From scenario thinking to strategic action. By Ian Wilson.

Practical word of caution:

Decision makers, particularly senior executives, have a natural impenitence with analysis and rather to ‘cut to the chase’. This tendency for ‘action’ is nevertheless praise worthy should put into account so that the scenarios (the context for action) can first be established. Once executives see that the process both begins and ends with an emphasis on action, they are more easily persuaded of the true value of scenario planning.

Key terms:

Scenario: A collection of futures that intended to establish the boundaries of our uncertainty and limits to plausible futures.

Resilient strategy: it is not the only quality to be sought in a strategy. It can be built into the strategy later, not by reducing its force or boldness, but rather by ‘hedging’ or contingency planning.

The Knowledge Gap:

Scenarios needed a tighter linkage to strategic planning and decision making in order to engage operations managers seriously and continuously. Scenarios are not an end themselves but more of a management tool to improve decision making The need for linking perceptions about the future to current decisions.  In other words “translating the implications of the scenarios into executive decisions and into strategic action. “ Clearly stating an implementation issue.

Mental maps:

Good managers know where they are, where they’re going, and how they’ll get there. There should be a need for confronting managers with the acknowledgment of what they don’t, and cannot, know about the future. When we do not know the future, so we must perceive it as a challenge to out presumption of knowing (and thus managerial competence). ‘Because few, if any, corporate cultures reward incompetence, managers have a vested interest in not acknowledging their ignorance, and so in resisting the intrusion of scenario planning into traditional forms of decision making. ‘

Where to start?

Establishing a clear-cut decision focus on every set of scenarios.

WHAT NOT TO DO :
The First Step in the "do not do" Scenario process:

Do not: review the changing forces affecting the business environment (traditional way, will be presented below).

Determine the usefulness of the scenario upon their ability to influence executive action (it would focus on a potential problem).

The Second step:

What should we NOT DO with the scenarios once we have developed them?

1.     Create an action plan for each scenario  (paralysis by analysis)

2.     Assign probabilities and develop a strategy for the most probable one. But WAIT! The author suggests that probability has more to do with forecasts than with scenarios; and scenarios are not forecasts. Wilson admits that we all have natural tendency to have an assessment (probability) on any choice based on what’s more likely to happen. Wilson’s critical point that to avoid playing the probabilities game to the point of focusing on one; more probable scenario and exclude the others.

What TO DO:

Develop a resilient strategy within the framework of alternatives features provided by the scenarios. Locate strategic decisions that scenarios should be designed to explain.

Why?

At the outset: the ultimate purpose of scenarios is not just to develop plausible descriptions of alternative futures but rather help executives make better, more resilient strategic decisions.  By doing so, we effectively link them to specific planning needs and prevent the process from drifting into overly broad generalization about the future of society or the global economy.  Scenarios normally deal more with long-term trends (5-10 years) thus these decisions are strategic rather than tactical.

FOUR approaches for scenario development (ranging from most elemental to the more sophisticated):

1.     Sensitivity/risk assessment:

Used to evaluate a specific strategic decision where the need is already known. The question therefore is whether to proceed or not (that is after assessing the strategy’s resilience or vulnerability in different business conditions.

-       First: Identify key conditions (e.g. market growth rate, changes in forex, tech development) that the future environment has to meet in order to precede with a ‘go’ decision.

-       Second: Assess the state of these conditions in each scenario. Making is possible to compare the scenario conditions with the desired future condition.  Assess how successful and resilient or vulnerable a ‘go’ decision may be in each scenario.

-       Third: Assess the overall resilience of a decision to proceed with the proposed strategy (and consider the need for ‘hedging’ or modifying)

This approach gives a straightforward application of scenarios to decision-making (using a series of descriptive and judgmental steps). However, it depends on having a very clear focus in order to decide to ‘go/not go’. (NoteToSelf: ie paper corp thinking about investing $600 m in new plant. Apply the steps to find out different levels of demand growth (1^st) that will lead to similar patterns of eventual decline (2^nd).  Thus the paper corp decided to go the extreme way and scaling down the initial plant (3^rd).

2.     Strategy Evaluation

Simply put, to act as ‘test beds’ to evaluate the viability of an existing strategy (a traditional one, that is). We play this current strategy against the scenarios and see how it holds up.

-       First: Disaggregate the strategy into it’s specific thrusts (e.g. ‘Focus on upscale consumer market segments’, ‘diversify into related services areas’) and spell out the goals and objectives.

-       Second: assess the success the relevance and likely success (in terms of meeting the desired outcome) in the diverse conditions of the scenarios.

-       Third: by now, this impact analysis should enable the management team to identify:

o   SWOT

o   Comparative competitive success or failure

-       Fourth: identify options for changes in strategy and the need for contingency planning.

The benefit of this assessment boils down to highlighting ‘bottom-line’ issues that require immediate attention.   A good example of this strategy is a large department store that used it in 3 distinct ways:

o   Evaluate the likely payoff from it’s current strategy

o   Assess and compare strategy of other competitors

o   Analyze retail strategy options to identify the most resilient ones and possible inclusion in the company’s strategy (the company indeed expanded into specialty stores as a result of this exercise).

3.     Strategy development (using a ‘planning-focus’ scenario)

An approach to bridge the ‘culture gap’ between traditional planning and scenario planning (single vs. multipoint forecasting). It consists of selecting one of the scenarios as a starting point and focus for strategy development, and then using the other scenarios to test the strategy’s resilience and assess the need for modification, ‘hedging’ or contingency planning.

-       First: review the scenarios and identify 1) opportunities 2) threats. Looking at each scenario individually first, and then as a group.

-       Second: determine, based on review, what the company should/should not do in each.

-       Third: select the most probable one, aka ‘planning focus’.

-       Fourth: integrate the strategic elements identified in 2^nd step in a coherent strategy for the scenario chosen in 3^rd step.

-       Fifth: test this strategy against the remaining scenarios to assess its resilience or vulnerability.

-       Sixth: review the result of this test to determine the need for strategy modification, ‘hedging, and contingency planning.

The author defends his use of probabilities although he had preached against them in the beginning by explaining that 1) the other scenarios were not discarded. 2) it could be used an intermediate step to get senior executives accustomed to relying less on the traditional planning. Example: Shell Canada in 1980’s. As a member of the Royal Dutch/Shell Group, the executives as Shell Canada were well aware of the strict interpretation of the scenario-based planning. So they felt that this approach would help the company ease from the traditional way. Moreover, the discussion showcased so much uncertainty in executive opinion about future trends. After choosing the ‘planning focus’ (in their case it was two scenarios). They proceeded to structure its strategic positioning to answer three questions: 1) What strategies should we pursue no matter what scenario occur? 2) What strategies should we pursue if either of the ‘planning focus’ scenarios occur? 3) How sensitive are base strategies to variations in assumptions under contingent conditions?

4.     Strategy development (without using a ‘planning-focus’ scenario)

Executives take all scenarios at face value without assigning probabilities and aim for a strategy that can deal with a wide variety of business conditions.

-       First:  identify key elements of a successful strategy

-       Second: analyze each scenario to determine optimal setting for each strategy element (e.g. What would be the best marketing strategy for scenario A? Scenario B?)

-       Third: Reviewing these scenario-spacific setting to determine most resilient option for each strategy elements.

-       Fourth: integrating these strategy options into an overall, coordinated business strategy.

Obviously, this is the most sophisticated, demanding method that makes optimal use of every scenario possible. e.g a large European financial services firm where the scenario team were also the strategy team. They first structured scenarios around their perception of the critical uncertainties facing the firm. Then identified opportunities and threats. Next, they used this framework to assess the firm’s current competitive position and prospective vulnerability. Which then led them to the following steps:

o   Single out 11 key elements of well-rounded strategy

o   Identify optimal strategic option for each of these 11 elements

o   Select the most resilient option for each element, and integrate the options into coherent strategy for the firm.