by Peter Schwartz, J. Wiley and Sons, 1997.
A copy of this book can be ordered online via the Ashridge e-bookshop.
This is about scenario planning, with Shell as the successful user of the method. It involves detailing a number of possible futures and developing options to meet them. Shell used scenario planning to consider possible futures and were ready when some of them happened, such as the end of the Soviet Empire.
(Reviewed by Edgar Wille in June 1999)
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Peter Schwartz worked with Pierre Wack, Arie de Geus, Ted Newland and others in the Shell Planning Group who originated the 'scenario' approach to preparing businesses for possible futures, so that events would not take them by surprise. This is probably the easiest book to read on the subject and enables one to apply the principles to one's own organisation.
How can we plan for the future when we don't know what tomorrow will bring? Such unpredictability drains people and organisation's of confidence. Scenario planning gathers the maximum amount of available information and builds a series of pictures of what the future could look like. What challenges could the world present us? What would our options be and how might others respond to our actions? If this is done from a number of different angles, some of them perhaps outrageously unlikely, then when the unexpected does happen companies are not taken by surprise. They have been there before. They have lived a number of possible futures before one of them has arrived.
The term scenario is a theatrical one for the script for a film or play. In the business context scenarios are scripts or stories of how the world might turn out tomorrow, 'stories which can help us recognise and adapt to changing aspects of our present environment'. They are about making choices today with some understanding of what the reality might be like. They are tools for ordering perceptions 'about alternative future environments in which one's decisions might be played out'. The 'plots' are carefully constructed to make important elements of the world scene stand out.
Scenarios are not predictions. They are vehicles to help people learn. They then are prepared for whatever happens instead of clinging to an illusion of certainty. 'It is this ability to act with a knowledgeable sense of risk and reward that separates both the business executive and the wise individual from a bureaucrat or a gambler.'
The use of scenarios started as a method for military planning, involving people like the futurist Herman Kahn. Shell adopted the method or disciplined mode of thinking to see what could happen to the price of oil, after years of relative stability. Two sets of scenarios were developed by Pierre Wack and his team in the late 60's. One was for no change, with extensive new oil fields in the non Arab world. The other was for an oil crisis sparked off by OPEC. The scenarios were presented as stories with events portrayed as if they were news, but with detailed tables of price figures and practical implications. They were not just flights of imagination.
Top management listened and knew that they had to be prepared to change their business drastically. Wack presented his scenarios with no holds barred as to the implications if the worst case was to be avoided.
It happened. In 1973 after the 'Yom Kippur war' the energy crisis burst upon the world. Of the oil companies only Shell was emotionally prepared and they rose to be one of the two largest of the oil big seven. Shell had a tool for reperceiving the world, for questioning assumptions and gaining, not an accurate picture of tomorrow, but rather a readiness for anything, and this enabled quick decision making. Wack was about liberating people's insights, not mere prediction. Shell repeated the success by being ready for the enormous falls in the price of oil in the 80's. They had been there, too, before it happened.
The method employed by Shell was not merely to use conventional sources of information, but to get out and talk to unusual thinkers, people who had their fingers on the pulse of society. They came from all walks of life, all over the world, and were knowledgeable about values and lifestyles beyond the normal demographic and geographic ones.
For many years Schwartz has felt that there must be better answers to the question of how a better world can emerge, free from the extremes of comfort for the few while the majority of the human race well nigh starve, or mediocrity for everyone by central planning which doesn't meet the deepest human and spiritual needs. He is also fascinated by the possible outcomes of hormone development and application, which could enhance life-span ceilings to 150 in place of the nineties. What would be the implications of this for society, if there were as many 100 year olds as there are now 70 year olds. And it doesn't pay to scoff. The Times scoffed at flying as theoretically impossible two months before the Wright Brothers did it.
Schwartz has been facing the possibilities of this hormone business. Childbearing years extended and the effect on demographics; pressures on the environment; health pressures to make these longer years disease free; impact on long term insurance; employment patterns. The list could be endless and scenarios go beyond lists into the telling of such futures as stories which challenge.
Schwartz tells the story of how scenario planning was used in the establishing of a company with Paul Hawken, the futurist and ecological author. The firm was to import strong digging tools from England suitable for the French intensive method of organic gardening. Before they started they had visited a number of futures their venture might lead them into. They looked at possible futures of mail order; of demand for good quality products in place of the throw away society; the impact of the green movement and green awareness; the growth of the organic approach to food; health preoccupation; a move from inbuilt obsolescence; the philosophy of life developing among now adult baby boomers.
There was this minuscule company taking the trouble to write scenarios before going far with their plans. They followed the scenario pattern of developing stories in which three trends were envisaged
So they came up with a picture of continuing materialism and managing to find solutions which made life tolerable in the prosperous nations. Another was of decline and poverty, low growth, environmental crisis, price rises, scarcity of natural resources, depression and hard times. The third set of stories was of a change of values, simple living, environmental friendliness, inner growth rather than materialism, quality of life not quantity of goods.
They found that in the first scenario sophistication and a trend toward country living would serve their proposed business well. In the second the survival needs would mean that people could not afford to be without good tools. In the third the inner directed people would want meaningful pastimes, among which gardening would become significant, a place for reflection and growing healthy food. So all three scenarios gave a hopeful picture for the proposed business venture.
However they then had to add stories about import/export issues in the light of world economic trends; the possibility of currency moves wiping out their profits. They had to consider the future of selling methods. Mail order seemed to fit best with all three.
In fact this planning work of the late seventies helped. The 80's showed elements of all three scenarios and they were able to get a mix of provisions together which brought success and flexibility with which to meet the future. A noteworthy feature was that in looking at a little relatively local project, the friends had to look at the whole world and view the micro in the light of the macro.
Scenario writing requires honesty. You must not refuse to entertain the unpalatable, as politicians usually do. You mustn't think anything is impossible, as the USA defence people did. The break up of the Communist system in Europe and the old USSR was not envisaged and left them bewildered and lacking a raison d'?tre.
People so often feel safer not thinking about possibilities. And personalities come into it. If you are a pessimist you will have to force yourself to ask 'Is there any possible ground for an optimistic scenario? If so I must include it.' We have to test our perceptions with facts on why different people may see the same organisation in such different ways and then project the facts and link with others to look at different worlds.
Again, you can't work serially, because everything which happens affects everything else. You have to be a systems thinker. You can't package knowledge into separate compartments of expertise, not if you are to consider all the possible angles. And although no one person can have all the angles sewn up there must be readiness to listen to the messages of other domains and integrate them into the whole.
You don't write scenarios just about possible facts. You have to recognise that perceptions in one way are facts or certainly create them. Scenarios also work from the world of facts into the world of perceptions in the heads of decision makers. This leads to strategic insights.
The fact that scenarios use the story telling method is not a cause for derision in the rational world we suppose business operates in. Stories are the oldest way whereby truths have been clarified and preserved. Stories have, for most people, an impact that tables and graphs lack. Why else should the most serious of people read fiction. Scenarios are stories that give meaning to events. The ancient myths were not untruths as the word is often misused. They encapsulated perceptions of truth in a memorable and influential manner, which contributed to the creation of a whole culture. Organisations, too, have their myths through which they perceive the world.
Peter Schwartz tells how at Shell there was a belief that the Soviet Union did not need to be taken seriously when looking at the future of oil and gas, because of the closed and inefficient nature of its economy. They accepted however that possibilities of Soviet changes should be included in the scenario activity. This meant including the possibility that such changes might cause Shell not to go ahead with the enormous Troll gas field, with construction of the largest structure in the world as a platform.
The possibility of better relations with the USSR seemed remote. It was at the height of Reagan's 'evil empire' speech; Gorbachev was a relatively obscure party official. But the scenario technique was well established and so it was permissible to examine unlikely scripts and try different mindsets. What made them uncomfortable was worth paying attention to. It might be crucial. The reader is invited to ask what are the Troll type decisions being faced in their organisation and what are the ramifications.
The six or eight men who run Shell run 8% of the world oil production. The attention they pay to scenarios is a measure of the significance of the approach. They know that it gives the opportunity to break out of established mindsets which blind us to possibilities. So they listened to the scenario which included the release of Russian oil and disagreement within OPEC. They allowed themselves to postulate an unexpected fall in oil prices. They entertained the idea of a Soviet Union where its faltering economy could no longer afford its rigid system. By 1983 the scenario writers had also heard of this Gorbachev enough to know that if he came to power, massive changes would follow. The fact that the oil price fall did not spring from the Soviet changes does not alter the fact that the company mindset was made ready for change by such comprehensive considerations.
Shell also made presentations to government agencies to glean their reactions. Every Soviet expert, except German Heinrich Vogel, thought they were crazy to envisage a change in the Soviet system. So did the CIA. The CIA had the same facts but they didn't ask the right questions.
The Troll project was not abandoned but cost reduction policies were set in train and investment in other oil fields was trimmed. This latter decision meant that when the oil prices did come down Shell was able to use that investment money to buy oil reserves at half the price of six months earlier. The entertaining of 'impossible' ideas also enabled Shell to consider the possibility that, with lower prices, oil might become just a commodity and they entered the trading arena in a big way. They also moved ahead fast on research into how to develop and sell environmentally friendly products at a premium price.
It will have been noticed how in all these considerations scenarios swing between relatively narrow issues about investing in a new oil platform and world issues like 'what is going to happen to the Soviet Union?'. Broad issues put the narrower ones into perspective. The systems principle again. Small issue scenarios in the mid 80's did answer questions about the ability of companies to produce synthetic fuels but they missed the broader questions as to whether the energy shortage scare was permanent or whether it could give place to over supply. We can no doubt all remember being part of this scare.
Peter Schwartz gives practical advice in some detail on how to hunt and gather for information, being careful to pay attention not only to what we think we need to know. An alert mind is needed which is constantly filtering the information by which it is surrounded and making new connections. And when you see a possibility you actively seek information which may be relevant, as the Shell people did over the Soviet Union and found a number of little known essays on economic dangers by Soviet experts.
Empathy is another characteristic that scenario construction requires. You need to get into the skin of others. 'If I were a Soviet Economist today'; 'If I were a teenager in the world today'. Or perhaps look at the environmental issues as a scientist; then as a politician; then as an environmental activist. Each will have a different mindset. The good strategist, the good marketer in a company, just the good citizen, all need to take into account all the perspectives and live with them.
Keeping files on everything is not as important as just letting everything you read or hear sink in and make you alert. This encouraged me as I can never cope with even what I read in the Financial Times. But the odd scientific article about metals with a shorter than expected life had enormous consequences for Boeing, both in ensuring safety and increasing the potential sales if planes would not last so long. However for Shell, air fleets updated sooner than expected would mean less fuel sales, because the planes would be more efficient.
Keeping in touch with public perception is also vital to scenario writing. It can change so quickly - as for example with the awareness of global warming which took America by storm when there was not much news for a chat show to talk about, though the facts had been there for years. TV is also a source of information about what people believe is happening. You have to be alert to the impact of news to see what may be a perception shaping event and what is transitory.
The impact of popular music also needs to be observed along with fringe movements like that based on the Gaia hypothesis which sees the earth as a single, vast, self regulating organism. Shell paid attention to a fringe energy expert who saw energy conservation as making continued growth possible. They saw this as meaning that the days of big oil demand might never come back.
The scenario people are continually talking to experts famous and apparently obscure. A throw away line from Peter Drucker on the need to keep personal relationships and trust active, when modern communications had transformed the financial trading activities started Schwartz seeing the significance of the web of relationships by which we can learn more than we can from publications.
But how many middle managers can have a talk with Peter Drucker? I did once for 10 minutes about the antics on Broadway of an 81 year old actor in Drucker's video on time management. Well it has changed the way I read his books. He's human. But then so are many of the 'great'. Schwartz suggests that any middle manager reading an article can write to the author and probably get a response to contribute to scenario thinking. Networking is a key to information gathering and it can be done by the internet without having to make appointments to meet, though it may lead to this.
One can also read books as you would talk with thinkers. On a personal note I usually read about 5 books at once on the grounds that I don't only talk with one person each day. I also take note of the dictum of Francis Bacon that only a few books are to be thoroughly read and digested. For the rest skimming will do. Schwartz describes some of his skims and some of his deeper book reads. One of the problems for management busy fighting fires and meeting deadlines is that they don't find the time to read enough and therefore get hemmed into narrower confines than they need to do their job. The Economist is specially recommended by our author.
The second half of the book gives detailed help with the construction of scenarios, which any company which sees the need would do well to heed. You begin by identifying the driving forces in the situation you are writing stories about. And because individuals perceive these differently it is best to work in teams with the benefit of exchanging insights.
Driving forces are well considered using the PEST analysis or STEEP, which looks at:
Each is illustrated in turn with an example from the publishing industry - population growth; electronic media; transport costs of book pulping instead of just in time issuing; paper and ecological damage; political and trade restrictions such as retail price maintenance in the UK until recently.
The global teenager is taken as an illustration of a driving force, with adolescence and technology leaping over national boundaries with significant effect.
After uncovering the driving forces, the next stage is to separate the 'predetermined elements', which you can't influence, from the 'critical uncertainties', which you might.
Predetermined elements are those where the pattern of the future is determined by what has already happened. Thus the long duration of the American budget deficit was foreseen at Shell in 1982, because of the commitments to defence spending and social security and the general perception by Americans that they were overtaxed.
Predetermined elements include the demographic issues. The babies are born who will affect birth rates in 20 years time. So are those who will be drawing pensions in 20 year's time. The facts are there but so often businesses don't trouble to find them and apply them. Also if they are uncomfortable people try to deny them or look the other way, like the numbers of cars and extent of road construction suggested by such demographic trends.
Critical uncertainties flow out of predetermined elements. For example Shell knew the demographic and economic pressures on the Soviet Union, but the reaction of the political system could not be known with certainty. What will happen if the American deficit is overcome? It looks pretty certain that traffic congestion will get worse and commuting become more and more painful. But the critical uncertainties concern the response to this. Will commuting cars become travelling offices? Will more people work from home? Will public transport become sought after and efficient? Will flexible hours become universal? These are critical uncertainties.
The actual writing of a scenario looks at each of these three categories - driving forces, critical uncertainties and inevitabilities - and follows them down many channels. Converging forces and their intersections are examined. You might provide three scenarios - a status quo, an optimistic vision (perhaps using the Japanese definition of optimism: 'having enough challenges to give life meaning'), and a pessimistic one, with enough credibility to frighten your managers. On the other hand it is easier for them at least to listen to these disturbing scenarios because there are less frightening alternatives too. Strangely people don't respond to too much optimism: 'things could never really turn out that well" they say.
However Schwartz cautions against feeling you must have three scenarios; the middle of the road one can easily lack challenge and enable mangers to take refuge in it as a comfort zone. So if you do have a middle, status quo, scenario, avoid making it too bland and include in one of the scenarios something which is particularly challenging because it may loosen up thought in spite of or because of its outrageous nature, such as what would happen if your country withdrew all immigration restrictions.
Another less outrageous challenge is to envisage a world or country where business does not assume that there must be winners and losers, where the zero sum game is not inevitable. This can be constructive by pointing out that some opposing forces can be harmonised. Perhaps growth and environmental safety need not be incompatible. Each difficulty is thus seen as an opportunity to learn.
In composing the plots it is important to realise that if you change one factor you change many others. Mass automobile travel also needed asphalt roads, rubber tyre factories, oil pipelines. Just designing a machine would not have been enough.
Another exercise that helps to develop scenarios is to speculate on where the big discontinuities could come from and track them through the web of society. Climate change; a large meteorite engulfs a major city; space technology becomes seen by the populace as a boring activity; new plagues worse than AIDS; benevolent despotism ousts democracy under the UN; new religious wars; drug traffic becomes uncontrollable or is made legal and so ceases as a significant business. They may never happen, but the thinking will spark off ideas which will have relevance in some other field.
A warning is given that when you develop scenarios you don't have to assume that in a pessimistic plot things will go on getting worse till total disaster strikes. Things have a knack of reversing themselves. A useful way of learning to carry out a scenario write up is to go back to a past situation and write it as you might then have done. What would you have offered as your alternatives? Then hindsight will tell you what did happen.
And as to the value there is no doubt. Look what has happened to the steel industry, to the car industry and many others because they refused to consider what they didn't want to see. There is no company or other organisation that does not need to take these examples to heart and resolve to be open to all possibilities, however unwelcome.
Peter Schwartz is in his 40s. So he should be around to see whether any of his scenarios for 2005 will resemble reality. Among his plots are a Japanese/American trade bloc; molecular engineering; genetic medicine; increasing world co-operation; two billion teenagers by 2000; if every Chinese citizen had just one motor scooter there would be another 2bn barrels of oil required daily; solar energy; will environmental fears prove to be false alarms, or worse than we feared? will information be the new wealth of nations and individuals? where will the EU be by 2005 and what of the ex Communist countries? what will be the shape of companies in future? what will be the impact of organisational learning? decentralisation? slimmer smaller business units? will education really improve and will it create new markets as new aspirations grow? is the fax an interim machine pending more integrated communication systems?
The darker scenarios include: ethnic wars in the old communist territories (and this before they became so prevalent); the battle between libertines and fundamentalists; prevailing cynicism and its impact on everything; end of the EU; unconstrained competition; the demise of the small investor; technological accidents; many small wars; many territories flooded by ocean level change.
Peter Schwartz finishes on an optimistic note, in the sense that the challenges are capable of being faced up to and there is plenty of imagination, drive and competence about. The shadow of the cold war has been removed and has given the capacity 'to dream of a better tomorrow, confident that tomorrow will arrive'.
He sees the scenario approach as giving a shared language for the creation of strategy at all levels of an organisation. And the language contributes to the development of shared models of the world. It also contributes to reducing the sense of powerlessness that we often feel when contemplating the future. We can do something to make a small part of the most desirable future come to pass. We are not just machines controlled by unknown forces. As Michael Ventura is quoted as saying 'If you look at your life on the level of historical time, as a tiny but influential part of a century long process, then at least you can begin to know your own address. You can begin to sense the greater pattern and feel where you are within it, and your acts take on meaning'.
It is also possible to use the scenario method to consider the alternatives in one's personal and family future and to be better prepared for whatever may come along in life. Specific issues like job change, career direction, marriage, might all be looked at more wisely perhaps if all the options were carefully thought about and discussed. The real test of the value of scenarios is whether anyone changes behaviour, because the future is seen differently. Like Shell over Troll, companies and individuals can say 'I have an understanding of how the world might change. I know how to recognise it when it is changing, and if it changes I know what to do.'