Excerpts from “Key Lessons for Adopting Scenario Planning in Diversified Companies”

Daniel G. Simpson,

Planning Review; Oxford; May/Jun 1992

BACKGROUND: WHAT IS SCENARIO PLANNING?

Scenario planning is the process of constructing alternate futures of a business' external environment. The goal is to learn to use these alternative futures to test the resiliency of today's action plan.

The best rationale for scenario planning is articulated by Catherine Bateson, currently a professor at George Mason University, in a new book on corporate responsibility, The Nissan Report: "Any organism acts not in response to external reality but in response to an internally constructed version of that reality after it has passed through a series of filters. Human beings filter through what we call attention and on the basis of what we call relevance." These filters are critically important to successful management since it is impossible to digest all the information available. The main question addressed by scenarios is whether a corporation's established filters are blocking important information that will be either valuable or harmful if withheld.

Scenario planning originated at Royal Dutch/Shell in London and is most often used by businesses that are extremely sensitive to external factors beyond their control--energy and public utility businesses, for example. For a variety of reasons, the consumer packaged goods industry tends not to be as highly sensitive to its external environment. Initially, I was not convinced that the scenario planning process would be productive in my industry.

I am now convinced. While consumer products companies are less sensitive to the external environment than those in some other industries, that differential is changing. The most powerful agent of transformation is information technology in the distribution channel; however, changes in advertising and media delivery are

also occurring. The regulatory environment is becoming an increasingly important factor as well. The more a business is affected by externally controlled variables, the more the value of scenario planning increases.

The technique of scenario planning is not widely understood. While somewhat descriptive, the word "scenario" elicits all kinds of vague and loosely defined concepts. The most common use of "scenarios" is in financial projections with uncertain outcomes. Long-range planning documents typically include a section

called "scenarios," which most often describe alternate outcomes of new product introductions. As a result, scenarios mean different things to different people.

Scenario planning is a very clearly defined technique: It is a disciplined planning methodology that generates a wider view of the external environment. Webster's dictionary provides another definition that enriches our understanding: "a plot outline or synopsis of a play or motion picture." Rather than being dry collections of alternatives or probability charts, scenarios are quite literally, stories. That distinction is key to understanding and successfully implementing scenario planning.

WHEN TO USE SCENARIO PLANNING: DEFINING THE BUSINESS ISSUES

Properly defining an issue, and setting the stage, is critically important to the success of scenario planning. Poor definition at the outset will almost always lead to failure later on, regardless of how well the process is executed in later stages. Three recommendations will help practitioners define the nature of good scenario

planning problems (see Exhibit 1).

1. FOCUS ON A SPECIFIC, ACTIONABLE ISSUE. One of the most difficult tasks in scenario planning is setting boundaries on the inquiry--defining the issues around which the plays will be written. If the boundaries are too narrow, the scenarios will tend to be only minor variations on a single theme. If the

boundaries are too broad, the scenarios lose their significance for the key players--the managers of the strategic business units.

Scenarios must evolve around an actionable issue of significance to the business unit. While learning is an important outcome of scenario planning, ultimately, the right result should be action. Learning is only effective to the degree that it produces action.

Peter Schwartz, President of the Global Business Network and author of a recently published book on scenario planning, The Art of the Long View poses two closely related questions to help define actionability: "What keeps the operating unit managers up at night? What really makes a difference?"

2. FOCUS ON AN APPROPRIATE, ACTIONABLE ISSUE. Actionability is necessary but insufficient. Like most planning tools, scenario planning has maximum value only in selected circumstances. An issue for which scenario planning is ideal will have five attributes:

* The external environment can evolve in fundamentally different ways--the outcome is not predetermined.

* The change is out of the control of the business unit.

* The change has the potential to be permanent and structural.

* The optimal actions of the business vary greatly, depending on how the environment develops.

* The decisions of the business unit are not easily reversed or undone after the environment becomes clearer.

3. DO NOT GENERATE SCENARIOS ON CONTROLLABLE VARIABLES.

Scenario planning should develop alternate views of uncontrollable variables in the external business environment--not simply lay out alternate outcomes of internal decisions. The resulting scenarios should describe the different environments that shape the playing field where internal decisions will be played out. Variations on the theme of "We do something. It works or it doesn't" are not scenarios. The most frequent example of this approach is a set of alternative outcomes for the launch of a new product. Although generating these alternative outcomes may be very important for financial planning, this is not scenario planning.

ORGANIZATIONAL BENEFITS OF SCENARIO PLANNING

The ultimate result of scenario planning is taking correct action on an issue critical to the success of the business. However, the business also reaps additional benefits that may extend much farther than the decision at hand (see Exhibit 2).

4. UNDERSTANDING AND CLARIFYING PERCEPTIONS AND ASSUMPTIONS OF KEY MANAGERS. Group discussion on possible variability in the external business environment often helps crystallize both individual and group thinking. It's naive to assume that the "facts" are consistently perceived the same way by all business managers. Individual assumptions have to be made explicit.

The value of this clarification process cannot be underestimated. As Peter Schwartz pointed out in a recent speech to the San Francisco Bay Area chapter of The Planning Forum: "We make decisions, not based on the real world, but on what each of us believes about the real world." These beliefs are not universal, and some of the most enlightening discussions in scenario building sessions take place when two managers disagree about some element of the future, the present--or even the past.

One useful technique for getting to the root of assumptions--a Japanese practice called "Five Times Why"--was taught to me by Charles Hampden-Turner, author of Charting the Corporate Mind. For every assumption, assertion, or belief that becomes the subject of disagreement, ask the people involved why they think their point of view is true. When they offer an answer, ask why that answer is true. By the time you've repeated the process five times, you should get to the real root assumption. Somewhere along the way you may find a statement that can be tested in some logical way.

5. IMPROVING THE SPEED OF DECISION MAKING. Competitive advantage is often a function of speed. Arie de Geus, retired Planning Coordinator for Royal Dutch/Shell, states it even more firmly in his 1988 Harvard Business Review article "Planning As Learning": "The ability to learn faster than your competitors may be the only sustainable competitive advantage."

Strategic speed depends in part on the ability to look for and recognize the lead indicators foreshadowing larger changes. Scenarios help to change the threshold of attention by creating a new sensitivity to relevant information--a widened field of perception--so that this expanded range of knowledge can more quickly

become part of the thinking process of an organization. A bit of information that might have been regarded as insignificant now becomes crucially important.

Kathy Eisenhardt's award-winning article, "Speed and Strategic Choice" in the California Management Review, reinforces the point that building and churning multiple, simultaneous alternatives helps speed decision making. The process of creating alternatives fosters assurance that the best approaches have been

considered, and that a fall-back position is always available. Scenarios don't spell out alternatives or options. Scenarios are mental rehearsals for surprising futures as well as opportunities for reaching a consensus on what the implications of the future may mean for operations. The linkages between scenarios, their possible

impact on the business, and the lead indicators that help focus information processing is critical.

Managers who learn to apply scenario planning techniques can make good decisions more quickly because they thoroughly understand the relationship between the business and its environment. They "master the clay," to borrow a phrase from Henry Mintzberg's classic "Crafting Strategy" article in the Harvard Business Review. This intuitive understanding of the interface between the business unit and the alternate possibilities in the external business environment allows managers who use scenarios to cope quickly and surely with sudden changes in their external environment. By "rehearsing the future" through scenario planning, a business manager is able to successfully adapt instead of just react.

6. MAINTAINING AN AGGRESSIVE, CAN-DO ATTITUDE WHILE SERVING UP UNFAVORABLE OUTLOOKS. One of the less obvious yet important benefits of constructing alternate scenarios is allowing multiple points of view to rise through management communication channels without being prejudged or automatically dismissed. Large organizations have multitudes of very smart and insightful people who care deeply about the business. Behind a number of business failures are individuals or groups who "saw it coming" in time to do something about it but who, for cultural reasons, were unable to clearly articulate their points of view to the key decision makers. Scenario planning allows these alternate and sometimes alarming views to surface without being stigmatized as the product of managers with a defeatist attitude.

THE DRAFT: CHOOSING THE PLAYERS

Selecting those who will help build the scenarios is critically important. A variety of management skills are needed on the team

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7. OPERATING MANAGEMENT MUST TAKE THE LEAD IN THE PROCESS. Arie de Geus forcefully articulated this in his Harvard Business Review article: "Planning as Learning": "The only relevant learning in a company is the learning done by those people who have the power to act." Scenario planning must be done by the line managers charged with making the decisions. Even issues that

require intensive functional involvement should have some operating management participation. Like most other planning efforts, one of the fastest paths to useless results is to have a planning department or the company's financial community generate the scenarios. The proper role of the scenario planner is one of consultant, facilitator, catalyst, and accelerator of the learning process.

8. ACTIVELY SEEK AND INCORPORATE CONTRARIAN VIEWS FROM OUTSIDE THE OPERATING UNIT. The best scenarios modify current perceptions in fundamental ways. This process is sometimes difficult to ignite without sparks from contrarians outside the operating unit.

While it's true that operating managers know their business better than any one else, this doesn't always mean that they're able to generate excellent scenarios by themselves. The professionals most familiar with the business are also the ones most likely to have developed a single perspective, sometimes even a myopic view, of its external environment. It's not always easy to enter a discovery process when you live a business day-to-day and are emotionally attached to it.

The search for contrarian views should lead in two directions. Find outsiders who bring fresh perspectives or "different mirrors" like the ones Robert Waterman refers to in his book, The Renewal Factor. Professional consultants are one obvious source, but others include suppliers, buyers, advertising agencies, and retired experts in related fields.

An often ignored source of input is intelligence and opinion from people inside the corporation but outside the business unit. Large corporations have all kinds of hidden talent within their walls: a first-rate musician who sits in the distribution group; a trained anthropologist in the sales department; a history buff in accounting. Try to find these smart, creative people, and tap them for the scenario workshops.

A wise tip is offered by Peter Schwartz of the Global Business Network: Be unconventional. Get exposed to outrageous opinions that may make operating managers somewhat uncomfortable at first. At the very least this will test the resilience of their thinking. Look for less obvious sources of information. Examples include films, novels, specialized or counterculture magazines from other fields, and remarkable people with completely different experiences.

9. ENGAGE A PLANNING LEADER FROM OUTSIDE THE BUSINESS UNIT. Because the scenario planning process is eminently logical, it seems easy to execute. It isn't. It's hard, especially with the large, multi-functional groups that typically comprise a business unit. Uncertainty about the process, and the

complexities of group dynamics make it difficult to try to engage in a scenario planning process without some help from outside the business unit. Ideally, this will be an experienced scenario planner, but it should at least be a strategy expert with group management skills.

A skillful process leader satisfies three needs:

* FACILITATOR. There's a need to perceive and manage the dynamics of the group as a whole, constantly monitoring the delicate balance between individual and group desires. Scenario planning can stir a wave of uneasiness when it plows uncharted waters or questions an organization's basic beliefs about the external environment. A skilled facilitator should be able to manage both the frame of the discussion as well as the speed at which it proceeds.

* CONSULTANT. The scanning "radar screen" of the group may not have the capacity to identify some issues and themes that are potentially important to the organization. In this case, the process leader should be prepared to ask provocative questions and challenge assumptions. While balancing between two

roles--facilitator and advisor--the process leader must pay close attention to the individual needs of the key decision makers, both inside and outside the group.

  • PLANNER. The planner's role is to keep the group focused on producing germane, adequately detailed alternative views of the external environment. The best process leaders thoroughly understand the discipline of scenario planning, environmental analysis, and techniques for identifying the most important key drivers of the business.

DIVING IN: PROCESS LEARNINGS

The following seven recommendations should be reviewed before initiating the scenario planning process. Since the complete process is complex, the reader should read both case studies and theoretical articles to get a better preview of how it works in practice .

10. BEGIN THE PROCESS WITH ONE-ON-ONE INTERVIEWS WITH KEY MANAGERS. Pierre Wack of Royal Dutch/Shell, the man most responsible for the development of scenario planning, and author of the "Gentle Art of Reperceiving" articles in the Harvard Business Review, is quick to point out that

understanding the external business environment is only half of a good scenario planning process. "A good scenario seems to emerge, naturally and miraculously, from an intensely experienced polarity: on one side, a

good analysis of the unfolding business environment; on the other side, a clear knowledge of the existing mind-set of managers, which covers their view of the unfolding business environment."

There are all kinds of techniques to try to understand the mindset of key managers, but there's probably none better than the give and take of frank conversation. It's quite effective to begin the strategy-development process with one-on-one interviews with all the relevant managers, using open-ended

questions that help map the manager's mind.

11. IDENTIFY A SPECIFIC YEAR IN WHICH TO CONSTRUCT YOUR SCENARIOS. Lawrence Wilkinson of the Global Business Network counsels that scenarios of the future should be framed in a specific year …..There are two advantages. First, scenarios are best told as stories viewed from that future time. Don't try to construct a tale of the future as it unfolds from today. Instead, tell the story looking back from that future period. The distinction is subtle, but it can prevent some conflicts over the relative likelihood of specific events.

Second, choosing a specific future time period also allows the scenario builders to get a sense of the possible rate of change. But before looking ten years into the future, practice by looking ten years into the past. Because managers tend to focus on day-to-day business operations, they're sometimes blind to the