The Scenario Approach to Strategy Development:
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When companies cannot imagine the future, they are often blind-sided by what develops. Competitors they did not anticipate suddenly emerge, technologies in which they invested heavily become obsolete, or customer demands take an unforeseen turn. In many cases, these crises could easily have been turned into opportunities, if only companies had imagined unforeseen possibilities and started building competences years in advance. By forward thinking and imagining what the future might entail, companies can lay the foundation for tomorrow's success, while competing to win in today's marketplace. Scenario planning is one of the most important tools for a learning organization. Scenario learning, according to Fahey and Randall (1998), is not about trying to predict one likely future; instead companies must model three or four different visions of the future so they can make better strategic decisions that will succeed in a wide range of possible futures.
Scenarios are already being used in many industries, including energy companies to understand potential interactions between public policies, oil reserves, and prices at the pump. Consumer goods companies develop scenarios to understand how the collision of demographics, lifestyles, and economic conditions might produce widely different markets in the future. High-tech firms devise scenarios that show how multiple technologies could be combined to destroy some markets and create others. Financial services firms craft scenarios that illustrate how the boundaries between insurance, banking, securities, and advisory services could collapse to spawn new markets.
Every company can learn from imagining potential changes in their environments by utilizing a methodology that combines two elements: developing scenarios and integrating the scenarios into decision-making. Through scenario planning, managers can foresee tomorrow's threats and opportunities and act on them today.
Fahey and Randall (1998) prefer the term scenario learning to the more common term scenario planning, because learning refers to challenging assumptions, discussing opposing ideas, and actually putting the knowledge to use. By definition, a scenario is a descriptive narrative or story of a plausible alternative vision of a specific part of the future, according to Fahey and Randall (1998). Scenarios are researched and developed in sets of three or four to study how a company, or one of its decisions, would fare. Scenarios combine estimations of what might happen and assumptions about what could happen. A projection should not be confused with a prediction of what will happen. According to Fahey and Randall (1998), a projection is one view of the future and a set of logical assumptions. The authors further assert that each scenario must consist of four key elements: driving forces, logics, plots, and end states.
According to Fahey and Randall (1998), driving forces shape and propel the story described in a particular plot and can be divided into two categories:
• Environmental forces, such as economic, social, cultural, ecological, and technological events, trends, and developments.
• The actions of institutions, including the businesses, political parties, government agencies, and regional and international bodies.
Both types of forces should be considered. The authors offer this example: if Wal-Mart was looking at the future of shopping malls, one technological force it would have to consider is electronic shopping. It would also have to consider the potential impact of anti-pollution legislation that could lead to higher gas taxes; one result could be fewer trips to shopping malls.
logics explain why the forces behave as they do in a story. For example, a story built around increasing regulation of the health care market would not only identify which forces would cause the market to evolve in a specific direction, but also why they would do so. It would identify why senior citizens or insurance companies would support specific types of legislation, and how they might exert political pressure.
Plots, or stories, connect the present to the imagined future. Each plot illustrates what would have happened for a specific future to come about. For example, a health care firm might consider plots around deregulation or increased regulation of the industry, or different forms of competition, including new entrants.
The outcome of a plot is an end state, End states describe what will happen in a particular future at some point in time. For example, the health care firm's decision-makers might ask what would happen if the government rescinded certain major regulations and imposed some others. End states can be very detailed, including descriptions of who the competitors will be and what they will be offering, and the types of customers and how and why they will buy. End states are not intended to be accurate forecasts, but speculative projections based on assumptions that are continually changing.
Scenario planning is not just about constructing scenarios. It is also about improving decisions. Through end states, plots, and logics, scenarios help managers see what possible futures might look like, how these futures might come together, and why they might occur. Scenarios serve the following purposes:
• They enable managers to challenge assumptions about their industry, technologies, and the economy, and if necessary, to change their views.
• Scenario planning can produce new decisions, because it may lead a company to consider factors that had not been on its agenda, such as investing in a new technology that is critical.
• It may also lead a company to reframe existing decisions. A highly plausible scenario suggesting slower economic development in a company's new markets might cause a firm to reconsider the aggressive penetration strategy it had planned.
• Scenarios can help managers to formulate contingent decisions. They can determine how the organization could respond to a variety of potential events in the future, such as rapid market penetration by a new competition.
But there are three challenges that companies face:
• How can it imagine its future?
• How can learning be integrated into decision-making?
• How can the company learn about and prepare for the future faster than competitors?
To meet these challenges certain tasks must be mastered:
• Understand the present and the past. Projecting the future requires identifying the forces today that are likely to shape the future.
• Describe a variety of potential futures. Consider the consequences of each possible strategy.
• Delineate how the futures might evolve. What sequence of steps and by whom would have to be taken to shape the future.
• Identify indicators to track.
• Link scenarios to decisions that are already being made within the company.
• Link to the analysis process. Scenarios provide direct input into the choice of strategy alternatives and to capital allocation decisions.
• Link to organizational procedures. There should be widespread participation in developing the scenarios, and sharing of insights that result.
• Involve decision makers. They must participate in shaping scenarios and considering their implications on the company.
These eight tasks can be combined into a methodology. There are two approaches for constructing scenarios. Companies can use future backward, in which they select several projections and try to discover the paths that lead to them, or they can use future forward, which requires projecting plausible futures based on analysis of present forces and their likely evolution.
Regardless of the approach used, scenarios must be connected to the business strategy if the company is to prosper from what it has learned about its potential futures. One area that can be improved through scenarios is the scope of the strategy. Scope addresses the question of where in the marketplace the company wants to compete, what customers it wants to serve, and what products and services it wants to provide, etc. Scenarios can also create new views of interrelationships among products and industries. Equally important, scenarios can help managers avoid making the wrong scope decisions. A surgical instrument firm realized it would be disastrous to invest heavily in its current product line after studying scenarios that showed how easily a competitor could introduce a better substitute product.
Scenarios should also be integrated into decisions about how the company will differentiate itself from current and future rivals in the minds of its customers. A business that does not offer unique value to customers cannot succeed for long. Scenarios help to identify new ways of competing. According to Fahey and Randall (1998), a major national retail chain was currently developing scenarios that compare and contrast a variety of competitors conditions over the next 10 years. It hoped to identify the best way to compete for customers in each scenario to determine where stores should be located, the right range of products and services, the customer segments it should solicit, and the best pricing strategy.
The goals of a company's strategy can also be influenced. Scenarios can lead to new goals, changes in existing goals, or changes in the timetable for achieving the goals.
To insure that the scenarios influence decision-making, the company should create scenario teams to oversee, craft, and put scenarios to use. Team members should be drawn from various functional units, groups, or levels in the organization. They should be original thinkers with sound knowledge of the company, its competitive environment, and the critical issues to be addressed. According to Fahey and Randall (1998), team responsibilities should include conducting the research needed to shape a plot, articulating the end states, and deriving business implications from the scenario learning.
Line managers must be involved in the scenario process, so that they will use the learning from scenarios in their decisions. Fahey and Randall (1998) suggest that several senior line managers should be asked to join the scenario team, or be given progress reports in scenario development, including end states, plots, and business implications. They should also be asked to appraise the end states, plots, and their supporting logics.
The team may also need input from outsiders. These can include management consultants; experts on topics such as demographics, technology, or political processes; and suppliers, distributors, and end customers. While some companies have invited outsiders to be active members of their scenario teams, in most cases outsiders are only involved in certain phases of scenario development. A technology expert, for example, could be used to challenge the logics supporting the plot.
Scenarios must be an integral part of strategic thinking. They give insight into what will be needed to succeed in various visions of the future, and how to set the stage for that success.
The approach to scenarios that we have been discussing may be dismissed by managers who have been burned in the past by bad forecasts. Remember, however, that scenarios are not forecasts. Forecasting predicts one likely future that will develop, and the company gambles all of its resources on a tomorrow that may never come. In contrast, scenarios help managers test strategies in several different futures.
The problem with forecasts is that they are so often wrong. Over time we have learned that forecasts of anything truly uncertain, like estimates of commodity availability, almost always fail. Companies investing heavily in these forecasts would have been in deep trouble. Many events that occur today will have predictable results tomorrow. These events are called predetermined elements, and they are useful in making plans in the near future. Too often though, people wrongfully assume that an event is predetermined.
Only rigorous research, meticulous attention to detail, and testing of ideas can help in avoiding mistakes. It is therefore important, according to Fahey and Randall (1998), to distinguish the predetermined elements from uncertainties when identifying the driving forces. For example, the aging of baby boomers is a predetermined element that will lead to predictable consequences for many businesses.
The scenario approach helps managers deal with uncertainty by learning what it would be like to run their businesses in different futures. By testing their decisions in several logical futures, they can explore the consequences without actually risking their companies and careers. The actual future that emerges will then contain fewer surprises that could paralyze an organization. Many managers are so unnerved by an abrupt turn of events that, instead of taking action, they deny that the unwanted future is actually happening. Using scenarios makes it more likely that managers will react quickly, and with confidence, to unexpected challenges.
References:
Fahey, L. & Randall, R. M. (1998). Learning from the Future: Competitive Foresight Scenarios. New York: Wiley.