In the unpredictable business environment, any advantage that allows the possibility to predict and prepare for outcomes will add value. Monitor Group partner Nick Turner explains to CEO how scenario planning can offer companies an advantage.
We live in a time of increasing uncertainty, from the emergence of new markets, technologies and business models to the challenges of climate change and instability.
Consider, the global economic crisis. Opinion is divided between those who believe that the downturn is a temporary glitch before the economy leaps ahead, and those predicting a prolonged recession. Either of these paths—and others in between—have profound implications for industries, markets, and companies. Although this uncertainty presents CEOs with significant risks to manage, it also offers tremendous opportunities for growth and competitive advantage.
Of course, no one knows which path will prevail. Yet every CEO must make decisions and act with confidence. In the absence of a crystal ball, thinking systemically and strategically about a variety of potential outcomes can provide greater clarity and free organisations from the constraints of their own biases, wishful thinking, and assumptions about the future. Scenario planning is a rigorous methodology that has been used by many of the world’s leading corporations to do just that. By exploring a divergent set of challenging, yet plausible scenarios (narratives about the future), companies can develop more robust and flexible strategies, make better decisions, pursue new directions, and adapt and grow in a rapidly changing world.
Developing scenarios
Scenario planning was first used by military organisations after World War II to 'think the unthinkable'. Since the 1970s, when Royal Dutch Shell first adapted the methodology to corporate strategy, it has been widely applied to manage risk and accelerate growth by boards of directors and teams at the executive, departmental, and business unit levels.
The scenario planning process is highly creative and collaborative and rigorously challenges the mental maps that shape our perceptions about the future. Ideally, it involves a diverse internal team (made up of different functions, ages, genders, backgrounds) and several outside ‘provocateurs’ to tap varied perspectives and experiences. The first step involves isolating the key issue or decision to be made. This might be a big, long-term bet, such as investing in a new technology, acquisition, or manufacturing facility. Or the focus could be more exploratory, such as assessing emerging markets or potential innovations.
The team then brainstorms the driving forces (social, economic, political, technological, environmental) that will shape the business environment in the decade ahead, but are outside of the company’s control. Some of these may be locked in, such as the number of teenagers in 2020. Others, however, will be highly uncertain and unpredictable, such as consumer preferences or public opinion. These factors are then prioritised according to both uncertainty and their importance to the decision or issue at hand.
This process yields three or four scenarios—plausible stories of very different futures that are constructed around actual plots rather than a best-case/worst case continuum. The test of a good scenario is not whether it portrays the future accurately but whether it stretches the team’s thinking and helps it anticipate and rehearse the future to make better decisions today.
Using scenarios
Once the scenarios have been fleshed out, the next step is to explore the implications and options that are posed by each scenario and across the set as a whole. To identify new growth opportunities, for example, executives might ask:
- What does success look like in this scenario?
- In what markets will we play and which customers will we serve?
- How will we serve those customers?
- What capabilities will we need to have in place?
- Which actions should we prioritise? Which ones are robust across all scenarios and which are contingent depending on how the future unfolds?
- How would we know if this scenario were going to come true (in order to quickly revisit/reprioritise our options if necessary)?
By rehearsing scenarios in this way, executives can adapt more quickly to what is actually happening, and to anticipate better what could happen. Decisions that have been pre-tested against a range of probably outcomes are more likely to stand the test of time. And by systematically exploring possible scenarios, executives can act with greater confidence today.
The benefits of scenario planning
Given the accelerating rate and breadth of change, the world is likely to become even more unpredictable, volatile and complex in the years ahead. Executives will therefore need to become even more adept at making decisions under conditions of uncertainty. Scenario planning can help executives overcome two major obstacles to such decision-making: denial and paralysis.
Denial is often manifested in an unwillingness or inability to see the need to change. This is especially common in successful companies that believe they can apply the business models, approaches or metrics that worked in the past to new opportunities.
By articulating challenging, yet plausible, ways in which the future could evolve, scenarios encourage executives to 'think the unthinkable', anticipate surprises, and rehearse new possibilities.
Paralysis, in contrast, often emerges when executives are overwhelmed by the number and complexity of choices or when an over-emphasis on competitive threats obscures growth opportunities. By using scenarios to explicitly structure or frame the key choices the organisation faces, they can see desirable possibilities and understand why and how to make realistic strategic choices.
Finally, scenario planning is a flexible tool that executives can use to complement other strategic processes across a variety of outcomes. In addition to helping overcome wishful thinking, denial, or paralysis, scenarios can be used to generate novel ideas and innovation agendas. Scenarios can function as a ‘wind tunnel’ through which new proposals and initiatives can be ‘flown’ to test their resilience.
Scenario planning is also valuable in crafting a compelling corporate vision and then building widespread alignment around it. And because stories have always been the most powerful way to communicate ideas, scenarios can engage entire organisations in an ongoing strategic conversation about their future.
Whatever the outcome, scenario planning is a powerful tool precisely because the future is unpredictable. Scenarios will not necessarily provide an accurate picture of the future, but they will give executives better contextual awareness, clarity, and confidence to make decisions today.
