Scenario Planning and Strategic Forecasting - Forbes

My specialty is multiple scenarios, or scenario planning, as it is best known. Scenarios are alternate futures in which today's decisions ... 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AsIsettleintotheroleofcontributortothisspace,Iwanttoexploremultiplefuturesandmultipleperspectives.SincemyapproachtolookingaheaddiffersfromwhatsomeStratforreadersmaybefamiliarwith,Iwanttostartbyexplainingoneofmyfavoritemethodologies,whichisdistinctfrom—butinterestinglyrelatedto—geopoliticalforecasting. Myspecialtyismultiplescenarios,orscenarioplanning,asitisbestknown.Scenariosarealternatefuturesinwhichtoday'sdecisionsmayplayout.Theyarestorieswithbeginnings,middlesandends.Goodscenarioshavetwistsandturnsthatshowhowtheenvironmentmightchangeovertime. GoodScenarios Agoodsetofscenarioswillcontaintwotofivedifferentnarratives.Morethanfivescenariostendtogetconfusedwithoneanother.Threescenariosrunthedangerthatpeoplewilltrytopickthemostmoderateormostapparentlyplausibleandforgetabouttheothertwo.Fourisagoodnumber—neithertoomanynortoofew. Eachscenarioshouldcontainenoughdetailtoassessthelikelihoodofsuccessorfailureofdifferentstrategicoptions.Willtherebesufficientdemandforanewproduct?Aresupplychainslikelytoremainintact?Howmuchcompetitioncanweanticipate?Havenewtechnologiesrenderedaproductobsolete?Willpoliticalinstabilityputthoseoilfieldsbeyondourreach? Agoodsetofscenariosshouldalwaysbecustomizedtoaparticularcontext.ThescenariosthatRoyalDutch/Shellusedtoanticipatethedropinoilpricesin1986werefardifferentfromthescenariosamajorcomputermanufacturerusedtonavigateitstransitionfromproductstoservices.ThescenariosXeroxusedtoanticipatetheconvergenceofthecopierandprinterwerefardifferentfromthescenariosAmericanExpressusedtodealwiththereplacementoftraveler'schecksbycreditcards.Eachorganizationneedsitsownscenariostofaceitsownchallenges. Purposeisalsoimportant.Sometimesthepointofascenarioistopryattentionawayfromtheordinary.Theveryprocessofthinkingaboutarangeofpossiblefuturescanbeausefulopportunityforaddressingissuesthatmightotherwisebeneglected.ThinkabouttherisingpowerofChinaandIndiaorthecreepingonsetofclimatechange. Eachindustrywillhaveitsownexamples:foreducation,thespreadofmassiveonlineopencourses;forenergy,newtechnologiesfordecarbonizationorextraction;forentertainment,oscillatingparadigmsbetweenbigscreenblockbustersandfarethatfitsonmobilescreens. Alternatescenarioscanserveasrelativelylow-costinsurancepolicies.Youarelesslikelytobeblindsidedifyou'vetakenthetroubletoimaginesomeunwelcomedsurprises.Andontheupside,scenarioscanidentifywhite-spaceopportunitiesthatremainunfilleduntilafirstmoveroccupiesthespacethatlessimaginativecompetitorsneverknewexisted. TheProcess Thescenarioplanningprocessusuallyunfoldsaccordingtoanorderly,methodicaleight-stepprocess.Theprocesshastwomajorparts:first,choosingwhichscenariologicstofleshout,ataskthatcomprisesthefirstfivesteps,andsecond,tellingtheactualstory,itsimplicationsandearlyindicators,whichcomprisetheremainingsteps.Afull-blownscenarioplanningprojectusuallytakesthreeorfourmonths,startingwithinterviewsandaninitialworkshop,thenatleastamonthofresearchandwriting,thenasecondworkshoptodrawimplicationsfromtheramifiedandrefinedscenarios,andthensometimetosummarizetheresultsofthesecondworkshopintoapresentation. Step1:FocalIssue Theprocessbeginswithidentifyingwhatapersonororganizationwillfocuson.ScenariosforthefutureofthegalaxywillnotbeusefultoacompanytryingtodecidewhetheritshouldbuildanewfactoryoutsideSaoPaulo.Sometimesthefocalissueisaveryspecificquestion:ShouldweinvestintechnologyX?ShouldwebuycompanyY?Sometimesthefocalissueismoreopen-ended:Aretherepotentialsurprisesthatcoulddisruptourcurrentstrategy?Andothertimesthefocalissueisgeopolitical:WhatwillthefutureofcountryZlooklikeasamarketforourseveraldifferentproductlines? Step2:KeyFactors Oncethefocalissuehasbeendetermined,ascenarioteamwillbrainstormalonglistoffactorsthatcouldaffectthefocalissue.Manyofthekeyfactorswillbefairlyobvious.Theyarethesortsofthingsthatwouldbeaddressedinatypicalbusinessplan:customerdemand,suppliers,competitors,productiontechnologies,humanresources,etc.Oncetheteamhaslisted30or40differentkeyfactors,though,theprocesswillreachouttolessobviouspossibilities:Whatifthereisanewentrantonthecompetitivelandscape?Whatifthereisanewdisruptivetechnology? Step3:ExternalForces Afteridentifyingkeyfactors,it'stimetoconsiderthemoreremoteforcesoperatinginthelargerworld,e.g.,geopolitical,economic,socialandtechnologicalforcesthatareoftenleftoutoftheusualbusinessplan. Strategicplansthatdisregardsuchforces—warisanobviousexample—oftenfail.ThekindofgeopoliticalanalysisthatStratforofferscanplayamajorrolehere.Butagoodsetofscenarioswillalsoofferinsightintolessobviousdynamicssuchasmigrationpatterns,culturaldifferences,newtechnologies,currencyfluctuations,environmentalissues,and/orepidemics. Inadditiontopotentialrisks,it'sessentialtolookontheupside.Opportunities,breakthroughsandnewtechnologiesaredifficulttoanticipate.Butit'simportanttoexerciseimaginationindisciplinedwaysthatdomorethangazeattheworldthroughrose-tintedglasses.Humaningenuityshouldnotbediscounted,howeverdifficultitmaybetoanticipate. Aswithkeyfactors,thereisnoproofforhavingthoughtofallpossibleexternalforces.Thisworkcallsforimaginationandcreativity.Onceascenarioteamhasgeneratedalistof70to80keyfactorsandexternalforces,theefforttocomeupwithstillmorewillgetharder.Alloftheobviousfactorsandforceswillhavebeenmentioned.Itisnecessarytopushimaginativethinkingtothelimit,butnottoofarbeyondthelimit.Someoutlandishideasarewelcomed,butwhenpeoplestarttalkingaboutgreenmenfromMars,youknowit'stimetomoveon. Step4:CriticalUncertainties Byfollowingamethodical,step-by-stepprocess,thescenarioteamcanachieveabalancebetweenthekindofwildcreativityandfree-formimaginationcalledforduringthebrainstorminginstepstwoandthreeandgoodjudgmentbasedonknowledgeandexperience.Wherestepstwoandthreefeaturedadivergentprocessinwhichtheteamtriestothinkofeverythingthatcouldaffectthefocalissue,stepfourcallsforaconvergentprocessofprioritization. Thecriteriatobeusedinallocatingpriorityvotesareimportancetothefocalissueanddegreeofuncertainty.Whenallthevotesarecountedandcloselyrelateditemsclusteredtogether,therewillbeashortlistofcriticaluncertainties.Forexample,willenergypricesriseorfall?Willconsumervaluestiptowardthemoretraditionalorthemoreself-expressive?Willatechnologyadvancerapidlyorslowly?Willthegovernmentleantowardderegulationorreregulation? Step5:ScenarioLogics Buthowdowedecidewhichfuturesareworthdevelopingasdetailedscenarios?Thisisthechallengeofstepfive,howtonarrowdownfromthevirtuallyinfinitenumberofpossiblefuturestosettleonjusttwotofivethatwillleadtostrategicinsight. Afterallthepriorityvotesoncriticaluncertaintieshavebeencounted,thegroupfixesonjusttwocriticaluncertaintiestoserveastheaxesofa2-by-2matrix.Fourscenariologicsarethengeneratedfromthelabelsontheendsofthetwoaxes. Thissetofscenarios,developedforoneoftheDetroitThreeautomakerswaybackin1984,contained"theofficialfuture"inthelowerleftquadrant:low-pricedfuelwithneo-traditionalconsumervalues.ThiswasthekindoffutureDetroithadbeenplanningonformanydecades.Buthigherfuelpricesandchangingconsumervaluesrequiredthemtothinkofnewkindsofvehiclesthatwouldbeappropriatefordifferentenvironments.Asaresult,theclientstartedthinkingharderaboutsmallercars,aswellastheminivansandSUVsthatwouldappealtoconsumerswithnon-traditionalvalues. Ilikethiscasestudyjustbecauseitofferssuchagoodexampleofan"officialfuture."Geopoliticalforecastscanhelptoformulatetheofficialfuture.Scenarioplanningcanthensupplementthebasecaseforecastwithotherscenariosthatwillfurtherilluminatethebasecase.Theirlogicshavebeenchosenbasedonthescenarioteam'scollectivejudgmentregardingwhatismostimportanttothefocalissue.Itpaystoquestionthemostimportantassumptions.Whatifwe'rewrong?Scenarioplanningguardsagainstthedangersofplacingalloftheorganization'seggsintothebasketofjustoneforecast,howeverwellfoundedthatforecastmaybe. Step6:Scenarios Thesecondmajortaskofscenarioplanning—actuallytellingthestoryofeachchosenscenario—callsforverydifferenttalentsandskills.Agoodscenarioisverymuchastory,butmoststoriesarewrittenbyasingleauthor,notbyacommittee.Howcanascenarioteamcombinethecreativityofmanyindividualsintojustoneclearnarrativeline? Asamatteroftradecraft,agoodmethodforelicitingspecificplotelementsistoencourageworkshopparticipantstowritenewspaperheadlinesonpost-itnotes.Aharvestofsuchpost-itnoteswillsupplyplentyofcontentforthescenarionarrative. Thisprocesscanbestartedinaworkshopsetting,butoncethemembersofthescenarioteamhavegenerateddozensofplotelementsandnewspaperheadlines,itcantakeseveralweeks,evenmonths,forasmallcoreteamtodraftnarrativescenariosfromtheoutlinesgeneratedintheworkshop. Step7:ImplicationsandOptions Usuallyamonthtotwoafterthefirstworkshop,asecondworkshopwillbeheldtofigureouttheimplicationsofeachscenarioandthestrategicoptionsappropriatetothoseimplications.Takeonescenarioanduseitastheplayingfieldonwhichourplaysmustbeplanned.Playouteachscenariotoitsconclusion.Thenstandbackandlookatthelistsofstrategicoptionsappropriatetoeachscenario.Pulloutthosethatshowuponallormostlists.Thesearethe"nobrainers,"thestrategicoptionsthatlookgoodinanyandallscenarios.Startworkonthemimmediately. Theoptionsthatlookgoodineveryscenarioareoftenassociatedwithwhatarecalledpre-determinedelements—aspectsofthefuturethatcanbereliablypredicted.AndhereistherealmwhereStratfor'sgeopoliticalanalysisalignsmostcloselywithscenarioplanning.Whatevercanbepredictedshouldbepredicted.Fortheunpredictableremainder,thecriticaluncertainties,scenarioswillcapturethealternativesincoherentbundles. Demographyisoneofthemostreliablesourcesofpre-determinedelements.AndnotehowsignificantlydemographicsplayinStratfor'sforecastsfor,say,Russia,wherethepopulationisdeclining,orJapan,theworld'sfront-runnerinagingpopulation. Step8:EarlyIndicators Earlyindicatorsarethefirstsignsofthebigchangesthatdifferentiateonescenariofromanother.Sometimesearlyindicatorsarefoundinthebehaviorofthemostinnovativeconsumers,sometimesinthesmallstoriesdeepwithinanewspaper.Sometimesearlyindicatorstaketheformofnewjournalsorpublicationsindicatingtherisingpopularityofsomenewtechnology.Othertimesafewwordsinthespeechofanimportantpoliticianwillsignalsomenewlegislation. Earlyindicatorsareparticularlyimportantinmovingfromasetofscenariostoasinglestrategywhenyoucannotidentifyasingle"strategyforallseasons."Ifyoucannotfindsucharobuststrategy,butyouhaverehearsedwhatyouwoulddoineachofthescenarios,thenyoukeepaverycloseeartothegroundforearlyindicatorsthatsuggestmovementinthedirectionofonescenariooranother.Whenyouhaveaccruedenoughindicatorstogiveyouconfidencethatyouknowwhichscenarioisunfolding,thenyoustarttoimplementthestrategymostappropriatetothatscenario. MovingfromScenariostoStrategy Scenariosbythemselvesdonotdeterminestrategyanymorethanaforecastdoes.Astrategyneedstobedevelopedinlightofasetofscenarios.Thinkofscenariosasdifferenthandsofcardsyoumightbedealt;thinkofstrategiesasthewayyouwouldplaythosecards. Sometimesscenariosaredevelopedafterastrategyhasbeendetermined.Inthatcasethescenariosserveasakindofwindtunnelforstress-testingastrategy.Thinkofthestrategyasamodelairplane.Underwhichconditionswillitfly?Underwhichconditionswillitcrash? Usingscenariostotestastrategycanfunctionlikeaninsurancepolicy:Youhaveamechanismforsurvivingcertainunfortunatecontingencies.Whatifcertainaccidentshappen?Doyouhaveacontingencyplan? Givenasetofscenarios,thereareseveralroutesyoucantravelfromscenariostostrategy.Ratherthanpickingonescenarioandbettingthecompany,itisfarbettertofindastrategythatisrobustacrosstherangeofscenarios."Nobrainers"createsuchastrategy,butnotallscenarioshavenobrainers.Sometimestherelevantscenariosaresufficientlydiversethatnosinglestrategywillprevailacrossallofthem.Inthatcaseit'sagoodideatohaveastrategyappropriatetoeach,thenattendverycloselytoearlyindicatorsthatwouldtipyoutothelikelihoodofonescenarioovertheothers. NotRocketScience Scenarioplanningisnotrocketscience.Thereisagooddealofcommonsenseinvolvedinthepracticeofscenarioplanning.Buttherearemanywaystogowrong,manymistakesthatcanbemade.Aswithmanypractices,experienceisagoodteacher.Skilledfacilitationbyanexperiencedpractitionerisamust. Fortunately,thenumberofskilledpractitionersisincreasingeveryday.Asearlyastheturnofthecentury,in2000,theCorporateStrategyBoardpolleditsmemberstofindoutwhattoolstheyusedmostforlookingintothefuture.Responsesfrom183corporationsshowedscenarioplanningtobethemostpopularofeightdifferenttoolsincludingSWOTanalysis,Delphipolling,MichaelPorter'sfiveforcesofcompetitiveposition,andothersuchwell-knownplanningmethods. Asscenarioplanninggainsinpopularity,itsmostexperiencedpractitionerskeepexploringnewdepthsinitstheoryanditspractice.CombiningStratfor'sgeopoliticalanalysiswithscenarioplanningmaybethenextfrontier. StratforPrintReprints&Permissions