Scenario planning to manage chaos strategically

Although not new, scenario planning has never been so relevant. The degree of uncertainty, or ‘chaos’, has increased dramatically, especially with a range of disruptions brought on by digital technologies, political unrest, climate change, and shifts in customer behaviour. Scenario planning is a great process to manage these uncertainties more systematically as it provides the flexibility that is lacking from traditional strategic planning. It is also a fun way of engaging a broad and diverse range of stakeholders.

So let’s recap on a not-so-new yet proven method to remain relevant in the long term!

In 2013, nobody thought that the iron price was going to drop by more than half in just 18 months

Over the past five years, the world economy has seen significant volatility,[1] especially within commodity markets. The structural impact of this collapse has been felt, and is likely to continue to be far reaching for years to come. This volatility has not only impacted resources companies, but also the multitude of industries and workers that rode the wave of the commodity boom, as well as the Australian government that benefited greatly from the mining boom.[2]

commodity

Commodity boom and bust cycles are nothing new. They have happened before, and undoubtedly will happen again, and are just another uncertainty of doing business.

Organisations constantly have to deal with a blend of uncertainties, known long-term shifts and megatrends. For many CEOs and leadership teams, the question is, “how can one plan for an increasingly uncertain future?”

The origin of scenario planning

There is no crystal ball. However, there are methods that can be used to not only manage these uncertainties but also become more comfortable with ambiguity caused by a widely-changing environment. One such method is called scenario planning, and like many strategic methodologies, its modern roots are based in military strategy. The United States Air Force is credited with initiating the first scenarios after WWII in order to anticipate surprise nuclear attacks by considering alternative strategies.[3]

“Scenarios help us to make crucial choices in uncertain times as we grapple with tough energy and environmental issues.”

Peter Voser, Former CEO Royal Dutch Shell

While many organisations have applied this methodology, Royal Dutch Shell was one of the first, and arguably one of the best at using scenario planning to manage uncertainty in one of the world’s most capital-intensive, yet most volatile industries.[4] Pierre Wack, affectionately dubbed the ‘Father of Shell Scenarios,’ encouraged his managers to challenge conventional business thinking.[5] This approach helped Shell in the early 1970s to anticipate the possibility of a sharp rise in oil prices ahead of the 1973 oil crisis and laid the foundation for the following four decades of Shell’s scenario planning. Jeremy Bentham, Shell’s current Head of Scenarios, Strategy and Business Development outlines the benefit of scenario planning by stating that “scenarios give us lenses that help us see future prospects more clearly, make richer judgments and be more sensitive to uncertainties.”[6] Subsequently, while other organisations are focused on the short term, Shell is planning far into the future.[7]

What is Scenario Planning really?

Scenario Planning is a fun, elegant and simple way to engage a team on the future, debate robustly yet constructively the future possibilities, develop long term yet practical strategies or solutions, and plan ways to address changing circumstances with a clear sign-posting system. Monitor Deloitte’s Fast Forward™ method is a simple, rapid-fire version of scenario planning. At the core of the method is an ‘outside-in’ approach, with a clear focus on the broader world surrounding an organisation, including but not limited to customers, competitors, regulators, and governments.

How do we do it?

The Fast Forward™ method is made of four simple steps, which should be conducted as a team to maximise engagement and ownership of the future strategy and plan.[8]

scenario proc

Step 1: Identify uncertainties and future driving forces

Conduct research and/or – even better! – bring in external experts to identify the future trends and uncertainties that could impact the organisation and its ecosystem, e.g. customers, covering three levels of abstraction:

  • Contextual environment, e.g. political, economic
  • Industrial environment, e.g. industry dynamics, customer needs
  • Organisational environment, e.g. products and services, operations, asset base, financial

Step 2: Prioritise uncertainties

Using the input from internal and ideally external subject matter experts and key stakeholders, the uncertainties are prioritised based the degree of uncertainty and potential impact on the organisation. The two most uncertain and highest impact uncertainties are then selected for scenario development; the other uncertainties and trends are not discarded and will be considered to enrich the description of the future scenarios.

Step 3: Develop scenarios

The two most critical uncertainties selected in Step 2 can be projected in extreme directions on two axes, forming the foundations for four plausible, impactful scenarios. These scenarios are four possible versions of the future and will be used to test strategies and tactics. These four scenarios can be further described using the research conducted in Step 1 and the other trends and uncertainties identified previously. The point here is to make these believable but more importantly engage your teams in the description of what the future potentially holds. This will prepare for the future strategy development.

Step 4: Strategy development

The next step is simply to develop a number of strategic options and tactics to allow the organisation to survive in the different scenarios. The options that are common to the four different scenarios can become part of the ‘core strategy’; the other options that help the organisation be successful in one, two or three scenarios form part of alternative strategies. The definition of signposts, which indicate whether one of the four scenarios is becoming real, will help indicate when to switch or adopt elements of one of the four alternative strategies.

Where have we applied it?

A recent example of where Deloitte applied this Fast Forward methodology was for a long term transport strategy. The planning horizon was 30 years, which represented a challenge given the level of disruption experienced in the automotive and engineering industries. To deliver this, the team conducted research, in partnership with a scientific and academic institution that had conducted extensive research in future macro trends that could influence not only the transport system but the broader region.

This research was then used with the Deloitte’s Fast Forward methodology to develop four alternate versions of the future, or scenarios. The outcome of the project was an overarching vision and strategy for the region’s transport system that factored components from all four scenarios, including themes such as the change in spread of population around the region, and the type of economies that will drive the prosperity of the region. This effort helped identified capabilities and initiatives that will be critical to develop over the next 30 years, with some requiring investment now to be prepared for the changes coming our way.

scenario ex

Conclusion

Scenario Planning cannot predict the future but it is a powerful tool in the strategy practitioner’s toolkit to help frame and manage an uncertain future. It provides a solid framework and methodology to engage a broad range of stakeholders with diverging opinions on what the future may hold and how they can plan for it. It opens up minds and helps an organisation develop the mechanism to be ready for future disruptions, even if not fully known at the time of the planning process.


 

[1] VIX index, CBOE http://www.cboe.com/micro/vix-options-and-futures.aspx

[2] The Efffect of the Mining Boom on the Australian Economy, RBA -http://www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-08.pdf

[3] Kahn, H. & Wiener, A. J. (1967). The next thirty-three years: A framework for speculation. Daedalus, 96(3), 705-732

[4]40 years of Shell Scenarios, 1972 – 2012 (http://s05.static-shell.com/content/dam/shell-new/local/corporate/corporate/downloads/pdf/shell-scenarios-40yearsbook080213.pdf)

[5] Pierre Wack Scenarios: The Gentle Art of Re‐Perceiving (One Thing or Two Learned While Developing Planning Scenarios for Royal Dutch/ Shell), Cambridge: Harvard Business School, 1984.

[6] 40 years of Shell Scenarios, 1972 – 2012 (http://s05.static-shell.com/content/dam/shell-new/local/corporate/corporate/downloads/pdf/shell-scenarios-40yearsbook080213.pdf)

[7] Ibid.

[8] http://www2.deloitte.com/us/en/pages/strategy/solutions/corporate-and-business-unit-strategy-services.html

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