Posted by: itm2011 | May 16, 2011

Scenario Planning: A Tool for Strategic Thinking

Scenario Planning: A Tool for Strategic Thinking 

Final case summary by WanYi Chow

Introduction: Scenario planning is a disciplined method for imagining possible futures that companies have applied to a great range of issues. It differs from other strategic planning methods, such as contingency planning, sensitivity analysis, and computer simulations. Contingency planning offers only a linear view on the decision making process, while sensitivity analysis examines for all factors variables and give a less dynamic perspective.

Scenario planning is a systematic methodology which attempts to interpret possibilities by identifying patterns and clusters among millions of possible outcomes a computer simulation might generate. It provides a 360-degree of analysis on the subject issue.

Methodology:

  1. Define the Scope.  The first step is to set the time frame and scope of analysis (in terms of products, markets, geographic areas, and technologies) identifying the relevant issues by studying the past and its causes, especially its sources of turmoil and change.
  2. Identify the Major Stakeholders. To recognize parties that has an interest in these issues. Others that will be affected by them. Who could influence them? Identify their current roles, interests, and power positions, and ask how they have changed over time and why.
  3. 3.    Identify Basic Trends. Briefly explain each trend, including how and why it exerts its influence on your organization. It may be helpful to list each trend on a chart or so-called influence diagram to identify its impact on your present strategy as positive, negative, or uncertain.
  4. 4.    Identify Key Uncertainties.  What events, whose outcomes are uncertain, will significantly affect the issues you are concerned with?
  5. 5.    Construct Initial Scenario Themes. Once you identify trends and uncertainties, you have the main ingredients for scenario construction. A simple approach is to identify extreme worlds by grouping all positive elements in one and all negatives in another. Another method for finding some initial themes is to select the top two uncertainties and cross them. This technique makes the most sense if some uncertainties are clearly more important than others.
  6. 6.    Check for Consistency and Plausibility. First examine its validity with elimination methods. Second, determine if the scenarios agree with each other. Third, are the major stakeholders placed in positions that are open to change?
  7. 7.    Develop Learning Scenarios.  From this process of constructing simple scenarios and checking them for consistency, some general themes should emerge. The initial scenarios provide future boundaries, but they may be implausible, inconsistent, or irrelevant. The goal is to identify themes that are strategically relevant and then organize the possible outcomes and trends around them.
  8. 8.    Identify Research Needs.  To expand your knowledge and vision that is not yet aware in your industry, as a learning scenarios should help you find your blind spots.
  9. 9.    Develop Quantitative Models. After completing additional research, you should re-examine the internal consistencies of the scenarios and assess whether certain interactions should be formalized via a quantitative model.
  10. 10.  Evolve toward Decision Scenarios. Finally, in an iterative process, you must converge toward scenarios that you will eventually use to test your strategies and generate new ideas. Retrace steps one through eight to see if the learning scenarios address the real issues facing your company. Are these the scenarios that you want to give others in the organization to spur their creativity or help them appreciate better the up- and downside risks in various strategies.

Example:

The advertising industry is once which has gone through significant change through the years, and an area in which following trends is of utmost importance. Thus, it makes a good business segment in which to employ scenario planning.

The Interpublic Group, a large advertising conglomerate, used strategy planning to answer the question of how the advertising industry would address globalization. They incorporated all kinds of data, including relevant issues throughout the past (things like technological advances, political events and shifts, and general demographic change in their audience), perceived trends for the future (a continuation of globalization, a decline in brand name value, and the role of the agency in business), and key uncertainties with regard to specific issues that agencies had been dealing with (fragmentation of the media, in-house advertising at companies). Using all of the above with scenario planning, they found three possible scenarios which could play out around the subject of globalization and the future of their business.

The first was complete globalization in which trends continued, and agencies based in North America, Europe, Japan, and China would dominate the international business of advertising to the world. The second was a mix of globalization and local growth. In this scenario, large agencies would have an international presence and cater to the largest brands, but smaller agencies would serve local business and specialty products which are part of the local fabric, thus more difficult for large agencies to establish relationships with. The final scenario is one in which large agencies crumble somewhat beneath their size and operating costs and in a global world, smaller, sleeker agencies are able to flourish. With less operating costs they are seen as appealing by brands and are able to take a large chunk of business away from the large agencies.

The key to the scenario planning system is that, as above, a company like Interpublic is now prepared for a variety of outcomes and can plan ahead of time how best to react given each scenario. Being prepared for multiple outcomes is key in an area like advertising in which it is of vital importance to be ready for whatever is coming next.

 

Conclusion:

Each company must decide for itself, once it constructs scenarios, whether to gamble the future on one scenario, stay flexible to exploit multiple scenarios, develop exit routes in case things sour, or hedge the risk through strategic partnering or diversification. Developing early indicators for each scenario helps you recognize, before competitors, which way the world is headed. When dealing with highly interactive situations (in which stakeholders react to events and each other), you may need to express the scenario elements not just in terms of trends and uncertainties, but also in terms of the rules of interaction.

Dynamic, as opposed to static, scenarios help people reason through the multiple pathways an industry or company may traverse in view of the prevailing trends, the presumed rules of the game, the uncertainties that lie ahead, and the stake holders involved.

When contemplating the future, it is useful to consider three classes of knowledge:

1. Things we know we know.

2. Things we know we don’t know.

3. Things we don’t know we don’t know.

Good scenarios challenge tunnel vision by instilling a deeper appreciation for the myriad factors that shape the future.

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