Best Practices: Scenario Planning

Scenario Planning: An Introduction

"Scenario planning isn't the same thing as strategic planning," says TEC speaker Gideon Malherbe. "Basic strategic planning tends to address the accidents of the day, such as the decision to reduce inventory because of a downturn in the economy. Scenario planning looks at what's going to happen tomorrow. It's focused on understanding what the future will look like, so that CEOs can build their organizations accordingly."

Fellow TEC speaker William Poppei agrees: "With scenario planning, we encourage business leaders to imagine not just one, but a variety of future possibilities. When I meet with CEOs and other senior executives, I tell them, 'Take your imagination out of the corral and let it fly!'"

The TEC experts stress that scenario planning is an outstanding learning tool -- a way to learn about the future through a deeper understanding of the major driving forces affecting all of us today. In a group setting, executives engaged in scenario planning exchange knowledge and ideas, constructing a selection of "future stories" that expand their understanding of the current business environment and broaden their perception of future events.

"Driving forces," the most significant trends likely to affect the larger world, generally represent four categories:

• Society -- Demographics, lifestyle changes, etc.
  
  
• Economics -- Industry changes, competitive forces, changes in workforce, etc.
  
  
• Politics -- Electoral, legislative, regulatory
  
  
• Technology -- Innovations, etc.

Within this overall grouping are predetermined elements (large-scale forces that are relatively stable and predictable, such as population demographics) and critical uncertainties (forces that we can't predict, such as natural disasters, shifts in consumer tastes, new products devised by the competition, and so on).

"The goal in scenario planning isn't to create one specific future," Poppei says. "Instead, by drawing attention to key drivers and exploring how they push the future in different directions, planners create an array of possible 'futures' -- resulting in the ability to make crucial decisions today.".

Scenario Planning: The Process

The basic approach in scenario planning is two-fold, says Malherbe:

1. Know your core competencies. The starting point for any future thinking is knowing your strengths as they exist right now. Know as well your organization's strategic advantage in the marketplace.
   
   
2. Identify forces and trends. Has your company taken the time to seriously pinpoint forces that affect your financial performance -- now and in years to come?

"In some industries, the driving forces are obvious," Malherbe says, citing, for example, the dominant influence of political and environmental sentiments on the forest industry. In the coming years, what if the environmental lobby becomes stronger or, conversely, less influential?

Poppei strongly urges participants to think out-of-the-box. A key to his approach is giving people a fundamental change to think about. "A good example is the Internet, which facilitates communication to and from any locality in the world," he says. "Now we don't need central meeting spaces any longer. How is your business different when all your customers and suppliers, as well as your competition, is in the same room and can talk to each other at the same time?"

Other guidelines to constructing scenarios:

• Look for patterns -- As you devise different versions of the future, look for common threads and/or underlying similarities.
  
  
• Tell a story -- Convert apparently random scenarios into plausible, coherent stories.
  
  
• Imagine, don't predict -- Don't confuse scenarios with predictions.
  
  
• Test the impact -- What are the consequences for your company of each different scenario?
  
  
• Break free of stereotypes -- Use scenario planning to challenge inbred or conventional assumptions.

Malherbe also suggests defining a timeframe for each scenario. "Some events may occur in 20 years, some in two. But you can't work with indefinite, open-ended scenarios." (Poppei agrees: "Creativity without any boundaries is chaos.").

The next step is determining how many scenarios to develop -- one, three or five. "Five is the ideal number," Malherbe says, "although the disadvantage is that this is expensive, complex and time-consuming. A smaller, agile company should pick three and get going."

Who should participate in these planning sessions? According to the TEC experts, the approach is carefully selecting individuals who bring different assets to the process. This might include:

• People with a comprehensive knowledge of the company and its competitive environment
  
  
• Men and women with varied roles inside the organization, particularly upper management
  
  
• Department managers, especially those involved in research and development
  
  
• People of different ages
  
  
• Suppliers, strategic partners and major customers

Poppei often suggests to clients that they include new company employees as part of the scenario planning group, regardless of the positions they've been hired for. "These people don't have preconceived notions of how things 'should' be done," he says. "Usually they can be trusted to come up with provocative new ideas."

Malherbe advocates expanding the make-up of the team to include outside consultants and, when appropriate, industry specialists. These individuals provide a valuable objective view and don't come burdened with the "baggage" of being employed by the organization.

What emerges, Poppei notes, is a range of choices that identify potential threats and opportunities -- many of which might otherwise go unnoticed by company management focused obsessively on the organization's present-day situation.

Benefits of Scenario Planning

"The goal of scenario planning is opening up the mind to hitherto unimaginable possibilities," Malherbe says, "while at the same time prompting business leaders to question their own basic assumptions about how the world really works."

Adds Poppei: "As a result of imagining different scenarios, the organization can more readily recognize warning signs as they unfold. By rehearsing different versions of the future, business leaders are better prepared to handle new situations as they arise. They've already examined options for actions that offer effective strategies for the future."

Other benefits of scenario planning:

• Inspires a sense of urgency about the future
  
  
• Promotes proactive leadership initiatives
  
  
• Offers a forum for CEOs and senior management to communicate their vision to different stakeholders

"By postulating different views of where your business is headed, you gain a sharper sense of the environment you're working in now," Malherbe notes. "It's a great way to avoid being overly conservative in your thinking. You don't want to limit your organization's potential in today's competitive marketplace."

Through scenario planning, a business can take these pro-active steps:

• Identify internal and external factors currently affecting organizational performance.
  
  
• Draw company employees into a shared vision of the future.
  
  
• Devise contingency plans to respond appropriately to external changes.
  
  
• Challenge long-held internal beliefs.
  
  
• ncorporate the effects of change into long-range planning.

"As a result of scenario planning, people within the company generally feel more confident about the future," Poppei notes. "There's less fear about what lies on the horizon. Instead, employees feel more empowered and flexible as events unfold around them."

Telling Stories

An essential component to looking ahead is the ability to "tell a story," according to the TEC experts. A good story is plausible and consistent; it also serves to challenge the business leader's current assumptions about the marketplace.

"You can plan a scenario for any part of your business," Malherbe says, "from processes and systems to customers and the competition. In each case, the story should be designed to offer answers to certain 'What if?' questions."

An effective "future story" also offers these advantages:

• By highlighting future warning signs (i.e., a competitor's technological innovation or a sudden drop in the stock market), a business can avoid surprises and be better prepared to adapt and act effectively.
  
  
• New strategies derived from future stories have the potential to create distinct competitive advantages.
  
  
• Generate ongoing high-level discussions about the future.

Poppei suggests starting with a frighteningly basic question: How would you plan for the five-year failure of your organization?

"Ask people in the company how they might go about destroying the business," he says. "Employees won't believe you're serious, so they won't think they actually have to do any of the things they propose. As a result, they won't limit themselves, and will give you their best ideas. After all, in their minds, the exercise is just fun. They will suggest all kinds of possibilities. And that's exactly what you want!"

In this manner, he adds, the CEO and senior management can learn what employees think is working and what isn't working in the business -- and what the company is doing right now in both categories.

"What makes scenario planning such an effective tool is that it tells many compelling stories," Malherbe says. "This is a way to gauge current reality and a way for people to find meaning in the daily tasks they perform for your organization."

What the Future Might Look Like

"Thinking about the future means asking yourself some tough questions," Malherbe says. "But the value lies in anticipating change before it happens -- rather than mindlessly reacting to whatever comes at you next."

Poppei encourages CEOs to look at the amount of time their senior executives spend examining current and future trends in their industry, as opposed to worrying about this year's budget shortfalls or allocations. Do they, in fact, think at all about what the marketplace will look like five or ten years from now? If so, are they working together on a coherent, shared vision of that future?

"A forward-looking organization must devote resources to projecting new core competencies, new product development, new industry alliances and so on," Poppei says. "This isn't the same as restructuring and reengineering. This is consciously and deliberately exploring the outermost boundaries of what may lie ahead."

Toward that end, the TEC experts suggest asking questions like:

• Who will our customers be five years from now?
  
  
• What channels will we use to reach these customers?
  
  
• Are our short-term priorities aligned with our long-range goals?
  
  
• What will constitute our competitive advantage?
  
  
• What will make us unique?
  
  
• Are we aware of new competitive threats on the horizon?
  
  
• Does senior staff have a commitment to altering the business model as changing times demand?
  
  
• Is our change mandate driven by our competitors' actions or by our own unique vision of the future?

"Your answers to these questions will tell you a lot about who you are today," Malherbe notes. "It will also give you a better sense of the type of resources you'll need to commit to imagining your organization's future."

Contributing Experts:

Gideon Malherbe

Gideon Malherbe is president of VCI of New York, a firm that provides leading-edge consulting services and executive development programs. VCI has conducted presentations to more than 50 TEC groups, and facilitated nearly 150 workshops in the U.S., Australia and South Africa. A native of South Africa, Malherbe holds degrees from the University of Cape Town and the University of Witwatersrand.

William Poppei

William Poppei, a graduate of the University of Chicago, has been a professor in the finance department of DePaul University since 1968. He teaches finance classes and an interdisciplinary undergraduate course in creative thinking. He has received the annual Distinguished Teacher Award 15 times since the awards began in 1979. Poppei has conducted more than 250 presentations to TEC groups.

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