Monday, April 23, 2012

Scenario Planning - Part 2 - Rediscover your original entrepreneurial power

Editor's Note: This is the second of a five-part series on the impact of scenario planning. The Mead Consulting Group has been utilizing scenario planning to help clients build flexibility into planning and execution for almost 20 years. While scenario planning was once conducted primarily with our larger clients, today, over half of our clients (owner-operated, strategic, and private-equity- backed) have discovered the benefits of scenario planning.  - DPM
"Scenario planning is a discipline for rediscovering the original entrepreneurial power of creative foresight in contexts of accelerated change, greater complexity, and genuine uncertainty." -Pierre Wack, Royal Dutch/Shell 
Many people react to uncertainty with denial, or hope. To manage risks related to innovation /investments that extend long into the future, managers must be willing to look ahead and consider uncertainties. But rather than doing that, many people react to uncertainty with denial. They take an unconsciously deterministic view of events. They take it for granted, that some things will or will not happen. Not having tried to foresee surprising events, they are at a loss for ways to act when upheaval takes place. Scenario planning is a tool for helping managers to take a view into the future in a world of great uncertainty. It is a tool to manage strategic risks and opportunities.

The point with Scenario planning is to make strategic decisions that will be sound for all plausible futures. Scenario planning is the process in which managers invent and then consider, in depth, several varied scenarios of equally plausible futures with the objective to bring forward surprises and unexpected leaps of understanding. These scenarios represent a tool for ordering the perceptions of a management team. The point is not to select one preferred future and hope for it to become true. Nor is the point to fund the most probable future and adapt to it. Rather, the point is to make strategic decisions that will be sound for all plausible futures. No matter what future takes place, a company and its management team is much more likely to be ready for it and influential in it, if it has seriously thought about scenarios. Scenario planning is about making choices today with an understanding of how they might turn out.

Preparation for Building Scenarios - Five Steps
Step 1: Discovering the key strategic decisions that may have to be made. Management has to understand its choices. Decisions loom in the near or immediate future and it is management's responses to them will determine much of its future performance and survival. These strategic decisions, that might have to be made in the future have to be uncovered. This is done by asking the right questions related to the mission and business purpose of a company such as: where is our industry going? What is the path of development   of our industry? What events might influence it and will force us to change? Under which circumstances might we become in very successful, under which circumstances will the company be at risk? It takes persistent work to penetrate the internal mental defenses of human beings. Therefore this task includes examination of existing mind-sets of managers, so that prejudices and assumptions become obvious and careful thinking whether those mind-sets would keep these managers from seeing the right future. The best way is to begin with important decisions that have to be made anyway and then built out to the environment. This step also should include an identification of the key factors of the business system influencing the success or failure of the decision.

Step 2: Information gathering. The scenario process thus involves research - skilled hunting and gathering of information. Flexibility of perspective is critical in doing it. The professional scenario planner has to simultaneously focus on what matters in a given decision situation, but keep awareness open for the unexpected. Typical topics are: science and technology developments; perception-shaping events, that shape or change the perception of the public; new ideas or potentially disruptive forces that emerge in the "fringes" (that means not in the mainstream) and are spreading further.

Step 3: Identifying the driving forces of a scenario. Look for key driving forces, the driving forces of the macro-environment that influence the key factors identified earlier. For example government regulations might influence them. But beside government regulations, there are many less obvious external factors as well.  Driving forces are the elements that move the plot of a scenario that determines the story's outcome. Driving forces often seem obvious to one person and hidden to another. Therefore the identification of driving forces should be done in a team brainstorming environment. Most processes run through a common list of categories of driving forces: social forces/demographic developments, technological developments, economic developments and events, political developments and events, environmental developments. Companies typically have little control over driving forces. Their leverage for dealing with them comes from recognizing them, and understanding their effect.

Step 4: Uncover the independent elements. Independent or predetermined elements are developments and logics that work in scenarios without being dependent on any particular chain of events. That means, an independent element is something that seems certain, no matter which scenario come to pass. For example one commonly recognized independent element is demographics, because it is changing slowly, but predictably. For example the Soviet Union experienced a sharp decline in births during and immediately after World War II. One generation later, in the 1960s and 1970s, that original "baby bust" was echoed by an even greater decline. In the mid-eighties therefore the U.S.S.R. experienced a decline in its labor force as fewer and fewer young people came of age. This might have induced its economic breakdown which lead to its political breakdown. This was a predetermined or independent element. Identifying such elements is a tremendous confidence builder in strategic decision making. Managers can commit to strategies and policies and feel sure about them. Look for "in the pipeline" effects. Closer to home, the aging of the U.S. baby boomer demographic will continue to have very interesting effects.

Step 5: Identify critical uncertainties. In every plan critical uncertainties exist. Critical uncertainties are often related to predetermine elements. You find them by questioning your assumptions about predetermines elements and chains of predetermined elements. Critical uncertainties are the variables in scenario planning and are the basis to create different scenarios in parallel. One method to identify the most important critical uncertainties is, to rank key factors and driving forces on the basis of two criteria: first, the degree of importance for the success of the focal issue or decision identified in step one; second, the degree of uncertainty surrounding those factors and trends. The point is to identify the two or three factors that are most important and most uncertain. These factors are forming then the basis for the different scenarios, because the goal is to end up with just a few scenarios whose difference makes a difference to decision-makers.
...Now the team is ready to compose scenarios of the future.

NEXT ISSUE: Composing Scenarios, Analyzing Implications, Developing Common strategies, and Monitoring indicators and signals

Comment on your experiences with scenario planning.

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