Scenario planning


Scenario planning, scenario thinking, scenario analysis, scenario prediction and the scenario method all describe a strategic planning method that some organizations use to make flexible long-term plans. It is in large part an adaptation and generalization of classic methods used by military intelligence.
In the most common application of the method, analysts generate simulation games for policy makers. The method combines known facts, such as demographics, geography and mineral reserves, with military, political, and industrial information, and key driving forces identified by considering social, technical, economic, environmental, and political trends.
In business applications, the emphasis on understanding the behavior of opponents has been reduced while more attention is now paid to changes in the natural environment. At Royal Dutch Shell for example, scenario planning has been described as changing mindsets about the exogenous part of the world prior to formulating specific strategies.
Scenario planning may involve aspects of systems thinking, specifically the recognition that many factors may combine in complex ways to create sometimes surprising futures. The method also allows the inclusion of factors that are difficult to formalize, such as novel insights about the future, deep shifts in values, and unprecedented regulations or inventions. Systems thinking used in conjunction with scenario planning leads to plausible scenario storylines because the causal relationship between factors can be demonstrated. These cases, in which scenario planning is integrated with a systems thinking approach to scenario development, are sometimes referred to as "dynamic scenarios".
Critics of using a subjective and heuristic methodology to deal with uncertainty and complexity argue that the technique has not been examined rigorously, nor influenced sufficiently by scientific evidence. They caution against using such methods to "predict" based on what can be described as arbitrary themes and "forecasting techniques".
A challenge and a strength of scenario-building is that "predictors are part of the social context about which they are trying to make a prediction and may influence that context in the process". As a consequence, societal predictions can become self-destructing. For example, a scenario in which a large percentage of a population will become HIV infected based on existing trends may cause more people to avoid risky behavior and thus reduce the HIV infection rate, invalidating the forecast. Or, a prediction that cybersecurity will become a major issue may cause organizations to implement more secure cybersecurity measures, thus limiting the issue.

Principle

Crafting scenarios

Combinations and permutations of fact and related social changes are called "scenarios". Scenarios usually include plausible, but unexpectedly important, situations and problems that exist in some nascent form in the present day. Any particular scenario is unlikely. However, futures studies analysts select scenario features so they are both possible and uncomfortable. Scenario planning helps policy-makers and firms anticipate change, prepare responses, and create more robust strategies.

Wargames

Good analysts design wargames so that policy makers have great flexibility and freedom to adapt their simulated organisations.

Applications

Business

In the past, strategic plans have often considered only the "official future", which was usually a straight-line graph of current trends carried into the future. Often the trend lines were generated by the accounting department, and lacked discussions of demographics, or qualitative differences in social conditions.
These simplistic guesses are surprisingly good most of the time, but fail to consider qualitative social changes that can affect a business or government. Paul J. H. Schoemaker offers a strong managerial case for the use of scenario planning in business and had wide impact.
The approach may have had more impact outside Shell than within, as many others firms and consultancies started to benefit as well from scenario planning. Scenario planning is as much art as science, and prone to a variety of traps as enumerated by Paul J. H. Schoemaker. More recently scenario planning has been discussed as a tool to improve the strategic agility, by cognitively preparing not only multiple scenarios but also multiple consistent strategies.

Finance

In economics and finance, a financial institution might use scenario analysis to forecast several possible scenarios for the economy and for financial returns in each of those scenarios. It might consider sub-sets of each of the possibilities. It might further seek to determine correlations and assign probabilities to the scenarios. Then it will be in a position to consider how to distribute assets between asset types ; the institution can also calculate the scenario-weighted expected return. It may also perform stress testing, using adverse scenarios.
Depending on the complexity of the problem, scenario analysis can be a demanding exercise. It can be difficult to foresee what the future holds, i.e. to foresee what the scenarios are, and to assign probabilities to them; and this is true of the general forecasts never mind the implied financial market returns. The outcomes can be modeled mathematically/statistically e.g. taking account of possible variability within single scenarios as well as possible relationships between scenarios. In general, one should take care when assigning probabilities to different scenarios as this could invite a tendency to consider only the scenario with the highest probability.

History of use by academic and commercial organizations

Most authors attribute the introduction of scenario planning to Herman Kahn through his work for the US Military in the 1950s at the RAND Corporation where he developed a technique of describing the future in stories as if written by people in the future. He adopted the term "scenarios" to describe these stories. In 1961 he founded the Hudson Institute where he expanded his scenario work to social forecasting and public policy. One of his most controversial uses of scenarios was to suggest that a nuclear war could be won. Though Kahn is often cited as the father of scenario planning, at the same time Kahn was developing his methods at RAND, Gaston Berger was developing similar methods at the Centre d’Etudes Prospectives which he founded in France. His method, which he named 'La Prospective', was to develop normative scenarios of the future which were to be used as a guide in formulating public policy. During the mid-1960s various authors from the French and American institutions began to publish scenario planning concepts such as 'La Prospective' by Berger in 1964 and 'The Next Thirty-Three Years' by Kahn and Wiener in 1967. By the 1970s scenario planning was in full swing with a number of institutions now established to provide support to business including the Hudson Foundation, the Stanford Research Institute, and the SEMA Metra Consulting Group in France. Several large companies also began to embrace scenario planning including DHL Express, Dutch Royal Shell and General Electric.
Possibly as a result of these very sophisticated approaches, and of the difficult techniques they employed, scenarios earned a reputation for difficulty in use. Even so, the theoretical importance of the use of alternative scenarios, to help address the uncertainty implicit in long-range forecasts, was dramatically underlined by the widespread confusion which followed the Oil Shock of 1973. As a result, many of the larger organizations started to use the technique in one form or another. By 1983 Diffenbach reported that 'alternate scenarios' were the third most popular technique for long-range forecasting – used by 68% of the large organizations he surveyed.
Practical development of scenario forecasting, to guide strategy rather than for the more limited academic uses which had previously been the case, was started by Pierre Wack in 1971 at the Royal Dutch Shell group of companies – and it, too, was given impetus by the Oil Shock two years later. Shell has, since that time, led the commercial world in the use of scenarios – and in the development of more practical techniques to support these. Indeed, as – in common with most forms of long-range forecasting – the use of scenarios has reduced to only a handful of private-sector organisations, Shell remains almost alone amongst them in keeping the technique at the forefront of forecasting.
There has only been anecdotal evidence offered in support of the value of scenarios, even as aids to forecasting; and most of this has come from one company – Shell. In addition, with so few organisations making consistent use of them – and with the timescales involved reaching into decades – it is unlikely that any definitive supporting evidenced will be forthcoming in the foreseeable future. For the same reasons, though, a lack of such proof applies to almost all long-range planning techniques. In the absence of proof, but taking account of Shell's well documented experiences of using it over several decades, can be significant benefit to be obtained from extending the horizons of managers' long-range forecasting in the way that the use of scenarios uniquely does.

Process

The part of the overall process which is radically different from most other forms of long-range planning is the central section, the actual production of the scenarios. Even this, though, is relatively simple, at its most basic level. As derived from the approach most commonly used by Shell, it follows six steps:
  1. Decide drivers for change/assumptions
  2. Bring drivers together into a viable framework
  3. Produce 7–9 initial mini-scenarios
  4. Reduce to 2–3 scenarios
  5. Draft the scenarios
  6. Identify the issues arising