Scenario Planning - Case Study Example

The potential of scenario planning to help organizations plan for the future The past 30-40 years have been quite different from the earlier years atleast in one sense and that is the way world is changing the rate of change is so fast that the traditional forecasting and strategic planning find it increasingly difficult to do what they have been devised for. In a report by Price water coopers summarized decade ending in 2006 as “10 years of high –speed change” characterized by “unsettling twists and turns” citing series of events that confounded executives across the globe. The events like Enron’s implosion, the pooping and busting of dotcom bubble , 9/11 attack on America, the gulf war, sharp jump in commodity prices etc took many business leaders by surprise and threw many of the well formulated strategies out as useless. The rate at which the environment is changing is making it difficult to develop long term plans and strategies and the traditional forecasting techniques and strategic planning tools are based on the assumption that future would reflect what happened in past and is happening in present. This concern is not new, in fact it was 1980s, since when the strategic planning – systematic and formal, came under heavy attack because of the impossibility of forecasting the future. Hamel (1996) viewed strategic planning as more of a calendar-driven ritual, with an underlying assumption that the future will be more or less in line the present. The challenge faced by the organizations of formulating strategies when the future was so unknowable forced thinkers to review the relevance of the strategy as a concept and as a process. As the business environment is becoming more volatile, systematic strategic planning and forecasting are finding it increasingly difficult to deliver results. The reason for their failure does not lay in them i.e. as methods they still precisely or accurately do what they were supposed to but changing scenario has put up different demands on strategic planning tools. The expectation from such tools has changed in keeping with the changes in the business environment. Today considering the fast pace at which things are changing and the way entire world is becoming a smaller place i.e. getting connected. Both these developments have changed one thing that is predictability of the future. But long term planning is something that businesses can’t dispense with. They have to plan or at least prepare for the future. Thus an alternative of traditional strategic planning or forecasting is something which businesses world over are seeking. Gravin D, Levesque L(2006) defined scenario planning “ as a process that stimulates, imaginative, creative thinking to better prepare an organization for the future. “. Scenario planning emerged as an alternative to strategic planning during 1970s. According to Pierre Wack (1985) suggested that forecasts are constructed on the premise that future world will be much like that of today, so in changing times when future will be highly different from present the forecast will at best be marginally useful and at worst can be highly dangerous .The assumption of linearity between present and future is what underlies the traditional strategic planning based on forecasts but scenario planning assumes that if managers are aware and even moderately prepared for diverse range of future, they can better deal with it. In fact with scenario planning a firm can actually use uncertainty to its advantage for example, when Shell group used scenario panning it was able to predict oil crisis not exactly as it unfolded but at least to an extent that it was better prepared while it s competitors were shocked by the OPEC formation and stocks pilling up plummeting oil prices, The Shell group had already sold its stock before the prices crashed. Scenario building unlike its earlier counterparts does not assign probabilities to various possibilities. As scenario builders realize that future is so uncertain and attaching probability unknowingly will do more harm than good and even these scenario builders are comfortable with the amount of uncertainty as they know they whatever may ensue in the future they will not be surprised as they would have already lived that scenario mentally and thus would know how best to respond. Scenario builders neither believe nor try to measure or control the future. They simply develop various possible picture of tomorrow’s world along many dimensions. Scenario planning is different from contingency planning, sensitivity analysis and simulations. While contingency planning considers only one uncertainty like what if government the government increases FDI limit etc, scenario planning considers the composite impact of many other uncertainties like how same or increased domestic demand will behave along with a hiked FDI or current FDI limit. In case of sensitivity analysis the expected result is in the form of likely effect of variation in one variable while keeping other things constant, while scenarios can capture changes in many variables at the same time. Scenarios are able to include the elements which are beyond the reach of even the most sophisticated simulation models like innovation etc. Scenario planning aims at capturing wide range of possibilities even the ones which are mostly missed or deliberately ignored by management. Scenario planning is capable of changing the mindsets of the people in the organization and keeping their mental maps relevant. Value of Scenario planning for a company or industry In absence of scenario planning a firm may have to either rely on strategic planning techniques like sensitivity analysis, contingency planning, simulation modeling etc or it has to abandon long term planning at all. If an organization plans for future based on the predictions of forecasting techniques which extrapolate future on the basis of past or current trends, the downside may be that the firm loses substantially on account of failure of its plan to meet the future. And no business today can dispense with long term planning as failing to plan for future may leave them less competitive. Thus scenario planning gains importance as this is not a technique to forecast the future on the basis of current trends. Neither does it hand out a single best plan or strategy. Scenario planning simply creates as many as possible but at the same time relevant future scenarios that may play out. The purpose of the scenarios is not to offer a single best strategy, the purpose is rather to make people see and realize what could be different turns situations might take and what different worlds may there be. On the basis of these different scenarios the company prepares itself to find out how these different scenarios may interact with the strengths and weaknesses of firm and what will be the likely future of the firm in each scenario. Armed with this knowledge the business leaders can formulate robust strategies (that would stand or work in diverse scenarios) or weak but flexible strategies suited to one or two scenarios. The point here is if a strategy is not robust then it must be flexible enough to correspond to the changing environment and scenarios. The firms also identify where they are vulnerable in different scenarios and how to prepare for them. Thus scenario planning allows businesses to be prepared for long term future with different set of strategies for different plausible situations. Another important advantage of scenario planning is that it sparks imagination in a company by making people think through each scenario and link present situation with each scenario. The byproduct of this exercise is that people may learn how to create a scenario by making different forces in the environment interact in a desired manner. Any industry or company has to plan for future for its success. But today’s environments is characterized d by fast pace of change. But this fast change or increasing uncertainty cannot undermine the importance of long range planning. In fact uncertainty can be quite advantageous for a firm as the opportunities usually come out of uncertainty. Thus not only surviving but also thriving in uncertainty is what becomes the new world order. Scenario planning can actually help a firm or industry achieve its full potential. Every industry for it success depends on a lot of macro economic, social, technological, natural, legal etc factors. To deal with these environmental factors or even exploit them there is a need for a required interaction among many such factors. The factors may interact in many ways and the way they interact can determine the fate of the industry. Though there are certain factors which the industry may not have any control, but there would be certainly many factors over which it can wield some influence. The task for the industry leaders is to find out what are the likely movements of the uncontrollable variables and how can they be matched by the best combination of other variable which might be, to some extent, under control. For example after doing the scenario analysis the industry realizes that these could be the different likely scenario and reading the warning signals they can identify the scenario towards which they are moving and can act accordingly. For example in some country mutual fund industry after realizing that the government is opening the economy may consolidate the industry to better prepare for foreign competition. Any company will have to consider both external as well internal environment for its success and this is where scenario planning can help a company by making sure that the company is prepared for the future shocks and surprises. The company can come up with many likely scenarios and see if its prepared to deal with the scenarios and that would help a company in not only determining but also building up its competitive position in the future. The company will have a clear idea based on it scenario analysis what to expect from the future and how to best respond for different future states. Components of Scenario Planning The components of scenario planning are important to appreciate how scenario planning may help an organization in achieving its objectives. Garvin D, Levesque L (2006) explained a model of scenario planning process. Please refer Exhibit 1 in Appendix section. Component of Scenario Planning Key Focal Issue – An important issue or uncertainty that may have significant long term impact on firms chances of success. In this stage a firm clearly identifies scope and time frame for its concerns and choices. For example - Should the company plan to enter foreign market or focus on domestic market only? Driving Forces – These are the factors that may significantly impact or shape focal issue. These can be major environmental factors like political, social, economical, technological, legal and natural etc. In case of the above example major driving forces could be Changes in trade policy with foreign countries Changes in demand pattern in the domestic market due to changes in the demography or natural environment etc Major indigenous technological break through These driving forces are further subdivided in to two categories driving forces which are predetermined and the ones which are uncertain. Out of the above mentioned driving forces that we identified changes in the demography can be predetermined while changes in foreign policy can be quite uncertain. Critical Uncertainties – All the uncertain forces identified may not be equally important and thus we need to find out the most critical of them with respect to their relevance to the organization and level of uncertainty. For example “Technological breakthrough” and “Foreign trade policy” identified as two critical uncertainties. Scenario Framework In this step each critical uncertainty is reduced to a dimension with two extreme values at both ends. The two critical uncertainties interacting with each other will give rise to four different scenarios each one as a combination of different values of two uncertainties. A two by two matrix will be formed with two values each for “technological breakthrough” and “foreign trade policy” and will result into four different scenarios. The idea here is not that one of them will surely play out and the other one will not. In fact most likely is that none of them will play out but considering the four we would have circumscribed the whole range of possibilities and whatever may happen will happen form within the considered boundaries only. See exhibit 2 in appendix section for different scenarios in this situation. Scenarios – The various alternatives that emerge out of interaction of various critical uncertainties are various plausible hypotheses about the future (how domestic market will be like). They will highlight what the future might have in store for the company. The company will be sensitized to how it is positioned vis-a-vis its competitors both domestic and foreign. Narratives- Each scenario is woven in to a story. The stories must make sense and at the same time should be able to sensitize the company people towards future. One of the major roles of scenarios is to stretch the thinking of organization and make it see beyond obvious. The company is also forced to logically link present with each scenario and that improves people’s both logical and imagination skills. While creating narrative sits important to give a name to each of the scenarios and the name should be able to generate sense of connectedness between people and the future. The frightening may make people get on their toes, the opportunity may motivate them to work harder and topple their competition. Implication - After creating the narratives the attention comes back to the key focal issues. Organization is placed juxtaposing with each scenario and the impactions of each of the future alternatives are identified. The result of this exercise is the awareness about the strengths and weaknesses, alternative options, and ways to bridge the gaps in capabilities, action plans etc. Early warning signals - One of the greatest values of scenario planning lies in its ability to give early warning signals to the organization. These indicators sensitize the organization that where the world is moving and which scenario is more likely to play out. Thus the firm may be able to read what its competitors, still relying on traditional forecasting techniques, cannot. For example since the organization may start tracking key indicators like international meetings, technological developments etc. and as soon as the firm reads these signal it will be in a position to adjust itself accordingly. Scenarios can also be used to evaluate strategic decisions as how well an organization’s past strategic choices are in line with the changing world. Conclusion Scenario Planning is a useful way for a firm to formulate long term plans with having to depend on forecasting techniques of past which can no more deliver results. The changing environment will force more and more companies to develop scenario planning capabilities to be able to meet future challenges with preparation. A famous quote encapsulates the essence of scenario planning i.e. “Chance favors those who are prepared”. Thus scenario planning is not determining accurately what future would be rather it is trying to imagine how many different futures can there be. Appendix Exhibit 1 Source – “A note on scenario planning” by Garvin D, Levesque L (2006) HBR Foreign Trade Policy / Technological Breakthrough 100% FDI allowed FDI not allowed Major breakthrough ( leaving existing technology obsolete) “Clash of Titans” Heightened competition both by domestic and foreign players. “Rise above the equals” Competition within the domestic players only. No major innovation “War of unequals” Foreign players with latest technology fighting for the market yet to get exposed to new technology “Do the New” Domestic firms finding other ways to compete Exhibit 2 Possible range of scenarios Cornelius, P., Van de putte, A. and Romani M. (2005) ‘Three decades of scenario planning in shell’, California Management Review, vol 48, no. 1, pp. 92-107. Courtney, H., Kirkland, J. and Viguerie, P. (1997) ‘Strategy under uncertainty’, Harvard Business Review, December. De Geus, A. (1988), ‘Planning as learning’, Harvard Business Review, March. De Geus, A. 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