events, but a deepunderstanding of the forces that might push thefuture along different paths. As an example hecited Shell’s Group Scenarios of 1983, called:Incrementalism and the Greening of Russia. TheGreening of Russia scenario told about a virtuallyunknown man coming to power followed by amassive economic and political restructuring inRussia. It was not that this man, as an individual,would cause the changes. Rather, that his arrival inpower would be a symptom of a set of underlyingcauses and circumstances.

The Greening of Russia story also provides agood example of why Shell revise and renew theirscenarios every two to three years. Shell’s practiceis to share current scenarios with external bodiesand when the Greening of Russia was presented toSoviet experts in government agencies, it wasalmost universally rejected as implausible. Theproblem that the Soviet experts had with Shell’sstory was one that is common to managers in



187SCENARIO PLANNING AS A STRATEGY TECHNIQUE

organisations and people everywhere, which is that

views about the world are formed from the present,from the reality of today. Managers make sense of the world by looking at it through eyes whichreflect their own mental maps. The world looksdifferent according to the knowledge andexperience that they have, according to thethoughts that influence them and the way otherpeople around them think. It is on the basis of this‘selective’ reality (i.e. limited information) thatstrategists derive strategies, marketers make plansand managers allocate resources. Schwartz andShell proposed that building scenarios enabledmanagement to challenge the implicit assumptionsthat were held commonly in the organisationalmindset and to broaden their views. By buildingalternative scenarios – different pictures of thefuture – and challenging strategies for robustness inthese different possibilities, managers would have asuperior context for developing long-termstrategies and for developing shorter-term con-tingency plans.

Formal styleWhilst Khan’s work evolved into the intuitiveapproach adopted by Shell and SRI, another styleof scenario building was emerging. Two of Khan’scolleagues from Rand Corporation developed tools,expert judgement and cross-impact analysis, for usein ‘formal’ scenario building when they moved tothe University of Southern California. Thisapproach to scenario planning emphasised the useof computers, models and processes grounded inanalytical rigour. In the 1980s this methodologywas adapted by Battelle, the US-based consulting

group. A new process was developed by Battelleplus a software product (now called InteractiveFuture Simulations) to support it. Analysis andcalculation form the basis of this style of scenariomethodology which was very different from themore informal, creative, imaginative schoolpractised by Shell and SRI.

Meanwhile, during the 1970s, the FuturesGroup (a US strategy and policy research firm)developed another approach to scenario planning,based on trend-impact analysis. This evolvedfurther when adapted by consultants Deloitte &Touche, by adding aspects of the Shell/SRI process.

One of the reasons why scenarios are notadopted more widely is this divergent set of methodologies and the different emphases onquantitative or qualitative input. It is difficult formanagers to sift through the different approachesand know, with confidence, which one to adopt forwhich business issue. Also, while the division into‘intuitive’ and ‘formal’ styles helps potential usersunderstand different methodologies, it is alsomisleading. Shell, for example, while naturallyaligned with the intuitive school, would argue thatits stories are credibleand built on formal analysis,trend data and quantitative information as well assubjective ideas, feelings and imagination. Theexample presented in Ringland’s (1998) book todescribe the Battelle process shows that managerialjudgement is a fundamental part of the input tocomputed simulations.

Therefore, describing what scenario planning isand choosing a scenario process is notstraightforward. To quote Schoemaker (1993):‘The term scenario has many meanings, rangingfrom movie scripts and loose projections tostatistical combinations of uncertainties’.

Scenario thinking andscenario planning

In a review of 70 scenario studies, van Notten etal. (2003) proposed a classification of scenariosalong several continuums. One of these was the‘formal’ and ‘intuitive’ classification discussedabove. Another addressed the purpose behindstarting on a scenario planning exercise. Theirresearch revealed a range of reasons whyorganisations embraced scenario planning,stretching from explorationto decision support.

At the exploration end of the continuum, thekey objective for organisations in engaging in ascenario process is the potential to learn. Living

By building alternative

scenarios – different pictures

of the future – and challenging

strategies for robustness in

these different possibilities,managers would have a

superior context for developing

long-term strategies and for

developing shorter-term

contingency plans




through the process of: formulating the businessquestion or issue; data collection and gathering;assimilating the information and crafting narrativesor generating modelled outcomes, is essentially alearning process. Those involved broaden anddeepen their understanding of the forces drivingthe business, of the trends which might influencethe future of the organisation, or gain a betterknowledge of some of the uncertainties that couldimpact the business. When used for this purpose,the process itself becomes very important, at leastas important as the scenario outcomes and theimplications for future strategies.

Adding probabilities to support decision-makingThe opposite view is that building scenarios is notthe primary purpose, rather it is applying theoutcomes to strategy making that is important, i.e.using the scenarios to support strategic decisions.When this is the purpose of engaging with ascenario exercise, it is common to find probabilitiesattached to the various scenario outcomes. Forexample, four scenarios were developed by Battellein 1988 for a US IT company which had successfulbusinesses in Europe (Millett, 1992). The CEO of the IT company was interested in how theconvergence of the European Community toward asingle market after 1992 would affect the Europeanbusinesses. He was clear that the objective was todevelop different possible future marketenvironments within which he and his team couldformulate strategic directions and contingencystrategies. Of the four scenarios generated, one wasdescribed as the ‘most likely’ and was called ‘EC1992 Works’. This painted a relatively optimisticstory of the EC attaining many of its marketcohesion goals by the end of 1992. In this scenario,the level of IT market growth was estimated asmedium to high. A second scenario was titled ‘EC1992 Disappoints’ and painted a picture of a slowerevolution toward a single market. In this scenario,moderate IT growth could be anticipated. ‘The ECFails’ was the pessimistic story where no realprogress was made and consequently IT growthwould be poor. Finally, scenario four was called‘The US of Europe’ and set the scene for betterthan expected attainment of all the goals of theCommunity and where IT market growth would bevery high.

As a result of this exercise, the companyimplemented various strategic moves including:expanding its presence in Europe, especially itsmarketing and service networks with the aim of maintaining close customer contact; committing to

an office in Brussels; and revising and extendingthe scenario thinking to 1995.

Reasons to actively avoid adding probabilitiesPurists from the ‘scenarios as learning’ school arguestrongly against adding probabilities to scenarios.The underpinning philosophy they adhere to is toallow the mind to open and ‘think theunthinkable’, i.e. think outside of the existingorganisational paradigm. This is why Shell makes adistinction between Scenario Planning andScenario Thinking: ‘Scenarios ... are stories thatare concerned more with strategic thinking thanwith strategic planning, and more specifically withthe quality of the thinking. As we enter thesealternative stories, we are guided to practise aflexible approach to the future and to alter ourmental maps. Scenarios attempt to look beyondour more limited mind-sets, recognising thatpossibilities are influenced by a wide range of people and that many views of the world aredifferent from our own’ (Davis, 2000).

Proponents of this use of scenarios argue thatstrategies should be tested for their robustness in allthe alternative futures that scenario thinkinggenerates. It is not about choosing which one ismore probable. Advocates of the learning styleargue that adding probabilities turns the scenariosinto forecasts. Therefore, when used for learningand for challenging the prevailing organisationalmindset, the advice is to avoid probabilities orcalculations of ‘likeliness’, which are typical of thedecision support notion. To prevent any chance of this happening, Shell only present two scenarios ateach strategy review. Experience has shown that if three scenarios are produced, there is a tendency forthe optimistic, pessimistic and compromise ‘mostlikely’ stories to be the result. The compromisestory is then used as the basis for further strategicplanning and the original purpose of stretchingminds and challenging assumptions is lost asmanagers take the ‘easy’ middle-of-the-road optionwhich is probably very close to the ideas they held– the organisational paradigm – before starting onthe scenario exercise. As Porter (1985) pointed out:‘Every plan is based on an industry scenario in oneform or another, though the process is frequently animplicit one’. He was an advocate for practisingscenario techniques in strategy formulation. Herecognised that the assumptions managers used asbackground to generating their strategies wererarely made explicit or challenged. Byacknowledging the uncertainties, he foresaw muchimproved strategy outcomes.




Shell’s aim in restricting their global strategiesto two is to tell alternative stories which will strikea balance between provoking thinking while notbeing rejected as fanciful escapes from reality (see

below for the importance of attaining thisbalance). The two scenarios they produce are bothplausible and credible stories about the future.Managers are asked to construct strategies that willbe robust in either world.

Level of analysis

Scenarios have been developed for countries, forregions, for issues (the future of crime, the future of women) and for institutions. Among thoseexamples developed for organisations, there can bemany levels of analysis, from global, external,environmental to focused, internal issues. Thelength of the time period considered tends tocorrelate with the scale and scope of the exercise.For example, compare the World Business Councilfor Sustainable Development scenarios 2000–2050(Davis, 2000) with Porter’s (1985) theoreticalexample using scenario analysis to develop acompetitive strategy for the US chain saw industryin 1973.

Global, complex, long-term scenariosThe World Business Council’s scenarios have a fifty-year time horizon and were produced in order to:‘explore sustainability at this juncture in humanhistory and to raise fundamental questions of howhumanity defines itself and how each one of uscomes to terms with the challenges of the 21stcentury’. From this objective, three scenarios werebuilt as a result of extensive interviews with opinionleaders and companies from around the world. Eachof the three stories described possible worlds in 2050and were called, FROG!, GEOpolity and Jazz. Theyare summarised in Table 1.

From these different global, long-term picturesof the world, the researchers concluded differentchallenges for businesses and prescribed verydifferent strategies. The predominant theme of FROG! is that people, institutions, governments,do not engage with the sustainable environmentdebate. There is a trust in the power of newtechnology to deliver solutions and a propensity toleave the problems for others to solve. As a result,the environment gradually deteriorates. In thisFROG! world, a strategy of preparedness isprescribed, so that if/when there is a ‘shock’,companies are ready to deal with it. Takingprecautions is another part of the strategic adviceand being vigilant, attentive and alert for whencompanies might have to take action. Whereas in

Ja zz , a world in wh ic h ec onom ic growth hasembodied environmental values, businesses needto get involved early in working with stakeholderson environmental matters. And in GEOpolity, aworld where the environment gains significantimportance, business strategies need to focus oncontributing to and, where possible, shaping thedebate about new institutions. In this world,businesses will do best if they are in a position of influence.

Focused, narrow scenariosA completely different example is to be found inPorter ’s classic textbook Competitive

Adva nt age(1985). He provided a theoreticalexample of how to use scenario techniques toformulate a competitive strategy for the chain sawindustry in the USA in 1973. Whilst he advocatedbroad thinking about the external environment,he focused on his industry structure model as aframework within which to construct differentcompetitive scenarios. He tested each of the ‘fiveforces’ specific to the US chain saw industry atthat time for unknown elements and found four of the forces harboured degrees of uncertainty. (See

Experience has shown that

if three scenarios are

produced, there is a

tendency for the optimistic,

pessimistic and compromise

‘most likely’ stories to be the

result. The compromise story

is then used as the basis for

further strategic planning and

the original purpose of

stretching minds and

challenging assumptions is

lost as managers take the

‘easy’ middle-of-the-road

option




Figure 1 for a summary of the ‘uncertain’ elementsPorter identified.) From the long list thisgenerated, uncertainties were categorised intodependent and independent uncertainties, anddependent ones (e.g. future levels of TVadvertising, which was dependent upon the futuredemand of casual users) were discarded for thepurpose of constructing scenarios. As with allscenario methodology, the fundamental forceswhich are likely to influence and change thestructure of the industry are the key building

blocks for the scenarios.Four important, independent uncertainties wereidentified from this analysis (casual user demand –would it be low, medium or high; how quickly thisdemand would grow; which distribution channelswould be favoured – dealers or non-dealers; andthe mix of sales of private label compared withbranded chain saws) which when tested forconsistency and interaction with each other,generated ten plausible scenario outcomes. Fromthese, highly specific competitor moves could be

played out. For example, one of the scenarioshighlighted the possibility that the casual usermarket for chain saws would not becomesignificant. In this outcome, the question of howkey competitors would react was explored. Wouldthey invest in this market anyway? What strategyshould near competitors plan to take if they did?Another scenario played out events that led toprivate label dominance in the casual user market.In this situation, questions were raised about howbranded suppliers might react – would they retreat

to traditional segments? In another scenario, thecasual user market is a fad and competitiveadvantage can be won if branded suppliers whohave served the professional market maintain theirstrength in this traditional segment and are nottempted into the casual user segment. (For adetailed account of this scenario analysis, seePorter, 1985, Chapter 13.)

The level at which scenarios are constructed,the degree of uncertainty and the scope they setout to embrace are further criteria for dividing

TABLE 1: World Business Council scenarios for 2050

FROG!

GEOpolity

Jazz

Many people live perfectly fine lives in this world, but at the global level,environmental health is deteriorating. Although population growth has beenslowing, the world’s population exceeds 11 billion people – and this growthtogether with the growth in economies around the world results in theenvironmental burden increasing dramatically over what it was in the 1990s.Natural resources are stretched – especially water.

There is a rise in health problems and concern about the potentialfor plagues. Passing notice is given to the disappearance of particularspecies. The slow deterioration of the environment happens over time,against a background of economic growth, so that whatever signals mighthave raised the level of public concern tend to be misread. In most cases,these signals are not even observed.

This is a world of highly coordinated environmental and social initiatives inwhich the resources and persuasive powers of a number of groups areharnessed for specific actions on a global scale. In response to perceivedcrises, consensus emerges surprisingly rapidly through highly interactiveinformal means – especially internet conferences, grassroots interactive

cable conferences, and TV-ad broadsides from powerful NGOs. It is a worldof big projects and of innovative institution-building.

In the world of Jazz, diverse players join in ad hoc alliances to solve socialand environmental problems in the most pragmatic way possible. The keynote of this scenario is dynamic reciprocity – a give and take that is keenlyattuned to the opportunities of the moment and, at the same time, alert tothe ways of incorporating long-term values into strategies for commercialsuccess. This is a world of social and technological innovations,experimentation, and a powerful ever-changing global market.




scenarios into finer taxonomies. Are they global,broad scope and long term as in the WorldBusiness Council’s scenarios, or are they focused,narrow and short term, more akin to the examplePorter provides? Narrow or focused does not mean

they exclude uncertainty and does not necessarilyimply a reduced number of scenarios as a result – asPorter’s worked example demonstrates with tenplausible scenarios generated.

Scenarios are adaptable and flexible in useScenarios at different levels of analysis are oftencomplementary. A first exploratory, broad exercisewhich looks globally can be supplemented withdecision support scenarios focused on investigating aspecific issue, industry, business or topic. Porter

extols the virtues of this approach: ‘In someindustries scenarios are best constructed by startinginside the industry and looking outward foradditional sources of uncertainty. In otherindustries, it is more appropriate to begin with

macroscenarios and then narrow the focus to theindustry. Macroscenarios can provide importantinsights into possible industry changes. They canexpose possible shifts in macroeconomic, political,or social variables that are not foreseen in a moreindustry-centred view of the external environment.’By macroscenario, Porter is referring to changes thatmight occur outside of his industry structure forces,i.e. those that are covered by the PEST model.

Similarly, the World Business Council globalscenarios are designed to stimulate broad

FIGURE 1: Uncertain elements in the US chain saw industry (adapted from Porter, 1985, p. 454).

Suppliers

This force harboured few

uncertainties.

Entry barriers

Uncertainties include:

• How high any future scale

economies might be, in both

manufacturing and marketing.

• How easy/difficult it might be to

gain access to distribution

channels.

• Will safety legislation change or

be introduced?

Rivalry

• What will existing competitors do

in response to new entrants?

• Will incumbent manufacturers

exit?• How fast will the casual market

segment grow, peak and reach

maturity?

Substitutes

• The extent to which electric

powered saws will replace petrol-

driven chain saws.

Buyer power

• What level of fixed costs?

• The future level of casual user

demand is unknown and timing

of it.• Which segments will develop

relative to others and at which

speed?

• Will private label take-off?

• Price sensitivity of buyers is

unknown.

• Which channel to market will be

favoured?




discussion on the challenges of sustainabledevelopment for business. The recommended nextstep is for businesses to use these as a platform formore focused industry scenarios which incorporatelocal business issues. In their turn, the focusedscenarios could stimulate the review of existingstrategies and creation of new ones.

Scenario techniques are very flexible. They canbe applied to almost any business issue thatinvolves degrees of uncertainty. They are bestknown for their corporate, high-level, global andlong-term use, but the technique can be used toanswer very specific issues of competitive strategy(illustrated above), marketing problems orproblems of organisational capability. Marketresearch for new product development, forexample, is cited by Millett (2003) as an areawhere the use of scenario thinking led to asuccessful new product launch. He described how,in the mid-1990s, Battelle worked with ahousehold products company to think aboutcleaning products for the future by exploringconsumer trends such as an ageing population,more households with two wage-earners, growingconcerns about health and welfare. From thesetrends emerged future consumer values of convenience, speed and thoroughness that led, atthe turn of the millennium, to the successfullaunch of a new hygienic, disposable wipe forcleaning surfaces effectively and quickly.

A focused scenario technique was similarly usedto investigate the next ten years of the UK autogas(liquefied natural gas (LNG) as anenvironmentally friendly replacement for petrol)market in the light of the development of cleanerpetrol, inner-city pollution problems and theprospect of hydrogen-fuelled automobile engines.The scenario outcomes were used to test howeffectively the assets, capabilities and culture of thecompany doing the research could deliver autogasin the different worlds the scenarios described. Thesame approach was used to highlight significantgaps in the organisational capabilities of a UKinsurance company operating in the commercialmarket segment. Risks for the near-term future if contingencies were not resourced with some degreeof urgency were clear in both instances. Forexample, in the autogas exercise, the flexibility of the logistics capability serving the fuels networkcould not cope with consumer expectations in twoof the three scenarios developed. Given the lengthof time required to build this capability, it was seenas urgent to make some plans for strategicinvestments in distribution. This was especially

important since it was clear that the closestcompetitor was in a stronger position with a moreflexible system already in place.

Why scenario techniquesare not used

CostThe very flexibility and applicability of scenariotechniques appear to mitigate against their use.There are different methodologies to adopt, whichto the infrequent user appear confusing. Matchingthe methodology and the level of analysis to thebusiness issue and the purpose underpinning theexercise is not straightforward. Added to this,there is the commonly held view that a scenarioprocess will be expensive in terms of employinglarge amounts of resources in the organisation. Itoften requires multiple inputs and quality isdefinitely improved if a team is involved. Whileproponents argue that this broad engagement isbeneficial in that more people ‘own’ the outcomeand teams are built in the process, the costargument is rational and hard to overcome. Millett(2003) suggests that a scenario team might consistof 5–10 people who meet regularly and broadenparticipation by running workshops. They conductinterviews and have to do research. This couldtake 50% or 100% of a few managers’ time over aperiod of anything up to six months. Oftenfacilitators or consultants are used. Millett suggeststhat costs could easily reach US$600 000 for a six-month exercise, a real reason why SMEs (smalland medium-sized enterprises) would choose not toengage in the scenario planning process and whymajor corporations only use the technique onceevery three to five years at best.

While there is a significant investment in thebroad, large-scale and long-term scenario exercisessimilar to that completed by the World BusinessCouncil, scenarios focused on making shorter-termbusiness decisions more akin to that suggested byPorter are much less resource-intensive. The studyfor the UK autogas market, for example, wascompleted by one person, part-time over a periodof three months. Ten one-to-one interviews andtwo workshops were conducted over the period,complemented by desk research. From this worksignificant insights into the future strategy of theorganisation were made. Recommendationsincluded actions that could be implementedimmediately plus ones that should be made overthe next five years.




Whilst it is clearly important to consider thepotential investment and commit to the resourcesrequired before engaging in a scenario exercise, thecosts need not always be high. One size does not fitall, scenario processes are flexible and can be cut tofit the size of the business issue being addressed.

Confidence and uncertainty

The underpinning philosophy of scenario thinking,that the future is uncertain and cannot bepredicted, is often difficult for managers to accept.While it is a common experience that plans gounrealised or need to be changed because of changing external events, confidence in forecastingpersists often with the belief that with better modelsand tools it will even improve over time. Because itis difficult for managers to accept that uncertaintyand risk cannot be planned out of the future, theydisplay a preference (a greater acceptance andunderstanding) for scenario approaches that includeadding probabilities. From his experience, Millett(2003) argued that the stubborn avoidance of forecasting and prediction by ‘purist’ scenariopractitioners in their prescribed methodologies wasone reason why the technique lacked popularity.The research literature provides explanations of thismanagerial bias of overconfidence in their ability topredict and control.

Evolutionary psychology theory provides themost fundamental explanation (Cosmides andTooby, 1997). It asserts that accepting uncertainty,recognising it as inevitable and living with it, goesagainst the grain of human nature. It is humaninstinct to downplay risk. Confidence in leaders isa virtue that is appealing and naturally attractsfollowers. Even before business existed, in pre-industrial and tribal societies, it was beneficial forindividuals to display confidence. Gradually, overtime, this trait has been selected-for in ourpopulation. Evolutionary psychologists explainthat as a consequence, the human mind hasevolved to be overly confident, which in thehighly risky days of our ancient past helped ensureour survival.

Today, in the business world, this characteristicstill confers advantage on managers who are oftenselected as leaders for their confident attitude. Thedownside, however, is that there is a tendency tobelieve and act as if no problem is outsidemanagement’s control. Experience and complexitytheory informs us that the world is not controllableand that random events occur frequently, but it ishard-wired into human nature to ignore theevidence that supports this. Organisational life and

strategy itself tend to reinforce these humaninstincts that everything can be planned andorganised. Reality is hard to see and if leftunchallenged, our minds will instinctively acceptthe optimistic view that everything can becontrolled (Nicholson, 2000).

Evolutionary psychology also provides anexplanation for managers’ natural preference foranalytical frameworks such as PEST and SWOT(Strengths, Weaknesses, Opportunities andThreats). Survival chances in the ancient pastwere enhanced if we made swift judgements thatcould be acted upon quickly. The learningmechanism we evolved to enable us to do this wascategorisation or stereotyping. We are therefore,naturally inclined to sort phenomena that arealike, but different, into labelled boxes or onto listsunder headings. It is simple, quick and helps makedecisions. These are all essential characteristics forsurvival, but will not give any depth of understanding, thus potentially trapping theindividual into a lifetime of reactive strategies.

Schoemaker (1993) investigated the psycho-logical basis of scenario planning. He took as oneof his starting points managerial overconfidence:‘Numerous behavioural studies have demonstratedhow poorly calibrated people’s subjectiveprobability judgements tend to be. The reasons forsuch overconfidence can be several, ranging fromgeneral optimism to corporate or individual blindspots.’ From this point he conducted a range of experiments to test how, if people were asked toconsider different scenarios, their confidence abouttheir own decisions for the future were affected. Hefound that when people engaged in scenariothinking their confidence in their own judgementsabout the future decreased. He also found thatpeople were more open to consider the possibilityof events that they had not experienced, could notimagine or could not recall from memory. Thismeant they became more open to other ideas andviews than those they held personally. However, if the scenarios they were presented with wereextreme, because they could not be believed,people’s beliefs remained unchanged with atendency to be more anchored to their own ideas.

Therefore, the natural instinct of human beingsto be overconfident makes adopting theexploration style of scenario thinking difficult toaccept. But, taking this approach does appear tobring the benefits of opening minds to other ideasas well as increasing the doubt management mighthave in the one future they have anticipated in thecorporate plan.




Wack (1985) also observed managerialresistance to ambiguity and uncertainty during hisworking experience with managers practisingscenario thinking. He noted that this resistanceincreased with management seniority. Heexplained that this was due to senior managers’training and the expectations put on them by theorganisation that they should exercise judgementand provide definitive answers, not appear ‘weak’with answers of, it might be like this, then again, itmight be like that. However, he did consider thisto be, at least in part, an outcome of history, seniormanagers having spent the majority of their careersto that time (he talked about the 1950s and 1960s)within one company and in highly predictable andstable economic environments. He foresaw thatthe world was changing and that this wouldinfluence the experience of future managers, whohe anticipated as a result, would become moreopen to the challenges of complex, turbulentenvironments.

While most thinkers and managers would agreethat the corporate world has become more chaotic,there has also been a trend toward celebratingstrong, individual corporate leaders who appearalmost single-handedly accountable for corporatedirection and strategy, communicated toshareholders and investors with conviction andcertainty. These leaders are required to know whatvalue the organisation will deliver to shareholdersand investors next quarter, next year and furtherinto the future with clarity. Scenario techniquesmight not meet the needs of these leadershippressures or fit comfortably with this leadershipstyle, since the scenario building process ispowerful because it draws on numerous players andviewpoints and, ideally, it is a consensus buildingand legitimising device that should not beentrusted entirely to the corporate elite.

Organisational culture and diversityIn a study by Graetz (2002), different groups of managers from the same telecommunicationscompany were asked to build scenarios around acommon issue, following a prescribed process. Priorto the exercise, each individual completed apsychometric assessment designed to analysepreferred style and behaviour in terms of right- andleft-brain thinking (rational versus imaginative)and for team working. Comparing the outcomesshowed how different styles dominating each groupresulted in different emphases in the scenariosproduced. The group that performed very poorly atdelivering creative, plausible and consistent

scenarios (the study’s criteria for successful scenariooutcomes) was one that was dominated by rationalthinkers and individuals with no strongpredisposition for team work. Where rational,analytic and systematic approaches to problem-solving were not dominant in a group, thescenarios were creative and to some extent,plausible, but lacked consistency.

While this is not surprising, building the teamto participate in a scenario exercise appears to bemore crucial to the outcome than is the case usingother planning tools. It is a methodology thatrequires multiple inputs in order to generatethought-stimulating outcomes. By its very nature,it will deliver better results if the people gatheringand interpreting information for model building orcrafting into stories are not limited by a narrowview or single way of thinking. Therefore,organisations that try hard to maintain and respectdiversity of views among their managers will findusing scenario techniques easier as well as beingmore likely to deliver quality outcomes. Similarly,employing the technique in these organisationswill be particularly useful as a means of engagingthe multiple perspectives that exist and embracingthem in a framework for thinking about strategy.

A second finding of the same research,however, indicated how difficult diversity of thinking was to achieve. Despite a critical mass of creative thinkers, the dominant culture of thistelecommunications company was analytic,rational and systematic. So that when put underpressure, groups that were naturally creative andimaginative changed radically to match thedominant cultural style. The resultant scenarioslacked insight, impact and imagination. Context,culture and capability are, therefore, veryimportant in determining the outcome of ascenario exercise. Existing organisational culture isa particularly powerful influence.

Organisations that try hard to

maintain and respect diversity

of views among their

managers will find using

scenario techniques easier as

well as being more likely to

deliver quality outcomes




Leaders need to work with balanced teams if scenario outcomes are to embrace bothquantitative and qualitative information to delivervaluable insights and open managers’ minds toother possibilities. If consultants are introducedinto the process, they need to be sympathetic tothe needs and the culture of the organisation intailoring their advice and style. Regardless of whether consultants or internal managers areleading the exercise, the choice about how toproceed might not be straightforward, since apredominately rational, analytical culture wouldshow greater ownership of a formal scenarioprocess. This, however, might not deliveralternatives with significant impact to movemanagement from their current view of reality, andcould ‘avoid’ aspects of reality that are too difficultto measure or incorporate into a very quantitativeapproach. In other words, what might be ‘good’ forthe organisation might be the most difficultprocess to put in place and gain acceptance withincumbent managers.

Conclusion

Strategy is largely formulated for the future and isconcerned with the world outside the organisationat least as much as with what is going on within itsboundaries. Scenario techniques are one of the fewtools strategists have to help them formulate theirideas about both. Environments and futures are

increasingly turbulent, uncertain and complex.More than any other strategy tool, scenariosengage with these characteristics rather thanignore them. There is, however, a significantchallenge for the leader who chooses to implementa scenario process in harnessing maximum return.Many things mitigate against success, includingfundamental human psychology. But the benefitscould be significant. No one summarises this betterthan Schoemaker (1993):

A concerted, collective scenario building effort

will give the firm’s managers a head start, aswell as a conceptual framework within which toscan, encode, update and understand the futureas it unfolds. In our age of information

overload, the ability to distinguish signal fromnoise is a critical skill. But, incisive patternrecognition can only occur if the right mentalmaps exist in a manager’s mind. Scenarios candevelop, align and focus such maps.

In a world where competitive advantage is hard togain and sustain, any process that increases thechances of anticipating and winning this strategicprize must be worth serious consideration.

References

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