What is scenario planning and how to use it
In today’s post we are going to talk about scenario planning, the last technical input that went into the visioning workshop /strategy workshop as part of the Corporate Strategy & Transformation study.
We will discuss what is scenario planning, some reasons why the scenario planning tool is insufficient to make decisions and steps in scenario planning. We will also offer an example of how to use this tool in visioning workshops with clients.
What is scenario planning
Before we discuss how to conduct scenario planning let’s look at what is scenario planning.
So what is scenario planning? Scenario planning is a planning tool used to make flexible long-term plans to deal with major, uncertain shifts in the organization’s environment.
It is also a tool that allows companies to develop a resilient strategy or test the flexibility of the existing company strategy against various possible future alternatives.
In other words, scenario planning is a structured way for an organization to identify and gain a deeper understanding of the underlying major drivers of change, think about how those potential changes may impact an organization, determine what is required for the organization to succeed if potential changes occur and develop the strategy accordingly.
And no surprise, scenario planning has its roots in military strategy, with the use of scenario planning in business pioneered by Shell.
One interesting aspect of running a scenario planning workshop for a client is that as we run a scenario planning exercise we are basically admitting to the client that we cannot predict the future. We just can’t do it. There are too many uncertainties.
No consulting firm anywhere in the world can do this since no analytic technique exists to predict the evolution of a market. This is an important insight to keep with you.
And even of uncertainties we are certain will occur, we can’t predict how those variables will change. They can go up or down, or sideways. For example, the price of oil could go up or down. We know it is uncertain but we don’t know which side it can go.
So in a scenario planning exercise the first thing you are doing is you are admitting to the client that there are uncertainties and, even if you can predict some of the uncertainties with certainty, you can’t predict with certainty which side the uncertainty will go.
Instead, you are helping the client to determine which of these uncertainties are the most important ones. And given the fact that uncertainties can go in either direction, you are helping client to understand what would a market look like depending on the multiple combinations and permutations of the most important uncertainties.
Some limitations of the scenario planning tool
Scenario planning is something that is useful, definitely spurs conversation, yet this tool is by itself not sufficient for client to make a decision. It is just one of the tools in a strategist’s armoury.
There are number of problems with scenario planning.
One, with scenario planning you get these very loose guidelines about the future and you still have to figure out what to do with it.
There is also a risk that the organization’s leadership will act like deer in the headlights if faced with a broad range of uncertainties and possible outcomes. That is one of the reasons why we prioritize uncertainties so it can be displayed on a two-by-two matrix, as explained below.
Scenario planning also runs the risk of executives becoming complacent. Executives can assume that all potential futures were considered so there is no need to keep their mind open and constantly scan the environment for drivers of change, their potential impact on business and actions required to prevent negative impact.
Extreme scenarios are also often ignored as they are deemed highly unlikely to happen. Yet, as financial crises and many other events showed us, this type of limited scenario planning can be very deficient. Instead all extremes, positive and negative, must be considered during scenario planning.
Scenarios are also often viewed as right or wrong, and as static. With this line of thinking “wrong” scenarios are often disguarded. Instead, scenarios should be viewed as something that are a work in progress and which are adjusted over time as more information becomes available and as environment changes. It is crucial to remember that scenario planning is an iterative process.
Despite the limitations of scenario planning, it is still a powerful tool to have in the strategist’s armoury. You need to know this because it is still useful as a staging point for a discussion.
Firmsconsulting’s 6 scenario planning steps
We usually do the scenario planning exercise nearly a 3rd of the way into the visioning workshop. And, unless you have educated the executive team about the issues and you would have done that through the case studies and the industry analysis discussion, they are going to start throwing out issues that are not really issues. So the scenario planning exercise only works well if you have seeded the right concepts in there.
If you haven’t and they are working off with context base that is completely inappropriate you are going to have a problem. The entire exercise will fail.
Once an organization’s environment is well understood after discussing industry analysis and case studies, scenario planning can begin.
Scenario planning is run following a logical sequence of steps, which are actually the same in every single study.
Step 1 – “Brainstorm” major issues impacting the sector
The first step of the scenario planning exercise is to sit down with the executive team and “brainstorm” major issues impacting the sector.
Here we need to do the kind of brainstorming that Alex Osborn (the “O” of legendary ad agency B.B.D.O.) invented in the 1930s and popularized in his 1953 book “Applied Imagination“. The kind of brainstorming where a group of people throw out ideas in a meeting, or in Osborn’s words “using the brain to storm a creative problem”, and do so with the absence of criticism or negative feedback. The kind of brainstorming that, according to Osborn, was central to B.B.D.O.’s success.
However, please keep in mind that usually when we talk about brainstorming within the context of case interviews and management consulting, we are talking about a very different process vs. the type of brainstorming process which we use in scenario planning. Usually when we refer to brainstorming we are referring to a structured, methodical, logical process of identifying drivers of the issue, which ultimately can be showcased as a decision tree.
As the “brainstorming” process gains momentum, it helps to ask executives to look beyond the medium term. If executives only focus on the short- and medium-term they will tend to extrapolate current environment conditions into the future. Asking them to think beyond the medium-term resets their mindset and makes it easier to see what are the major drivers of change, how those drivers may change in 5-10 years and how they can impact the organization.
Issues are ideally listed with a thick marker on separate Post-It Notes and placed on the wall. All the participants should provide input so they feel a sense of ownership. All inputs must be publicly displayed versus being captured on a laptop by a consultant who resembles a squirrel.
Step 2 – Cluster Issues into groups
Once you have listed all these issues, you need to cluster them into two groups.
The one group is what are the predictable things we know will happen. And the other group is what are the uncertainties.
Step 3 – Select top 2 drivers of change
Then we can put aside certainties and we need to determine which uncertainties are highly correlated and can be combined (Post-It Notes stuck to each other and placed on the wall) and which uncertainties are not key drivers of future scenarios (removing Post-It Notes from the main wall to a separate area in case the group wants to go back and reconsider adding back certain variables).
Key independent uncertainties are then prioritized to identify those having the most impact on the business. Specifically, we need to rank independent uncertainties from one that has the biggest impact on organization to the one that has the least impact on organization. So if we come up with 10 independent uncertainties we will list them, one having the biggest impact, two having second biggest impact and so on.
This exercise should help to cut down the number of uncertainties to 3-4, usually because independent variables can be clustered into 3 or 4 groups. And out of top 3-4 we should further prioritize the top 2. And, as stated above, it is a key to make sure such 2 variables are not dependent on each other.
Step 4 – Develop a two-by-two matrix
For those top two independent uncertainties we develop a two-by-two matrix. The base assumption here is that by defining the extreme corners of any given environment one explores the correlation between all relevant uncertainties, recognising that reality will likely be somewhere in the middle. Defining scenarios is not meant to describe the most likely case. It purely explores uncertainty correlation and illuminates the “what might be” to better understand associated risks with any path forward.
As a side note, if, lets say, the four top uncertainties are highly important to consider, we can create additional two-by-two matrixes to depict additional outcomes, but this is usually not necessary as generally key drivers can be prioritized to only two.
Moreover, if the result of scenario planning work is more than 4 scenarios managers tend to just focus on the most important (in their opinion) scenario and ignore other scenarios. Therefore, it is best to prioritize issues to the point that the top two drivers can be selected.
Each scenario should be given a catchy name so it can be more easily internalized by executives, such as “All bets are off”, “Sustainable Growth” and “First Frost”. Internalizing scenarios will help executives keep scenarios at the top of their mind, ask better questions and, as a result, better prepare for the future.
Step 5 – Understand each scenario and adjust strategy accordingly in light of scenarios
Each scenario is then analysed to understand what will it take to succeed in such environment.
The two-by-two matrix gives you four scenarios of the future. Scenarios A, B C and D. That is what the market could look like in the future.
Then you need to facilitate a discussion addressing the following types of questions:
- What products and services do we need to offer in each of these four possible future markets?
- What would our pricing strategy be for each of these 4 future possible markets?
- What our channel strategy will look like?
- What sales and marketing will look like?
- What would alliances and acquisitions look like?
- What would our core business be?
- Why would that be our core business?
That is the type of discussion you need to have with the executive team. And this analyses of each scenario should be captured in written form by someone on your team. Again, always in public versus clicking away on a noisy keyboard.
Scenarios can then be used to shape the ongoing strategy of an organization.
Step 6 – Iterate
As mentioned above, scenario planning is an iterative process. While the consulting team can help kickstart the process and run the initial scenario planning analysis, scenario planning exercise should not end at the conclusion of the visioning workshop. Instead the major drivers of change and scenarios generated should be revisited by executives on an ongoing bases to factor in new information and changes in the environment.
An example of using a scenario planning tool in visioning workshops
We are going to pick two uncertainties here for the point of explaining them. Lets assume one uncertainty is market openness and the other one is degree of commoditization of the energy market.
A market can either be highly opened or not open at all. So you get two options for market openness. Markets can also be commoditized or specialized.
Therefore, on one axis you have got market openness, high or low. On the other axis you have degree of commoditization, either commoditized or specialized.
So you can see you have 4 options. Markets can either be very open and commoditized or very open and specialized. Or it could be closed and commoditized and closed and specialized. These are the only 4 options.
For each of those options you then have to figure out what that market looks like and what it means to play in each of those segments. That is the kind of discussion you are having with the client.
You are saying, “If the market is closed and very specialized what kind of skills do we need to play in this market?” So you are basically saying, “What is the winner looks like in this market?” And what you are trying to do here you are trying to determine what is common for these 4 options, because what is common for each of 4 options is the attribute or skill that the client must possess if they are to win in any scenario.
If something is only a requirement to succeed in, maybe, one of those four options, and not a likely one, you can say, “Hmm, may be we don’t really need it. But if we could have it, it would be great.”
If something is needed in 3 of those 4 possible scenarios of the future, and not needed in all four, you can say, “Ok, we need it in 3. So even though it is not needed for every option I think this is a skill we need to have.”
Through the process of attrition you are collecting the skills you need to succeed here. And at the end of the day you say, “Ok, if this is what the market could look like (looking at 4 options) these are the skills we must have to compete and what would a strategy for us look like if we had those skills?”
That is the kind of discussion you are having here. And someone from your team needs to be capturing everything.
The question of how to amass so many skills for so many scenarios is for a different update. This refers to the note at the bottom about the evolution of scenario planning and this is the part most companies get wrong. How does one pick one future and bet on it while remaining flexible to all possible futures?
At the end of the day what you will have is four scenarios. Scenarios A, B, C and D. Only your final scenarios will have catchy names as per above.
Because you are dealing with two axes of uncertainty, market openness and the degree of commoditization and there are only 2 outcomes for both of them, you have got a two-by-two matrix.
And remember it is a role of the partner to keep the group focused. To say, “Even though you think this is highly unlikely, remember that Empire Energy may do the opposite? Do you want to be further away from them or be closer to them? What does it mean to go further away from them?”
At the end of this you are going to get some critical principles. Not hard and fast rules, but you will have some critical principles for what it is going to take to win in the future. These principles are the boundaries of our thoughts. They are like flagpoles with rope around them. We will not stray outside them unless we have a damn good reason to do so.
And one of the critical principles we came up with for this study is that given the amount of turbulence and uncertainty it is far better to be anchored to some large client and work with them, which is a vital, vital principle because going forward that large client is likely to be Empire Energy, which again reinforces this notion that we should only do what is in Empire Energy’s best interest.
Running a scenario planning workshop
That is how you run a scenario planning workshop. It is not difficult once you know the principles and steps to follow. And it is a lot of fun.
The skill level required to run this type of workshop is very high. We have seen junior people do it but they make it too mechanical and wooden. They also usually fail to get the leadership team to see a unique future. Juniors typically generate plans for a company that are evolutionary versus revolutionary because it is far easier to recommend a slight change to the strategy versus a radical change.
It takes an enormous amount of skill to allow the executives to be free flowing yet keeping them focused on the overall objective function, which the partner will know but cannot make obvious.
It is very easy to just go off on a tangent, especially with all this talk about technology and so on. People may go as far as suggesting to put drones in the air to deliver electricity. You have got to keep them focused.
You have got to say, “What is going to happen in a deregulated market? Well in a deregulated market it means competitors arrive and they steal market share. Less market share means less revenue. Less revenue means less free cash flow to do fancy things that could appear in the sci fi channel.”
You have got to be able to tie these logical pieces together. You have got to know where you are trying to get them to go and shepherd them there. This is very hard to do because if the executives raise material differences, they need to be seriously considered and that means the partner needs to re-juggle the workshop structure in his or her head, in real time and while managing the conversation.
If you are leading this kind of workshop this can make or break your career because the impact can be so significant. You get a lot of airtime with senior executives. You get to coordinate the discussion. You get to guide them and shepherd them. And it’s a really big opportunity so don’t mess it up. This is an opportunity very few people get.
In effect, you are being observed and judged by very senior people in industry. It is a live job interview.
And when you get the opportunity you have to make it count, make it exciting. And you need to brace yourself for hard work. Running a workshop like this is incredibly tiring.
Summary of steps for scenario planning
To wrap up, remember that scenario planning is an admission that the future is uncertain. And it means that you are going to present ideally four scenarios of the future to make sure the strategy can operate in all four scenarios.
To do this you have got to rank the issues facing the company, cluster them into two groups, things that are certain (we call them trends) and things that are uncertain (we call them uncertainties).
Then you need to determine which uncertainties are highly correlated and can be combined and which uncertainties are not key drivers of future scenarios and can be removed. Then you rank the remaining independent uncertainties.
For the top two uncertainties you need to build a two-by-two matrix and each quadrant of a two-by-two matrix becomes a potential future scenario.
And then you need to have an elaborate discussion about many vital aspects such as skills, competencies, resources required to succeed in each scenario, what should be company’s core business given each scenario, and those become principles which you will use to shape the on-going strategy for the organization.
Lastly, make it clear to executives that this process has to be iterative.
And, of course, you can see us conducting scenario planning in training videos which are part of the Executive Program.
We hope you enjoyed this post. We hope that through these type of posts and related podcasts you are more excited about strategy. We hope you can see the power, the impact, just enormous change we can bring to people’s lives.
Because that is what we are doing. We want to go out and we want to help this utility overcome damaging blackouts, shutting down of schools and hospitals, and make them into a successful company that can compete in the future.
This drive to change the world should be the only reason to want to be a strategy consultant.
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