Written by Mark Vickers from i4cp on July 17, 2009
Scenario planning is faddish for a lot of companies, like shorter hair or diagonal tie patterns or wearing watches. It’s usually the bad times that bring out the scenario planners.
“It’s sort of like flood insurance,” Michael Raynor, a Deloitte Consulting LLP corporate-strategy expert, recently told the Wall Street Journal. “Everybody runs out and buys flood insurance the year after the flood” (Tuna, 2009).
It’s human nature, of course, to start planning harder for the unexpected only after the unexpected has happened. That occurred after 9/11 and it’s happening again in the wake of the harsh global recession.
People are simply stunned by major events. I call it the “Fiction Effect.” One day you’re plugging along, living your life, working your job, maybe a bit bored by mundane affairs. The next day, something happens that you can barely believe, something that is supposed to occur only in the realm of fiction or long-gone history rather than in your current all-too-real life.
The Fiction Effect gives you a jolt, opening you and others up to the fact that life really is stranger than fiction in many cases. Hijacked jet planes flying into the Twin Towers? The almost instant demise of several great financial institutions? The sheer immensity of the Maddoff Ponzi scheme?
Yes, strange and threatening things happen, as do strange and great things. Tampa Bay Rays in the World Series? Only in fiction. The election of a black U.S. president? Only in some far off future.
But no, they are realities, and pretty soon they don’t seem strange at all. They’re just another part of the landscape, like cell phones or cloning or water on Mars.
What scenario planning can do is prepare you for the strangeness of reality, allowing your organization to react quickly to possible and often plausible scenarios while others are still stunned into inaction or scattering in panic.
For those who aren’t very familiar with business scenarios, the Scenario 101 introduction goes something like this: Scenario planning has been used since the 1940s by parts of the U.S. military and was made famous by Royal Dutch Shell in the 1970s, when the scenario-creating corporation was reportedly able to react better than its competitors to the 1973 oil shock.
Since then, many companies have used scenarios, with a Bain & Company study finding that about 70% of executives said they used scenarios in 2002 (Tuna, 2009).
Scenarios are, in essence, alternative stories about the future. Shell, which is an i4cp member company, notes that scenarios “identify some significant events, main actors and their motivations, and they convey how the world functions.” Shell also notes that these stories are not linear or mechanical forecasts. Rather, scenarios “recognize that people hold beliefs and make choices that can lead down different paths. They reveal different possible futures that are plausible and challenging.”
i4cp and its predecessor, the Human Resource Institute, has written scenarios for many years – whether they were in vogue at the time or not – integrating them into each of its knowledge centers and highlight reports. These scenarios can be used by companies to look at a wide range of human capital issues.
But, although such “off-the-shelf” scenarios can be helpful, scenarios are best when they’re the result of a group interaction within organizations, such as operating managers and planners working together. As a group, such a team identifies a topic of interest and then tries to isolate the driving forces that influence that topic. Those forces are grouped together so organizations can see the patterns, and often the drivers are ranked by their potential impact and certainty.
There are different kinds of scenarios, such as inductive, deductive, incremental and normative. Without getting too deep into the scenario weeds, it’s often best to start with deductive scenarios, which rely on a four-quadrant “payoff” table. Let’s say, for example, that something shocking but still fairly plausible happens in 2012, such as a major war between India and Pakistan that China is drawn into. What happens to your organization if it has outsourced huge components of its businesses to one or all of these nations? How could the company react in a timely and effective way to continue meeting the needs of customers?
Now let’s say that, during that same period, your company loses several crucial patents and has no other blockbuster innovations to take their place. How would it survive, especially if certain manufacturing or research operations abroad suddenly stopped producing due to geopolitical instability?
In this particular scenario – which involves Asian instability plus revenue declines – some organizations could find themselves in serious danger of collapse. Such a scenario is not created to predict such dire events, but simply to help business leaders consider what would ensue if such events were to occur. By thinking through the possibilities, an organization might have two advantages. First, it would be less likely to be paralyzed by the Fiction Effect and therefore better able to react quickly to the realities of the situation. Second, it would be more likely to have made contingency plans in the first place, ones that ameliorate the crisis.
There are many examples of scenarios, of course, Some assume good news, others bad news, and others ambiguous news. But what they all have in common is that they help managers and planners question their assumptions about the future, preparing themselves and their organizations for the myriad events that are stranger than fiction.
Documents used in the preparation of this TrendWatcher include the following:
- Shell (2009). Looking ahead: Scenarios.
- Tuna, Cari (2009, July 6). Pendulum is swinging back on ‘scenario planning.’ Wall Street Journal.