Even before the tragedies of 11 September, business strategists were faced with a daunting task. The technology bubble with its associated high equity values was deflating at a rate faster than many imagined possible. Industry segments as diverse as oil, aviation, financial services, and semiconductor design were consolidating. In addition, the economy was teetering on the brink of a recession. Then came the terrorist attacks and the subsequent war. It is clear that planning has become vastly challenging.
But should firms merely hunker down, cut costs, and wait this out? Should the primary inputs into strategic decision-making be day-to-day customer feedback and CNN broadcasts? While we firmly believe not, as do many firms we speak to, the actions we see are indicating the contrary. Broadly, headcount reduction is receiving significant attention while strategic thinking is being put on hold. Cost reduction is clearly important to maintaining balance sheet strength, but it is also crucial to ensure that the strategic process continues.
In change there is opportunity. History shows that companies that are most able to interpret the environment and its likely future will chart a stronger outcome than others. There is no reason why this should change.
Scenarios are possibilities, on which a firm’s fundamental strategy or operational issues can be tested. They are neither forecasts nor predictions. The point is not to decide which scenario is correct. Rather, scenario development is a creative process that has been proven to generate new ideas and approaches. Exploring possible futures is more important than debating the probability of a scenario’s occurrence.
Scenarios are built around ‘drivers,’ ie the key influencers of a future environment. For example, when we developed a series of ‘September 11 Aftermath Scenarios,’ our drivers were the duration of the conflict and the stability of the anti-terrorism coalition. ‘Signpost’ is a term we use to describe a signal that identifies the emergence of a particular scenario. (For example, a country electing to leave the coalition could be considered a signpost of an unraveling coalition and the future world associated with it). Recognising a signpost allows an organisation to adapt much faster than competitors who are unaware of the signal.
Case study
How does this scenario approach unfold in an individual situation? Here is an example. A global supplier to the fabric industry needed to redefine the strategic direction of its most promising business segment to ensure future success. Scenarios played a key role in the process of promoting creativity and identifying robust tactics.
To begin, the management-appointed team identified a large number of drivers that could determine the evolution of the business environment. These were sorted on the basis of their potential impact on the business, as well as the degree of uncertainty surrounding them. The team then focused in on the drivers or ‘scenario cornerstones’ that would be likely to have the greatest influence on the company’s business environment and were the most uncertain: government regulation, value-chain integration, the development of Mexico as a production centre, and technical breakthrough. Using these drivers, the team constructed scenarios based on the range of possible outcomes of the four cornerstones.
Five distinct scenarios were constructed. One scenario, for example, was based upon the likelihood of an emerging government regulation driving a substantial shift in market growth. This allowed the firm to determine what steps it needed to take to be qualified to meet this demand. The firm realised that its technical capabilities were seriously lacking in this area and rallied around the need to rebuild them.
Also during this exercise, it became clear to company management that they should implement a set of critical actions, including stepping up investment in low-cost regions, acquiring specific personnel capabilities, and increasing the level of market promotion to build demand for their products. These actions were robust under any of the possible scenarios and possessed attractive near-term payouts in addition.
Overall, the team found the session energising, highly creative, and rewarding as a set of clear actionable tasks emerged as deliverable.
Best practices
Different firms use different approaches to construct scenarios, but we see several practices that typically define the integrity of the process.
Frame the situation properly - It is important to establish the desired time horizon and frame the problem very clearly. Scenarios can be used both to examine long-term risks and opportunities for the largest multinationals at a corporate level, and to understand the near-term impact of a competitor introducing a new product in a strategically important region.
Ensure that the key drivers are independent - As noted above, scenarios are built upon drivers. Selecting a short list of drivers for analysis is important – robust scenario development requires that the drivers be as independent as possible. For example, consumer confidence and economic growth are two drivers that are unlikely to be independent – in fact, they are often closely correlated. Consumer confidence and the likelihood of a technical breakthrough, however, are far more independent and might prove to be a better foundation for rigorous scenario development.
Identify appropriate scenario cornerstones - Another factor in determining which drivers are chosen is the context of the problem being addressed. We typically look for drivers that are both high impact ( they will significantly affect the business) and highly uncertain ( it is very difficult to forecast an end state). While a scenario built around fuel economy regulations may yield insights for the corporate strategy of an automobile manufacturer, it would have far less impact on the firm’s supply chain strategy.
Describe the scenario and its winners - It is useful to describe the scenario clearly. Two or three paragraphs are sufficient - perhaps beginning with ‘A world in which...’ This allows the team to share in the meaning and implications of the scenario better, and also to quickly recall the essence of the environment when viewing the work months or years later. Describing the characteristics of winners in each scenario is also an essential step in the creative process.
With this foundation, new strategies can be defined or existing ones tested; risks assessed and opportunities brainstormed. Scenarios offer a wide range of benefits. Shell, for example - one of the earliest proponents of scenarios - was able to respond more quickly to volatile oil prices than its competitors. Our own scenario work has shown similar benefits in other organisations, whether in helping a fibre manufacturer to explore expansion opportunities, an oil company to consider operational change issues, or a resin manufacturer to understand the impact of a changing customer base.
In these uncertain times, do not ignore your strategy. Good scenario development is an essential step in diagnosing today’s environment and in generating those actions that can make a real difference in the future.
Richard Eno is vice president, global management consulting, Arthur D Little, Inc, E-mail: eno.r@adlittle.com
SHELL GROUP’S STRATEGY
The Shell Group of companies has a long corporate history of scenario planning and is, perhaps, the most well-known practitioner. Current scenario planning at Shell is not subject to a mechanistic link to planning processes; rather, a combination of global scenarios and more focused local scenarios, with tools for facilitating scenario use, provide a broad framework that influences strategy development.
Shell says that building and using scenarios is a highly collaborative process, and is synonymous with thinking broadly and freely about a problem - not viewing it from the perspective of a single discipline.
The company’s own approach is to begin with a series of interviews to capture intuition and insights. The process then moves into a phase of workshops and research, in which ideas are gathered, shared, tested, and linked. The final step is crafting stories that embody the critical challenges that have emerged from the process. According to Shell, scenarios are particularly useful in situations where there is a desire to put challenges on the agenda proactively (for example when there are leadership changes and major impending decisions) and where changes in the global business environment are recognised but not well understood.
Scenarios help to reveal their users’ understanding of what is important, how those elements will evolve in the future, and the linkages between them. These insights about the global business environment upon which decisions are being based can be shared, detailed and tracked. Strategies can be adjusted accordingly.
Shell has information on building and using scenarios at:
http://www2.shell.com/home/Framework?siteId=royal-en&FC1=&FC2=&FC4=&FC5=&FC3=/royal-en/html/iwgen/About/scenarios/building_and_using_scenarios.html
