Development Of Scenario Planning Management Essay

This chapter proceeds to explain scenario planning and its purpose. The differences between strategic planning, scenarios and forecasting are discussed. How scenario planning came into practice is discussed to establish an understanding of the reasons why managers turn to this method. Literature guiding the different processes of planning using scenarios is explained to exemplify its qualitative nature. The effectiveness of scenario planning with regard to different aspects of the process are criticized. The benefits and drawbacks of using scenario planning and lastly the relation between consumer behavior and scenario planning are discussed.

Planning for the Future

This section seeks to introduce the concept of future planning with regard to strategic planning and the degree of importance given to planning in organizations. It then continues to explain the relevance of scenario planning and scenarios, which offer more flexibility than traditional strategic planning.

Strategic planning

Planning was developed with the belief that it would enable a step by step process to create strategies that could promote a company’s competitiveness. Mintzberg (1994) argues on the difference between strategic thinking and planning. Strategic thinking is the merger of intuition and creativity, whilst planning is analysis. He looks back into history and even relates the invention of the Polaroid camera to strategic thinking. Land’s intuition sparked when his daughter asked him the simple question as to why she could not view the picture immediately. Then he started planning. Therefore strategic thinking leads to planning.

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Planning is “dependent on the preservation and rearrangement of established categories” and is therefore often not thought provoking or radical (Mintzberg 1994: 109). Mintzberg (1994) goes further to highlight the fallacies of planning. Firstly the fallacy of prediction, where it is possible to forecast the future accurately devalues the concept of strategic planning. The fallacy of detachment is when plans are not made just from hard data available to managers but can evolve from anywhere. The fallacy of formalization is when a formal system does not necessarily instigate new ideas. Rather Mintzberg stressed on “informal learning that produces new perspectives and new combinations” (1994: 109). Given the bureaucracy and stiffness of tradition planning methodology there has been a shift towards more flexible planning that even Mintzberg pointed out. One situation occurred in the 1980s and is recurring again today. This is when strategic planning was attacked for its formality and rigidity and it is being accused for the same faults today. Furthermore, Grant (2003) puts forth the solutions to this need for flexibility in the form of scenario planning, strategic intent and innovation. Thus, Grant (2003: 493) states that scenario planning was introduced “to reconcile systematic strategic planning with turbulent, unpredictable business environments”.

Definition of scenario planning

Dutta and King (1980 cited in Ghosh and McLafferty 1982) explain that scenario planning falls within the arena of strategic planning today. According to Schoemaker (1995) scenario planning is a concept that produces a narration of a particular state in time by explaining how variables in an environment interact. It looks at a range of uncertainties as opposed to other planning models that only display the relationship between two variables as is the case with contingency planning (Schoemaker 1995). Fahay (2003) argues that scenario planning is not one single event that is discarded after construction of the scenarios. Rather it produces indicators to assist managers in seeing how the future changes. Learning is therefore amplified through scenarios. This is supported by Yeoman and McMahon-Beattie (2005) who refer to it as a holistic approach that feeds into instilling a learning culture. Furthermore it breaks down barriers within organizations as traditional top down planning boasts centralized decision making whereas with scenario planning people are integrated across the organization and decision making is decentralized ( Chakraborty 2011).

Definition of scenarios

Becker (1983) sees scenarios as hypothetical situations that enable managers to test out their future strategies. Bishop, Hines and Collins (2007) provide a managerial perspective where scenarios force one to question themselves, their future and whether they will be prepared for it. However Van Der Heijden (2000) defines scenarios as a process that is based on group instinct to determine the uncertainties driving a particular situation. Fahay (2003) dismantles the assumption that scenarios are the most essential part of scenario planning. An excessively refined scenario that spins a reality framework that fits perfectly is not really of any use until it is taken forward to discuss the strategic implications of the scenario on current and future strategy. Scenarios equip companies with two capabilities, to gain a level of preparation for the future that is to come and to offer them a platform from where action can be taken if one of the futures were to occur. (Fahey 2003)

Scenarios help to fix potential future problems. Senge (2006) argues against the need to break things apart, and view them as single entities in an attempt to fix them. This is an illusion according to Senge and must be avoided if real learning is to occur. Senge promotes all things as part of an interrelated system, the environment with various dependent forces acting on it is also a system. Things need to be treated together for learning to occur, which is systems thinking. Masys (2012) links Senge’s argument for learning organizations to scenario planning as he states that the viewing of things as a system allows the discovery of relationships and recurring trends. This is exactly what scenario planning does.

Development of scenario planning

Piirainen and Lindqvist (2010) indicate the evolution of scenarios. In their introduction phase scenarios were designed to answer questions pertaining to 40 years ahead in the future across the globe or at a national level. However with time their usage has become more fragmented, with shorter time lines and boundaries limited to a particular subject field or organization. This has enabled a more widespread usage of scenario planning in different industries.

Historical background

Once an environmental concern is identified, the strategic inertia decreases and scenario planning enters (Wright et al 2008). Scenarios emerged in the post war era in USA and France. Scenario planning was initially used as a tool by military and governments to develop planning models. Kahn, a ranked authority on the US Military’s defense and strategic planning started to use scenarios first (Bradfield et al. 2005).

Piirainen and Lindqvist (2010) identify the advent of scenario planning in businesses with Royal Dutch/Shell in the 1970s, where Wack at Shell first predicted the oil crisis through scenario planning. Shell since then has further developed their scenario planning process. Their foresight capability enables them to anticipate and react accordingly to possible futures. Scenario planning has gained confidence in the eyes of companies that it aided through times of uncertainty, for example when Saatchi and Saatchi made their way through the takeover phase in the industry. (Saunders 2009)

Taking off from forecasting

Conventionally planning was done through the use of forecasts which were highly reliable in the stable environment of the mid-1900s. The 1970s were characterized by unstable economic conditions. Numerous incidents such as in 1973 where forecasts did not even come close to predicting the recession led to many companies incurring losses as uncertain futures could not be forecasted with reasonable credibility. (Wack 1985, Piirainen & Lindqvist 2010) Therefore environmental instability had fuelled the transition from forecasting to more qualitative methods (Traynor & Traynor 1993).

Schoemaker (1993) states that scenarios lengthen the confidence intervals of participants and therefore though scenarios probability estimates can be more accurate. However Wright (1999) explains that probability estimates are biased as they are judgments of probability. Furthermore, probabilities are meaningless in an uncertain world as things could move in any direction. Also, Goodwin and Wright (2001) emphasize that the upside of scenario planning is that it does away with the need to estimate probabilities and treats uncertainties in a more realistic manner by accepting that they are unpredictable.

Use of Scenario Planning

Linneman and Klein (1983) through a survey concluded that scenario planning was popularly utilized in capital intensive industries such as oil, electricity and automobiles. Going further into an organization Piirainen and Lindqvist (2010) define technology and strategy management as two fields where scenario planning has become an integral means of management. Scenarios have gained popularity at organizations like Xerox, Motorola, General Motors and 3M (Fahey 2003).

Narrowing down to the types of organizations where scenario planning is beneficial Thomas (1993) identifies organizations with a learning oriented culture to be the right fit for scenario planning. Scenario planning can also be the stepping stone aiding an organization wishing to become a learning organization. Simpson (1993) comments on the limited literature on planning theories for diversified firms. He proposes that in fact scenario planning is one of the few theories that are adept to such complex organizations. There is a tendency for scenarios to gain high review and praise in environments where a planning system was never in place. However it can be argued that even when a planning system exists, the introduction of a new planning technique that offers flexibility is desirable. (Quinn & Mason 1994)

Scenario Planning Approaches

There are a multitude of approaches to scenario planning. There is no consensus on scenarios in terms of the characteristics, process, and principles as a range of variations exist (Bradfield et al. 2005).This section will review the literature of Schoemaker (1995), Schriefer and Sales (2006), Simpson (1993), Becker(1989) and Schwartz (1991) to illustrate their methods of scenario planning step by step in the table (figure 1).

Figure 1: Scenario Planning Techniques

Schoemaker’s 10 steps

Schriefer and Sales’s Dynamic Learning Process

Simpson’s 7 steps

Becker’s 8 steps

Schwartz’s 8 steps

Step 1

Define scope of analysis in terms of the product, industry and time frame

Analysis: problem is defined based on the environment and organization

Single interviews with managers involved in the decisions and processes.

Choosing drivers

Determine the issue

Step 2

Identification of all major stakeholders

Scenarios: the collection of data to understand the causal relationships between the variables.

Choose a particular year for which the scenarios are postulated.

Identify the ranges of values for them

Stakeholder analysis and how the decision will impact them

Step 3

Determine trends in the environment

Dynamic Scenario Generator: generates the scenarios by inputting the various causal relationships to create consistency.

Challenging assumptions

Choose scenarios to be created

Macro-environmental analysis of driving forces in the environment

Step 4

Identification of those trends that are uncertain and unknown.

Unified single vision has to be eliminated for the planning period, to enable new thoughts and ideas to surface

Select trends

Ranking the driving forces by importance and degree of uncertainty. The objective is to identify the trends that are most important and most uncertain.

Step 5

First construction of the scenarios

The relatively more certain variables not subject to change need to be identified

Project trends for each scenario

The development of the axes for the scenarios matrix is based on the most important and uncertain trends identified in step 4.

Step 6

Check for consistency and ensure that the story narrative of each scenario flows

View with a bifocal lens to see both the external and internal issues, short term and long term

Narrative description of each scenario

Detailing the scenarios across the range of trends and factors

Step 7

Development of learning scenarios which builds on the initial simple scenarios

Internal reality testing by testing scenarios on other functions in the business not just the decision makers

Impact on business

Implications arising from each scenario

Step 8

Potential areas of research required are identified

Strategies developed to deal with the scenarios.

Identify leading indicators to signal when a particular future is approaching.

Step 9

Consider whether a quantitative model is required based on the scenarios. For example Shell develops these with regard to oil prices, GNP growth, and taxes

Step 10

Ensure the decision scenarios are answering the original question defined

Adapted from: Schoemaker (1995), Schriefer & Sales (2006), Simpson (1993), Becker(1989), Schwartz (1991)

Breaking down Scenario Planning

There lies a relationship between all the factors involved in the scenario planning process, the external environmental forces, team interrelationships, organizational structure and the process of decision making (Harries 2003). This section looks at different aspects of the scenario planning process and their criticism.

Generating ideas

There are two different recommendations as to how information on trends for scenarios can be generated. Schoemaker (1995) prefers a basic environmental analysis that discusses the economic, political, socio-cultural and technological factors driving the environment. The use of the PEST model is often criticized as it is not used in the right manner as generic factors are attributed to each category. Burt et al (2006) suggests moving away from the taxonomic PEST and adopting a more critical methodology for identifying uncertainties and trends. It is often a concern that the PEST does not lead an organization to learn anything new. However in support of PEST it can be argued that it is a simple step to initiate the scenario planning process. It puts the participants at ease to know they know what they are talking about before entering the arena of unknown. (Burt et al. 2006)

Both Schoemaker (1995) and Burt et al (2006) then suggest identifying the uncertainties from the previous data. Burt et al (2006) emphasizes the use of an impact/predictability matrix (see figure 2) that is used to cluster uncertainties and determine which uncertainties are the high impact ones. Therefore the trends plotted in the bottom right corner of the matrix, which is shaded in figure 2, forms the basis of scenario construction. The uncertainties must be examined in depth to extract the polar extremes which are encapsulated as the axes of the final scenarios matrix. On the other hand, Schwartz (1991) believes that a panel discussion involving knowledgeable debate is more efficient than a PEST. Information gathering in scenario planning is through qualitative means like interviews, focus groups, brainstorming and panel discussions (Day & Schoemaker 2005). Van Der Heijden (2000) highlights the institutional feature of scenario planning that draws on group knowledge. The dilemma exists of whether individual mental models of group members should be aligned to enable easier consensus or will the group be a victim of group-think. The other choice is to be a fragmented group. Scenarios provide a mid-ground by creating the opportunity for strategic conversations.

Figure 2: Impact/Predictability Matrix

Adapted from Burt et al 2006

Bishop, Hines and Collins (2007) introduced aided judgment techniques like role playing and visualization to allow participants to move into a zone of meditation and calm enabling them to have a clear visual of the future. Saunders (2009) and Ralston and Wilson (2006) stress on the importance of imagery in scenario planning as qualitative data is image and emotion based. However, Saunders (2009) also criticizes this image heavy approach because whilst some individuals are less adept to communicating ideas verbally, similarly some may be less willing to communicate through pictures. However images illicit learning through emotions and enhance qualitative richness (Zaltman 1997) and can be fluidly integrated into the process of scenario planning. Saunders (2009) further critiques projective techniques in terms of their ethical integrity as they can entice people to think in a particular direction through cues.

Developing the scenarios

Van Der Heijden (2000) proposes the concept of scenarios being iterative, which coincides with the latter steps of scenario planning that Schoemaker (1995) suggested. The concept is that as the planners point out new barriers and limitations to uncertainties, a new set of scenarios will evolve based on the new driving forces being defined though this iterative process. Eventually the final outcome will display a more thorough understanding of the scenarios and uncertainties (Van Der Heijden 2000).

Scenarios should be created across a few variables initially and at a later stage should be extended to explain other variables (Bunn & Salo 1993). Ratcliffe (2000) states that two to four scenarios are generated on average. However, often only three are generated as planners thematically create scenarios that are good, average and bad. Schoemaker (1991) states that scenarios are not mutually exclusive and neither are they exhaustive. Also, the titles given to each scenario should be creative, meaningful and jog ones memory.

Evaluating scenarios

Once scenarios are developed, two paths can be taken. The first one is where strategy is designed to be applicable to all of the scenarios. Schoemaker (1992) offers a key success factor matrix that identifies the core capabilities necessary to thrive in the scenarios. The second route is where proposed strategies are evaluated against the scenarios to identify the best fitting strategy. The strategy that is positive for the majority of scenarios will be selected.

People in scenario planning

Scenario planning uses the knowledge and capabilities of a range of people, strategists, managers and subject experts to provide a range of perspectives (Varum & Melo 2010). Day and Schoemaker (2005) define the first step for scenario planning to generally be the spread of the planning team that must boast the presence of key stakeholders. Ralston and Wilson (2006) say that a team should have a mix of educational backgrounds, and too many numbers people should be avoided.

The choosing of participants in the scenario planning process is integral. Simpson (1993) highlights a few necessary skills required from these participant teams. Firstly the team should be led by the planners who are operating the process of scenario planning. The views of people contradicting the general vision of the masses must be taken on, as it is these contrarian attitudes that prevent a myopic perspective. Suppliers, retired employees, personalities with intellect in different fields and buyers are examples of these outsiders. Furthermore the decision making quality is dependent on the degree to which the decision makers can draw the line between uncertain and certain events as the ability to account for uncertainty is crucial to scenario planning (Van Der Heijden 2000).

Effectiveness

Connecting the line between uncertainties and strategy is vital to the success of scenario planning and its usability in an organization. The use of scenarios in depicting the present is often disregarded, but it is vital to know what is affecting the industry today and will that change in the future? (Fahey 2003) It is argued by Bunn and Salo (1993) that turning a blind eye towards the past, and focusing only on the future by scenario planners is risky. Einhorn and Hogarth (1982) support this point as they explain how causal relationships from the past are used to make inferences about the future by scenario planners. Van Der Heijden (2000) uses the critical realism paradigm to support this, as it is through deduction that the future can be known given our knowledge of the past and present. Alternatively others have stated that a single focus on the future hones better results.

There is also the dilemma of how much is enough information? The plethora of information that scenario planners collect is needed to establish a profound understanding of the subject matter to enable them to effectively create realistic scenarios (Amara 1988). However, Sjoberg (1982) argues against this because if information is too vast it diminishes the quality of the scenarios. Bunn and Salo (1993) put forth their argument where although a lot of data is initially collected, the data is then filtered to strain out the most relevant information and construct scenarios.

Since scenario planning thrives on qualitative data, most of which is verbally collected through interviewing and discussions the effectiveness of the scenarios is dependent on the use of these data collection methods. Saunders (2009) has defined four limitations that are presented in the table below (figure 3).

Figure 3: Limitations of verbal information collection techniques

Topic sensitivity

Topic sensitivity is an issue as there is an inclination for the people involved in the process of scenario planning to not be very open to expressing their views on sensitive topics (Childer et al 1985)

Communication

Participants are knowledgeable but unable to verbalise their thoughts (Saunders 2009). Ralston and Wilson (2006) and Schwartz (1991) argue that inclusion of key internal and external stakeholders is integral to scenario planning, although communication between internal stakeholders may be easier because of similar backgrounds and language.

Level of privacy

People are not willing to discuss all the issues openly (Saunders 2009)

Memory

People’s memory cues and retrieval capabilities often falter in artificial environments that are not the actual environment of the issue at hand. Hence since scenario planning involves brainstorming or interviewing in a controlled environment these cues cannot trigger memory, and thereby some information may be left out of the discussion. Also the individual differences in the usage and recall functionality of their memories play a role. (Saunders 2009)

Richness of qualitative data

Qualitative richness is dependent on which techniques are used.

(Saunders 2009)

Adapted from Saunders (2009)

Finally, the usability and derivable benefits from scenarios are entirely riding on the creation and presentation of scenarios (Wack 1985). Fischhoff (1988) stresses on the manner in which a scenario is displayed to the client which determines how well it is understood. Bunn and Salo (1993) discuss the importance of the scenario presenters in maintaining equal attention towards the explanation and time devoted to each scenario narrative to ensure an unbiased opinion of all scenarios.

Drawbacks of Scenario Planning

Piirainen and Lindqvist (2010) are of the view that scenario planning is simply chaos in an organized manner, and it does not truly give any real answers. Also, cognitive biases are prevalent as they are most frequently seen in situations where there is a high degree of environmental uncertainty (Evans 1982). Van Der Heijden (2000) presents a problem of forecasting futures in general. The central problem lies in identifying what to forecast. Often people stay bound to the things they know, and do not delve into the realm of uncertainty. For example if sales via catalogues are increasing a forecast of new technologies replacing catalogues could be undertaken. So connections must be made to identify the future problem.

Becker (1989) reveals a negative characteristic of scenarios where they may simply be extrapolations of past trends and are therefore not truly scenarios as they will not include the real challenges businesses are threatened by.

In practicality when scenario planning does occur in an organization there is often a double sided bias where some managers place more emphasis on the negative, whilst others focus on the positive (Zakay 1983, Becker 1983). Zakay (1983) states that there is a tendency for people to predict a more desirable future for themselves. Whilst Becker (1983) proposes that negative undesirable perceptions of the future are unlikely to be developed by managers. Judgment lapses are common, where trends are imagined where none could possible exist. Also, there is an influence bias where the planners assume to have an overpowering influence over events when they actually do not. (Bunn & Salo 1993)

Benefits of Scenario Planning

Scenario planning as per Goodwin and Wright (2001) makes natural sense of the world, and is a practical approach as it has been developed and is used primarily by practitioners. However it is argued that as a result there is a lack of theoretical framework holding it up which Goodwin and Wright (2001) refute. This enables scenario planning to be used efficiently and easily by managers who are not theory experts in the area.

Simpson (1993) brings forward some benefits of scenario planning such as the ‘can-do attitude’ it instills. Through generating a multitude of scenarios managers can be prepared to deal with the future, and are less likely to be caught by surprise. Doorn (1986) recognizes the numerous pros of scenarios such as the ability to see more options, high level of adaptability as the participants are the stakeholders and enable ex-ante evaluations. Also recommended is the adoption of mini scenarios that have a shorter time horizon and often eliminate the many cons of scenario planning such as being too optimistic. One very popular reason driving the growth of scenario planning is the risk reduction factor by Becker (1989). Scenario planning enables companies to see how to minimize risk by employing a strategy that “fits” the most scenarios and thereby eliminates those risks. The plethora of sources from which information and insights are gained is a benefit of scenario planning. It is a participative process that engages a range of people and their views. The intricacies that scenario planning can uncover surpass those of quantitative techniques as highly uncertain trends will be included in the analysis that may be overlooked otherwise. (Miller and Waller 2003)

Scenarios undermine the assumptions driving trends and events, forcing the unknown to be considered. The use of multiple scenarios enables researchers to explore the entire vacuum of possibilities. It enables the opening up of the system of interrelated processes to display the areas of uncertainty. Scenario planning and worst case scenarios are the way forward into the uncertain world. Red teaming is a mechanism that drives people away from the straight thought, groupthink, and pre-established notions. (Masys 2012). Red teaming has the advantage of bringing across the concept that events can be disparate by nature but can have trends within. This is integral to scenario planning and forms the basis of observing trends and developing scenarios. Flood (1999) supports this advantage of red teaming, as some connections are formed no matter how independent and unrelated the events seem to the naked eye.

One take away of scenario planning is the strategic conversations it generates. These are almost considered mythical because of their scarcity. Strategic conversation refers to both formal and informal conversation in an organization. There is a degree of abstractness that stigmatizes the strategic conversation as it is not so widespread at present. (Chermack, Merwe & Lynham 2007). Scenarios open up communication channels, enabling strategic conversation across the organization internally and externally (Mietzner & Reger 2005).

Consumer Behavior Scenarios

Scenario planning was developed to aid strategic planning but has become vital to other internal functions such as logistics and budgeting that utilize scenario planning for their objectives (Axson 2011). So there is a trend of scenario planning being used more in functions like marketing to gauge consumer behavior. Also according to Axson (2011) the primary reasoning behind this increased reliance on scenario planning is the high uncertainty of today’s world with natural disasters, wars occurring across the globe and the high rate of trend adoption by consumers. Keeping in line with this McKinsey has published a research report on the Chinese consumer of 2020. This research by McKinsey reflects on the consumer behaviour, economic changes and population changes that will characterize the consumer of 2020. The move away from malls and shopping for entertainment purposes is being replaced by e-commerce and 2020 largely focuses on that aspect of consumer shopping behaviour (Atsmon et al 2012). Ghosh and McLafferty (1982) also discuss the implications of the changing retail environment to fewer physical stores, which is a growing concern for the future and is highly relevant to the case study research undertaken for this project.

Conclusion

The merits of scenario planning with regard to it being a highly practical approach are highlighted by Goodwin and Wright (2001). The focus on the strategic implications of the scenarios is stressed on by Fahay (2003), and disregards additional refinement to individual scenarios as simply generating scenarios is not the aim of scenario planning. Wack (1985) describes the evolution of planning from quantitative to qualitative, and how the drawbacks of forecasting are negated by scenario planning. There is no set method of conducting scenario planning, and different researchers have come up with their own guideline of steps. There is however an overriding similarity between the processes as ultimately all the processes discussed involve the defining of the issue, a trends analysis, scenario formulation and an investigation of the implications. Since scenario planning is dependent on the insight and views of a group, there can be limitations with regard to the communication behavior of individuals and degree of group think. Simpson (1993) identifies the skills that participants involved in scenario planning must possess for it to be effective. Shoemaker (1995) prefers the use of PEST in the trends analysis, whilst Burt et al (2006) considers it ineffective. Varied viewpoints in each aspect of the scenario planning process point out different inefficiencies and inaccuracies. Also the idea of scenarios being iterative is vital, as new ideas feed into the creation of better more informative scenarios. Fischhoff (1988) emphasizes on the presentation of scenarios as vital to their understanding, as well as the creative names chosen for each scenario. Lastly a section on consumer behavior through scenarios captures the gist of this study by aligning the literature on scenario planning with its usage in contemplating future consumer behavior. Therefore from the literature review it seems relevant to discuss the use of scenario