Scenario Planning (Cont.) 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.

 

 

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