harbottle consulting effective planning & risk management in an uncertain business environment...

Harbottle Consulting

Effective Planning & Risk Management in an Uncertain

Business Environment

Risk Management & Scenario Planning

Terry Harbottle

University of Lethbridge


Key Objectives of the Evening

• Understand the purpose and role of scenarios in strategic planning and risk management

• Understand the types of issues and problems for which scenarios are most valuable

• Understand the basic methodology / process in developing scenarios


Strategic -technology & information - knowledge management -industry value chain transformation -business model Environmental Risk -environmental disasters -changing environmental regulations

Operating Risks -distribution networks -manufacturing –gas processing

Commercial Risks - new competitor(s) - customer service expectations - new pricing models - supply chain management

Market & Credit Risk -price - interest & fx. rate -commodity price

Organization wide

Con

nect

ivity

Risk

Identification Impact Response

A Framework for Integrated Risk Management


Strategic Management - Context

Social

Economic

Political

Technological

Environmental

Financial

Organization

Forces(Little or noInfluence )

Factors & Actors

(Some Influence)

Customers

Regulators

Competitors

Politicians

Suppliers

The World

The IndustryCommunities

InternalResources, capabilities &

competencies


Scenarios & Planning … A History

Do we need a strategic plan?

1950 1960 1970 1980 1990 2000

Denial Acceptance Frustration Solution Integration

Leave it to the Kremlin

The importanceof looking

ahead

The impossibilityof predicting

The rise ofscenarioplanning

Integrationwith strategic

changemanagement


Strategic Planning Process

VisionMission &

Values

Goals & Objectives

Strategic Options

StrategyDevelopment

Implementation &Evaluation

Feedback & Learning


Scenarios In Strategic Planning

VisionMissionGoals

Future Business

Environment(Scenarios)

CompetitionCompetencies

Learning& Change


Scenarios in Strategic Management Process

BusinessEnvironment

Analysis

StrategyFormulation

StrategyImplementation

PerformanceEvaluation

LearningManagement

of ChangeManagementof Business

Scenarios 5 Year BusinessPlans/Budgets


Why Plan?

• Is the future predictable?•How do you think about the future?

•How do you plan for an uncertain future?

But plan you must …

“Failure to plan is planning to fail”


The Illusion of Certainty

• “The phonograph is of no commercial value” Thomas Edison, 1880

• “There is no reason for any individual to have a computer in their home.” - Ken Olsen, President of DEC, 1977

• Internal sales forecasts for PCs for the 1980s: 295,000. Actual sales for PCs in the 1980s: over 25,000,000 - IBM, 1979

• “Anyone who thinks the ANC is going to run South Africa is living in cloud cuckoo land.” - Margaret Thatcher, 1987

• “They couldn’t hit an elephant at that dist…” - Last words of General Sedgewick, 1864


The Challenge of Uncertainty

Who would have guessed?

• The rise of the Internet?

• That long distance telephone calls would cost 5c per minute?

• That electricity would be deregulated and unbundled?

• That the “Standard Oil Trust” would be reunited?

• That a WTO meeting would lead to passionate riots?

• That Nortel faces de-listing from the NYSE?

• That Enron would vanish in 6 months?

• Recent Geo- political events

The future is not predictable, yet we must make decisions & act.


Decisions and Consequences

“…Strategic planning does not deal with future

decisions but with the futurity of present

decisions…”

—Peter

Drucker


Expectations and Decisions

1970s Oil a declining resource$100 / bbl inevitable

1980s Electricity demand growth

1990s Mexican growth expectedJapan recoveryAsian growth inevitableInternet business

2000s Electricity & gas pricesTechnology “bubble”Ethics & Leadership

Shale Oil Barents Sea

Nuclear

’94 Crash Barings demise Thailand AOL/ Time Warner

California / Alberta Dot.com Collapse Enron / World Com


Two Perspectives on the Future

Future Uncertain

Range of Futures

Insight

Robust Strategies

Decisions based on Expectations

Future Predictable

Consensus Future

Accuracy

Optimal Strategy


Predictability & Uncertainty

ForecastingScenario Planning

Degree

Time

Predictability

Uncertainty


Scenarios… Examine Alternatives

Area ofImplausible

Futures

Area ofPlausibleFutures

Wildcard Scenario X

Wildcard Scenario Y

Scenario A

Scenario BScenario C

Today

Today Tomorrow


Scenario Planning

‘Risk Management and Opportunity Identification

at the Strategic Level’


A Scenario Is...

A story, an image, or a map of the future

and

An interpretation of the present

projected into the future

and

An internally consistent story about the path

from the present to a future horizon


Scenarios = Alternative Futures

•Multiple– views with different logics

•Qualitative– dealing with complex structural change

•Objective– plausible and internally consistent descriptions

•Focused– key issues and uncertainties

•Open-ended– outlines, not precise details


Scenarios Involve Outside-In Thinking

Social

Economic

Political

Technological

Environmental

Financial

Organization


Factors & Actors

(Some Influence)

Customers

Regulators

Competitors

Politicians

Suppliers

The World

The IndustryCommunities

Resources, capabilities &competencies


Scenarios and Systems Thinking

Events

Patterns

Structure

Systems Scenarios

Visible Manifestations

Trends andCombinations

Causal Relationships

Scenario Logic

Characteristics & Storylines

The Story


Scenarios - Part of a Strategic Process

Key Strategic Issues

Focal Question

Scenario Development

Implications

Strategy Development


Value of Scenarios

• Shared articulation of alternative futures

• Coherent “mental maps” of the future

• Analysis of current environment

• Context for developing and evaluating strategy

• Encourage adaptation to change

• Emphasize uncertainty and the need for flexibility


Features of a Good Scenario

• Plausible

• Recognizable from the signals of the

present

• Creative in exploring new ground and ideas

• Relevant and significant to the organization

• Internally consistent

• Challenging


Developing Scenarios

5. Scenario Logics

6. Scenarios

3. EnvironmentalForces

4. CriticalUncertainties

8. Early Indicators

7. Implications

1. Focal Issue

2. Key Factors


Scenario Process in Pictures

Forces Uncertainties Characteristics Paths


Scenarios Ask the Right Question...

“The only relevant discussions about the

future are where we succeed in shifting the

question from whether something will happen

to what we would do if it did happen.”

Arie de Geus

Shell Group Planning


Key Points

•Scenarios are descriptions of alternative futures

•Scenarios are focused on key issues and uncertainties facing the organization

•Scenarios are the output of an interactive and creative process designed to gain insight not prediction

•Scenarios are part of a larger strategic process contributing to enhanced strategic thinking, learning, and decision making

•Scenarios planning is particularly valuable in turbulent environments facing structural change


Future of the Railway Industry – A Case Study

The purpose of this case study is to provide an example

based on a real scenario project. It is not a model case.

Timing and logistics force modifications in the 8-step

process. Some worked, some didn’t. All were valuable

in learning more about the challenge and reward of

developing and applying scenarios to organizations.

The viewgraphs to follow trace through each step in

the process.


Is a Railway Example Relevant?

• The railway industry has a number of distinctive characteristics. Do these have any relevance to other industries?

– The industry is very capital intensive– The industry is concentrated into a small number of major

companies and independents– The industry is driven by the economy and subject to political

intervention– The industry competes across RR’s and with other “modes” (e.g.

truck vs. rail) both domestically and internationally– The industry is increasingly impacted by technological change

and lack of skilled workers– The industry has much to learn from the experience of others


Scenario Interview Questions

• Past Changes – What has changed over the past 10 years that has had a significant impact on the industry / company?

• Lessons from the Past – What has made the company successful in the past? What lessons do we need to remember? What do we need to forget?

• Current Constraints – What things need to be changed for the company to be successful in the future? What are the barriers to innovation and change?

• Critical Decisions – What important decisions are on the immediate horizon? What important decisions are being ignored that should be addressed?

• Dark Spot – There is a dark spot on the horizon. It is not here and now but could have a major impact on the company / industry in the future. What is it?

• Good Future – If you looked back 10 years hence and the company had been very successful, what went right? What does a good future look like and what needs to happen for that good future to occur?

• Oracle – If you could spend time with an oracle or clairvoyant who knew the future, what question would you ask? What would you really like to know?

What are the issues on the minds of managers? What are the strategic issues the scenarios should address? Try some of these questions in your company.


Developing the “Focal Question”

The focal question identifies:

• The key strategic issue facing the company / organization.

• The key decision facing the company.

• The key question you would like to answer.

The focal question should:

• Focus on the company specifically (not the future of the world).

• Highlight the key strategic question (e.g. growth, profitability, industry structure, competitive position, customer relations, etc.).

• Focus on a single concern (not compound issues).

Examples

• How can ABC penetrate and gain dominance in market W?

• How can LMN maximize growth opportunities?

• How can XYZ strengthen customer relationships?

• How can increase long-term profitability?


Interviews & Focal Question - RR Example

• Issues Emerging from Interviews– Railroad mergers

– New transport regulation

– New trade flows

– Truck competition

– Agricultural policies

– Customer industries (coal, paper, grain, steel, autos)

– Union power

• Focal Question– Can Railco improve its competitive position and capture

growth?

Dilemma: Short term cost or long term growth? Unable to resolve.


Factors and Forces

All organizations are embedded in a larger context. The accompanying chart distinguishes the contextual environment (forces & factors) from the transaction space (actors). A key step in scenario development is to identify the forces driving change in the external environment. One approach in identifying major driving forces / factors in a workshop involves 3 steps.

1) “Take 4 or 5 minutes by yourself and identify 4 or 5 factors or forces (no real distinction is needed) which could impact the focal question.”

2) Go around the room and have each person describe the forces / factors they identified. Summarize to 4 or 5 words and write them on large post-it notes.

3) Using volunteers, sort the post-it notes into clusters around common themes. Do not use a pre-defined framework. Select notes randomly and look for another with a common connection, etc. Build up between 7 and 10 clusters. There should be no more than 10 post-it note ideas per cluster. Name the clusters reflecting the underlying theme.

The cluster themes may be interpreted as the “forces” driving future change. They also represent a framework for describing the future. Each “force” must be included in all of your scenario descriptions although with varying interpretations and importance.


Context of the Firm

Social

Economic

Political

Technological

Environmental

Financial

“Firm”


Factors & Actors

(Some Influence)

Customers

Regulators

Competitors

Politicians

Suppliers

Contextual Environment

Transaction Space

Communities


Key Factors & Forces - RR Example

Process• Brainstormed factors and

forces• Grouped into clusters• Clusters labeled to reflect

major theme / force

Factors & Forces (from clusters)

• Macro-economics• Global / Asian growth• Rail performance & competition• Customer industries• Rail industry restructuring• Truck competition• Labour• Regulation & Politics• Ports & Water• Environment


Importance and Uncertainty

Forces Importance Uncertainty

______________________

______________________

______________________

______________________

______________________

______________________

______________________

______________________

______________________

______________________

______________________

______________________

______________________

______________________

______________________

This chart shows one approach to identifying “critical uncertainties”. These are forces which are both important and uncertain. Uncertainty means either that they have a wide range of possible outcomes, and hence are uncertain, or the impact of the driving force has a number of different possible impacts (e.g., technological change may be uncertain because there is a range of possible new technologies OR because the impacts on society are highly uncertain)

The task is to rank (or rate) the forces on importance and uncertainty. This can be done in a group by allocating votes among participants (e.g., 3 votes for each participant) or by rating each force (1 – 5 scale) to identify the two which are most important and uncertain. The vote should narrow the choice but you should leave room for discussion before selecting 2 forces as the critical uncertainties.


Critical Uncertainties - Rating Importance & Uncertainty

Participants allocated 5 votes each for importance & uncertaintyImportance Uncertainty

Macro-economics 6 14

Global / Asian Growth 3 2

Rail Performance & Competition 8 0

Customer Industries 11 6

Rail Industry Restructuring 5 4

Truck Competition 3 1

Labour 4 6

Regulation & Politics 2 9

Ports & Water 2 1

Environment 1 2


Critical Uncertainties - Refining the Definitions

• Macro-economics (rate and structure of growth) was immediately identified as a critical uncertainty; Global / Asian growth could be incorporated into this dimension.

• Customer industries was a second candidate, but this appeared to be closely linked to macro-economics / growth

• Was rail performance and competition predetermined (I.e. zero uncertainty)? When we unpacked this cluster it became evident that performance pressures were “inevitable” but not so clear.

• A second critical uncertainty emerged around competition and industry structure, which appeared interesting and challenging.


Example of a Cluster

Rail Competition and Performance• Improving asset utilization• Railroad reliability• Seamless intermodal service• Ability to handle information• Rail track / operation separation• Seasonal operating difficulties• Rising customer expectations• Increasing rail to rail competition• Move to schedule services• Info systems in railroads

Clusters help focus the process but can suppress critical factors

A wide array offactors grouped

into a single cluster


Scenario Logics

The dimensions are the critical uncertainties: label the 2 axes. Then describe the ends of the spectrum (2 – 3 words or phrases)


Scenario Logic Framework - RR Example

Economic Growth & Structure

Ind

. S

tru

ctu

re C

om

peti

tion

Restrained CompetitionMarket Power

Scale & Consolidation

Open CompetitionCustomer Driven

Market Share & Open Access

High GrowthGlobal

TechnologyProductivity

Low GrowthVolatile

NationalisticInterventionist


Scenario Names & Characteristics

• • • •

• • • •

• • • •

• • • •


Scenario Logics - Railway Industry

Economic Growth & Structure

Ind

ustr

y S

tru

ctu

re C

om

peti

tion

Restrained Competition

Open Competition

High GrowthLow Growth

Dinosaur Park

•Contraction•Stable Regulation•Excess Capacity

Riding the Momentum

•Global Trade•Consolidation•Bulk commodities

Stagnant Growth

•Desperate Customers•Nationalistic•Interventionist

Technology Forced

•Customer Demands•Seamless Service•Internal Pressure


Other Examples – NA Mining

High GrowthPrices & Productivity

Low GrowthPrices & Productivity

ClosedDivisiveConflictDistrust

Self-Interests

OpenInclusiveHolisticTrust

Respect

MoneyDivides

New Horizons

PerfectStorm

PhoenixRising

Societal Values

Econ

om

ic P

erf

orm

an

ce


Other Examples - Future of NAIT

Open Competition

Limited Competition

Public Private

• Political conflict• Government directed• Public driven• Education controlled

• Open markets• Consumer driven• Expanded training• Leading edge technology

• Corporatist• Business driven• Partnerships• Structured Learning

• Government driven• Social Responsibility• Stability• Education Integration

PROZACTIVITY COMPETITIVE EDGE

CONTROLLEDGROWTH

DALLAS


Developing Storylines

Scenarios are stories, engaging, logical and challenging. Stories need a plot through time. One way of developing the story through time is to have participants describe events consistent with the scenario logics in 3 time frames: near term, medium term and long term. Writing these as newspaper headlines is one approach which can add fun and creativity to the exercise (but can become trivial if you are not careful).

The descriptions should reinforce the overall logic of the scenario. They provide useful material in writing the stories and in developing material. A useful tool in developing the logic and story of a scenario is to map out the logic. An example of a “logic map” for the railroad scenario “Riding the Momentum” is shown in the next viewgraph.


Logic Map for “Riding the Momentum”

Global Growth

RisingTransportDemand

Growth inTruck Traffic

& Profits

RailConsolidation

Lower Costs& Market Power

IncreasedProfitability

Increased InvestmentShip / Rail Technology

Long Haul Focus

Constrained Competition

RestrainedCompetition

Mapping thelogic helps in

developing thestory through

time


Writing & Communicating Scenarios

Scenario writing is an art. The written scenarios are intended to engage the mind of the reader. To draw them into the future. To encourage them to explore new ideas. To think differently. The stories must be logical, internally consistent and believable. The writer does not need to think through every detail. Indeed, this is counterproductive. The scenarios are necessarily incomplete to let the reader add ideas and examples from his / her experience.

There is tremendous opportunity to be creative in writing scenarios. Experiment. Try new things. Some have used dialogue; some have used “newspapers”; some prefer “bullets” to written prose; some have written in the future tense, present tense and past tense. (I prefer the past tense because stories seem more real and believable when written as if they have already occurred. )

Some include the logic leading up to the critical uncertainties in their reports; some include an overview before the stories (my preference); and others plunge right in. Some include both stories and “bullets” using a “summary comparison table” to encourage comparison across the scenarios (see next viewgraph). Scenarios should be grounded in recent events. The same event(s) may appear in all scenarios but with different interpretations leading to distinctly different futures. This links the future to alternative interpretations of the present and anchors the stories in reality that readers are currently experiencing.

Written documents are only one form of communication. Presentations are another form. Others have developed videos; and others have used actors to bring the scenarios alive – literally. The only limit is writing and communication is your imagination (and budget).


Summary Comparison Table

Scenario A Scenario B Scenario CCharacteristics Scenario D

+++ + - - 0

Growth

Prices

Tech Impact

Globalization

Policy

Values

Rapid Protection Slowing Stable

Volatile Flat Rising Falling

Regulated Free Mkt Reregulated Regulated

Authoritarian Liberal Tolerant Intolerant


Scenarios to Strategies

Implications

Scenarios

StrategicPlans

ExistingStrategies

NewStrategies

StrategicObjectives

Windtunnelling Windtunnelling


Scenarios as a Tool - Implications

Questions

• What are the threats and opportunities in each scenario?• What factors are critical for success in each scenario?

Deepen understanding of the scenarios

Provide a broad context for more specific questions


• Who will be the major competitors in each scenario?

• How will these competitors respond to our new strategy?

• Could completely new competitors emerge in our business?

• What will be the impact on our relationship with suppliers?

• How will our customers change? What new needs will they

have in each scenario?

Explicit consideration of key actors

Scenarios as a Tool – Competitors, Suppliers & Customers


Scenarios as a Tool – Existing Strategies

“Windtunnelling” – How will our current strategies fly in the future?

How would our existing strategies perform in each of the scenarios?What are the pros and cons?What are the risks? Where are we vulnerable?Will our current strategies meet our strategic objectives?

Ensures articulation of existing strategies and objectives Forces managers to think through the consequences of current strategies Encourages discussion of risks and rewards


Scenarios as a Tool – Generating New Strategies

If scenario A (B, C, ..) occurred, what should we do?What strategies should we pursue?

ScenariosGenerate

NewStrategies

Evaluate(Windtunnel)

ReviewObjectives

Forced generation of different strategies (lateral thinking) Active discussion of the consequences of specific choices

harbottle consulting effective planning & risk management in an uncertain business environment...

Documents

harbottle consulting

developing scenarios

role of scenarios

uncertain future

environmental regulations

basic methodology process

internal sales forecasts

commercial value thomas