The future of scenarios

The future of scenarios: Challenges and opportunities
Stephen M Millett. Strategy & Leadership. Chicago: 2003. Vol. 31, Iss. 2; pg. 16, 9 pgs Abstract (Summary)

Most often, scenarios are used by top management to provide a better understanding of the range of possible business environments they must contend with in the future. To achieve more consistently productive uses of scenarios, three major challenges must be addressed for the future of the scenario method: 1. Resolve the confusion over the definitions and methods of scenarios. 2. Clarify and enlarge the appropriate application of scenarios, and 3. reduce the resources required to perform scenario planning. Consultants use the term "scenario development" to describe a variety of different methods and practices. Managers who are confused over the definitions and techniques offered by various scenario practitioners don't make enlightened buying decisions. Too often managers end up buying a scenario process that does not produce the results they hoped for. A quick review of the evolution of scenario consulting can eliminate some of the confusion over terminology and typology.

More than a decade ago I published The Manager's Guide to Technology Forecasting and Strategy Analysis Methods (Battelle Press, 1991). A key purpose of the book was to acquaint all levels of management with various methodologies for considering the future, including scenarios. In the ensuing years I have observed with some frustration that corporate and institutional managers still don't get the full return on investment in scenarios that they should, nor do they employ scenarios on the full range of corporate issues suited to this methodology.

Most often, scenarios are used by top management to provide a better understanding of the range of possible business environments they must contend with in the future. As a tool for imagining alternative futures, scenario projects have helped many leaders gain perspective to guide their search for competitive advantage. Yet many corporate leaders and mid-level managers who have experimented with scenarios complain that the promise of this methodology remains unfulfilled. Most often it's the mid-level managers who grumble that these big picture "strategic scenarios" don't address the competitive issues and the critical decisions that they face in the trenches of their business.

To achieve more consistently productive uses of scenarios, I see three major challenges that must be addressed for the future of the scenario method:

* resolve the confusion over the definitions and methods of scenarios;

* clarify and enlarge the appropriate application of scenarios; and

* reduce the resources required to perform scenario planning.

How both the consultants who lead scenario projects and the corporate managers who use scenarios meet these challenges will determine the utility of this methodology as a business decision-making tool.

1)Resolve the confusion over the definitions and methods of scenarios

The challenge

Consultants use the term "scenario development" to describe a variety of different methods and practices. Managers who are confused over the definitions and techniques offered by various scenario practitioners don't make enlightened buying decisions. Too often managers end up buying a scenario process that does not produce the results they hoped for. A quick review of the evolution of scenario consulting can eliminate some of the confusion over terminology and typology (Exhibit 1).

In the 1950s, Herman Kahn and his associates at the RAND Corporation adapted the meaning and method of theatrical scenarios to war planning. Kahn used scenarios to mean alternative paths resulting in alternative outcomes, such as his four scenarios of how nuclear war might erupt between the US and the Soviet Union. Using facts and rigorous logic, Kahn demonstrated that much military planning was based more on wishful thinking than reasonable expectations. For example, rather than assuming that all crises would be rationally managed, Kahn foresaw a possible nuclear "war by miscalculation", which illustrated a possible future that thankfully did not occur in 1962[1].

In military circles, scenarios are still paths to alternative outcomes. But corporate scenario planning sometimes describes hypothetical paths to a result or to a set of alternative results not linked to specific paths.

Scenarios as planning context. Based on Kahn's work at RAND and later at his own Hudson Institute, war-planning scenarios were adapted by companies as a business-- planning tool in the early 1970s. Ian Wilson at GE, Pierre Wack at Shell, and Peter Schwarz at SRI International redefined scenarios as alternative outcomes of trends and events by a target year regardless of the precise sequence of events. Their scenarios were descriptions of future conditions rather than accounts of how events might unfold. Scenarios offered a set of distinct alternative futures to emphasize that the business environment was uncertain and could evolve in totally different ways. The scenarios provided a context for the development of long-term corporate strategic plans and near-term contingency plans.

For example, Wilson led perhaps the first major corporate scenario project at GE that produced in 1971 four alternative scenarios of global and US economic and socio-political conditions in the year 1980: benchmark (with a 50 percent probability), more inward-looking societies (25 percent), more integrated societies (15 percent), and more disarrayed societies (10 percent), At about the same time, Wack led a scenarios project at Royal Dutch Shell that also generated four different scenarios for global conditions for energy demand and prices. Their definition of "scenarios" and their methods remained the gold standard of corporate scenario generation for the next three decades[2].

Anticipating discontinuity. The scenario method popularized by GE, Shell, SRI International, and Global Business Networks (GBN) emphasizes creativity and imagination. The practitioners of this method assert that a discontinuous future cannot be reliably forecasted, but it can be imagined and "lived in" as a means of learning from it. This creativity of scenario writing, especially within a project team context, should ideally also inspire creativity in the subsequent business strategy and planning.

Another principal approach, however, stresses analytical rigor. Ted Gordon and Olaf Helmer, who worked at RAND at the same time as Kahn, developed tools for expert judgment and cross-impact analysis. Using this approach, Battelle developed a different scenario method supported by a software program, first called BASICS and now called Interactive Future Simulations (IFS), that incorporates cross-impact analysis as an approach to modeling and simulation. Scenarios are calculated rather than intuitively derived[3].

The business purpose of scenarios. I can understand easily why managers who may have never had scenario training or prior experience experimenting with scenarios become confused about what types of scenarios they want to use in their business. However, I believe it is the obligation of scenario consultants to carefully explain the different types of scenarios processes and their relative advantages and disadvantages to scenario-buying managers. Given that there are different virtues in various approaches, I encourage managers to ask more questions of the scenario consultants as to what methods and types of results are best suited for the business challenges of a particular business and its culture. A good scenario process begins with a clear statement by the manager of why the business needs scenarios and what it must get from them.

Assessing your consultant's strengths and weaknesses. As a purchasing and a process management decision guide, managers must also be clear what kind of expertise the scenario consultant brings to the project. Some consultants are very knowledgeable about an industry, a market, or an emerging technology, for example, but not about scenario methodology. Others consultants are futurists whose real strength is discerning hints about possible evolutionary environmental trends. Other consultants know a great deal about scenario methods, but need to master the substantive topics of the scenarios.

Keep in mind that the substantive learning process is terribly important for all participants. For example, Wack and his associates at Shell were very familiar with the oil business; one of them told me in private that he would have no clue how to do scenarios for any client other than an oil company.

A key question for managers: is the consultant's job primarily to be a facilitator, an industry expert, or a diviner of future trends? An ideal consultant would have both process and domain expertise and be sensitive to the sometimes subtle signals of profound change. Such consultants are rare (and rightfully expensive). More importantly, the manager and the consultant must together form a team that adequately covers both method and substance.

The opportunity

The next great challenge, in my opinion, is for scenario consultants to embrace greater flexibility in the scenario methods they use and more precision in the terminology for describing those methods. Likewise, managers need not only to be aware of the strengths and weaknesses of different approaches, but also to demand the approach that is best suited for the situation.

Synthesis of methodologies. A more complex challenge is the synthesis of the existing definitions and methods of scenario generation into a new composite approach. I believe that scenarios methods are ready to evolve to the next level of development. Both the intuitive and analytical scenario methods have been practiced for more than 30 years with many marginal improvements but no radical revision. The next generation of scenario tools should not only combine previous methods, but also actually blend them into a more comprehensive methodology. One possibility is a composite of the creative, intuitive scenario method with the analytical scenario method. The creative approach could establish some broad boundaries on uncertainty and the analytical method could provide more details with the precision that is achieved with modeling and simulation. With an understanding of today's situation and with alternative futures, the scenario team could interpolate alternative sequential scenarios from the present to the future.

Action steps

Managers need to know the different definitions and methods of scenarios and how to match them to their needs. Managers must then determine the best style for their needs and corporate culture. Creative companies will likely prefer the intuitive scenario method, while engineering-oriented companies will likely prefer analytical scenarios. Managers may wish to start with intuitive scenarios and progress to analytical scenarios as they move from a macroscopic look at future environments toward assessing the impact of specific issues and decisions.

Scenario practitioners, likewise, should be very clear in their use of terms and methods in proposing how a company should use scenarios. The approach must be adapted to the personnel and culture of the company to be most successfully applied.

2. Clarify and enlarge the appropriate application of scenarios

The challenge

Beyond the confusion caused by the different definitions and methods of scenarios lies the uncertainty about when and how to apply scenarios in the business environment.

In the earliest GE approach to scenario planning, Wilson and his associates were trying to understand and anticipate macroscopic social, political, and economic changes in the corporate environment for the benefit of senior managers. This approach was also used at Shell, where scenario development was closely associated with business environmental scanning. Scenario writing provided more robust results than merely extrapolating trends, especially financial projections.

Based on the experiences of GE and Shell, corporate scenarios became a tool of strategic thinking, learning, and planning, in many respects parallel to the contingency planning practiced by the Air Force using Kahn's hypothetical, sequential scenarios. To this day many practitioners generate scenarios primarily for the benefit of senior managers. However, beyond the executive suite, scenarios have many other applications and utility, including training, near-term decision-making. It is my opinion that scenario planning can also be used for certain types of forecasting.

Forecasting? For many years, scenario practitioners disagreed about whether scenarios could be used for any type of forecasting. To some, "forecasting", meant only financial forecasts, and they were opposed to using scenarios as another conventional tool of financial planning. Rather, they wanted scenarios to be used for senior executive strategic planning that recognized potential changes in the business environment and provided foresights beyond numerical forecasts. Therefore, they strongly opposed the idea of using any type of probabilities with scenarios. Their opposition was based on their experience that if one scenario was deemed more probable than others, invariably it alone was selected for the corporation's major planning effort[4].

Assign probabilities? Battelle, on the other hand, uses scenarios with proportional probabilities. Our experience has been that analytical scenarios may be considered forecasts to the degree that they identify, integrate, and anticipate trends and their likely outcomes (based on current knowledge and expectations). Scenario probabilities involve some calculations but mostly judgments. The probabilities reflect our own expectations and analysis of major trends, subject to revisions. Software is used to enforce consistent logic and to provide sensitivity analysis, simulations, and revisions based on new information. Prediction is not the goal. It's noteworthy that GE's first set of scenarios included proportional probabilities (meaning that the probabilities had relative rather than absolute meaning). Subsequent GE scenario projects chose to avoid explicit quantification.

Invariably managers want to know whether some scenarios are more likely than others and why. Understanding the conditionality (relative likelihood) of scenarios is extremely important for both the planning and forecasting functions, a reality known by Kahn, Wilson and Wack. Kahn argued that some nuclear war scenarios were more likely than others based on trends, but the others (the outlier scenarios) had to be considered and managed, too. An example of Battelle's probability scenarios was a project for the future demand for electricity by the Los Angeles Department of Water and Power (LADWP) in 1987-1988. We realized that a critical issue was the growth in demand driven by technologies rather than population. We also identified an overreliance on transmission of power generated outside of the service area and too little reliance based on alternative generation facilities. This LADWP scenario project highlighted the need to diversify and expand generation, actions that resulted in part in Los Angeles having adequate electricity supplies when the rest of California did not in 2000.

Market research. In addition to planning and forecasting, scenarios can be used for market research and new product development. Traditional market research tools work for identifying short-term consumer demand, but they fail for long-term questions. Consumers cannot report what they will and will not buy beyond a year or more in the future. Therefore, scenarios can be used as a futuring tool to help simulate the needs and desires of the future consumer. In the same manner, scenarios provide a tool for the so-called fuzzy front end of new product development.

As an example of this process, in the mid-1 990s, Battelle worked with a household products company to generate scenarios on the future of household cleaning. We identified and interrelated major trends such as an aging population, more two-wage earner households, and a growing concern about preventing diseases. Convenience, speed, and thoroughness of cleaning emerged as major future consumer values. In this context, we identified a new product that would be an effective hygienic disposable wipe to clean surfaces. Such products came to the market by 2000 and proved to be highly successful with consumers.

Scenarios for resource allocation. Managers know that scenarios can be powerful thinking tools, especially for looking at evolving operational environments. However, a major debate revolves around whether or not scenarios have successfully developed into a tool for investment and company decision-making. One view has been that scenarios provide context, but not direct inputs for such decisions (R&D priorities, new products, and financial investments). This approach emphasizes the role of scenarios in team building, information gathering, learning, and strategic thinking. It advocates using scenarios primarily as a tool for corporate learning and for changing corporate culture.

Another view, however, holds that scenarios can and should be used for near-term business decision-making. As such, they are another method of analysis, especially for highly uncertain circumstances. Proponents accept the use of probabilities, modeling, and simulation as features of analytical scenarios. In the case of the Los Angeles Department of Water and Power project, Battelle used the scenarios as different starting points to run econometric models giving us very specific demand forecasts. These allowed us to define the investments in generation and transmission that would be required for various levels of demand,

Teambuilding. Lastly, the scenario process can be used for the team building and training of the participants. Measured by these criteria, it can be argued that the mental exercise has more value for a company than the scenarios themselves. This learning process is particularly valuable if the same team has the responsibilities for implementing the business strategies or new product concepts that result from the scenarios. This benefit occurs with both intuitive and analytical scenario methods.

Scenarios will always be limited in appeal as long as they are used only as a tool for strategic thinking, learning, and planning at the senior executive level. The day-to-day work of business is operations. Scenarios need to be applied to the numerous operational issues that companies face. With alternative scenarios as context, managers should be addressing such questions as: what are the alternative methods and outcomes for flexible manufacturing technologies to improve throughput and quality? What are the alternative outcomes for automating processes using wireless communications and control? What are the relative advantages of every-day low prices relative to coupons and special sales?

The opportunity

If scenarios are to gain acceptance in the business world, then practitioners must clarity which type of scenario technology should address what problems for managers. Managers, too, need to define their problem and apply the appropriate method to it, whether they are practicing strategic thinking, learning, team building, forecasting, or making an investment decision. It should be reiterated that intuitive scenarios work very well for team building, learning, and strategy making in the broadest context. They also provide insights for managing in highly uncertain, very long-term, and particularly ambiguous environments. As a follow on, analytical scenarios can be used to give the thinking more vigor and precision. The output of scenarios can be used as inputs to more quantitative models. In other words, an increasingly more focused progression of futuring tools for looking at the macroscopic to the microscopic can be very useful to corporations. For example, using the LADWP case, we used scenarios as pre-conditions for new forecasts and sensitive analysis for residential electric use.

Scenarios for line managers. In addition to corporate strategic thinking, scenarios need to be applied to operational challenges to impact performance. Scenarios can capture microscopic as well as macroscopic strategic issues. Another approach is to use groups to brainstorm specific actions that implement the strategies from different scenarios. This requires broad dissemination and discussion of the scenarios among line workers and their managers. Scenarios, in other words, may find new uses as discussion points for quality circles and managers may find other applications for them within the context of total quality management.

Managers should begin with intuitive scenarios to encourage creativity and out-of-thebox thinking and then graduate to analytical scenarios. Scenario practitioners need to understand the internal dynamics of the company in order to help various managers be more productive. Managers at all levels of the organization need to participate in scenario exercises, sometimes side by side with senior managers.

3. Reduce the resources required to perform scenario planning

The challenge

Scenario development and research can be quite expensive. Shell is one of the few corporations in the world that has a scenario staff and performs scenarios routinely. At most other firms, scenario projects are undertaken only infrequently. The problem is that scenarios require a team effort and professional facilitation. A scenario team might consist of 5-10 participants. They have meetings and workshops. They have interviews and research to perform. The scenario project may require 50 percent to 100 percent of several key managers' time over a period of two to six months (possibly longer), with internal costs as high as $400,000. Consulting fees to professional scenario facilitators may be an additional $200,000. With costs like these, few small and middle size companies can afford to perform formal, rigorous scenario projects. Only the largest companies do scenarios on a routine basis, and many of them will do scenarios no more frequently than once every three to five years.

Currently, scenarios, like other forms of management consulting, are typically priced for executive management consumption at major corporations. High prices, unfortunately, discourage use of scenarios by lower levels of management. Medium and small companies are often unwilling to invest in the scenario process. Scenarios could enjoy much broader business appeal if their costs were to decline or if they provide more value for their corporate customers.

The opportunity

The level of effort, the budget, and the complexity of the scenario exercise must be proportional to the project, the level of management and the size of the enterprise. Generally, scenario practitioners need to find ways to streamline their process and reduce their prices. Casual scenarios may be entirely appropriate, as long as there is truth in packaging. However, consultants should not misrepresent simple scenarios based on little or no research as adequate substitutes for complex long-term scenarios, if the situation warrants the more thorough scenario development.

Automation. There may be ways to automate, or semi-automate, the scenario process. No software package is likely to replace the inputs of intelligent and knowledgeable people, but there may be ways to automate their inputs to cut down on time and expense. After all, the value of the scenarios resides in their implications for strategy and operations, not in the scenarios themselves. Too much time and effort frequently go into generating the scenarios and not enough in deriving business foresights from them. Therefore, we need to speed up the scenario generation effort to allow sufficient time and resources to thinking through both strategic and operational implications from them.

Action items

Managers must insist upon practical results from any kind of analysis or planning exercise, including scenarios. Likewise, scenario practitioners need to speed up and simplify the generation of scenarios. The next generation of scenario methods should eliminate, reduce, or automate some steps to reduce the time, effort, and expense while preserving the benefits of group participation and learning.

If we, both the consultants and the management consumers of scenarios, move forward to meet the many opportunities listed, we are more likely to be successful in firmly establishing scenarios as business thinking, learning, forecasting, and decisionmaking tools in the future.

footnotes------------------------------------------------
1. Herman Kahn, Thinking About the Unthinkable. New York: Avon Books, 1962, pp. 41-61 and 150-164. Herman Kahn, The Year 2000. New York, Macmillan, 1967, pp. 262-64. When Kahn left RAND and created the Hudson Institute in New York, he had the opportunity in the late 1960s to exchange ideas about scenarios for business planning with Ian Wilson at GE and Pierre Wack of Royal Dutch Shell.
2. Environmental Task Force of the Corporate Executive Staff, General Electric, "Four Alternative World/US Scenarios 1971-1980", report dated 21 January, 1971; Ian Wilson, "Scenarios", in Jib Fowles (Ed.), Handbook of Futures Research, Westport, CT: Greenwood Press, 1978, pp. 225-47; Pierre Wack, "Scenarios: Uncharted Waters Ahead", Harvard Business Review,

[Footnote]
September-October 1985, pp. 73-89; Pierre Wack, "Scenarios: Shooting the Rapids", Harvard Business Review, November-December 1985, pp. 130-50; William R. Huss and Edward J. Honton, "Scenario Planning - What Style Should You Use?", Long Range Planning, Vol. 20, August 1987, pp. 21-9. Peter Schwartz, The Art of the Long View, New York, Doubleday/Currency Books, 1996; Lawrence Wilkinson, "How to Build Scenarios", Wired Scenarios: 1.01, pp. 74-81. This author gathered additional information in conversations (e-mail and face to face) with Ian Wilson and Peter Schwartz in San Francisco, April 2002.
3. John G. Stover and Theodore J. Gordon, "Cross-Impact Analysis", in Fowles, Handbook of Futures Research, pp. 301-28; Huss and Honton, "Scenario Planning - What Style Should You Use?". Also see Stephen M. Millett and Edward J. Honton, A Manager's Guide to Technology Forecasting and Strategy Analysis Methods, Columbus, OH: Battelle Press, 1991.
4. "Probabilities. Help or Hindrance in Scenario Planning?", The Deeper News, Global Business Network, summer 1991; Thomas Mandel and Ian Wilson, "How Companies Use Scenarios: Practices and Prescriptions", Report No. 822, SRI International, spring 1993; Michel Godot, Creating Futures. Scenario Planning as a Strategic Management Tool, London: Economica, 2001, pp. 163-80.