Scenario Planning

Gill Ringland, Bloomsbury

Executive Summary

Scenarios as Models of Future Worlds

One of the best definitions of scenario 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 core questions facing the organisation.

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 future now thinking. This technique, put forward by Kahn to promote debate on nuclear weapons, aimed through the use of imagination and detailed analysis to produce a report about current events as it might be written retrospectively by people living in the future.

Most current uses of scenarios relate to Kahn’s purpose in being used, for example, to

While forecasts or high-growth/low-growth forecasts (sometimes also called scenarios) can be used for any of these purposes, 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 include

The number of scenarios is bounded on the lower end by the adoption of two qualitatively different worlds, 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 the middle scenario is ‘right’, that is, that it’s 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 them, in order to avoid defensiveness. A longer timescale is easier to work with than the mid-term (for example, three years) since many of the defining trends will already be clear and the current complexities still confusing in the medium term.

Creating Scenarios

The creation of scenarios is an excellent management development tool for a team, taking team members beyond defending their current role. 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 people-months to thirty people-years.

A significant advantage for an organisation in creating their own scenarios is that wild cards will emerge during the research. These are events that would be calamitous but are judged unlikely to happen. Action to determine the process for dealing with these and the subsequent discussions are often beneficial, prompting new insights.

Using Existing Scenarios

The emphasis in most organisations, however, 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 scenarios is given in Table 1.

Table 1: Table 1

Table 1: Table 1

 

Workshop

Using existing scenarios with a team

Day 1

Plenary

Brief on trends

 

Groups

Discuss effect of trends on offerings; report back

 

Plenary

Brief on scenarios

 

Groups

Add depth for specific business; report back

 

Groups

Communicate scenarios

Day 2

Groups

Discuss effect of scenarios on existing offerings, new offerings

 

Groups

Develop timeline for new offerings

 

Groups

Develop timeline for new threats

 

Plenary

Report back, plan next actions

It is important that these workshops are held off-site to signal their difference from routine work. The two-day format is good to allow time for reflection and absorption, 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 that has added competitive advantage in the past continue to do so as markets change? By using scenarios the team can recognise the future world built into their plan and 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 sketch or a team effort. Back-of-the-envelope calculations can often capture the essential relative viability of a single capital project under different scenarios. Full reworking of the business plan may be needed in large organisations in which many different divisions and functions will be affected.

Portfolio management

A market attractiveness/capability matrix is often used to manage a portfolio of businesses within a company (see Table 2).

Table 2: Table 2

Table 2: Table 2

 

Market attractiveness

Capability

Matrix

Market attractiveness

weak

medium

strong

high

Double or quit

Try harder

Leader

medium

Phased withdrawal

Proceed with care

Growth

low

Withdraw

Phased withdrawal

Cash generation

Examining the portfolio as it would exist in the future under each scenario produces a new position on the matrix for each business. While the discussion of the factors affecting each business is useful, the improvement of the decision process is the main gain.

In assessing the likelihood of a scenario coming true, early indicators are used—events that will occur in the next year or so specifically under one scenario. These might be selected topics already watched by ongoing mechanisms, for example, the patents or competitive intelligence departments.

Scenarios in Public Policy

Since the time of Hermann Kahn, scenarios have been used to

Workshops associated with building scenarios 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 (for example, growth rate, dominant technology) in the left-hand column and the other columns describing the factors under each scenario. While these were good working tools, they were fatally bad communication tools.

Names are often used to communicate the essence of scenarios. The Chatham House Forum scenarios for the economics of the industrial world in 2020 are called Atlantic Storm and Market Forces; in Atlantic Storm Europe and the United States 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 stories, and glossy booklets can all be 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.

Making It Happen

Use scenarios for stimulating debate, developing resilient strategies, testing business plans against possible futures, and trying to anticipate futures.

Allow one or two days for management teams to develop scenarios for their business, based on existing information within the company.

Hold workshops off-site to signal ‘different’, with two-day residential formats to allow optimum reflection and absorption time.

For a single capital project, try back-of-the-envelope calculations to capture the essential differences in the viability of alternatives.

To assess the likelihood of a scenario coming true, use early indicators—events that should be seen in the next year or so.

Communicate scenarios graphically, for example, by imaginary newspapers written as if in the future, day-in-the-life stories, film, or glossy booklets.

Conclusion

Most people who work with scenarios find it to be stimulating and enjoyable. The next stage, making the most of scenario planning, depends on:

The Best Sources of Help

Books:

Ringland, Gill. "Scenario Planning: Managing for the Future". Chichester: John Wiley, 1998.

Schwartz, Peter. "The Art of the Long View: Planning for the Future in an Uncertain World". Chichester: John Wiley, 1997.

Biography

Gill Ringland graduated as a physicist, spending two years at the University of California at Berkeley and a year as a fellow of Oxford, before moving into the area of computing. After working for an expanding software house, where she became chief technical consultant, Gill moved on to work for the Computing Science Committee of the UK and the Engineering Research Council. In her current post as group executive, Gill is responsible for strategy at ICL. She wrote "Scenario Planning" (John Wiley, 1997).