SCENARIOPLANNING i

StevenM.PumaPresidioSchoolofManagement

ScenarioPlanning

C u l t u r e , V a l u e s a n d E t h i c s ( S U S 6 1 0 5 ) I n s t r u c t o r : D o n n a M o n t g o m e r y , P h . D .

ii SCENARIOPLANNING

TableofContents

Introduction.................................................................................................................1

HistoryofScenarioPlanning ........................................................................................2Orientation.................................................................................................................................................................... 4Exploration ................................................................................................................................................................... 4ScenarioCreation.......................................................................................................................................................4Connection.................................................................................................................................................................... 7

Conclusion ...................................................................................................................8

WorksCited .................................................................................................................9

SCENARIOPLANNING 1

IntroductionScenarioplanningisagroup‐baseddecisionmakingtool,whichhasitsrootsinpost‐WWIImilitaryplanningandthepetroleumindustryofthe1970s.Unlikeitscousins,forecasting and prediction, scenario planning does not attempt to project futureoutcomes based on data from the past. Thesemethods can often lead to “tunnelvision”, due to their preference of one outcome over another. Instead, scenarioplanningallowsformorerobustdecisionsbyallowingmultiplepossiblefutures.

Scenario planning, as described by Peter Schwartz, Chairman of Global BusinessNetwork(GBN),“…isatoolforbetterdecisionmaking…Businessandgovernmentsemploythistoolbecauseithelpsthemtomakebetterstrategicdecisions.”(Ogilvy)PresidioSchoolofManagementhaschosentoteachscenarioplanningaspartofitsStrategic Management curriculum, because of its unique ability to deal withuncertainty inplanning the future.This isagood thing,becausePresidiostudentsand faculty face much uncertainty in meeting the many challenges of bringingsustainabilitytothebusinessworld.

Thispaperwillserveasanintroductiontoscenarioplanningasitiscurrentlybeingtaught by Jay Ogilvy, Ph.D., Presidio faculty member and co‐founder of GlobalBusinessNetwork.WewillbrieflyexplorethehistoryofScenarioPlanning,fromitsroutsinmilitaryplanningtothecurrentday.Thiswillbefollowedbyastep‐by‐stepwalkthroughof thescenarioplanningprocess.Wewill concludewitha short lookinto how scenario planning can be useful in the cultural change managementprocess.

2 SCENARIOPLANNING

HistoryofScenarioPlanningScenario planning arose out of a need to plan for futures filled with muchuncertainty.Thisuncertaintyisparticularlymagnifiedinmilitaryoperations,whichiswhyscenario‐typeplanningcanbe tracedback to19‐centurymilitaryplanners.Militaryoperations,bytheirverynature,arefraughtwithallkindsofuncertainties.Yourenemyisconstantlytryingtodeceiveyouandhidehismovementsfromyou.Factors beyond your control, such as weather, frequently change. The combinedactions of thousands upon thousands of men, over vast distances, often lead tounforeseen consequences. For these reasons, military planners often take theapproach of envisioning multiple different stories of what might happen in thefuture,knownasscenarios,andpreparingaplan forwhat todo if thosescenarioscometopass.Thewell‐knownactivityofwargamesisonewayofpracticing,inrealtime,whatanarmywilldoiffacedwithaparticularscenario.

In the post World War II U.S., the need for continuing military research,developmentandplanningwasrecognized:

“WorldWarIIhadrevealedtheimportanceoftechnologyresearchanddevelopmentfor success on the battlefield...There were discussions among people in the WarDepartment,theOfficeofScientificResearchandDevelopment,andindustrywhosawa need for a private organization to connect military planning with research anddevelopmentdecisions.”(RANDCorporation)

As a result, The RAND Corporation was formed in 1948. Among its many otherachievements, this not‐for‐profit think tank was the first to develop scenarioanalysis,aprecursortoscenarioplanning.Scenarioanalysisdifferedfromscenarioplanning in thatutilized aprobability‐based system,where adifferentprobabilitywouldbecalculatedforthepossibilityofeachscenariotakingplace.

RAND employee Herman Kahn was a military strategist and systems theorist(wikipedia.org)whoworkedonScenarioAnalysisandwasthepersonresponsibleforusingtheword“scenario”todescribethefuturestorieswhichweredeveloped.Mr.Kahn,mostfamousforworkingonnuclearwarstrategies,wantedtoemphasizethefactthatthesestorieswerenotpredictionsofthefuture,butrather“storiestoexplore”, and that the word “scenario” was a reference to Hollywood futuristicmovies. Khan later formed his own company, The Hudson Institute, where hecontinuedtodevelopscenarioplanning.(VanDerHeijden)

In the 1970s, scenario planning was further developed and brought into thebusinessworldbytheglobalpetroleumcompanyRoyalDutchShell,where

“interestinscenariosatamoreconceptuallevelarosewiththeincreasingfailuresofplanningbasedonforecastsinthemid‐1960s.Scenarioswereinitiallyintroducedasawaytoplanwithouthavingtopredictthingsthateveryoneknewwereunpredictable.ThroughPierreWack,whointroducedthescenariosatShell,theearlyattemptswerebasedontheKahnphilosophy.”(VanDerHeijden)

SCENARIOPLANNING 3

AfterWorldWar II and continuing through the early 1960s, the price of oil wasconsideredtobestable,andtheconventionalthinkingintheindustrywasthattherewas no reason for this to change. Leading the team at Shell, PierreWack did in‐depthresearchonwhatfactorswouldaffectthepriceofoilinthefuture.

AstheUnitedStatesbecamemoreandmoredependentonforeign‐importedoil, itseemedlikelytoPierrethatAraboilproducers,could,andwould,increasethepriceofoil.“Theonlyuncertaintywaswhen.Oncecouldnotknowforsure,butitseemedlikely to happen before 1975, when old oil price agreements were due to benegotiated.” (Schwartz) Pierre prepared two scenarios, one with oil pricescontinuingalongthesamehistoricaltrend,andonerecountinganOPEC‐ledglobaloil crisis.While his analysiswas thorough, the topmanagers at Shell did not act,eventhoughtheyunderstoodwhatthismeantforthecompany.

Itwas at this point thatWackunderstoodwhat needed to bedone: heneeded toimmersehisaudienceinthefutureworldofhisprediction:

“In this new type of scenario, therewere nomore simple tales of possible futures.Instead,Pierredescribed the full ramificationsofpossibleoilprice shocks. ‘Prepare!’hetoldoilrefinersandmarketers. ‘youareabouttobecomealow‐growthindustry.’HewarnedthedrillersandexplorerswhosoughtnewoiltogetreadyforthepossibiltythatOPECcountrieswould takeover theiroil fields.Most importantly,Pierrevividlypointed to the forces in theworld, andwhat sorts of influences those forceshad tohave.Hehelpedmanagersimagingthedecisionstheymighthavetomakeasaresult.

Andhewas just in time. InOctober,1973,after the ‘YomKippur’war in theMiddleEast, there was an oil price shock. The ‘energy crisis’ burst upon theworld. Of themajor oil companies, only Shell was prepared emotionally for the change. Thecompany’sexecutives respondedquickly.During the followingyears,Shell’s fortunesrose.Fromoneoftheweakerofthe‘SevenSisters’…itbecameoneofthetwolargest,andarguablythemostprofitable.”(Schwartz)

Intheyearstocome,thiswouldbecometheformofscenarioplanningwidelyusedbybusinessandgovernment:fullyfleshed‐outstoriesofthefuture,eachresearchedin detail and allowing the reader to envision themselves squarely in this futureworld,muchliketheHollywoodmoviesfromwhichscenarioplanninggotitsname.(GlobalBusinessNetwork)

ThecurrentmethodologyofscenarioplanningtaughtbyJayOgilvyatPresidioisthesamewhich isutilizedbyGlobalBusinessNetwork (GBN), theorganizationwhichJayfoundedin1987alongwithcolleaguesPeterSchwartz,formerheadofplanningat Royal Dutch Shell, Stuart Brand, creator of theWhole Earth Catalog, LawrenceWilkinson,formerpresidentofColossalPicturesandNapierCollyns,alsofromShell.

“Global Business Network was created in 1987 around a pool table in a Berkeley,California, basement by five friends. TheseGBN cofounders envisioned aworldwidelearning community of organizations and individuals—a network, connected by the

4 SCENARIOPLANNING

open and generous exchange of ideas, "out‐of‐the‐box" scenario thinking, ruthlesscuriosity,andexcitingnewinformationtechnologies.”(GlobalBusinessNetwork)

OneofthecornerstonesofGBN’ssuccess is itsexpansivenetworkof “remarkablepeople”,whomitutilizesasresourcesforinspiration,subject‐matterexpertise,andearlyindicationsoftrends.Thesepeoplerangefromartiststomusicianstobusinessleaders tophilosophers. It is access to thesepeople thatallowsGBN theability tocreate scenarios that are both grounded in reality and that portray an accuratepictureofthefuture.

HowScenarioPlanningWorks

A scenario planning engagement would involve several phases: Orientation,Exploration,ScenarioCreationandConnection.TrainingatPresidiofocusesmostlyontheScenarioCreationphase,andwillbethebulkofwhatcanbeoutlinedinthispaperinstep‐by‐stepdetail,althoughtheotherphaseswillbediscussedastotheirimplications for the organization pursuing a scenario planning exercise. (GlobalBusinessNetwork)

OrientationThe orientation phase iswhere the leaders of the scenario planning effortwouldmeetwiththeorganizationtodeterminethepurposeandgoalsoftheexercise,whoistobeinvolvedandwhatthemetricsforsuccesswillbe.Duringthisphase,afocalissuethatwilldrivethescenarioswillbedetermined.

Most important in thisphasewill be choosinganappropriatemixofpeople tobeparticipants. Forthescenariostotrulyrepresentanaccuratepictureoftheissuesfacing the organization, the scenario development team should represent a cross‐sectionoftheorganization,bothhorizontallyandvertically.Thiswillavoidthetrapofscenariosconvergingonthenarrowpoint‐of‐viewofonedepartmentorsilo.

ExplorationTheexplorationphaseisapreliminaryinformation‐gatheringphase.Thepurposeofthisphaseistoexamineanyexternalcontentthatisrelevanttothefocalissue.Thiscanbeaccomplishedthroughexternalinterviewsandresearch.

ScenarioCreationThescenariocreationprocesswillgothroughthefollowingsteps:

1. Brainstormingfactorsandforces:Thefirststepisabrainstormingprocesstouncoverallofthekeyfactorsandenvironmentalforcesinrelationtothefocal issue. Usually, someonewill be selected as a “scribe”, whowill writedown,onawhiteboardorflipchart,allofthefactorsandforcesgeneratedby the group. It is important, at this point in the process, not to kill offcreativitybe judgingandevaluating ideasas theyarebeinggenerated. It is

SCENARIOPLANNING 5

best simply to generate a large amount of good thinking, no matter howoutlandishitmayseem.

2. Rankingcriticaluncertainties:Thegoalof this step is to identify two (2)“critical uncertainties” out of the list of factors and forces facing theorganization.Theywillformtheaxesuponwhichthefourscenarioswillbebased. These critical uncertainties will be those factors or forces that arebothmostuncertainandmostimportant.

Itisuseful,atthispoint,totalkaboutwhyweshouldchoosefactorsthatareboth“uncertainandimportant”. Ifanitemweretobehighlyimportant,yethighlycertain,thenitwouldholdtrueinallcircumstances,andthusisnotinneed ofmuch study. If something is of either high or low certainty, yet oflittle importance, then we are simply wasting time by considering it. Thecriticaluncertainties,ofbothhighimportanceandhighuncertainty,arethosefactorswithwhichwe can gain themost insight and value by consideringtheirimplicationsthroughmultiplescenarios.

Theprocessforidentifyingthecriticaluncertaintiesisasfollows:

• Each team member is allocated 25 “votes”. These can come in theformofpokerchips,stickydots,etc.

• Teammemberswillallocatetheir25votesindividually,basedontheirevaluationofwhichfactorsarecriticaluncertainties.

• Individualscanonlycastamaximumoffivevotesperitem.

• Thereisnoneedtoworryaboutredundancies.

• After counting up the allocation of votes, related factors and forcesshouldbeclusteredunderthetopscoringitems.

Theteamshouldcontinuethisprocessuntilthetwofactorsareidentified.Itis important to note that in the presence of a highly influential individual,suchasaCEOormanager,hiddenvotingmaybethebestcourseofaction,toensurethatthevotingisnotskewed.

3. Labeltheaxes:Takingthecriticaluncertaintieschosenbythegroup,a2x2matrixisformed,oneuncertaintyoneachaxis.Theaxesformacontinuumofuncertainty, and are the boundaries for each of the four scenarios. As anexample, one axis may be labeled “Rate of change in climate”, which canrange from “slow” to fast” and the other may be labeled “Governmentapproach to climate change”, which can range from “do nothing” to“aggressive intervention”. The four scenarios are then logically arrangedaccordingly.Thisisshowninthefollowinggraphic:

6 SCENARIOPLANNING

Important in the choice of proper axes is making sure that they arecompletelyindependentofeachother,andthuscanbearrangedcrosswisetoeachother.Keepinmindthatscenariodevelopment isan iterativeprocess,asisshowninFigure1.Theideaistocontinuallyupdateandimproveastheprocessgoeson,creatingamoreusefultoolasyouproceed.Atthisstage,itisimportanttocomeupwithaconcept inwhicheachscenariosheds lightonthefocalissue,andisbothplausibleandmeaningful.

4. Headlining: Now, the group will turn its attention to the four differentscenarios in turn, and attempt to develop stories for each. Considering thefirst scenario, each teammemberwill think up a “headline” thatmight befoundinanewspaperduringtheearlyyearsofthescenario.TheseshouldbewrittendownonPost‐ItNotes,andsharedwiththegroup.Thegroupshouldconsidereachheadlineinturnandevaluateforconsistencyandplausibility.The headline should then be placed on the chart for the specific scenario.Thisprocess shouldbe repeated for themiddleyearsand theendyearsofthescenario.

Asecondroundofheadliningshouldbecompletedforthebeginning,middleand end years of the scenario. This time, each teammember shouldwritedownthreeheadlines,onespecifictoeachofthetwoaxesandonesquarelyinthemiddle.

5. Writingthestory:Theteamwillbegintotaketheheadlinesandgenerateastory around them. The group should focus on uncovering the underlyingtrends that tie thevariouspiecesof thestory together.Particularemphasisshould be given to how these trends apply to the business of theorganization.ProfessorOgilvyremindsusthatscenariosshouldusefamiliarthemesasplots,suchaswinnersandlosers,crisisandresponse,goodnewsandbadnews,evolutionarychange,revolutionarychangeorcycles.

SCENARIOPLANNING 7

6. Refine thestory:This finalphaseof scenario creation involves taking theproposedstorylinesineachofthescenarios,andfleshingthemoutwithasmuchdetailastimeandresourcespermit.Forsomeorganizations,thispartoftheprocesscantakemonthsandconsistofin‐depthanalysesinallpartsofthe organization’s business. It is important to take advantage of whateversubject matter experts that the team has access to, whose input will beinvaluable to introducing those details which will bring realism to thescenario.

Figure1:ScenarioDevelopmentProcess.Source:Ogilvy,JamesA.,DevelopingScenarios:ScenarioDevelopmentForPresidioSchoolofManagement.Powerpoint.SanFranicsco,15February2008.

ConnectionOncethescenariosarecreated,theteamcanfocusonhowtoconnectthescenariostothestrategyoftheorganization.Scenarioscanbepresentedtomanagement,andstrategycanbebaseduponthem.

Therearefourbasicstrategieswhichcanbeemployedtodealwithaworldbasedinthescenarioswhichhavebeengenerated:

• Bet the Farm: This strategy assumes that one of the four scenarios is the“right”scenario,andrepresentsthefuture,asitwillactuallyunfold.Thus,theorganization tailors its strategycompletely for thisone future.This typeofstrategyisveryhighrisk.

• Core/Satellite:Thismethodplacesaheavieremphasisononescenariooverthe other three, but has some built‐in methods for dealing with thepossibility of other scenarios arising. The strategy associated with thismethodwouldbebasedfirmlyonthatonescenario,butincludescontingentstrategiesiftheorganizationfindsitselfinoneoftheotherquadrants.

• HedgeYourBets:Thisstrategyassumesthattheorganizationhasanequalchanceoffindingitselfinanyoneofthefourfutures.Itcreatessimultaneousstrategies,each focusedonadifferentscenario.This issimilar toaproduct

8 SCENARIOPLANNING

manufacturer creating four different products, hoping one wins. Thisstrategywillprobablycreateawin,butatahighcost.

• Robust: Like the hedging strategy, the organization also assumes that allpossible futureshaveanequalchanceofarisingandplansaccordingly.Thedifference is that only one strategy is used, notmultiple strategies. RoyalDutchShellusesrobuststrategieswhenevaluatingnewprojects:

“each project is evaluated economically against a set of, say, two or threescenarios,sotwoorthreeperformanceoutcomesaregenerated,oneforeachscenario.Andadecisiononwhethertogoaheadwiththeproject ismadeonthebasisofthesemultiplepossibleoutcomes,insteadofonego/no‐gonumber.Theaimistodevelopprojectsthatarelikelytohavepositivereturnsunderanyofthescenarios.”(VanDerHeijden)

Oncestrategiesaredetermined,theteamcanfocusondeveloping“earlyindicators”,which are specificmetrics that the companyuses todeterminewhat scenario theorganization is inataparticular time.Havinganetworkofsubject‐matterexpertscanbeparticularlyhandyincompletingthistask.

ConclusionInmyweek two forumpost, I alluded to the fact that scenario planning could beusedasatooltouncovertheculturalleaningsofanorganizationwithoutengagingin a process of specifically studying the culture directly. I think that scenarioplanning offers us this opportunity by allowing us to see a microcosm of thecorporate culture in action. On the flip side of that, scenario planning can be alengthy and involved process, depending on how it is implemented. It can be aworkshoprunovertwoweekends,oritcanbealengthystrategicprocessspanningmonths. Obviously, if your real goal is simply to find out how an organization’scultureworks,youmaywanttochoosetheshortervariety.

Byobservinghowanorganizationapproachesthescenarioplanningprocesswecanobserveallthreelevelsofculture,asestablishedinEdgarSchein’sCorporateCultureSurvivalGuide:Artifacts,EspousedValuesandSharedTacitAssumptions.

Weareabletoobserveartifactsthroughtheveryactofparticipatinginthephysicalspaceandobservingthedress,surroundings,atmosphereandmeetingstyle.Wecanobserve espoused values during the orientation and exploration phases of thescenario planning process, by availing ourselves of all of the readily availableinformation that the company provides. Shared tacit assumptions will makethemselves knownby theway that the teammembers proceedwith the scenariocreation exercise itself. There are many opportunities to observe the culture inoperation,fromthetopicstheychoosetostudy,tothewaythattheteammembersinteractwitheachother,tothewaytheychoosetoimplementtheresults.

SCENARIOPLANNING 9

WorksCitedGlobalBusinessNetwork.GBN‐AboutHistory.2004.21102008<http://www.gbn.com/AboutHistoryDisplayServlet.srv>.

—.GBNServicesConsulting‐Scenario.2004.21102008<http://www.gbn.com/ServicesScenarioConsultingDisplayServlet.srv>.

Ogilvy,JamesA.CreatingBetterFutures:ScenarioPlanningasaToolforaBetterTomorrow.NewYork:OxfordUniversityPress,Inc.,2002.

—.DevelopingScenarios:ScenarioDevelopmentforPresidioSchoolofManagement.Powerpoint.SanFranicsco,15February2008.

RANDCorporation.HistoryandMission.27May2008.6October2008<http://www.rand.org/about/history/>.

Schwartz,PeterJ.TheArtoftheLongView.NewYork:RandomHouse,Inc.,1996.

VanDerHeijden,Kees.Scenarios:TheArtofStrategicConversation.Chinchester:JohnWiley&Sons,2005.

wikipedia.org.HermanKahn.30September2008.6October2008<http://en.wikipedia.org/wiki/Herman_Kahn>.