Web only article: Scenario-based decision making

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posted 1 Jul 2000 in Volume 3 Issue 10

Web only article: Scenario-based decision making

Scenario planning is a creative technique for decision making that should be in every manager's toolkit. Terry van der Werff offers an introduction to the discipline, and explains how your business could benefit from thinking creatively about its future. To read the rest of this article, please visit the current issue on the Knowledge Management website.

In turbulent times, every corporate leader faces the question: ‘How do I confidently steer our company through uncharted waters without the fear of shipwreck along the way?’ or ‘How can I decide when the information is so sparse and our business is changing so rapidly?’

For questions such as these, many managers turn to scenario planning. Developed at the Rand Corporation in Santa Monica, California, for the military after World War II, it was adapted by Herman Kahn in the 1960s for business. Pierre Wack and Ted Newland brought it to prominence with their work at Royal Dutch Shell in the 1970s. Their examination of the impact on oil prices of a number of potential scenarios allowed Shell to respond rapidly and sure footedly to the 1973 oil crisis. Peter Schwartz's delightful 1991 book The Art of the Long View (Doubleday Currency, New York) did much to popularise the technique.

Scenario planning answers important ‘What if...?’ questions that involve large uncertainties in the external influences on the organisation. Unlike strategic planning which postulates a single future, scenario planning looks at several alternative versions of the future, any one of which may or may not come about.

Scenario planning steps.

Scenario development is as much art as science. While easy to describe, it is a bit messier to execute. The process I use is similar to that described in Peter Schwartz's book or in Paul Schoemaker's article “Scenario Planning: A Tool for Strategic Thinking" (Sloan Management Review, pp.25-40, Winter 1995):

Specify the major issue or decision you are facing

Isolate the key drivers (external forces) affecting your company

Select three drivers that are both important and the most uncertain

Write three scenarios (short stories) of the future, each highlighting a different key driver

Give each scenario a pithy, memorable name

Determine the implications of each scenario for the issue being considered

Consider possible strategies to respond to each implication

Select indicators which suggest that a particular scenario is unfolding

Act in a timely and appropriate manner as a particular future unfolds

So far, so good. The magic question, of course, is: ‘Do real companies and real scenario teams, in fact, use this process for planning purposes?’ My experience is that for the vast majority the answer is a resounding ‘No’ for three simple and compelling reasons:

Most CEOs are uncomfortable in making a somewhat fuzzy process their company's primary planning tool
80 per cent or more of the creativity comes during the first few hours that scenario teams brainstorm their story elements, implications, and responses
They are facing a critical issue and implicitly look to scenarios for help in making a decision now

My own light bulb lit up when participants in my workshops on scenario planning reported as much value in a few hours of sketching scenarios to make decisions as my consulting clients who invested weeks or months developing scenarios, supposedly for planning, but in reality for decisions.

So, what to do? I now advocate using scenarios as an aid to decision making , not as a planning method, and lead groups through the above steps with that in mind. For CEO organisations, during a half day seminar, I expose them to several trends that will probably affect them in the future, and to scenario sketching (it is inappropriate to call this scenario ‘development’ or ‘planning’ due to the limited time available) so they can use the trends to their benefit. For day-long management or board retreats I do the same. The major difference is that the product in the latter is a bit more ‘tangible’ because there is more time, but mostly because everyone is from a single organisation or company.

In CEO seminars I begin with a ten minute overview of the nine steps in sketching scenarios, followed by consideration of each step in turn, with examples from my own practice. The total time devoted to scenarios may only be 60-90 minutes, so the group stays together and each CEO works individually on each step, though the discussion is surprisingly rich due to the prior level of trust built up amongst the CEO club members.

In retreats I follow the same format with three exceptions:

After the three drivers are selected, participants chose a scenario team to be on. The remaining steps are done within each scenario team who are at separate tables in the same room.
As each step is completed, each scenario team reports its thoughts and results to the entire group, which with little prodding roundly, but good naturedly, critique the ideas presented.
After all steps have been completed, we review the strategies proposed by each scenario team (for different scenarios, remember) and as an entire group reach consensus on the one or two best strategies apply to the issue being faced. he CEO usually issues ‘marching orders’ for further work on the chosen strategy(ies).

Let me illustrate this through two case studies.

Case 1 (1995). This was a specialty retailer with about 40 stores spread across the United States. They were exceptionally well managed and had generated double digit annual growth rates in both revenues and profits for several decades. Annual revenues were about $500m. The CEO wanted to expose his management team to a new planning method for one time that was different from their well honed, rolling five-year plan that served them so well. In essence, he wanted them to take a step off the treadmill for a year.

The question developed (with some difficulty) at the two-day kickoff retreat was: ‘How do we position ourselves to be a $5 billion company in our industry by 2013?’

We worked together for six months - the CEO, his senior team of a dozen people, and the board - to develop three scenarios. One scenario was built around technology, another around life style, and the last around competition. The CEO stated there were creative strategies that came out of each of the scenario teams that probably would not have arisen through their traditional planning. But one strategy stood out.

The web was just starting to rear its head in 1995, and a few retailers were beginning to put their catalogues online. This didn't seem to fit the culture or business model of this company, yet it was clear that something was needed. The technology scenario painted a rich, pervasive technology infrastructure that would facilitate all kinds of interaction worldwide, both business and personal.

The stroke of genius was the CEO's. He finally asked: “What would our Internet initiative look like if it were a store?" The room fell silent, for everyone around the table knew the company was good at opening stores in new places. Their mindset instantly shifted from an unfamiliar technology to simply another new location. The CEO asked for and got a business plan in hardly more than a week. He approved the initiative and appointed the first employee of the new Internet store - the store manager. The Internet store was not put into the hands of the IT department, but into those of a seasoned store manager who was given full P&L responsibility.

Four years later their Internet store stands sixth or seventh in sales revenue amongst its now 50+ stores across the country and has been profitable since its inception.

Did this company develop the three scenarios further and set up a tracking and review system to decide when and what actions to take? No, they came out of the half-year scenario process with a particular strategy, a single decision to address an issue that wasn't even the focal point for the scenarios!

Case 2 (1999). This was a Credit Union League, the trade association for the roughly 200 credit unions in their state. Credit unions are facing enormous changes. The financial services industry is blurring the traditional lines that once separated companies and organisations into well-defined sectors. In the words of the League's CEO: "We are living in an era of hyperchange."

The question developed (with relatively quick consensus) at their annual board retreat was: ‘How do we position the League as the premier interstate and international leader in 2010?’

We worked together for one afternoon - the CEO, a few senior managers, and a small Board - to develop three scenarios. One scenario was built around technology, another around image, and the last around competition. (Technology and competition are hardy perennials as driving forces.) Several creative strategies came out of each scenario that the CEO and his team are now considering these for implementation. But, again, one strategy stood out.

Credit union leagues are organised for one state alone. The themes running through the implications and responses of the three scenario teams were to provide expanded services to credit unions within its own state and to take these beyond its borders. By the end of the afternoon the participants had shifted their mindsets from the posed question, which implied they wanted simply (!) to be the best, and shifted them towards being a credit union league that spanned several states with a single organization.

The major impact, subtle and unspoken, was to build support for a novel idea the CEO had already been thinking about, but which had not been voiced at the retreat. His senior team (as this is written) is fleshing out a strategy to expand the League to embrace credit unions in several states, in competition with existing leagues perhaps, but more likely through acquisition or consolidation. This is a bold initiative, flying in the face of tradition within the very conservative, stable credit union movement environment.

Decision making, not planning.

There you have it. Two quite different companies - one for profit, the other non-profit - and two radically different timeframes - six months versus one afternoon. Neither pursued scenario planning beyond the project. Yet each found a superb strategy through the scenario process and made the important decision to pursue it, even though neither was a direct answer to the question they posed.

The Internet store strategy clearly has been a smashing success. The regional credit union league initiative is still under development.

In the real world, most companies use scenarios as aids to decision making, not as an on-going planning methodology. The value lies not in the scenarios, but in the discipline of thinking creatively about the future. Recognizing this, you should help put this creative tool of sketching scenarios into the toolkit of every manager in your company. It will enrich their thinking and make them more nimble, better decision makers.

Terry van der Werff, D.Phil., CMC, is a business futurist and Certified Management Consultant who advises corporate leaders worldwide on strategies for their future. He can be contacted via:www.globalfuture.com