Traditional forecasting techniques often fail to predict significant changes
in the firm's external environment, especially when the change is rapid and
turbulent or when information is limited. Consequently, important opportunities
and serious threats may be overlooked and the very survival of the firm may be
at stake. Scenario planning is a tool specifically designed to deal with major,
uncertain shifts in the firm's environment.
Scenario planning has its roots in military strategy studies. Herman Kahn was an
early founder of scenario-based planning in his work related to the possible
scenarios associated with thermonuclear war ("thinking the unthinkable").
Scenario planning was transformed into a business tool in the late 1960's and
early 1970's, most notably by Pierre Wack who developed the scenario planning
system used by Royal Dutch/Shell. As a result of these efforts, Shell was
prepared to deal with the oil shock that occurred in late 1973 and greatly
improved its competitive position in the industry during the oil crisis and the
oil glut that followed.
Scenario planning is not about predicting the future. Rather, it attempts to
describe what is possible. The result of a scenario analysis is a group of
distinct futures, all of which are plausible. The challenge then is how to deal
with each of the possible scenarios.
Scenario planning often takes place in a workshop setting of high level
executives, technical experts, and industry leaders. The idea is to bring
together a wide range of perspectives in order to consider scenarios other than
the widely accepted forecasts. The scenario development process should include
interviews with managers who later will formulate and implement strategies based
on the scenario analysis - without their input the scenarios may leave out
important details and not lead to action if they do not address issues important
to those who will implement the strategy.
Some of the benefits of scenario planning include:
Managers are forced to break out of
their standard world view, exposing blind spots that might otherwise be
overlooked in the generally accepted forecast.
Decision-makers are better able to
recognize a scenario in its early stages, should it actually be the one that
Managers are better able to
understand the source of disagreements that often occur when they are
envisioning different scenarios without realizing it.
The Scenario Planning Process
The following outlines the sequence of actions that may constitute the
process of scenario planning.
Specify the scope of the planning and
its time frame.
For the present situation, develop a
clear understanding that will serve as the common departure point for each of
Identify predetermined elements that
are virtually certain to occur and that will be driving forces.
Identify the critical uncertainties
in the environmental variables. If the scope of the analysis is wide, these may
be in the macro-environment, for example, political, economic, social, and
technological factors (as in PEST).
Identify the more important drivers.
One technique for doing so is as follows. Assign each environmental variable two
numerical ratings: one rating for its range of variation and another for the
strength of its impact on the firm. Multiply these ratings together to arrive at
a number that specifies the significance of each environmental factor. For
example, consider the extreme case in which a variable had a very large range
such that it might be rated a 10 on a scale of 1 to 10 for variation, but in
which the variable had very little impact on the firm so that the strength of
impact rating would be a 1. Multiplying the two together would yield 10 out of a
possible 100, revealing that the variable is not highly critical. After
performing this calculation for all of the variables, identify the two having
the highest significance.
Consider a few possible values for
each variable, ranging between extremes while avoiding highly improbable values.
To analyse the interaction between
the variables, develop a matrix of scenarios using the two most important
variables and their possible values. Each cell in the matrix then represents a
single scenario. For easy reference in later discussion it is worthwhile to give
each scenario a descriptive name. If there are more than two critical factors, a
multidimensional matrix can be created to handle them but would be difficult to
visualize beyond 2 or 3 dimensions. Alternatively, factors can be taken in pairs
to generate several two-dimensional matrices.
One of these scenarios most likely will reflect the mainstream views of the
future. The other scenarios will shed light on what else is possible.
At this point there is not any detail
associated with these "first-generation" scenarios. They are simply high level
descriptions of a combination of important environmental variables. Specifics
can be generated by writing a story to develop each scenario starting from the
present. The story should be internally consistent for the selected scenario so
that it describes that particular future as realistically as possible. Experts
in specific fields may be called upon to develop each story, possibly with the
use of computer simulation models. Game theory may be used to gain an
understanding of how each actor pursuing its own self interest might respond in
the scenario. The goal of the stories is to transform the analysis from a simple
matrix of the obvious range of environmental factors into decision scenarios
useful for strategic planning.
Quantify the impact of each scenario
on the firm, and formulate appropriate strategies.
An additional step might be to assign a probability to each scenario.
Opinions differ on whether one should attempt to assign probabilities when there
may be little basis for determining them.
Business unit managers may not take scenarios seriously if they deviate too much
from their preconceived view of the world. Many will prefer to rely on forecasts
and their judgement, even if they realize that they may miss important changes
in the firm's environment. To overcome this reluctance to broaden their
thinking, it is useful to create "phantom" scenarios that show the adverse
results if the firm were to base its decisions on the mainstream view while the
reality turned out to be one of the other scenarios.