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Why scenarios are so useful in dealing with uncertainty

July 4, 2012

What are scenarios?

One of the best definitions of a scenario is by Michael Porter[1]:

“An internally consistent view of what the future might be, not a forecast but one possible future outcome.”

Scenario thinking traces its history back to just after World War II, when Hermann Kahn pioneered future now thinking [2]. This technique, initially put forward by him to promote debate about nuclear weapons, aimed to produce a report about current events as it might be written retrospectively by people living in the future. Its impact depended on the use of imagination backed up by detailed analysis.

Scenarios and imagination

These twin themes of factual backing and imagination remain the strengths of scenario thinking today. Good scenarios rely on detailed research for the factual backing, but increasingly the ability to engage with people’s emotions and imagination is seen as a crucial tool in managing organisations.

Many of the uses of scenarios that have become folk-lore are those where scenario thinking has enabled communities to reconcile differences and agree on a common goal, as in South Africa. Other applications with wide visibility are the scenarios developed by the US National Intelligence Council or the World Economic Forum to address global issues. The City of London used scenarios to explore the impact of China and India on financial services and raise awareness in the City of the rising competition from India. And Shell has not only used scenarios systematically since the early 1970’s but has written extensively about the influence scenarios have had on major decisions.

These highly visible, often complex and lengthy scenario projects have perhaps masked the fact that scenario thinking is now becoming part of the armoury of every Divisional Director and Corporate Development Director as a basic management tool. The reason for this is straightforward: at a time of volatility and change, managers need to be able to step out of their current framework and imagine future worlds—which may arrive sooner than expected.

The importance of this is growing as large organisations struggle to implement strategy. The credit crunch has forced the realisation that mindless adoption of common models cause systems to hit bubbles. It has caused organisations to realise that they need to connect better with people. Recent research in the areas of behavioural economics, complexity management and organisational leadership illustrates why new approaches are needed:

Work on behavioural economics[3] shows that people often make decisions based on approximate rules of thumb, not strict logic: and people rely on collections of anecdotes and stereotypes to as filters to understand and respond to events  (framing). Scenario planning is a set of processes for creating several scenarios or mental models and using them to aid decision making. These mental models provide additional anecdotes and stereotypes to aid in framing.

Complexity management in organisations is the methodology to minimise value-destroying complexity and efficiently control value-adding complexity. Scenarios provide a mechanism for understanding complex systems: a structure for tying together topical intelligence – from the front end of the organisation – with structural and strategic work. By sharing information from horizon scanning, forecasting and scenario exercises with the eyes and ears of the organisation, intelligence is made accessible to the organisation.

A new style of leadership “leadership from every chair” [4] demands that people share not only information but also an understanding of the culture (values) and narrative of the organisation, encapsulating the view of the world in the future. Scenarios provide a context for sharing this culture and values through stories and imagination. This supports a shared language in a way that aids decision making.

In a time of uncertainty

Scenarios explore a spectrum of different possible answers to core questions facing the organisation. They improve the robustness of existing plans, for instance, by exposing implicit structural assumptions in economic or social forecasts and allowing the assumptions to be checked and monitored. They can be used to create plans based on newly visible options.

In a time of uncertainty, the understanding of potentially different worlds and their implication for the organisation can bring forward the date at which a robust decision can be made.

An important part of the scenario narrative is an early indicator. This allows people outside the study to relate to the scenario. One famous example is the work at Shell in the early 1980’s which was seeking to understand events in Russia so that they could anticipate whether the extensive natural gas fields in Russia would be used only for internal markets, or available to outsiders like Shell. They deduced that there were a few bureaucrats who if they became senior would be influential in opening up Russia to trade. One of these was Gorbachev: so when he was promoted fast through the ranks, Shell held off taking part in the auctions of gas reserves elsewhere until prices fell through Russia’s entry into the market.

To discuss any of these ideas further, contact

[1] Porter, Michael, Competitive Advantage, Free Press New York, 1985.

[2] Ringland, Gill, Scenario Planning, John Wiley 2006 (2nd ed)

[3] Wilkinson, Nick, Introduction to Behavioural Economics, Palgrave Macmillan, 2007

[4] Zander, R,S. And Zander, B., The Art of Possibility: Transforming Professional and Personal Life, Penguin, 2000.

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