Scenario Building Workshop - How to Build and Use Scenarios

How to Build and Use Scenarios WFS 2008 Adam Gordon The Future Studio

Something about me

Something about the course

Something about the day

Your aims for the course?

What do we know about scenarios?

Scenarios are narratives of alternative environments in which today’s decisions may be played out. They are not predictions. Nor are they strategies. Instead they are more like hypotheses that ask “What if?” in a disciplined way, forcing the acknowledgment of new and unforeseen opportunities or challenges for an organization. GBN

Scenarios are not predictions. They are plausible hypotheses about the ways in which the forces external to us might evolve to impact us. They capturing the range of future conditions, opportunities, threats, and obstacles which we cannot influence, that affects our ability to reach our goal. This guides our strategic thinking about how to reach our goal, and possibly changes how we act.

Why scenarios? Why the future?

Asked what he feared most, the British Prime Minister Harold Macmillan responded … “ Events, dear boy. Events.”

How much strategic uncertainty do you perceive in your industry/policy environment? How much change will your organization require in order to remain competitive over the next 7 years? Low Med High Just a bit A fair amount Plenty & then some

Can we predict the future…?

“ Before man reaches the moon your mail will be delivered within hours from New York to Australia by guided missiles. We stand on the threshold of rocket mail” -- Arthur Summerfield, U.S. Postmaster General, 1959

The home computer of 2004, as predicted in 1954

Predictive failure is ubiquitous… Your favorites…?

Why exactly do we struggle to predict the future …?

Implications: Beyond the short term or other highly contained situations: Change is complex, disorderly. Behavior or outcomes can’t be reliably forecast. We can’t reliably determine the future …even with supercomputers.

Should we ignore the future?

Hamel & Prahalad “ Competing for the Future,” HBR, 1994

We should neither predict or ignore the future. We can and should understand driving forces and identify critical uncertainties, and explore how these might unfold, in order to manage uncertainty and profit from change. We can act to influence the future, and create a more or less desirable future. Key outputs: Better decisions not better predictions Taking control of our organization’s future

Courtney, H. et al., “Strategy Under Uncertainty”, HBR, November 1997 How do scenario fit into this? When do we use scenarios?

Low uncertainty. Clear view of the future. Dependable outcome.

Limited set of possible future outcomes, one of which will occur

Outcomes indeterminate, but bounded in a range

A limitless range of possible outcomes. True ambiguity. (Highest level of residual uncertainty.)

2 1 3 4 FOUR LEVELS OF UNCERTAINTY A B C ?

Situation analysis tools to use: – Market research – Cost benchmarking – Porter’s 5 forces – DCF/ NPV valuation End product: – Point forecasts – DCF analysis LEVEL ONE TOOLKIT

Situation analysis tools: – Decision / event trees – Game theory – “ Scenarios” of the defined outcomes End product – - Complete description of each world – - Dynamic path to each outcome, incl. trigger events and market signals – - Relative probabilities of each outcome – - Valuation/ risk assessment of each outcome LEVEL TWO TOOLKIT A B C

Situation analysis tools – Scanning & trend tracking – System dynamics – Scenario planning End products – A set of scenarios – Industry/world structure and operating conditions in each – Dynamic path to each scenario – Analysis of robust strategy in each – Strategy to enact preferred scenario, if possible LEVEL THREE: BOUNDED UNCERTAINTY

Situation analysis tools – Analogy and past-references – Visioning and visionary scenarios End products – Understanding of stakeholder positions – Usable set of possible analogous situations and precedents – Clearer understanding of possibilities and preferable outcomes LEVEL FOUR: HIGH AMBIGUITY ?

Sense that the future is predictable Sense of multiple possibilities Quantitative Qualitative Qualitative vs Quantitative methods “ It’s better to be vaguely right than exactly wrong.” Henley Centre

Scenario Planning

1940s: Herman Kahn, is a US defense analyst at the Rand Corporation. Near Rand’s Southern California offices, Kahn hangs out with screenwriters and moviemakers, Stanley Kubrick, etc. Kahn starts “telling stories” to describe ways that nuclear weapons technology might be used by hostile nations. Herman Kahn: Rand Corp. By the mid-1960s, Kahn’s was serving up dozens of alternative story forecasts (often generated with mainframe computers). Scientific American: Kahn is “thinking the unthinkable”.

1970: Pierre Wack , head of planning at Shell, France, and Ted Newland, a Shell senior staff planner go to talk to Herman Kahn. They adopt and rework the method for Shell. Invert the central predict-and-plan culture: Not: determine what’s most likely – plan intensively for that. But: assume every important outcome does emerge – various scenarios – “what will our challenges and best business options be in each case?”

Managers spend their time thinking “ what are the chances that X or Y or Z will happen?” Determine which is most likely and plan for it They should be spending their time thinking: “ what if X happens, what’s our strategy? What if Y happens, what’s our strategy? … Scenarios: Turning prediction on its head

1971: Everybody “sensed” that geo-political change, could change the stability of the existing “oil regime” which oil companies had dominated for 25 years. Shell Scenarios 1971-73. (Pierre Wack, Scenarios: Unchartered Waters Ahead & Shooting the Rapids, HBR, 1985) 1971: oil is is $2 1975: oil is $13 1979: oil is $37

SHELL

Scenario Practice Proliferates

Usage spread far and wide:

Research institutes

Most Fortune 500 companies

Many smaller firms

Trade associations

Militaries worldwide

Governments

Consultants

Why a scenario “set”?

ANALYSIS Point prediction Scenario planning Exploring alternative resolution of uncertainties that are important for the success/failure of and organization

Exploring the cone of plausible uncertainty Cone Of plausible uncertainty present Critical variable ?

Mapping the cone of plausible uncertainty

Going beyond the “official future”; challenging the dominant paradigm LGA The official future

This is not a scenario set:

1. Value-neutral Scenario sets

A wind tunnel / testbed for decisions v.d. Heijden The Sixth Sense

How does current or intended strategy (positioning, business model, etc.) hold up in each scenario ? Will it provide a defensible, distinctive value that fits with market or societal/public need? Is there still a fit between product (service) and environment? What will be necessary key capabilities & positions? What are the organizations present strengths and weaknesses in these capabilities or positions? A wind tunnel or testbed for decisions

OR: look at the scenario and determine what would be good strategy or a good position. Who will be successful in this world? Why? What resources, capabilities, business models, and other key success factors do they possess? Siemens

From scenarios to strategy

Generate alternative, plausible future model worlds

Test (1) current or (2) alternate strategies against these model worlds,

Or (3) determine what would be good business or a good position in these model worlds

3. Understand and apply robust strategy responses …or “take a position.”

There is no “good”or “bad” scenario. Every scenario is good for someone. We can only have a “bad scenario” for our current (legacy) capabilities and investments

2. Visionary Scenarios

Still exploring the cone of plausible uncertainty Cone Of plausible uncertainty present Critical variable ?

The vision scenario is an ideal outcome – which identifies and represents the shared hopes of a community, group, or organization. It is not an objective scenario. It is a story about how it would look if everything went right. Scenarios B, C, D in the set look at the various ways that things could go partially or totally wrong. There is one clearly preferred, desirable scenario. Visionary Scenarios

Shaping “a better future”

Influencing the future through eliciting shared preferences, wishes, values and fears. Tells the story of a high road, compared to various low roads

Silent Spring

No to Nukes

“ Rainbow nation”

Zero carbon footprint

etc

Destino Colombia

Visionary Scenario: High road Low road Shell

Arctic Marine Navigation (AMSA) GBN

Value -mapping the cone of plausible uncertainty Could be better Good! Disaster So-so

Multiple – often adversarial – stakeholders, including government officials, labor unions, business leaders, rebel and revolutionary groups, community organizations and educators. Broad involvement

Vision scenarios are a tool for problem-solving at the national or local level. Creating a single, shared vision that satisfies all players: the scenario that all can agree on, that is consistent with everyone’s goals. Create or increase alignment around a desired future or strategic direction. This is: “The best path forward for all” Develop it together – buy in. Consensus-building rationale

Strategy Implementation (& change management) Action Planning Visionary scenario process works to align the visions and goals of disparate stakeholders Vision, & goals Scenarios Vision, & goals Vision, & goals A B

Raise public awareness. Create high-level recommendations for public action. Help develop consensus on opportunities and threats among the wider community. Guide improvements. Well-publicized scenarios become a rallying device for public participation and problem-solving at the national or regional level. Communications & PR purpose

Consider the visionary scenario, asking: What it would take to get from here to the vision Identify leverage points – actions to take to influence each scenario to make it more like the ideal scenario. Get the message out! Get sign-ups and join-ups… Robustness: Common leverage points across scenarios to induce the ideal From visionary scenarios to strategy

Value-neutral scenarios Do scanning & trend tracking. Isolate key uncertainties Develop a scenario architecture Consider the worlds that emerge Develop a strategy that is robust across all worlds. How do we survive and profit, given what could plausibly happen? Scenario logics compared Visionary scenarios Do scanning & trend tracking Listen to all needs and preferences Find a future that we all agree on. Make this one scenario Chart divergence(s) from this ideal future, incl. the present trajectory Make strategies to bring us closer to this ideal future How do we make this scenario come true?

Creating Scenarios

5. rank uncertainties 6. Select scenario logic 7. Flesh out scenario worlds 8. Write scenario stories 9. Test A. Define D. Use C. Build B. Explore 10. Develop strategy implications 12. Renew 11. Communicate Steps in making scenarios 2. Define industry/sector status quo 1. Define project parameters 3. Identify trends & driving forces 4. Determine uncertainties & their polarities

Project Parameters A. Time horizon? B. Who is involved? C. Informing a specific decision or a general view of coming terrain?

Scenarios only provoke genuine learning and strategies when they answer genuine concerns . Figuring out the key question or important uncertainties is a crucial step. The scenario must be build around the uncertainties that matter to decision makers. (What would be really useful to know?) If the group doesn't care about the question they're trying to answer, the rest of the exercise is a waste of time.

Chart key patterns, relationships and forces in the organisational and transactional environment.

Market research

Industry analysis – 5 Forces model, etc.

Industry competitive dynamics

Competitor intelligence

Value chain analysis

System dynamics and feedback loops

… and any other status quo tool you like

Define the static picture: Status quo of market and industry environment

OUTSIDE-IN THINKING Organizations are most often “event-takers” or “trend-takers” – not makers. us culture environment values macro economics technology govt. & policy business international relations Infinite futures

Driver(s) Trend(s) Outcome(s) Friction Blocker(s)

Drivers, blockers, and trends in the future of your sector or industry?

Predetermined elements vs. uncertainties 1. What is the suggested effect of change driver or trend? (outcome at scenario-time limit) We are sure (if and what) We are unsure (if and what) 2. Will a change occur, and turn into an outcome in our industry that we can be reasonably sure about? Predetermined element Uncertainty

Predetermined elements and critical uncertainties in the future of your sector or industry?

2005 Scenarios for Credit Unions:

Certainties:

Customer knowledge continues to improve dramatically

Baby boomers redefine aging and retirement

Credit union consolidation continues

Expansion of fields of membership

Non-bank financial services providers increase share

Credit unions are increasingly embraced as “trusted mediator”

Internet banking increases

Telephone banking increases

DSI

Uncertainties have polarities UK LGA

Which uncertainties are most important to (have most impact on) the industry environment? Ranking uncertainties: 2 3 2 3 5 4 1 2 1 1

Certainties enter every scenario Uncertainties vary across the scenarios Doing uncertainty and importance at same time Low impact items seldom enter the scenarios

Select scenario logic Most important uncertainties “ 2 by 2” “ Fork in the road” A B C D A B C D Structured randomization

Uncertainty 1 (A) Uncertainty 1 (B) Uncertainty 2 (A) Uncertainty 2 (B) “ 2 by 2” Matrix Each quadrant points to a different future operating environment for the organization

Scenario Planning What does the world look like in each quadrant?

Identify the fork. Make a scenario that explores each path. Shell “People & Connections: Scenarios to 2020” Today Fork-in-the-road: one critical uncertainty

A special case of Fork-in- the-Road: “ The official future” vs. a diverging path

DIVERGENCE FROM THE OFFICIAL FUTURE 1. Start by articulating the official future — the future that your organization is planning for. 2. What must be true for this future to be realised? What assumptions are necessary? 3. Reverse these assumptions. 4. Develop stories of the future that diverge from the official future in plausible ways.

The official future vs. divergence from it, in the future of your sector or industry?

Structured randomization

Do Wildcard Scenarios Separately

Pandemic

Flood

Fire

Terror attack

Ethnic cleansing

Civil war

National war

Eco Disaster

Banking collapse

Economic Crisis

Stories about world of future stakeholders / customers : 1. Create human interest. Provide context for potential events 2. Balance imagination and plausibility 3. Show cause and effect Put people – stakeholders or customers – in the story. Scenarios are alternative stories of how what is valuable to people or how they access that value may change (threats and opportunities). Write up scenario stories – scenario media

Accenture: Future of Europe 2008

Squint Opera

Test the model worlds

Reality check to ensure that stories aren't just science fiction.

A. LOGICAL ANALYSIS Is there a plausible chain of events, actions, and counter-reactions that could lead to this future?

What other actions would have to take place to make it plausible?

B. ACTOR (STAKEHOLDER) ANALYSIS Walk through the scenarios from every point of view. Who would support the scenario emerging. Who would block the scenario or try to change it?

Do we assign probabilities to the scenarios? Why? Why not? Scenarios are not predictions. You have not “got it right” if the world comes to pass as stipulated in one of your scenarios. You have got it right if the set as a whole captures the outcomes that emerge Avoid returning to the predictive mindset. Probability?

Strategy is not just defensive. If the organization is strong in capabilities, resources, or positions, for the scenario set: How do we grow / exploit this in the future? What are the new applications of existing capabilities? In each scenario, what is the leverage action that best leverages our current capabilities, positions, distinctiveness for that scenario? Leveraging existing capabilities

Using any or all of the techniques mentioned, build a set of scenarios to help your organization manage its 5-15 year horizon. Be ready to present your work to the group. Making scenarios: your turn

Adam Gordon The Future Studio www.futurestudio.org www.futuresavvy.net adam.gordon@futuresavvy.net