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Scenarios in business

Book cover

by Gill Ringland, John Wiley & Sons, 2002

Abstract

As organisations operate in an increasingly complex and often confusing world, they find it even more difficult to plan. Scenario thinking can help organisations think about uncertainty in a structured way and manage their own future. Scenarios provide a forum for learning, for individuals, teams and corporations as a whole. They are a means of getting outside the orthodoxy of the organisation and focus attention on external rather than internal issues.

(Reviewed by Kevin Barham in February 2007)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)

The need for “future-resilient” decision-making

As organisations operate in an increasingly complex and often confusing world, they find it more difficult to plan. This book shows how scenario thinking can help organisations think about uncertainty in a structured way and manage their own future.

In use at Royal/Dutch Shell since the late 1960s, scenario thinking is now widely accepted as a valuable method for informing decisions. This book focuses on the use of scenarios in business, as part of a strategic management toolkit. The book is intended for “busy managers managing in unpredictable times” to help them carry out “future-resilient” decision-making. Drawing on a wide range of global examples, it provides managers at all levels with the knowledge, best practice guidelines and a practical set of tools to bring scenarios into their own organisation.

Author Gill Ringland was formerly head of strategy for ICL before starting The Lifestyle Network to study changes in consumer lifestyles. She is now CEO of SAMI Consulting (the consulting arm of St Andrews Management Institute) whose mission is to work with organisations on strategic issues to deliver “resilient decisions in uncertain times”.

Ringland says her book is for “anyone who realises that the future will no longer replicate the past, but is still struggling to come to terms with, and cope with, the uncertainties of the future”. Decisions taken today will have effects years hence, but in what sort of world, she asks? It is harder than ever to discern current trends and realties. The pace of change also requires managers to make decisions at more junior levels than before so it is increasingly difficult to make well-informed decisions.

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What are scenarios?

Scenarios, as described by the author, are possible views of the world that provide a context in which managers can make decisions. By seeing a range of possible worlds, decisions will be better informed, and strategy based on this knowledge and insight will hopefully be more likely to succeed. Scenarios may not predict the future but they highlight the drivers of change; understanding these can help managers take greater control of the situation.

The case studies in the book describe the use of scenarios across a wide range of business activities: in dealing with political and economic uncertainty, changes in industry structure, new markets, new business opportunities, customer strategy, future skill requirements, and business disposals. Scenarios are also being used to create a shared view among a management team. Scenario thinking, by setting discussions in a time frame beyond current preoccupations and forecasts, encourages a discussion that is less defensive and based more on a shared sense of purpose.

Scenarios can be used alongside other strategic management tools such as SWOT analyses and Market Attractiveness/Core Competence analyses. There is an important difference between scenarios and traditional techniques. Scenarios are tools for examining possible futures. This gives them a clear and distinctive role compared with standard techniques that may be based on a view of the past. By combining scenarios with traditional techniques such as SWOT, possible futures can be compared.

As the author says, the only constant today is change and the only certainty is uncertainty. In a changing and unpredictable business environment, assessing possible futures for your organisation is one of the best ways to promote responsiveness, flexibility and preparedness as a source of competitive advantage.

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The benefits of the scenario approach

Early in the book, the author sets out what she sees as the benefits to managers and organisations of using the scenario technique. Scenarios help us to understand today better by imagining tomorrow, thus increasing our breadth of vision and enabling us to identify change earlier. They help us to assess existing strategies and plans and to develop and assess options. Future thinking thereby reduces “crisis management” and improves our approach to change management.

Participating in the scenario-building process improves a management team’s ability to manage uncertainty and risk. It does this by sensitising managers to the outside world and helping them recognise the uncertainties in their operating environments, so they can question their assumptions, adjust their mental maps, and think “outside the box”.

Since the late 1990s, scenario thinking has moved into the business mainstream for strategy and planning, although the applications of scenarios have changed their emphasis. Previously, scenarios were often aligned with corporate planning and portfolio management. Now, they are increasingly concerned with “getting the big picture right”.

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Evolution in the use of scenarios

The first part of the book sets the scene by describing the experience of using scenarios and the lessons learned in a typical company (ICL) so that readers new to scenarios can see the concepts in action. It introduces the vocabulary and thinking of scenarios in the context of their use by ICL, tracing the evolution in the use of scenarios from pilot projects at head office to its adoption into the strategic development of the company over six years.

ICL began experimenting with scenario planning in 1993. The use of scenarios was divided into three main projects. In the first project, scenarios were part of Vision 2000, a project to envisage the IT industry in the year 2000 and focusing on economic growth and technology adoption as the main uncertainties. This early project was less successful than the company “would have liked”. Among the lessons learned was their failure to start with a specific, “big” question that they were trying to answer. They also lacked a planning framework in which to place the results. The project developed three scenarios – “Technogrowth” (high rate of change in demand); “Baseline” (medium growth in demand); and “Stagnation” (flat demand). But having three scenarios proved to be dangerous as people assumed that the middle one was “the forecast”.

The second project was concerned with reorienting ICL’s portfolio and focused on the question of what added value customers derived from the company. This was an important issue for front-line staff who were used to shipping computers but were unsure how to value services. The project created a set of scenarios that were used in corporate planning and by a wide range of management teams. Input on the relevant issues was gained by interviews with ICL senior management, rather than a literature search. This ensured the resulting scenarios would be relevant and challenging but not too “shocking” to prevent their use.

The third project used scenarios in a set of workshops for managers to explore economic futures and possible trading blocks, in order to develop a strategy for global versus local customers. It adopted and expanded existing scenarios developed by an external body (the Chatham House Forum) rather than creating new scenarios in-house. Hindsight indicated that they should have added some ICL-specific material to the participants’ briefing pack. (It was this project that led eventually to ICL adopting the Fujitsu brand – Fujitsu was ICL’s main shareholder – to emphasise the ability of the Fujitsu group to service global customers.)

One issue thrown up by the ICL experience is how to reconcile external sources of information, internal interviews and generally too much confusing data. Once the significant data are identified, the author says, the task is to see the trends, and group ideas so that the uncertainties and relationships are made visible. (She describes the use of magnetic hexagons on a whiteboard – “hexagon mapping” – for this purpose.) The next step is to create a storyline and give the scenarios names that evoke the essence of what they are about so that they become worlds that live for people. This creative step is often very difficult for an analytically-oriented team.

In one experiment, ICL tried brainstorming with a group of employees to think about the future. Brainstorming was found to be counterproductive as it was very difficult to get any coherence of vocabulary and vision and resulted in people arguing about who was right about the future. On the other hand, a series of scenario-creation workshops was found to be more effective. This focused people’s thinking on the potential challenges in 2020 and directed the group’s energies into output that helped the firm to plan for the future.

The author deduces from ICL’s experience that working with the teams responsible for a particular function or market is the only way to introduce scenario thinking into an organisation. For an action-driven company, it is a new way of thinking and demands careful positioning. A clearly defined big question, a “glossy” booklet with a good storyline, and a process by which the scenarios can be used by the organisation to decide what to do next, are all important in helping people to adopt the scenario approach.

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Scenarios and strategy

The author moves on to discuss the use of scenarios in strategy as organisations change their expectations and methods. Scenarios have been used to tackle four main challenges: political and economic uncertainty, industry restructuring, new products and markets, and portfolio management. As the world changes from supplier-led to demand-led economies, the focus for scenarios has moved from their use in planning to scenarios in the “storytelling” sense. As scenarios are increasingly used to develop significantly different world\views, they are more and more described through stories designed to capture people’s imagination. This is particularly important because organisations are now more dispersed, and individuals and teams within them are more empowered. The new challenge for scenarios in strategy is the creation of vision to help such organisations act coherently.

Scenarios explore uncertainty and prioritise issues of potential concern. They pick up weak signals about emerging risks and opportunities and prepare the organisation for surprises. (The author quotes Shell who say that with scenarios they “aim to make a better decision today or the same decision earlier”.) Importantly, scenarios provide a forum for getting outside the orthodoxy of the organisation and focus attention on external rather than internal issues. They also create a common language and the will to implement. Underlying all this is the role of scenarios in providing a forum for learning, for individuals, teams and corporations as a whole.

Scenario planning traditionally used possible future outcomes to improve the quality of decision-making and planning, but the emphasis has moved from building scenarios to successfully using them. If the techniques for building scenarios are by now well developed, the challenge is to incorporate an understanding of and facility with possible futures into management thinking. This has led to scenario planning being used more and more for team development where it provides a safe environment for developing an understanding of shared and differing assumptions.

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Pitfalls of forecasting

The author looks at potential “pitfalls and pratfalls” when working with scenarios. We have trouble foreseeing what will happen in the future, she says, because of two failures; believing what we want to believe and failing to pay enough attention. Our views of the future are also coloured by our most recent experience. To get round the “tyranny of the present”, we need to ask the “right question”, something that forces us to think differently about the present. To find the right question, we have to distance ourselves and find an “empty space” we can’t explain. We have to look at the future in the future’s own terms and let go of the assumptions about current reality that dominate our strategic thinking.

We also overestimate our ability to control the future. Sometimes, the need to develop a highly dramatic case and present a compelling point of view to get people to take action (as with the AIDS epidemic), can minimise equally relevant uncertainties in forecasts.

The forecasts of so-called experts can be unreliable – the author points to the “value of innocent eyes” asking “ignorant questions” and forcing us to question the automatic conclusions experts often offer. There is also a tension between our curiosity and obedience – we don’t want to upset the boss with negative forecasts. Ultimately, our knowledge is limited and most of what we need to know is outside our comprehension. Inevitably, some of our forecasts will be wrong.

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Making scenarios work

The author looks at the practical questions of how to make scenarios work and provides “action-oriented” checklists. A scenario project will be successful, she says, if people make decisions that are influenced by it.

The environment for scenarios. Some of the factors that increase the chance of success include:

  • Scenarios are best used where the force of the external world requires senior managers to think “outside-in”, and where they can create a shared context and language inside the organisation for people from different specialties, departments or cultures.
  • Stakeholders inside and outside the organisation must be engaged – this requires clarity about the aims and limitations of the approach, i.e. that they are not being used to forecast the future but to map out a “possibility space” to inform the decisions of the present.
  • Make sure the time is right – it is no good if the organisation is in crisis or panic.
  • Get the organisational framework straight – who is the project’s client and who are the opponents to the project?
  • Determine the scope and the deliverables – be sure you understand what is needed and when.

Scenario project stages. The author warns that, to be successful, the scenario project must be very well-thought out. She describes in detail the 12 key steps in developing scenarios:

  1. Identify the focal issue or decision.
  2. Identify key forces in the local, microeconomic environment.
  3. Identify driving forces in the macroenvironment (this involves “PEST” analysis of political, economic, social, technological trends).
  4. Rank the driving forces by importance and uncertainty.
  5. Select the scenario logics – two or three key driving forces or factors which are used to create a visual map of the scenarios.
  6. Flesh out the scenarios.
  7. Consider the implications for the focal question under the different scenarios.
  8. Select leading indicators and signposts.
  9. Feed the scenario back to those consulted.
  10. Generate and discuss the options.
  11. Agree the implementation plan.
  12. Publicise the scenarios (within the company).

The author discusses how to get started. This includes how to communicate the aims, scope and timescale of the project to the budget holder, how to set up the team, and, importantly, how to connect it into the organisation (possibly through an advisory board or project “champions”).

Deciding the question: interviews and workshops. Scenarios are most useful when they directly explore questions of concern to the organisation. Desk research and interviews with staff (and possibly workshops) are necessary for deciding the focal question. To this end, the author provides a list of questions that aim to trigger thinking: the key is to understand the person’s perceptions and unlock their strategic thinking. Interviews should aim to access a range of views from different parts of the organisation. Group interviews might also be held outside the office to encourage divergent thinking – using groupware computer software can help ideas rather than possibilities to dominate.

The issues that start to emerge from the interviews can be tested in “issues workshops” with a group of challenging people, including interviewees and outsiders. Scenario-creation workshops should involve the management team and be limited to the team (the author provides an agenda for a two-day workshop). Again, a groupware tool is useful for groups that are not used to scenario thinking. Other recommended tools are those for:

  • Capturing ideas and finding common ground (NUD*IST software)
  • Grouping the ideas (hexagons)
  • Sorting ideas into trends and uncertainties (the predictability-impact matrix)
  • Identifying the driving forces and testing the logic of the scenarios (influencing diagrams).

Creating scenarios. Creating believable and coherent scenarios with storylines and characters requires different skills from the analysis stage of scenario building. The author distinguishes between external scenarios (consisting exclusively of external influences that cannot be controlled by the organisation), internal scenarios (where only factors under the control of the organisation are considered) and system scenarios, a mixture of the two. She suggests that small organisations with low market power will mostly concentrate on external scenarios, while large organisations with greater market power will tend to use internal and system scenarios.

It is important to decide how many scenarios are needed. More than four may be too many for differences to be clear and useful. Two scenarios, on the other hand, allow a two-minute synopsis to capture the essence of the differences between the two worlds. This forms the basis for the brief “elevator speech” aimed at the CEO and Board.

A “trends and uncertainties” matrix can be used in a workshop to identify the trends common to all the scenarios and to group the uncertainties, until a few big ideas are visible and agreed on, and posed as a question.

The author also provides guidelines for developing the storyline. One piece of advice is to use “prototypical” characters in the scenarios: what sort of people would dominate in each scenario and which lose out? Some of the change imagined in the scenarios will be gradual along a single trajectory but some changes may happen suddenly. If the change is sudden, each scenario should be tested to see how “resilient” it is to the impact of the change and how easily it could recover or adapt to the impact.

Moving from scenarios to plans. The author uses the strategic planning process as an illustration of making decisions based on scenarios. Scenarios are not an end in themselves; their aim is to improve management decision-making. As those who have used scenarios have found out, this part of the process is more of a challenge than the scenario-building activity itself.

According to the author, the central step in creating new plans, after strategic analysis and scenario creation, is “strategy finding”. This entails a review of the opportunities, threats and their related options for action that have been determined in the different scenarios. The rule of thumb is to keep all the scenarios in play for as long as possible so the opportunities and risks of a superficially-viewed “good” development in an otherwise negative scenario can be determined. A “future-robust” plan must be based on several scenarios.

When it comes to strategy formulation, the author suggests that two factors are important in choosing a strategic position: the ability of the organisation to affect the competitive environment and its attitude to risk in choosing a focused or “future-robust” planning style. She proposes five forms of scenario-supported strategic positioning:

  1. React to recognisable trends – planning is oriented around the scenario with the highest probability. (This requires agreement among the people involved about the most probable future.)
  2. Manage future risks – minimising risks by building strategy on the scenario that presents most threats to the organisation. (Opportunities may be ignored, however.)
  3. Energetically use future chances – building strategy on the scenario with the biggest “upside” potential given by the environment. (Risky as it may ignore less promising scenarios).
  4. Stay flexible – gearing strategy to several scenarios with a “robust” core of assumptions common to all the scenarios. (This carries the danger that strategically important decisions may be put off).
  5. Develop and reach own visions – the organisation tries to influence the occurrence of desirable scenarios. (This depends on strongly controllable system scenarios dominated by key factors that can be influenced. Risky if the organisation pursues a single scenario strongly influenced by external environmental factors as it may be hard to change direction if those factors change. Also risky if the organisation overextends itself implementing plans fitting several scenarios at once, while a competitor focuses on a single scenario that really occurs.)

The author identifies two common errors in using scenarios. The first is for strategic planners to adopt just one external scenario under pressure from top managers to express planning situations in simple decision models. Another mistake is to get bogged down with alternative action options; trying to follow all the action options at the same time dilutes the firm’s strategic purpose.

Linking scenarios into the organisation. As the author points out, dissemination of scenarios is crucial for ensuring implementation of the resulting strategies. A “perceptual map” (a 2x2 matrix) can be used to expose scenarios to the project team and its immediate collaborators for resilience-testing and exploring the implications. The Board will need slides and a written report with recommendations. Wider distribution might consist of a printed storyline, perhaps with mock newspapers, short films or even actors to play vignette scenarios.

Scenarios will live in an organisation if people use them in their everyday work. They are most useful if they align leaders with a future vision long enough to change direction, if they help employees change the internal culture to meet future external challenges, and if they help planners who are already well connected with the changing environment.

Links to the organisation’s intelligence gathering and analysis activity are particularly important. Discussion about key intelligence topics helps planners move from considerations of the future to identifying early indicators. Disciplined intelligence gathering, as part of an ongoing system for collecting external information, helps ground the scenarios more effectively.

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Case studies

The book contains a number of case studies, chosen to illustrate the range of applications of scenario thinking, and spanning the four major challenges considered by the author to face organisations: the political and economic environment, industry restructuring, tackling new markets, and managing a portfolio. They also cover a range of different industries and a range of different timescales and techniques. Managers or team leaders responsible for each scenario provide insights from their experience.

  • How a multinational firm explored the impact on its business of changes in the political, social, cultural and religious environment in Turkey.
  • Preparing for a new energy environment at Statoil (Norway).
  • New car distribution of the future – exploring changes in industry structure arising from changing lifestyle and the use of e-commerce to purchase cars.
  • Reframing industry boundaries for structural advantage – one of the world’s largest papermakers rethinks its customer and supplier relationships after realising the future will be different from the past.
  • How a European software company developing software for collaborative working used a scenario approach to reframe its business.
  • “Foresight into insight” – how Texaco used the scenario process to create the context for investment and policy decisions.
  • Healthcare 2010 scenarios – GlaxoSmithKline used scenarios to explore futures for healthcare.
  • How a workshop, based on scenarios for the future of the City of London as a financial centre, helped a trading group analyse its portfolio.

One lesson learned from the case studies is that it may not always be necessary to develop new scenarios from scratch; existing ones may be sufficient to provide a framework for discussion. Even a short study can capture enough input to help management in decision-making. The case studies also contain some warnings: for example, scenarios that appear “unbelievable” may nonetheless transpire in the future; and at least some of the changes imagined in a scenario are likely to happen faster than expected.

The author concludes that in a complex and chaotic world, it is crucial to ensure that the firm’s vision is shared among its people to give coherence to their actions. A scenario approach can develop such a shared vision as models of the world represented through scenario stories are frameworks that enable people to relate to each other, communicate and act. As noted, however, moving from the scenarios themselves to strategy development and action is the most critical part of the scenario process and can be the most difficult. Some more guidance in this area would be helpful in future editions of an otherwise very useful book. Reportedly, more scenario projects fail because they have no impact on strategy and management decisions than because they were unimaginative or poorly constructed.

Smaller organisations are inevitably more constrained than larger ones in terms of the resources they can apply to scenario building. One interesting recent suggestion with regard to scenarios is to open up the scenario planning process and create “open source” scenarios. The notion is that an online database might be created containing thousands of items related to the future of the world, including both narrow concerns and large-scale drivers of change, with space for discussion and elaboration. The database would be free and open to all. People from around the world could play with the scenario elements, remixing them and coming up with surprising new combinations and ways of looking at the future. The suggestion is that organisations with limited resources would be able to draw on a world of ideas to craft their own scenario initiatives. However, persuading larger organisations to share their proprietary scenario information with the world at large is likely to be difficult.

[Readers interested in the use of scenarios may also like to refer to the review of Peter Schwartz’s book The art of the long view. Schwartz was formerly head of scenario planning for Shell and is considered one of the world’s leading futurists.]

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