Scenario Modelling: developing new products in uncertain times

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When markets are uncertain, scenario modelling can be a powerful way to guide
product development. This article looks at some factors critical to its success,
and how scenario modelling was used at Storebrand, Scandinavia’s largest life
insurance company.

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Scenario Modelling: developing new products in uncertain times

  1. 1. Extract article from PA perspective on insurance Scenario modelling: developing products in uncertain times First edition 2009
  2. 2. PA perspective on insurance Scenario modelling: developing products in uncertain times When markets are uncertain, scenario modelling can be a powerful way to guide product development. This article looks at some factors critical to its success, and how scenario modelling was used at Storebrand, Scandinavia’s largest life insurance company. BY: KeNNeTH HaNSeN, STOreBraND lIfe INSuraNCe aND alexaNDer HuuN IN NOrWay Kenneth Hansen Developing new products is challenging, and there is no This article will stick to the accepted definitions and guarantee of success. Yet new products are essential theories of scenario modelling, but will examine how – to respond to regulation, changing markets and they can be more effectively used in the real world. competition, or simply to grow. Scenarios must be a practical tool The financial crisis will make launching new products Too often, scenario modelling disappoints business more difficult. Although many companies will lessen their leaders. Scenarios require significant effort to develop, activity, most will continue to develop new products in and many find the results too generic or abstract – and some form. Using scenario modelling can vastly reduce therefore doubt their value as a practical tool to make the risk of misjudging the market. better decisions. The product development team after the first ‘TV debate (Photo: Storebrand) © PA Knowledge Limited 2009. All rights reserved.
  3. 3. In addition, the sheer magnitude of issues involved Scenario modelling in developing products can be overwhelming, without Scenario modelling is a framework for analysing the complication of considering several diverse the main uncertainties about the future to help a future scenarios. company make key decisions. Typically, it results in four distinctly different descriptions of the future. Scenarios must be specific and relevant to the product Strategies, product-design options and other critical and its developers. It is essential that they are means decisions can then be tested against the different used to guide companies towards making more scenarios to evaluate their robustness. profitable products, and not ends in themselves. Scenario modelling is distinctly different from Developing credible scenarios making prognoses, as the aim is to identify extreme To develop quality scenarios, with a broad frame of but probable futures. The analysis is primarily reference, a company should not solely rely on the qualitative but can to some extent be quantified. executive committee. Instead, a cross-functional team of experts should consult and collaborate with management. Diverse expertise will also ensure the By the time they were ready for a wider audience, scenarios are credible in the eyes of the wider workforce the scenarios had been rigorously challenged and later in the process. improved by the dialogue between the two teams. Upon presentation, the scenarios were immediately adopted However, a common pitfall is involving too many and sparked fruitful debate. people in the early stages. The result is often the same: scenarios so far removed from real-life situations they are not precise enough to help decision-making. ‘Ask the audience’: communicating the scenarios At Storebrand, the iterative process between the The objective of scenario modelling is to be useful cross-functional expert group and the management during all phases of product development – from the review team robustly defined the scope of the scenario development process itself, through to marketing and exercise, vastly improving the quality and usefulness of sales. This requires a strong common understanding the final scenarios. Picking a small expert group meant of the scenarios among people from many different all efforts could be concentrated on the scenarios, and functional areas. minimal time was spent co-ordinating proceedings. © PA Knowledge Limited 2009. All rights reserved.
  4. 4. PA perspective on insurance The key challenge is to convey the details of several Power in numbers diverging scenarios. Textbooks recommend documenting Product development often involves choosing IT them as one-page stories, yet these still demand a great systems, deciding sales and delivery strategies and deal from readers if they truly want to understand the calculating costs, market volumes and long-term ramifications of each. Even more creative solutions, profitability. For these reasons, quantifying scenarios such as producing fictional future newspapers, do greatly improves their usefulness. not address the mental challenge of comparing and contrasting different scenarios. Our experience is that Practitioners often resist quantifying scenarios – perhaps the use of theatre and interactive plays can be powerful to avoid equating scenarios with prognoses. In a scenario aids to communication. modelling exercise, no one scenario should be seen as more probable than the others. However, once you put At Storebrand, a studio-based ‘TV debate’ became a the numbers in, the temptation for some stakeholders is powerful communication vehicle. It comprised a host, immediately to calculate the average. For this reason, a studio audience and four expert panellists played it may be a good idea to seek advice beforehand, to by carefully rehearsed Storebrand executives. Each reduce the pressure to ‘average out’ the scenarios. panellist became the advocate of a specific scenario and, guided by the host during the 25-minute ‘show’, the At Storebrand, quantifying some key indicators made the four of them passionately debated how different issues scenarios much more tangible and useful. A fundamental would affect each possible future. Then they ‘asked internal debate over a future system platform was the audience’ their opinions: each audience member significantly advanced once customer volumes were voted with a special handset and the results appeared taken into account. immediately on screen – just like on TV. The corporate profitability model also benefited hugely, The first debate helped an audience of 65 product- as modellers ‘stress tested’ it under each scenario (see development specialists question product-development Figure 1). This gave the top management new – and options against the scenarios. Subsequently, the TV sometimes surprising – information about possible debate format was used in strategy discussions within outcomes. The so-called ‘worst-case’ scenario did not the Life division and at a meeting for 50 top executives appear so bad when seen in the model. from across the company. As a result, a large number of people developed an intuitive feel for the scenarios, and Measuring market development could measure up the available options against them. If a company decides on an option that will not thrive under some scenarios, then monitoring how the market develops is crucial. One solution is to employ a market intelligence unit; gauging opinion through internal surveys is another. Storebrand decided to poll 50 of its leaders monthly for their views of the market’s future direction. Then, it reported the results in a newsletter, which gave early warning of changing priorities and enhancing the wider understanding of the scenarios. Leaders © PA Knowledge Limited 2009. All rights reserved.
  5. 5. figure : The corporate financial model was stress tested against the quantified scenarios 200 180 Scenario 1 Scenario 2 Profitability index 160 Scenario 3 Scenario 4 140 120 100 80 2007 2008 2009 2010 2011 2012 completed the polls online, measuring each scenario The results for Storebrand against the month’s news and research papers. Many Scenario modelling has helped Storebrand view the found this process fruitful, helping them to engage with recent extensive regulatory changes as an opportunity current events. rather than a threat. It has been key to its success in becoming more competitive. Storebrand’s chosen product design would have been highly unsuccessful if one of the four scenarios were In 2006 Storebrand seized the largest market share to become reality. This scenario, initially thought so of the new Mandatory Occupational Pensions (MOP). unlikely it was almost removed, soon revealed itself to Then, in 2008, it increased its market share by 6% be a real possibility. Thanks to the initial scenario work, compared with its closest rival with its new Defined top management were able to immediately engage in Benefit (DB) products (Q3 figures). In the MOP project, deciding what to do. the scenarios were built into the financial model, giving information on vital decisions about pricing and profitability. In the DB project, scenarios were employed to help decide strategic and tactical issues, ranging from product design, system development and process changes to financial modelling. © PA Knowledge Limited 2009. All rights reserved.
  6. 6. PA offices worldwide Oslo Utrecht Stockholm UK: Dublin Copenhagen London Madison Frankfurt Cambridge Munich Boston Beijing Chicago New York Belfast San Francisco Los Angeles Denver Princeton Birmingham Washington Glasgow Houston Manchester New Delhi Abu Dhabi Dubai Bangalore Buenos Aires Auckland Wellington At PA Consulting Group, we transform the performance of organisations We put together teams from many disciplines and backgrounds to tackle the most complex problems facing our clients, working with leaders and their staff to turn around organisations in the private and public sectors. Clients call on us when they want: an innovative solution: counter-intuitive thinking and groundbreaking solutions a highly responsive approach: we listen, and then we act decisively and quickly delivery of hard results: we get the job done, often trouble-shooting where previous initiatives have failed. Corporate headquarters We are an independent, employee-owned, global firm of 3,000 talented individuals, 123 Buckingham Palace Road operating from offices across the world, in Europe, North America, Middle East, London SW1W 9SR United Kingdom Latin America, Asia and Oceania. We have won numerous awards for delivering Tel: +44 20 7730 9000 complex and highly innovative assignments, run one of the most successful venture Fax: +44 20 7333 5050 E-mail: info@paconsulting.com programmes in our industry, have technology development capability that few firms can match, deep expertise across key industries and government, and a unique www.paconsulting.com breadth of skills from strategy to IT to HR to applied technology. This document has been prepared by PA. The contents of this document do not constitute any form of commitment or recommendation on the part of PA and • defence • energy • financial services • government and public services speak as at the date of their preparation. • international development • life sciences and healthcare • manufacturing • postal services • retail • telecommunications • transportation © PA Knowledge Limited 2009. All rights reserved. • strategic management • innovation and technology • IT • operational improvement No part of this documentation may be reproduced, stored in a retrieval system, • human resources • complex programme delivery or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise without the written permission of PA Consulting Group. Delivering business transformation 00165-14

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