Change Implementation Techniques for Creating a Sense of Urgency

Technique 2.51 Scenario Planning

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Introduction

· Scenario planning or future proofing has been described as a

"...process of trying to anticipate future developments, so that actions can be taken to minimize possible negative consequences and to seize opportunities..."

Wikipedia as quoted by Marion Hume, 2010a

· It is a part of risk management that involves looking at "what ifs" and can be called future-proofing or future thinking. This is a way to think beyond the status quo by being provocative and challenging conventional assumptions, our thinking, orthodoxies, taken-as-given beliefs, etc.
"...The status quo can stifle imagination and "what if" questions are merely starting points..."
Alexander Osterwalder et al, 2010
Findings from analysis of today's environment can be outdated or even obsolete tomorrow. It is impossible to be certain about the future because of the complexities, uncertainties, potential disruptions inherent in the ever-evolving environment. Thus it is important to develop a number of hypothese around the future to serve as guidelines. Need to look at assumptions about how market forces, industry sources, key trends and macro-economic forces could unfold.

· Strategies are based on assumptions, either explicit or implicit. But unforeseen events can happen to render these assumptions incorrect; in the worst case, inappropriate strategy can result in the collapse of the organisation.

. No-one can predict the future with certainty and organisations can prepare for the unexpected and unknown by using "what-if" types of analyses.

"...The events that do the worst damage are the ones no one even conceived of..."

such as 9/11 (attacks on the World Trade Centre and the Pentagon, Washington, USA)

"...in a volatile and fast-changing world, a great many events simply cannot be prepared for..."

Geoffrey Colvin, 2005a

"...There will always be external risk factors that are beyond your control. Oil prices triple. A terrorist blows himself up in a shopping mall. Hurricanes level entire cities. Currency fluctuations leave behind trails of bankruptcies. But we can take measures to mitigate and manage business risks. Then, if disaster strikes at least your attention won't be split every which way by other worries......you cannot protect yourself against the unexpected, so you need to keep your house in as good an order as you can. If disaster strikes, you don't want to find yourself doing twelve things at once and misprioritising them in public. It's vital, therefore, that you take control of your internal business risks - the ones you can influence..."

Richard Branson, 2008

. As the world is VUCA (Volatile, Uncertain, Complex & Ambiguous) an alternative view to strategic planning is

"...don't waste your time on strategy and big plans, because we ain't got a clue what's going to be happening next. All you do know is it's gonna come really fast and you'd better be ready to roll with it and make the most of it..management's dead and strategy is dead in this kind of world..I've tried to figure out, what have we been doing so intuitively that's been working for so many years, and institutionalize it, and improve it..."

Kevin Roberts (Global Chief, Saatchi & Saatchi) as quoted by Dominic White, 2012

Instead of strategic plans, he gives his staff 10 things to do in 100 days as it is about "fail fast, learn fast, fix fast". Linked with this is the importance of "learning and fixing"

. The world is full of paradoxes and contradictions, such as

- globalisation v. regionalisation

- abundance v. scarcity

- leadership v. management

- economic short-termism v. sustainable development

- science v. technology

- materialism v. spiritualism.

Scenario planning involves the thinking, ie "imagine if....?"

When evaluating a scenerion, need to focus on the "low hanging fruit", ie solutions that deliver huge pay-offs all this and are within relatively easy reach.

Thus the basis of scenario planning is to develop ways to handle these paradoxes and contradictions. More often than not, the process raises more questions than answers.

. Starting in 1960s are some examples of most experts not predicting or misreading events around important people

- Deng Xiaoping (hiding from the Red Guard & later leading the re-emergent of China)

- Ayatollah Khomeini (living in exile in Iraq/France before leading the Islamic revolution in Iran)

- Margaret Thatcher (a junior education minister & later the first female PM of UK)

- Karol Jozef Wojtyla (Archbishop of Cracow (Poland) & later becomes the first non-Italian Pope (John Paul II) since Adrian VI (1522))

- Lech Walesa (an unemployed electrician & "Solidarity" leader who becomes the first president of post-Communist Poland)

- Nelson Mandela (serving a 27 year jail term in Robbin Island & later became first President of post-apartheid South Africa)

- Mikhail Gorbachev (a minor player in Communist Soviet Union who rose to the leadership of the Communist Party & dismantled the Soviet Empire)

- John Howard (a suburban solicitor & failed state politician who went on to become the 2nd longest serving PM of Australia)

. Furthermore, an organisation needs to understand, and to handle, risks that it could face. For example, the top 25 global risks (for more details see mega trends) identified at the World Economic Forum on Global Risks (2006) were, ie

"...- economic, such as oil prices/energy supply; asset prices and indebtedness; US current account deficit and US dollar; coming fiscal crisis (failure and market crashes); China (integration, protectionism and dislocation); critical infrastructure (power outages, data blackouts and attacks)

- environment, such as tropical cyclones (East Asia and North Atlantic); earthquakes (Japan and California): climate change; environmental degradation and loss of ecosystem services

- societal, such as regulation (changes); corporate governance (failures); intellectual property rights (piracy, etc); organised crime (counterfeiting)

- pandemics, such as slow and chronic diseases in industrialized countries (obesity, cardiovascular, cancer, etc); developing world diseases (HIV/AIDS and TB); liability regimes (insurance capacity)

- technological, such as converging technologies (privacy issues); nanotechnology; electromagnetic fields; pervasive computing (RFID)

- geopolitical, such as international terrorism; European dislocation; current and future hotspots (general Middle East instability, Iran, Iraq, Saudi Arabia and Korea)

- Most likely short-term risks with highest severity: New HIV/TB infections of 5 million people

- Most likely long-term risks with highest severity: incidence of HIV/TB flattens in sub-Saharan Africa, but rapidly expands elsewhere; incidence of HIV/TB infections flattens, death remains high

- Risks just outside the top 25 are

- Space weather (solar radiation)

- Loss of biodiversity..."

as quoted by Tim Mendham, 2006

. Scenario planning is an effective way of investigating how alternative futures might occur and handling the associated risks/uncertainity. Furthermore, it can help managers see important possible events that would otherwise remain unconsidered and brings flexibility into long-term planning.

. Scenario planning is part of long-term planning techniques, ie 10 plus years. As the timeframe gets longer, the reliability of projections and assumptions diminishes. For example, very few people predicted the speed of globalisation, the 9/11 terrorist attack, the fall of the Soviet Union, etc

. Scenarios are studies of the future. They are aimed at helping people overcome their mental blocks and to consider unthinkable futures, which would take them by surprise if they were not prepared. ie think the unthinkable. For example, the need to challenge the unconscious prejudice and assumptions that are obvious in our organisations, the way we manage our organisations and our world views/prejudices, etc that guide our decisions that shape our future. This can include understanding the dynamics of where we are now and its historical context before determining where we are going, ie what might be different tomorrow that would surprise us. Need to be continually scanning the environment from popular media to academic journals, to identify early warning signs of change - such as new technology that is disruptive. For example, look at the dislocation impacted upon Kodak by digital photography and the seismic shift in the software industry since the advance of Google, etc. Furthermore, there are the "slow moving" challenges such as climate change, or "strange bed fellows" such as telephone with a camera, the microchip and the radio transmitter.

. Thus to be able to make worthwhile predictions we need to understand the past, presence and future. This is very hard to do because

- history does not repeat itself;

- a small variation in our current situation can lead to extremely convergent results, eg butterfly affect (a butterfly moving its wings in India could cause a hurricane in New York)

- too many unknowns and uncertainties to be accurate about the future, ie multiplicative difficulties

. Remember: scenario planning is not a science - it is an art.

. Need to remember that the uncritical substitution of plausibility for probability has impacts on judgments when scenarios are used as tools for forecasting. Probability judgments are higher for the more detailed scenario, ie adding more detail to scenarios makes them more persuasive but not necessarily true

. It involves thinking about what you need to do before you even look at strategy. This encourages you

- to challenge own assumptions and understand where they might not be applicable,

- be confronted with new information and its ramifications,

- to better understand the myths and metaphors that are the basis of your organisational culture.

Control of Our Fate

Despite our belief that we can control our own fate (Cassius's idea), our supply of data/information and the use of computer modelling, etc, we are not very good at making accurate predictions. For example

- meteorologists have a bad reputation for the accuracy of their predictions of what future weather will be like

- the terrorist attacks (9/11) were not predicted with any degree of accuracy.

- the attack on Pearl Harbor in the 1940s was not predicted with any degree of accuracy

- the global financial crisis (starting in 2007) was not predicted with any degree of accuracy

- just prior to the presidential election in 2000, computer modelling predicted that Al Gore would win by a landslide; but George W Bush won

- the presidential election (2012) between Barak Obama and Mitt Romney was predicted to very close but Obama won very convincingly

- research by Philip Tetlock found that despite

"...political scientists claiming that a political outcome has absolutely no chance of occurring, it nevertheless happens around 15% of the time..."

Nate Silver, 2012

- attempts to predict earthquakes by using highly sophisticated, mathematical and data-driven techniques have proved inadequate, eg the Fukushima nuclear reactor was designed to handle a magnitude 8.6 earthquake based on seismologists' best predictions, ie anything larger than 8.6 was supposedly impossible. In March 2011, Japan was hit by an earthquake of magnitude of 9.1.

Our reliance on computer modelling has demonstrated the fragility of the conclusions due to our choice of assumptions, etc

. From work by Philip Tetlock (2005) as quoted by Nate Silver (2012), over a 15 year period (starting in the 1980s) it was found that expert opinions, regardless of the field of expertise, were not much better than random chance in the accuracy of their predictions, ie

"...They were grossly overconfident and terrible at calculating probabilities: about 15% of the events that they claimed had no chance of occurring in fact happened while about 25% of those that were absolutely sure things in fact failed to occur..."

Philip Tetlock as quoted by Nate Silver, 2012

Additional problems with predictions are that

- some people are better at understanding the "big picture" and others are more into the details. The latter provide more accurate forecasts

- predictions do not abide by fundamental laws, like physics, where there are intrinsic, knowledgeable and predictable consequences. Predictions are based on limited information that is continually updated.

- the brain is wired to detect patterns. Sometimes patterns are imagined rather than actual

- forecasting technological improvements has not helped to offset human biases, ie we select data that suits our biases

- extrapolation is a basic tool of prediction that is not necessarily an accurate tool, owing to the assumptions used, ie what has happened in the past will continue to occur

- as we receive more information than our brain can process, we sort it into patterns based on past experience. This can cause mistakes as these past patterns are not necessarily going to repeat themselves

- our brains process information by means of approximations, generalizations, simplifications, etc but these can be misleading and not reflect the true situation

- the volume of information is increasing exponentially while its value is not. Thus we need to find ways to differentiate between useful and useless information

"...experience, simplifications and approximations will be useful guides and will constitute a working knowledge. But they are not perfect, and we often do not realise how rough they are..."

Nate Silver, 2012

To help understand this, we use the idea of efficient-market hypothesis and whether an individual investor can beat the stock market. Each statement is an approximation that builds on the last one to become slightly more accurate, ie

i) no investor can beat the stock market

ii) no investor can beat the stock market over the long run

iii) no investor can beat the stock market over the long run relative to his level of risk

iv) no investor can beat the stock market over the long run relative to his level of risk and accounting for his transaction costs

v) no investor can beat the stock market over the long run relative to his level of risk and accounting for his transaction losses, unless he has inside information

vi) it is hard to tell how many investors beat the stock market over the long run, because the data is very noisy, but we know that most cannot relative to their levels of risk, since trading produces no net access return but entails transaction costs, so unless you have inside information, you are probably better off investing in an indexed fund

The first statement is a very powerful one; while the last one is full of qualifications and probably more realistic. The lesson? We need to be careful about mistaking approximations for reality

Need to distinguish between risk and uncertainty. Risk is a "known unknown" while uncertainty is an "unknown unknown". This concept refers to

- "known known" refers to when a question has an exact answer

- "known unknown" refers to a question with an imprecise answer

- "unknown unknown" refers to when we don't know what question to ask, ie it is not being considered; it cannot be imagined; it is as though it does not exist

As binary categories of either "predictable" or "unpredictable" are very rare, we need to handle uncertainty by using probability, ie based on past experience, there is a certain probability of the event happening again

We need to be careful not to mistake "unfamiliar" for the "improbable" or "unlikely" or "unimaginable", eg

- Pearl Harbour attack by Japan in WW2

- Cuban missile crisis

- 9/11 terrorist attack on World Trade Centre

This is called "mind-blindness"

. We blindly believe that we can control our own fate, ie we can control nature rather thanlive in harmony with it)

. Use simplification, generalisation &/or approximations to understand complex events, eg making assumptions about key factors, rounding off figures, etc. This can be very misleading. This makes accurate predictions about weather, economic/business cycles, recessions, political outcomes, etc very difficult to achieve, eg

i) Weather forecasters' challenges are

- it is a dynamic system ie everything affects everything else & systems are in perpetual motion

- uncertain initial conditions

- poor data

i) Economic forecasters' challenges are

- hard to determine cause & effect from economic statistics alone

- economy is not static, so some past explanations may not hold for future situations.

- impact of political decisions

- lack of accurate data despite the huge amounts produced, eg the US Govt produces around 45,000 economic indicators annually plus private providers are supplying 4+ million.

(NB do not mistake correlation for causation)

Control of Our Fate Five Main Reasons we Fail to Anticipate Events

According to Nassim Taleb (2007), there are 5 main reasons (errors of confirmation, narrative fallacy, human nature, distortion of solid or silent evidence and tunnel vision) we fail to see unexpected events:

i) errors of confirmation or problems of conductive knowledge or learning backward - we focus on experience and preselected observations, and then generalize from them to the unseen; we tend to look at what confirms that knowledge. This is knowledge gained from observation. We hope we can know the future with some certainity, given our understanding of the past. Yet what we learn from the past can turn out to be irrelevant or false for the future, so we need to be careful of our habits and conventional wisdom. Our tendency to generalize can lead to dangerous stereotyping and discrimination.

"...making a nae observation of the past as something definitive or representative of the future is the one and only cause of our inability to understand..." the future

Nassim Taleb, 2007

"...we are all motivated to maintain a sense of psychological safety by nurturing a positive self-image, by looking at the world as a knowledgeable and predictable place, and by avoiding risk. This can lead to an overestimation of the self and a habit of attending only to information that bolsters our existing beliefs..."

Boris Groysberg et al, 2010

Remember the statement of Captain Smith of the Titanic about his exemplary safety record before the fateful journey!!!!!!

This is linked with domain specificity and nae empiricism

- domain specificity - means that we react to a piece of information based on the framework that surrounds it and its social-emotional situation, rather than logical merit

- naive empiricism ‐ we have a natural tendency to look for instances to confirm our perceptions, ie

"...take the past instances that corroborate your theories and treat them as evidence......it is misleading to build a general rule from observed facts......sometimes a lot of data can be meaningless; and at other times one single piece of information can be very meaningful......once your mind is inhabited with a certain view of the world, you will tend to only consider instances proving you to be right. Paradoxically, the more information you have, the more justified you will feel in your views..."

Nassim Taleb, 2007

This asymmetry of knowledge is important as it provides insight into the unpredictability of the world, ie all pieces of information are not of equal importance.

ii) narrative fallacy - we believe that stories will display distinct patterns; we fool ourselves with stories and anecdotes. It is

"...our predilection for complex stories over raw truths. It severely distorts our mental representation on the world; it is particularly acute when it comes to a rare event......addresses our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical link, an arrow of relationship, upon them..They make them all the more easily remembered; they help them make more sense. Where this propensity can go wrong is when it increases our impression of understanding..."

Nassim Taleb, 2007

Furthermore,

"...the more random information is, the greater the dimensionality, and thus the more difficult to summarize. The more you summarize, the more order you put in, the less randomness. Hence the same conditions that make us simplify pushes us to think that the world is less random than it actually is..." and the less you are able topredict the future and handle unexpected events

Nassim Taleb, 2007

Remember: facts do not change but people's perceptions and/or interpretation of the facts do, ie perception distortion. Furthermore, we are better at explaining than understanding.

iii) human nature (we are programmed to handle the expected rather than the unexpected; how our emotions get in the way of a reference)

We have a tendency to reduce information into categories and store it in our brains, rather than looking outside our information set, judgments and explanations. This is partly explained biologically, as it is expensive (energy wise) to put information into our brain, costly to store it and costly to manipulate and retrieve it. Furthermore, parts of the brain are important in distinguishing instantaneous, emotional reactions (limbic) from thinking responses (cortical).

Our working memory has limited holding capacity, eg we have difficulty remembering telephone numbers that exceed seven digits. Thus compression and patternising of information, ie dimension reduction, is vital to the performance of conscious work. We selectively remember facts about the past that suit our point of view and conveniently forget other facts that challenge our views.

Both causality and narrativity are symptoms of the dimension reduction.

- causality suggests a chronological dimension that leads to the perception of the flow of time in a single direction. Our emotional makeup is designed for linear causality. With relationships between variables are clear, crisp and constant; yet the world is not - it is more non-linear, asymmetrical in its relationships and consequences. Furthermore, the appearance of busyness reinforces the perception of causality ‐ the link between results and one's role in them.

- narrativity allows us to see past events in a more predictable, more expected and less random way.

Thus memory is dynamic and not fixed, static or constant. This allows for perception and retrospective distortions, ie

"...memory is more of a self-serving dynamic revision machine: you remember the last time you remembered the event and, without realizing it, change the story at every subsequent remembrance. So we pull memories along causative lines, revising them involuntarily and unconsciously......a memory corresponds to the strengthening of connections from an increase of brain activity in a given sector of the brain ‐ the more active, the stronger than memory......because your memory is limited and filtered, you will be inclined to remember those data that subsequently match the facts..."

Nassim Taleb, 2007

Our happiness depends more on the number of instances of positive feelings rather than their intensity. This is called the positive effect. For example, in businesses the accounting period is too short to reveal whether or not performance is good or otherwise; yet management is judged on the short-term indicators.

"...But we do not live in an environment where results are delivered in a steady manner..."

Nassim Taleb, 2007

Furthermore,

"...humans will believe anything you say provided you do not exhibit the smallest shadow of diffidence......they can detect the smallest crack in your confidence..."

Nassim Taleb, 2007

iv) distortion of solid or silent evidence (we see what we want to see, ie these mis-perceptions become our reality, eg how we are selective in our understanding of history)

"...silent evidence is what events use to conceal their own randomness..."

Nassim Taleb, 2007

A subset of distortions is bias, ie

"...the difference between what you see and what is there..."

Nassim Taleb, 2007

We like to categorize things but don't consider the fuzziness of the boundaries between categories, ie

"...categorizing always produces reductions in true complexity......any reduction of the world around us can have explosive consequences since it rules out some sources of uncertainty......underestimate the impact of the highly improbable..."

Nassim Taleb, 2007

Fuzziness is the very essence of uncertainty.

Thus we assume that the world we live in is more understandable, more explicable, less irregular and more predictable than it actually is. In fact,

"...we are just a great machine for looking backward......humans are great at self delusion..."

Nassim Taleb, 2007

Yet history runs forwards, not backwards!!!

Silent evidence can cause a distortion at both ends of the spectrum, ie an overestimation or an underestimation.

Lucid fallacy refers to the elements of uncertainty that we face in real life that have little connection to the ones we encounter in the classroom. Computable risks calculated in the classroom are largely absent from real-life.

v) tunnel vision (we focus on a narrow range of well-defined sources of uncertainty; the difference between what people actually know and how much they think they know; the neglect of outside/external sources of uncertainty)

"...we are too narrow minded a species to consider the possibility of events straying from our mental projections..on matters internal to the project to take into account external uncertainties, the unknown unknown..."

Nassim Taleb, 2007

Many important breakthroughs, such as computers, Internet, laser were unplanned, unpredicted and initially not appreciated. Despite our improved ability to use predictive models, our success rate in forecasting the future is not very good.

Furthermore,

"...we are demonstrably arrogant about what we think we know..we have a built-in tendency to think that we know a little more than we actually do." This can get us into serious trouble..."

Nassim Taleb, 2007

We suffer from epistemic arrogance, ie as our knowledge grows, so our confidence increases significantly. This can result in over-confidence which causes an increase in confusion, ignorance and conceit. In fact

"...epistemic arrogance bears double effects: we overestimate what we know, and underestimate uncertainty, by compressing the range of possibile uncertain states, ie by reducing displays of the unknown......longer the odds, the larger the epistemic arrogance..."

Nassim Taleb, 2007

Furthermore, we have a tendency to favour underestimating the impact of unexpected events. This is more pronounced the further we are away from the event.

There is little difference between guessing and predicting, ie

- guessing (what I don't know, but what somebody else may know)

- predicting (what has not taken place yet)

Giving people more information does not necessarily improve the decision-making. People will select information that confirms their point of view (confirmation bias) and will suffer from belief perseverance (the tendency not to change opinions we already have). Many experts are narrowly-focussed people who suffer from a combination of confirmation bias and belief perseverance. Furthermore,

"...The problem with experts is that they do not know what they do not know..."

Nassim Taleb, 2007

In fact, many experts are worse predictors than amateurs!!!!!

"...experts were lopsided: on the occasions when they are right, they attributed it to their depth of understanding and expertise; when wrong, it was either the situation that was to blame, since it was unusual, or, worse, they did not recognize that they were wrong and spun stories around it. They found it difficult to accept that their grasp is a little short......humans are the victims of an asymmetry in the perception of random events. We attribute our successes to our skills, and our failures to external events outside our control, namely their randomness..."

Nassim Taleb, 2007

Furthermore,

"...statistically sophisticated or complex methods do not necessarily provide more accurate forecasts than simpler ones......the problem is that we focus on the rare occasions when these methods work and almost never on their far more numerous failures..."

Nassim Taleb, 2007

Linked with tunnel vision or "tunnelling" is anchoring, ie

"...you lower your anxiety about uncertainty while producing a number, then you anchor onto it......use reference points in our heads.....start building beliefs around them because less mental effort is needed to compare an idea to a reference point than to evaluate it......we cannot work without a point of reference..."

Nassim Taleb, 2007

In summary, when looking at history we suffer from randomness (incomplete information) or "triplet of opacity", ie

"...a. an illusion of understanding, or how everyone thinks he knows what is going on in a world that is more complicated (or random) than he realizes;

b. the retrospective distortion, or how we can assess matters only after the fact, as if they were in a rearview mirror (history seems clearer and more organized in history books than in empirical reality); and

c. the over valuation of factual information and the handicap of authoritative and learned people, particularly when they create categories..."

Nassim Taleb, 2007

Many organisations need to review their mindsets and practices to help them survive in uncertain times. With an increasingly unpredictable, complicated and volatile environment, many accepted practices and core businesses (products and/or services) need reviewing. Beware of making decisions which are based on old assumptions, eg high barriers to entry, high transaction costs, few capable competitors, growing and increasingly affluent markets, restricted information flows.

Generally human beings have a tendency to embrace information that reinforces their pre-existing views, while challenging or rejecting information that questions these views.

Many established management tools, such as net present value, are built on a foundation that assumes certainty, ie forecasting likely cash flows and discounting them. In a volatile business environment, this thinking is not advisable

Our traditional approach to handling uncertainty and the resultant chaos is to introduce more rules and regulations !!!!!!! This does not work.

One way to handle uncertainty and unexpected events is to have a wide spread, or diversification, of your exposure to risk, ie a small percentage in risky and speculative ventures and the balance in less risky and more conservative activities.

Furthermore, you need to develop ways to work around the inherent unpredictability and even exploit it, ie handle the unknown unknowns. Some recommendations include

- make a distinction between positive and negative contingencies - negative ones can hit hard and hurt severely, eg a big budget movie that is a box office failure. Positive ones can involve losing small to gain big, eg a new, cheap book that has the potential to be a bestseller. You need to know where your ignorance lies and have a precise understanding of the structure of uncertainty.

- don't look for the precise - remember that chance favours the prepared, and invest in preparedness, not the prediction. Making predictions tends to narrow our focus and makes us more vulnerable to the events that we do not predict.

- be very opportunistic - strenuously chase opportunities and maximize exposure to them. This stresses the importance of networking.

- avoid people who make predictions and be wary of planners - remember that planners, especially governments and their public servants, are not good at making accurate predictions

NB

"...I will never get to know the unknown since it is unknown. However, I can always guess how it might affect me, and I should base my decisions around that......the probability of a very rare event is not computable; the effect of an events on us is considerably easier to ascertain......we can have a clear idea of the consequences of an event, even if we do not know how likely it is to occur......this idea that in order to make a decision you need to focus on the consequences (what you can know) rather than the probability (which you cannot know) is an essential idea of uncertainty..."

Nassim Taleb, 2007

People like Warren Buffett (Barrie Dunstan, 2009) observed that the lesson learned from experience is that we learned nothing from experience!!!!!!! By the time the lessons are needed, a new generation has either forgotten them or not been taught them. Furthermore, this leads into the phenomenon "creeping determinism", ie

"...the sense that grows on us, in retrospect, that what has happened was actually inevitable - and the chief effect of creeping determinism...... is that it turns unexpected events into expected events..."

Malcolm Gladwell, 2009

The GFC has discredited most mathematical models that endeavour to forecast the future, especially those that used the activities of the past to predict the future and have not incorporated the psychological elements of human behaviour in decision-making. This is linked with the rational-irrational dichotomy and optimistic-pessimistic distinction. We tend to swing from irrational-pessimism, ie doom and gloom, to irrational-optimism, ie exuberance that encourages uncontrollable speculation and risk taking. Furthermore some of the assumptions are not valid, eg most macroeconomic frameworks have treated institutions, like Fannie Mae and Freddie Mac, as neutral. Based on what has happened in GFC, these institutional frameworks are far from neutral in their impact. Fannie Mae and Freddie Mac handle around 50 percent of all mortgages in the United States and they got into financial strife during the GFC.

Some more thoughts on the deficiencies of conventional, traditional financial modelling, ie

i) markets are not efficient despite the use of frameworks around the efficient market hypothesis (EMH), such as capital asset price model, the Black-Scholes option pricing model, modern risk management techniques, market-to-market accounting, market cap indexing, concept of shareholder value. Even the US Federal Reserve Bank fell under the spell of "markets know best".

ii) evaluating relative performance, via the use of, for example, alpha and beta (active return and market return), etc results in managers' tendency to over-diversify because of their fear of underperforming against the benchmark. The aim should be to maximize total returns after-tax and should be to maximize rather than to benchmark. The only way to produce a superior performance is to do something different

iii) this time it is different - remember that no one has the ability to predict the future with accuracy. Furthermore, a behavioural bias that we can influence the outcome of uncontrollable events, interpreting information in a way that supports self-interest and with a common focus on the short-term, will provide an illusion of control

iv) valuation matters - indicators such as price/earnings ratio are useful, eg buy stock when ratio is low, and sell when ratio is high. Need to keep emotions and sentiment away from decision-making as that swings from greed to fear

v) adopt a disciplinary approach - be patient and wait for the best time to buy rather than chasing every swing

vi) be careful of leverage - it can turn a good investment bad.

vii) complex mathematical models can hide the real risks - this results in obsession with needless complexity, ie

"...mathematics is......considered as producing precise and dependable results: but in the stockmarket the more elaborate and abstruse the mathematics, the more uncertain and speculation are the conclusions..."

Benjamin Graham as quoted by Barry Dunstan, 2010

viii) macro picture matters - need to understand macro and micro approaches

ix) cheap insurance - this is useful in a portfolio as it protects us from the known unknowns, such as inflation, bad monetary policy, poor government decisions, etc

x) most models are based on assumptions that are generally assumed to be fixed and stable. If these assumptions are taken to be random and/or changeable, most conventional models are of limited use. For example, the notion of competitive advantage, ie countries should focus on what they do best. Yet if commodity prices fluctuate, this competitive advantage might no longer be advantageous. Furthermore, the notion of competitive advantage is a basis for globalisation, ie efficiency, but in reality the systematic imperfections can distort this.

Another example is the attitude to debt. A positive attitude towards debt implies confidence in the future and a high degree of reliance on forecast. Yet

"...forecasting is harmful since people (especially governments) borrow in response to a forecast (or use the forecast as a cognitive excuse to borrow)...... borrowing makes you more vulnerable to forecast error..."

Nassin Taleb, 2010

Need to be careful of the concept of socialisation of losses and privatisation of gains. Alternatively,if a bank needs to be bailed out it should be nationalised; otherwise banks should be free, small and risk-bearing.

Furthermore, according to Taleb (2010), we

- need to make sure that any incentive or bonus system includes a disincentive for poor performance. Currently incentives system are asymmetrical, ie reward positive performance but no disincentives for poor performance.

- the complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. Most complex financial products (eg hedging products) are not fully understood, and as a result should be banned

- governments should not need to restore confidence; the system should be robust enough to handle adverse rumours

- need to be careful of using leverage to handle our debt crisis as it is not a temporary problem; rather it is a structural one

- the market is not the final arbitrator

- need to look at converting debt into equity, marginalizing the economics and business school establishments, banning leverage buyouts, reducing the bonus system, reducing risk-taking amongst bankers, educating people to handle uncertainty and not allowing organisations to become too big to fail

Mother Nature is a complex system that has developed ways to handle the unknowns. It is a

"...webs of interdependence, non-linearities and a robust ecology (otherwise it would have blown up a long time ago)..."

Nassin Taleb, 2010

- it has developed backups, eg in the human body we have 2 eyes, 2 lungs, 2 kidneys, etc. These backups are insurance, eventhough there are obvious inefficiencies in costs and energy usage in maintaining these spare parts.

- does not like over-specialization as it limits evolution and weakens the system

- works against largeness. For example, if one removes a large land animal like an elephant, the whole eco-system does not collapse. Yet the fear that one large bank failure (Lehman Brothers) could bring down the entire system was obvious in 2008.

- robustness is important as we are unable to correct mistakes and eliminate randomness from social and economic life. The challenge is to confine this like Nature does.

Scenario planning involves creating images about the future

. How the future might turn out

. Alternative views of the uncontrollable parameters in the external business environment; alternative images of the future

. Makes sense of future events in the same way as historical analysis makes sense of the past

. Connects disparate forms of information into holistic concepts of future

. Represents causal accounts of the future which provide operational insights

Scenario planning is aiming for better decisions today about the future by

. Questioning assumptions

. Developing fresh insight

. Getting the "measure" of problems

. Sharing understandings

. Rehearsing responses.

For example, Shell Oil Company (one of the modern pioneers of scenario planning) has this view of the objective of scenario planning:

"...explore and discuss what is happening now, so as to identify possible changes in advance and identify their consequences, so as to challenge and, if necessary, change the mental maps of decision-makers, so as to gain advantage..."

as quoted by Art Kleiner, 1996

Why Scenario planning?

. To sensitise decision-makers to handle the subtle changes in the environment, ie what has not been considered won't be perceived early enough?

. Econometric models cannot identify sharp discontinuities, ie qualitative shifts require qualitative understanding

. To identify changes in the type of business you are in

. To set or determine organisational strategies

. Identify opportunities for differentiation or diversification

. To change organisational structure

. To answer specific questions

. To adapt priorities for action

. To identify conclusions common across scenarios

. To identify key uncertainties for future study

. To establish a common language and framework

. To remove emotions from the future.

Scenario plans are relevant because they offer opportunities to

Simplify complexity

Evaluate risks

Understand sources of discontinuity

Clarify the emerging rules of the game

Encourage flexible thinking and learning

Align decentralised decision-making

Improve speed of response

Reflect diversity of thought

The role of scenario planning lies in:

Challenging the sacred corporate myths

Building the corporate knowledge base

Understanding the significance of seemingly unrelated events

Monitoring the unexpected

Scenario planning is not

An annual strategic planning "rain dance"

Foretelling or predicting

Crystal-ball gazing

The silver bullet for corporate strategies

Rather, it is

A deeply embedded manner of thinking and behaving in the organisation

Sensitising management to what could happen

Enabling management to recognise the significance of events as they unfold

Part of the strategic management toolkit

Involving of the entire organisation

More comments on scenario planning

. Some people do not see scenario planning as meaningful as they feel that the future is beyond their control and have a sense of helplessness because past goals, such as alleviating world poverty, have not been achieved

. Scenario planning tries to suggest what might happen in the future so that people can decide what they want to make happen. By looking at current trends, it is possible to make projections of what might be the case in the future. For example, if the population of a city is growing at two percent a year, we can suggest that the city will have more people in the future than it has now. We can calculate how many additional people the city might have. On the other hand, it does not mean that the city will definitely have those additional people. Many things could happen to stop or even reverse the city's population growth.

. Sometimes the forces that create the future have already shown themselves. For example, the effects of heavy rains at the source of the river can be predicted with a fair degree of certainty: flooding downstream will occur. This is really describing future implications of something that has already happened. On the other hand, some events are unavoidable and even imminent but when the events will occur is unpredictable, such as the crash of the stock market.

. A variation of scenario planning is called "pre-mortem", ie prospective hindsight to devise ways to help at project team identify issues at the start or outset. This is done by assuming that the project/activity, etc "failed" and to identify reasons on what went wrong

Limitation of traditional approach to developing strategy

. The traditional approach to developing strategy is based on 2 crucial assumptions:

i. that each organisation is better suited to doing some things than others or doing what you doing well and are best able to compete in, such as providing a differentiated, superior product/service

ii. that there are finite resources available, such as money, time, etc for allocation

. According to Jeffrey Pfeffer et al (2006), the empirical evidence shows a weak link between the activity of strategy planning and organisational performance.

. Increasingly, the world is becoming more uncertain and complex with accelerating discontinuous change. This has highlighted the deficiencies of the traditional approach to developing strategies to handle the future. The traditional approach follows 1 of 2 alternatives:

- rational approach, ie finding the best strategy through a process of rational analysis

- emergent approach, ie developing the best strategy over time through small, incremental changes

. Implicit in the traditional approach to strategy is the assumption that by applying a set of powerful analytical techniques, people can predict the future of any business accurately enough to allow them to choose a clear strategic direction. This is satisfactory in a stable business environment, but it breaks down when the environment is so uncertain that no amount of good analysis will allow prediction of the future.

. An important distinction between scenario planning and strategic planning is that the former begins with the future and works backwards, while the latter is more likely to start with now and look at where you want to be.

. However, organisations find it difficult to change strategy for many reasons. One of the reasons is that managers hone their management capabilities by tackling problems over and over again. Changing strategy is not usually a task which managers address regularly. Once an organisation has found a strategy that works, it wants to use it, not change it. Members of the management team are usually unable to see the need to change direction when the strategy that made the organisation successful has become obsolete.

. It has been claimed that both people and organisations do not respond to reality but to their perception of reality. This perception acts as a filter, and as a result we tend to see what we want to see, and tend to dismiss what we are not looking for. By changing filters, we can see the world differently. Scenario planning can do this by broadening, deepening and expanding filters so that we can be more sensitive to forces that shape our business environment and thinking. Scenario planning helps us to develop alternative images.

. Managers face 2 particularly vexing challenges in developing and implementing competitive strategies:

i. to ensure that the strategy is not a reflection of the biases (and ignorances) of the past

ii. the need for strategy to mirror the realities of the organisation's environment and for resource allocation to be aligned with the strategy.

What people have gained from scenario planning

. Importance of challenging assumptions and orthodoxy

. Maps uncertainty including the unpredictable

. Engages the creative side of people

. Changes the way we read the world

. Forces us to ask . What kind of world do I want to live in?

. It is hard work

. Multiple scenarios need to be defined

. Any scenario should be defined in broad terms only

Lack of certainty

. Trying to predict the future with any degree of certainty is not just impossible but dangerous. As many predictions end up being right for the wrong reasons, there is a tendency to believe in them. Sooner or later forecasts will fail, and usually when you most need the predicted outcomes to be accurate.

. Over a 15 year period, Wesfarmers has been collecting forecasts on market trends and prices

"...recasters get it right half the time, but you never know which half it's going to be. So it's always useless..."

Michael Chaney as quoted by Leon Getter, 2002

Yet we concern ourselves more about the accuracy of the forecasts, ie the ability to predict the number itself, than the range of forecasts.

Furthermore, as we don't know what the future holds

"...what we can say is we have an understanding of where our strengths are and we can look for opportunities. The future is unpredictable. We have to grab ourself the right people and the right balance sheet to take advantage of the opportunities as they emerge..."

Michael Chaney as quoted by Andrew Cornell, 2008a

. An example of inaccurate forecasting is this statement by the President of Digital Equipment Corporation in 1977

"...there is no reason for an individual to have a computer in their home..."

The explosion in personal computers was not inevitable in 1977, but was certainly within the range of possibilities that could have been discussed at the time.

. As the Director of the Howard Florey Institute in Melbourne, Professor Fred Mendelsohn observed

"...my mentors during my student days thought infectious diseases would be beaten by now. We never foresaw the emergence of multi-drug-resistant staph and the like. We never dreamt that infections like AIDS, Hep. B and C would be as big as they are now. We thought that there would be a major discovery of a single cause of cancer - we didn't imagine there were multiple biochemical pathways that lead to cancer......it is equally intriguing that no one foresaw the extent of breakthroughs that have since been made in areas like brain imaging. Nor was the human genome project expected to be completed so swiftly and comprehensively......we imagine knowledge going along in a linear fashion, but that is to overlook that knowledge tends to build on knowledge. The mapping of the human genome has led us in directions we never imagined. It is like compound interest; like the difference between fixed versus compound interest..."

as quoted by Fiona Carruthers, 2005

. In making predictions, there is a need to factor in an error rate. Otherwise several misconceptions can occur about the nature of uncertainty

- variability matters (need to understand the range of possibilities and not just work on averages)

- forecast degradation as a projected period lengthens (need to understand the full extent of the difference between near and far futures)

"...many events have taken place and new technologies have appeared that lie outside the forecasters' imaginations; many more that were expected to take place or appear but did not do so..."

Nassim Taleb, 2007

- random character of the variables being forecast

For example, consider the 1970 forecast signed by the U.S. Secretaries of the Treasury, States, Interior and Defence that suggested that the standard foreign price of crude oil by 1980 may well declined and would, in any event, not experience substantial increase. Oil prices increased by tenfold by 1980!

More recently, the crude oil price volatility in 2007/08 has made a mockery of forecasting!!!!!

. Levels of uncertainty consistently confronting managers today are so high that they need a new way to think about strategy, and thus need to have a better framework within which to understand and handle uncertainty with all its implications.

. Remember:

"...The stone-age did not end because we ran out of stones, oil will not end because we run out of oil..." Don Huberts as quoted by Karlson Hargroves et al, 2005

. There is a misconception that scenario planning is about predicting what will happen in the future. The truth is quite different as the future is unpredictable, ie we cannot know what will happen in the future. On the other hand, the future is an area of time that we can do something about. The past is finished, and it is too late to change the present. The decisions we make now all have consequences for the future.

. We explore future possibilities through perception and imagination. Scenarios are attempts to imagine future possibilities on the basis of what we know, or think we know. Scenarios are useful in helping us to understand what might happen as a result of the decision taken now.

. In order to perform the kinds of analyses appropriate to high-level uncertainty, organisations need to supplement their strategic toolkit with one or more of the following: scenario planning, game theory, systems dynamics and agent-based simulation models, and real options valuation models.

Techniques

Details

Scenario planning

Fundamentals to determining strategy under conditions of uncertainty

Game theory

Help managers understand uncertainties based on competitor's conduct

Systems dynamics & agent-based simulation models

Help in understanding the complex dynamics in the market

Real option valuation

Help in correctly valuing investments in learning and flexibility

. Scenario planning is about possibilities/alternatives for the future, ie what might happen. Unless people know what alternatives are available, they cannot choose what they want to happen, let alone make it happen. So the first step is identifying what might happen in the future. Then we can try to decide how the possibilities become realities and prevent those undesirable possibilities ever being realised.

. It must be remembered that events cannot be known in advance. On the other hand, careful thinking ahead can ensure success such as with the American space program. People had carefully thought about the challenges they faced and had developed realistic plans to handle them. Thinking ahead does not guarantee success. Nor does its absence ensure failure. Sometimes bad luck can overcome the most careful planning and good luck can make a fool look like a genius!!! On the other hand, generally, victory belongs to the people who think ahead and not to those who do not.

Scenario planning v. forecasting

Forecasting

Scenario Planning

Focuses on certainties, and disguises uncertainties

Focuses on uncertainties, legitimises recognition of uncertainties

Conceals risk

Clarifies risk

Results in single point projections

Multiple interpretations

Quantitative >qualitative

Qualitative > quantitative

. Scenario planning is used to explore the myriad of possibilities of the future in order to understand the various opportunities and challenges that may lie ahead, while strategic planning involves setting a goal and determining steps to achieve the goal.

. Scenario planning is not forecasting. When forecasting, we have the ability to model a complex web of drivers affecting the future of an organisation to produce accurate point estimates. The reality is that we don't have the information or the time to do this with any conviction. Worse still, reliance on point estimate forecasts may risk costly errors.

. It is precisely because of the consistent failure to accurately forecast key variables affecting business that the concept of scenario planning was embraced. It provides a way of planning without having to predict things that are manifestly unpredictable.

Scenario planning opens up opportunities

. Developing multiple, but equally plausible, futures provides a testing ground for major decisions. An approach has been to evaluate major projects against a small number of scenarios. The aim is to develop projects which have positive returns under a range of possible futures, rather than a single yes/no context.

. Today's organisations face a constant challenge to remain innovative, flexible and outward looking. Scenarios help to challenge the mental maps we all hold. These maps are in themselves stories about reality ‐ but they influence which opportunity we notice, and what strategies and actions we take. When our perspective changes, our view of all that is possible also changes.

. By recognising alternative maps of the future, scenarios have helped us to see a wider range of options and decisions, and to create opportunities.

. Scenarios are used to ensure the robustness of the strategies and to develop alternative responses. Furthermore, they help us to understand the long-term, to prepare for discontinuities and sudden change. They help us to recognise and interpret important events and new developments as they arise, and provide a link with the longer-term outlook.

Successful scenario planning

. Scenario planning is most successful when it leads managers to see blinkers that they have unconsciously adopted over the years at the same firm. It involves imagining things which were unimaginable.

. Scenario planning is a powerful means of story-telling, a way of changing people's viewpoints. Anyone who wants an organisation to change would have to find a way to make the future clearly visible, so that a wide range of people within the company could see it coming.

. They are supposed to be fictional and playful, not some sort of rigorous forecast. The objective is not to make accurate predictions but to come up with a mythic story that brings the point home. Scenarios need to be carefully drafted. It is important to identify the key drivers of change, and to understand how these drivers operate, their influences and effects.

Some guidelines for preparing effective scenarios

. Concentrate on the important elements

. Ensure they are able to be supported by analysis

. Make them sufficiently broadly-based to have many potential uses so that there is the development of a common language about the future among all parts of an organisation

. Include the unexpected as history shows that development occurs through discontinuities, through sudden, sharp steep changes rather than the passage of smooth and steady trends

. Blend facts with intuition, creativity and perceptions ‐ a "predict and control", data-led approach will stifle the scenario planning process

. Challenge existing mental maps and encourage people to play the tapes of tomorrow's game

. Involve thinking speculatively rather than logically

. Work backwards from the future rather than working forward from facts and data

. Encourage people to think outside the square

. Be prepared for wild cards, ie. massive events that emerge suddenly and unpredictably.

A Methodology around Scenario Planning

Methodology using scenario planning involves the following elements

i) understanding the challenges (including socio economic) involving change and complexity that are present in your organisation, brands, services, products, markets, etc (mapping the future)

ii) conducting an in-depth understanding of the real emerging challenges and their impact on your organisation (anticipatory action learning)

iii) understanding where your organisation is in its life cycle (timing in the future)

iv) using tools and techniques to think more deeply and to plan further ahead (deepening the future)

v) looking for fresh perspectives, new possibilities and untapped potential (alternative scenarios)

vi) developing strategies and the appropriate action plans to handle what has come out of the analysis (transformation)

Examples of scenario planning driving forces are

. Economic growth and health;

. Capital availability and dividend policies;

. Extent of competition;

. Changing pricing paradigms and price elasticities;

. Consumer preferences and demand;

. Scope and reach of regulation;

. Government policy direction;

. Business alliances and partnerships

. Technological drivers;

. Retail/wholesale and product mix

. Specific project developments

. International activities.

Deciding which possible outcomes should be fully developed is hard work and can involve some luck, but there are some general rules for effective scenario planning

. Develop only a limited number of alternatives or possibilities (around 4 or 5)

. Each alternative should offer a distinct picture of the industry's structure, conduct and performance

. Develop a set of alternatives that collectively account for the probable range of future outcomes and not necessarily the entire possible range (this should help determine how robust each strategy is, identify the likely winners and losers, and determine roughly the risk of following status quo strategies).

Formulating a strategy at each level of uncertainty

. Shapers aim to drive the industry toward a new structure of their own devising, ie their strategies are about creating new opportunities in markets either by shaking up a relatively stable industry or by trying to control the direction of the market in industries with high levels of uncertainty.

. Adapters take current industry structure and its future evolution as givens, and they react to the opportunities the market offers. In environments with little uncertainty, they choose a strategic position, ie. where and how to compete, in the current industry. At higher levels of uncertainty, their studies are based on the ability to recognise and respond quickly to market developments.

. Reserving the right to play is a special form of adapting, and involves making incremental investments today that put a company in a privileged position through either superior information, cost structures or relationships between customers and suppliers. This allows the organisation to wait until the environment becomes less certain before formulating a strategy.

Examples of this include pharmaceutical firms who have reserved a right to play in the market of gene therapy applications by acquiring or forming alliances with small biotech firms that have relevant expertise. This provides privileged access to the latest industry developments, and reduces cost investments compared with building up their own R&D programs.

Some scenario planning examples

. Scenario planning has been described as evoking a "surprise-free" future ‐ if it came to pass, it would not surprise anybody very much. Examples of successful scenario planning have included predicting that the

- Russians would be the first to get a satellite into space;

- the collapse of communism;

- the industrial rise and fall of corporate Japan.

1 Shell Oil Company

. The best-known example of its successful use is by Shell to handle the 1973 OPEC oil crisis. This resulted in Shell jumping from no. 7 in the oil industry to no. 2, ie from the least profitable to one of the most profitable.

. The scenario was developed well before the oil crisis. It was based on the proposition that if the world's economic growth continued to accelerate, then the demand for oil would reach astronomical figures, ie by the year 2000, 10 to 12 Saudi Arabias would be needed to satisfy demand.

. The balance of power in the Middle East was about to shift, with the Western oil companies, including Shell, about to lose control of the oil business. At the same time, demand was beginning to outstrip the ability of non-Arab oil fields to meet it. In the past, 75 percent of the oil produced in Texas had gone into strategic reserves, as a hedge for use during shortages. Now, only 10 percent of oil was being saved for reserves. Initially oil executives were happy that more of the oil was getting into the marketplace quicker and could see no reason they should build up more reserves as a safety net.

. In 1968, the Japanese policy makers saw the danger of severe shortages. To wean themselves from oil dependency, the Japanese began an energy efficiency improvement effort with a 25 year deadline. Furthermore, field managers of the oil companies were warning head offices about the impending changes. They were ignored.

. The typical reaction was

"...the Arabs will never get together..."

as quoted by Art Kleiner, 1996

. In 1970 Libya forced the price of its oil up by 30 percent. This started a chain reaction with other Arab oil countries competing with each other to see who would push the price of oil highest.

. The Shell matrix involved 4 new exploratory scenarios:

i) "surprise-free" world (in which shocks which everyone dreaded never occurred);

ii) "high-take" (in which the Arab countries demanded more money and received it from a desperate world starving for oil)

iii) "low-demand" (in which economic depression deflated the need for oil)

iv) "the alternative" (in which the energy picture switched from oil to nuclear, coal and others)

. The scenarios were overlaid with a triangle of the most significant energy players, ie the oil-producing countries of the Middle East, the oil-consuming countries of the West and the oil companies. Shell picked the most promising combinations and then role-played them ‐ taking the part of every significant player on the scene. What would the Shah of Iran do? How would the President of America react? How would the oil companies react? As they played out these scenes, they listened for contradictions.

. The process showed that the most likely scenario was the energy crisis with the price of oil rising dramatically. This scenario predicted a maximum price of $US6 a barrel (yet it peaked at around $US40).

. Despite Shell briefing the American government and corporate world, the Americans continued to do exactly the opposite of what was prudent: they depleted their oil reserves, instead of building them up.

2 Environmental scenarios

. In the 1980s, prodded by the re-emergence of climate problems, food shortages, health hazards and forest losses ‐ along with a possibly revitalised economy ‐ a prediction was made that environmental fervour would rekindle. This prediction would ultimately turn out to be right. Unfortunately the USA government rejected the possibility of it happening.

3 Ford Motor Company

. In 1975 some scenario planners put the idea to Ford that with the energy crisis there would be a swing to small, well-built cars with much better fuel economy, like the cars made in Japan. Ford rejected this idea and stayed with the large, fuel-hungry cars (at this time these cars had higher profit margins than small cars). Several years later, Ford was experiencing devastating losses as they couldn't compete with the Japanese cars.

4 South Africa

. Following the earlier scenario planning exercise (mid 1980s), initiated by Anglo American Corporation (a powerful South African mining corporation) and in which there was minimal input from the black community, the Mont Fleur Scenarios involved 22 prominent South Africans coming together during 1991-92 to ask: What will South Africa look like in the year 2000?

. The first scenario planning session was broadcast on TV throughout the country and opened many people's minds. It was based on 2 scenarios, ie the "low road" and "higher road": the "low road" described the likely future if the official apartheid policies continued and the country became increasingly isolated from the larger world, while the "higher road" described the reintegration of South Africa into the world community as apartheid was ended.

"...not only did the public conversations about the two possible futures cause many whites to think about the implications of continuing with the present policies, they reinforced the idea that the country did have a choice about its future......probably in part because of the success of the earlier exercise, when President de Klerk who officially started the process of ending apartheid in 1990, there was openness to the new round of scenario building......the idea was to involve people who would be part of creating the country's first multiracial government in thinking together about alternatives......the scenario allowed people to raise difficult issues while at the same time avoiding the kind of rhetorical positioning and arguments that usually accompanied a political debate about the future..."

Peter Senge et al, 2005.

. At Mont Fleur, there were 4 scenarios which were playfully nicknamed

i) Ostrich - current white South African government put its head in the sand, avoiding facing problems

ii) Lame Duck - the power of the new black government was so strictly limited by constitutional settlement that its power to act was completely crippled

iii) Icarus - the new government instituted radical economic reforms and increased state ownership of land and enterprises, bringing the economic system "to its knees"

iv) Flamingo - start slowly and work together as one

Despite initial resistance, the last was recognised as the only viable way forward

. Following on from Mont Fleur, it was claimed that the present course, ie apartheid, on which the country was set, was unsustainable. This led to the negotiations with Nelson Mandela, and his subsequent release from jail, and later his election as President of South Africa.

. It is claimed these 2 scenario sessions

"...had a major impact in shaping the thinking that has allowed the new South African government to hold together the diverse constituencies in the country..."

Peter Senge et al, 2005

In fact,

"...who could have predicted in 1985 that only ten years later, South Africa would have gone through a transition to a multiracial democracy without armed conflict and major bloodshed?..."

Peter Senge et al, 2005

5. Olympic Games (Sydney, 2000)

. For many months before the Games, the management and staff investigated many different possible scenarios that could occur during the Games. At the start of each week a scenario was selected; each group would study independently this scenario. By the end of the week, each group would present their findings on how to handle the scenario. By doing this every week, they developed ways to handle many different situations. As a result, detailed manuals were developed so that if one of the scenarios happened, they would have guidelines to follow on how best to handle the situation.

6. Hurricane Katrina (2005)

. Many corporations, such as Home Dept, Wal-Mart, FedEx, responded better than the US government agencies (local and federal) to Katrina's devastating path through Florida. The former had been trained in how to handle the realities of risk, uncertainty and crisis, such as those covered in scenario planning. Under non-rehearsed conditions, risk overwhelms the decision-making capabilities

7. Global economy (late 2008 credit crisis)

McKinsey & Co. has outlined 4 possible scenarios for a resolution of the Global Financial Crisis (starting 2008), ie

a) regenerated global momentum ‐ conditions are

- moderate recession for 3 to 4 quarters

- new, effective regulatory regime

- safe leverage ratios reached, leading to rapid expansion of trading and landing volumes

- cost of capital recovers to historical levels

- trade and capital flows recover quickly

- globalisation stays on course

- attitudes rebound, become positive

b) battered but resilient - conditions are

- prolonged recession for 18 months or more

- new, effective regulatory regime

- recovery generated by effective fiscal, monetary policies

- safe leverage ratios reached, leading to slow resumption of trading and lending volumes

- moderate recovery of trade and capital flows

- globalisation gradually gets back on course

c) stalled globalisation ‐ conditions are

- moderate recession of 1 to 2 years, followed by slow economic growth

- regulatory regime holds system together but with significant drag on economy

- overly-safe leverage ratios

- significant government involvement in allocation of credit

- significantly higher cost of capital

- globalisation stalls

d) long freeze ‐ conditions are

- recession lasts for more than 5 years

- ineffective regulatory fiscal and monetary policies

- all countries stagnate

- defensive leverage ratios will restrict credit flows

- significant government involvement in allocation of credit

- very slow recovery of trade and capital flows

- globalisation goes into reverse

In Summary

"...decision-makers who can expand their imaginations to see a wide range of possible futures will be much better positioned to take advantage of the unexpected opportunities that will inevitably come along..."

Paul Schoemaker et al, as quoted by David Stauffer, 2002

"...There is no singular future. It has to be seen in multiples and multiple possibilities..."

Chris Luebkeman has quoted by Sheridan Win, 2011

. There are 2 distinct approaches to scenario planning

- considering future scenarios helps managers to be more adaptive in their thoughts and actions about handling the future, ie the process makes the manager more thoughtful about the future

- examining scenarios in order to develop responses to them

. Scenario planning is

"...arning by doing..a planning activity that involves more play than analysis, more art than science, and more exploration than discovery..provides a route to a world that may become real. It relies on the power of storytelling and involves mechanisms to integrate complex variables into a coherent, plausible and comprehensive whole. Foretelling the future using stories is seen to generate greater realism than simply extrapolating trends based on hard data. Hard data can be part of the scenario, but other contributions come from educated guesses, beliefs, experience, perceptions and intuition..."

Harry Osman, 2004d

. How to implement to achieve the benefits:

- determine the scope and timeframe of the scenario being studied

- identify current assumptions and mental models of individuals who can influence these decisions

- create a manageable number of divergent, yet plausible, scenarios. Determine the underlying assumptions of how each of these imagined futures might evolve

- test the impact of key variables in each scenario

- develop action plans based upon either the most robust solutions of each scenario or the most desirable outcome towards which an organisation can direct its efforts

- monitor events as they unfold to test the corporate direction; be prepared to modify as required

. In other words

- critical success factors or drivers need to be determined and prioritised

- the uncertainties need to be identified and prioritised; with the appropriate risk management system put in-place

- the necessary changes to the organisation for each scenario need to be made explicit

. Some educational experiences include

- stretching your mind beyond the "group think" that can produce sameness

- remembering that apparently remote potential developments may have repercussions elsewhere

- anticipating how you and your colleagues might respond under both adverse and favorable conditions

. Some general rules in effective scenario planning are

- develop a limited number of alternatives or scenarios (around 5 ), eg

i) a "business as usual" scenario (no change)

ii) a pessimistic scenario (negative)

iii) an optimistic scenario (positive)

iv) a pragmatic scenario (realistic)

v) "left field" scenario (extreme)

NB Another way of saying this is to work with "3 Ps and a W", ie the possible, probable and preferential futures, plus a wild card

- each alternative should offer a distinct picture of the industry's structure, conduct and performance

- develop a set of alternatives that collectively account for a probable range of future outcomes and not necessarily the entire possible range, ie they are both plausible and surprising

- achieve a balanced focus on opportunities and catastrophes (NB scenario planning is not a substitute for crisis planning)

- do not forget to look at behaviourial changes required to handle each scenario and their impact in each scenario

- need to look at both macro and micro impacts, ie general and specific impacts in each scenario

. Remember

- allocate your resources prudently

- preserve your options and flexibility to handle unknown outcomes

- ensure that yesterday's logic is not used to solve today's problem, ie scenario planning does not look back - it looks forward

- allow the opportunity to rehearse, ie developing a memory for the possibilities in the future without the intense involvement of the emotions. Remember,

"...chance favours the prepared mind..."

Louis Pasteur as quoted by David Stauffer, 2002

- context is pivotal; with the relationship between things being important

- explore new relationships rather than new ideas. This comes from combining general and specific knowledge, ie general knowledge involves understanding the way the wider world functions (big picture, macro trends, etc); specific knowledge is the details of the problem you are investigating (micro trends, etc)

(sources: Art Kleiner, 1996; David Stauffer, 2002; Leon Getter, 2002a; Bill Synnot, 1999a; Fiona Carruthers, 2005; Harry Osman, 2004d; Geoffrey Colvin, 2005a; Justin Fox, 2005; Peter Senge et al, 2005; Nassim Taleb, 2007; Andrew Cornell, 2008a; Glenn Mumford, 2008; Richard Rasker, 2009; Marion Hume, 2010a; Sheridan Winn, 2011; Rachel Lebihan, 2012a),

 

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