Scenario Planning (Cont.) 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)

It is hard to make predictions based on the past with any degree of accuracy. The future is very unpredictable; using past data and patterns are not reliable indicators of the future.

Some of the "dos and don'ts" of scenario planning

- need to be careful of group think by encouraging people to think differently

- need to ask good questions

- need to be careful of the experts as they can be stuck in the past

- need to keep away from forecasting

- need to understand what you can and cannot influence

- it's about being a learner, ie learning and understanding the possibilities

- collaboration is more important than competition

- it is more art than a science and this helps explain why many executives find it hard to do

- most useful in long-term situations, eg decades rather than years, months, etc.. Most useful in industries like oil, aerospace, infrastructure, etc that have a long-term focus rather than short-term like fashion industries

- need to understand what you can influence and cannot

- be careful of negative scenarios

(source: ABC 2019)

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

8. Climate Change

In 2017 the Financial Stability Board's Task Force on Climate-related Financial Disclosures recommended scenario planning to investigate the impact of different assumptions about climate change and climate policy on organisations. The rationale for this was

i) it will help consider the issues around climate change as the outcomes are highly uncertain, eg
- what will be the physical response of climate and ecosystems to higher levels of greenhouse gas emissions in the atmosphere?
- what outcomes will play out in the medium to long term around timing, distribution and mechanisms during the transition to a lower-carbon economy?
- what are the potential disruptive impacts owing to substantial uncertainty and complexity?

ii) it will enhance organisational strategic conversations about the future by considering in a more structured way what might unfold, ie what is different from business as usual? It will help decision-makers' thinking across a range of plausible scenarios including ones where climate-related impacts will be major.

iii) it will help organisations frame and assess the potential range of plausible business, strategic, financial, etc impacts that will flow on from climate change. These will help managements to develop the most effective and appropriate action plans as part of strategic, financial, business, etc focus to handle a wide range of uncertain future conditions.

iv) it will help organisations identify indicators for monitoring the external environment, especially changes that will result in adjustments, modifications and reassessments, etc to the appropriate plans.

v) it can assist investors to understand the appropriateness of an organisation's different plans, and in comparing risk and opportunities to develop.

Some possible scenarios to be considered:

i) Business as usual, ie no change in climate change policies, eg continue to use fossil fuels, materialistic/consumption lifestyle dominates, etc

ii) The world's temperature experiences a less-than-2 degrees Celsius rise

iii) The world's temperature experiences a more-than-2 degrees Celsius rise

iv) Economic activity shuts down temporarily, eg for a month every couple of years (like in a pandemic)

v) Technology saves the day, ie technologies developed that make climate change a non-issue

vi) The world becomes uninhabitable

For each of these scenarios to be meaningfully examine

- the critical input parameters

- assumptions like possible technology responses and timing

- regional impacts

- time frames (short, medium and long term)

- sensitivities of key assumptions

- impacts on organisational strategy like value chain, capital allocation decisions, research and development focus, operational issues, balance sheet, sustainability, etc

(source: Task Force on Climate-Related Financial Disclosures, 2017)


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