Scenario planning – deciphering uncertain futures
When thinking about the future, we tend to extrapolate our current reality and what we believe already to be true. This makes it very difficult to conceive of futures that are radically different to the past. It can actively hinder our ability to plan effectively. Yet even with the most agile of business models, one needs to be able to make reasonable assumptions about the future if one is to develop sensible strategy and make sound investment decisions.
The worst that one can do is assume that business-as-usual will continue, yet to do so is very human. Uncertainty yields negative emotions and we are hard-wired to avoid those.
The history of business is full of examples of businesses that failed to anticipate the future, and ceased to exist as a result. For example, in mobile-telephony, Nokia were established market-leaders and in a seemingly unassailable market-dominating position circa 2005. Yet less than a decade later, Nokia no longer exists. They failed to envisage that the mobile-phone could be something more – a ‘smart phone’, or miniature computer, to be used for multiple purposes beyond simply making calls, or sending-and-receiving messages. Apple’s ability to envisage this possibility sooner, ultimately put Nokia out of business.
Without uncertainty, there can be no opportunity. All would know in advance which future business model is best, what innovation to adopt and what forthcoming changes in trends and fashions will ensue. This would render these useless as sources of profit and competitive advantage.
Traditional tools for thinking about the future, such as forecasting and risk-analysis, can exacerbate uncertainty by causing us to focus on only a very limited range of possibilities. This is most obviously true in single-track forecasting, as it assumes only one possible future – an assumption which is quite obviously ridiculous. And even techniques which assume several futures are possible, such as risk-analysis, only acknowledge a very bounded range of future possibilities, since these future possibilities are based on what has occurred previously. As a result, these standard techniques provide little opportunity to grapple meaningfully with the real issues and potential causes of futures that are very distinct from the present. They make us feel we have given due diligence to uncertainty but in reality, they just make us more vulnerable to it.
The secret to defusing this is to switch from attempting to predict the future, to creating a number of plausible views of what the future might be, through scenario planning. While this approach does not uncover all possible futures, it does a better job as a platform for discussing strategy and creates a portfolio of possible outcomes that are truly distinct from the present, against which the firm can bench-test its strategy and its likely responses. Almost inevitably, a well-executed scenario planning exercise yields opportunities and threats that have not yet been considered and other areas of improvement for the firm’s business.
The outcome of such an exercise is a detailed understanding of what the firm would need to do in order to optimise its business under a range of possible futures. Where the actions are common across multiple scenarios and otherwise make sense, they can be executed anyway. Where they make sense under some but not all scenarios, they can be filed as contingency plans.
The Client Experience
DEFINING THE SCOPE
Scenario planning is quite flexible in nature and several well-established methodologies exist. In defining the scope of the exercise, we will seek to understand the opportunities and challenges that you wish to explore and the outcome that you hope for. We will also discuss the possible approaches with you and help you decide which one is the best fit with your needs.
IDENTIFYING THE KEY DRIVERS OF CHANGE
Some change drivers are highly visible, others less so. We will research a broad range of drivers impacting your business and the industry sector in which you operate. We will provide you with a report (a slide deck, unless you request otherwise) outlining these drivers and such other contextual information as your people need to prepare for the scenario planning exercise.
Our approach is quite detailed and involves considering not only the obvious, primary change drivers but the secondary drivers that arise by interactions between them, too. Drivers will be ranked according to their perceived importance. This provides a solid basis on which to prioritise them and to select the most important.
CONSTRUCTING THE SCENARIO MATRIX
The most commonplace approach to constructing the scenario matrix is to select two clusters of driving forces that are deemed to be the most uncertain as variables and then constructing a 2 x 2 matrix around them. An alternative methodology developed by Shell can be used for three drivers, but that approach is slightly more complicated. The scenarios are constructed by your own people, in a workshop that we facilitate for you. It is a deeply interactive and creative process.
CREATING THE SCENARIO NARRATIVES
In the penultimate step, your people articulate what the future would be like for your business, under each of the identified scenarios. It is important that the usually quite diverse perspectives that exist across a firm be properly brought out and worked into the narratives. It is important at all stages to continually emphasise that the intent is not to try to forecast what will occur in the future, but to create a set of plausible narratives about what the future might hold, based on drivers that are accepted as important.
BENCHMARKING THE FIRM’S STRATEGY AGAINST THE SCENARIOS
In this final step, the group assesses how the firm’s strategy would need to be different under each scenario, and what actions would be required to make the change from the current situation, to the state that would be required in order to perform best under that scenario. This very powerful exercise delivers a far more robust understanding of what really drives your firm’s success and what actions would enhance its resilience to change and ability to seize new opportunities.