Scenario planning uses possible future outcomes (scenarios) to improve the quality of decision-making (planning). The emphasis has moved in recent years from building scenarios to successfully using them. The techniques for building scenarios are well developed - the challenge is to incorporate an understanding and facility with possible futures into management thinking. This has led to an emphasis on:
Scenario planning used for team development
Improving the structural assumptions and data behind planning
Techniques for communication of scenarios
Scenarios are beginning to be widely used in the public sector, as well as in business.
Scenarios are models of future worlds
One of the best definitions of scenarios is by Michael Porter:
"an internally consistent view of what the future might be, not a forecast but one possible future outcome".
At a time of volatility and change, managers need to be able to step out of their current framework and imagine future worlds - which may arrive sooner than expected. Scenario planning is a set of processes for creating several scenarios or mental models and using them to aid decision-making. The scenarios explore a spectrum of different possible answers to the core questions facing the organisation, for instance
In an Austrian insurance company in 1985, what would the effect of the fall of the Berlin Wall be on their business?
In a manufacturing company supplying copper cable to the telecom industry, what new markets were they equipped to tackle?
In a computer company, what would be the drivers of outsourcing and what effect would this have?
The scenarios capturing possible answers to these and similar questions are used to improve the robustness of plans, for instance by exposing implicit structural assumptions in economic or social forecasts, or to create new plans based on newly visible options.
Forecasting and scenarios
Scenario thinking traces its history back to just after the Second World War, when Hermann Kahn pioneered the technique of "future-now" thinking, aiming through the use of detailed analysis plus imagination to produce a report as it might be written by people living in the future, to promote debate on nuclear weapons.
Most current uses of scenarios relate to this, e.g.
to stimulate debate about choices
to develop strategy resilient against several futures
to test business plans against futures
to try to anticipate futures, as an aid to decision making
While forecasts - or high growth/low growth forecasts - sometimes also called scenarios - can be used for any of these, the use of imaginative and qualitatively different worlds is a central theme of most current uses of scenarios. Forecasts aim for accuracy, using techniques such as Delphi; scenarios explore the space of uncertainties in defining possible futures.
Questions often asked are:
how many scenarios?
The number of scenarios is bounded on the lower end by the adoption of two, qualitatively different worlds, and at the upper by the ability of the team - and its intended audience - to be able to comprehend the differences - maybe up to five. In planning work with numerate groups it is usual to avoid three or five, because planners will often assume that a middle scenario is "right" i.e. a forecast.
The timescale for the scenarios needs to be longer than the budget or planning cycle of the organisation - and certainly longer than the job tenure of the team developing the scenarios, to avoid defensiveness. A longer timescale is easier than a mid-term (e.g. three years), since many of the defining trends will already be clear, and the current complexities confusing.
The creation of scenarios is an excellent management development tool for a team, taking the team outside the defence of their roles at the time. It can be useful for management teams to take one or two days to develop scenarios for their business, based on existing information within the group, as a way of exploring shared perceptions.
The classic method for developing scenarios, based on research and analysis by an in-house team or consultants, may take from three man months to thirty man-years. Useful consultants are given in Table 1.
Table 1 insert
A significant advantage for an organisation in creating their "own" scenarios is that during the research, "wild cards" will emerge. These are events that would be calamitous but are judged unlikely to happen. Action to determine the process for dealing with these - e.g. the relevant department - and the subsequent discussions - are often beneficial, prompting new insights.
Using existing scenarios
However the emphasis in most organisations is moving away from developing new scenarios towards using and tailoring existing scenarios, working with management teams on the implications of the scenarios for their business or project.
A sample workshop outline to develop strategy based on scenarios would be as given in Table 2.
It is important that these workshops are held off-site to signal "different". The two-day format is good to allow reflection and absorption time; so residential workshops work better than non-residential.
Planning with scenarios
Scenarios and Business Plans
Business plans always incorporate the assumptions of the management team, which are often implicit. For instance will a characteristic, which has added competitive advantage in the past, continue to do so as markets change? By using scenarios, the team can recognise the future world they have built in to their plan, and allow them to explore the implications of other possible - or probable - worlds.
Some organisations work through the entire business plan for all (usually two) scenarios. This may be a back of the envelope calculation, or a team effort. Back of the envelope calculations can often capture the essential difference in viability of a single capital project. Full reworking of the business plan may be needed in large organisations where many different divisions and functions will be affected.
A Market Attractiveness/Capability Matrix is often used to manage a portfolio of businesses within a company (see Table 4)
By examining the portfolio as it would be in the future under each scenario, the new positions on the matrix can be seen for each business. While the discussion of the factors affecting each business is useful, the improvement of the decision process is the main win
In assessing the likelihood of a scenario coming "true", early indicators are used - events that will be seen in the next year or so specifically under one scenario. These can be chosen to be topics watched by ongoing mechanisms e.g. the patents or competitive intelligence departments.
Scenarios in public policy
Since the time of Hermann Kahn, scenarios have been used for instance to:
Create a common language and understanding, as in South Africa at the time the ANC was about to take power
Develop strategy in the face of new challenges, for instance as Canada faced the implications of the Information Society
Inform public debate, for instance in Norway on the use of oil revenues, or Scotland as the new Parliament was established.
Workshops associated with scenario building or examining the implications of scenarios are widely used to develop public opinion.
Communication of scenarios
When scenarios were mostly used within planning groups, the output was often expressed in tabular form, with a list of factors e.g. growth rate, dominant technology, in the left hand column and columns describing each factor under each scenario. While these were good working tools, they were fatally bad communication tools.
Names of scenarios are often used to communicate the essence of scenarios - for instance Atlantic Storm and Market Forces to describe the Chatham House Forum scenarios for the economics of the industrial world in 2020: in Atlantic Storm, Europe and the US are at odds, while in Market Forces, a free market dominates.
Newspapers written "as if in the future", descriptions of role model characters, "a day in the life of" stories, and glossy booklets are all used to communicate scenarios, depending on the audience. Recent work has used film and video clips with interactive choice to explore scenarios with groups of decision makers.
Most people who work with scenarios find it to be stimulating and enjoyable. The next stage, making the most of scenario planning depends on:
Deciding what problem the scenarios are to help solve - what are the crucial questions facing the organisation - the "I wish I had known this seven years ago" questions.
Creating or exploiting scenarios that explore the uncertainty space - often "in-house" scenarios focus on near in and internal problems
Giving the scenario effort high enough status e.g. by offsite meetings, high level sponsors, management feedback
Using the scenarios to drive decision making through stimulating debate, developing strategy, testing business plans or anticipating futures
Using imaginative and frequent communication to embed scenario thinking into discussion and decisions.
Peter Schwartz's "The Art of the Long View", John Wiley, 1997 (ISBN 0-385-26731-2, republished from the original) is an excellent introduction to scenario thinking.
Gill Ring land's "Scenario Planning", John Wiley, 1997, ISBN 0-471-97790-X is the best-selling "how to" handbook for practising managers.