“The 2020 election doomsday scenarios are endless: Dozens of lawsuits challenging state results.”
“Wildlife expert says black bears hunting humans is an extreme scenario.”
“Worst-case global heating scenarios may need to be revised upwards in light of a better understanding of the role of clouds, scientists have said.”
US banks have again been evaluated against adverse scenarios in annual stress tests, and the Finnish Air Force has trained key personnel in tactically challenging scenarios. Different transmission scenarios have been explored during the coronavirus pandemic, and recently published scenarios have already been updated to reflect the pandemic’s impact. Scenarios are frequently featured in the news – in a wide variety of contexts – and at first glance, they seem synonymous with alternatives. In strategic conversation, scenarios often refer to an organisation’s strategic options but also to different types of forecasts, quantitative models, economic modelling or sensitivity analyses. What do we mean when we talk about scenarios – and why does it matter?
Scenarios and strategic options – different tools for different purposes
What do scenarios and strategic options have in common? Both deal with alternatives. So, does it matter if strategic options are called scenarios? I think it does. Scenarios relate to alternative developments in the external environment of an organisation, whilst strategic options address the organisation’s own development pathways.
Shell, a pioneer of scenario work, has been developing scenarios since the 1970s and defines them as “plausible and challenging descriptions of the future landscape”. It is in this future landscape – illuminated by scenarios – that companies and other organisations must navigate and steer their operations, with alternative routes and directions available to decision makers – in the form of strategic options.
Strategic options are linked to companies’ own choices and opportunities, for example when pursuing growth. What are the dimensions of market growth and what are the company’s options and enablers regarding growth? A creative and systematic process helps build strategic growth options, discuss them in a structured manner and assess them systematically from different angles to draw up a well-founded growth strategy for the company.
Strategic options are a useful but underexploited tool. Based on research by Capful and others, a large number of companies believe that strategic options should be used as part of strategy work and decision making. In practice, however, very few companies systematically use them when developing strategies – due to firmly entrenched decision-making processes, avoidance of conflict or lack of time, among other things.
In the midst of the coronavirus crisis, it’s useful to look at the large number of uncertainties in the external environment and make scenarios for what might lie ahead; anticipate how and when we’ll get out of the pandemic and what the post-crisis world will look like. It also makes sense to take full advantage of strategic options – identify, describe and evaluate them against different criteria and scenarios – to make informed choices. But in the context of strategy making, it’s also advisable to keep in mind that scenarios and strategic options are not the same: Scenario-based strategy work is different from strategy work based on strategic options. If they look and smell like strategic options, why call them scenarios when they in fact are strategic options.
Scenarios or forecasts – what’s the difference?
From the outset, pioneers of scenario work – like Herman Kahn, Pierre Wack, Shell, SRI International and GBN – opted not to assign any probabilities to scenarios: all scenarios are treated equally possible. This may have been partly in response to companies being overly dependent on quantitative model-based projections in their strategic planning. Since the early 1970s, forecasting errors had become more frequent; they were at times dramatic and in some cases disturbingly large. What were the conclusions then, and what are the implications for scenario practice today?
- Scenarios should be used to identify plausible futures – not to predict probable futures.
- All scenarios presented should be taken as equally possible – for managers to thoroughly analyse the implications of each scenario and to compose backup plans for each scenario.
- Scenario work should reveal several possible futures – not to pinpoint the most credible future or the most likely one that is consistent with some underlying assumptions.
To spot genuine uncertainties and discontinuities or to anticipate radical structural changes and dramatic shocks in the external environment, we need a method that allows us to think the unthinkable and imagine the unimaginable – free from probabilities. It is not possible to foresee significant step changes using forecasts that are based on today’s and yesterday’s knowledge, frameworks, cause-effect relationships, continuities and trends.
Why is it important to emphasise the difference between scenarios and forecasts? Our thoughts and perceptions are – often unconsciously – controlled and guided by the desire to predict the future and the belief of past events repeating themselves. Scenarios are a tool, not only for dealing with uncertainty, but also for challenging decision-makers’ existing worldviews and mental models. To make this possible, we should avoid falling into the probability trap and steer clear of dominant thinking in scenario work.
The road from scenario thinking to the world of forecasting is paved with probabilities: when one starts talking about the likelihood of future developments, one shifts from scenarios to forecasts. Scenarios help you ask the right questions, whereas forecasts are used to find the right answers. Many strategic missteps stem from trying to find the right answers (problem solving), even though the right questions have not yet been asked (problem framing).
Forecasts and scenarios serve different purposes, and it’s prudent to keep these concepts and associated methods and practices separate in the strategy toolkit. A forecast is intrinsically uncertain, but this does not make it a scenario. If it looks and smells like a forecast, it’s a good idea to call it a forecast.
What are scenarios in strategy work – and what are they not?
The coronavirus crisis has revved up scenario projects. There’s an exceptionally high level of uncertainty regarding the future, and scenarios make it possible to address the uncertainty in a meaningful way. But in the thick of the action, it’s worth keeping the concepts of scenarios, strategic options and forecasts separate. Below is a brief summary of what scenarios are and what they are not in strategy work.
The economic, environmental, technological and other forces affecting organisations are increasingly complex and intertwined, and unexpected events like the Covid-19 pandemic can radically increase volatility in the external environment. But complexity and uncertainty need not prevent us from preparing for the future. Scenario-based strategic planning helps decisionmakers develop flexible strategies for an uncertain future, whilst new tools like Capful’s Scenario BuilderTM help make the process agile and effective.
When embarking on a scenario-based strategy project, it’s a good idea to make the rules of the game clear to all participants. The purpose of the process is not to prop up the ‘official’ future, determine a probable or preferable future, or seek support for existing management views. Quite the opposite, there’s now an opportunity to delve into issues and topics that call into question the official worldview or are otherwise ‘forbidden’ or ‘impossible’. To make the most of the project, it’s also necessary to clarify the concepts and help project participants distinguish the charming scent of scenarios from the equally wonderful smells of strategic options and forecasts.