Category: Blog

In a not too distant past, we used to model and calculate how things would develop with a ceteris paribus assumption of all other aspects of the issue than those we analysed. There was, and is, a rationale for “all else being equal”. Complexity is reduced. Our computational and cognitive capabilities are at ease. And we can produce an answer, which, according to the late management thinker Peter Drucker, too often is more important than asking the right questions.

The times we are living see change happening at an accelerating pace. The complexity of issues at hand is increasing, as we also appreciate the interconnectedness between micro, meso and macro level processes all around the globe. All in all, uncertainty is genuine. It cannot be reduced to risk and probabilities. The uncertainty we are confronted with in decision making does not follow the probability distributions underlying our traditional decision support models. This context indicates that we must accept living in a post ceteris paribus world.

Facing the complexity challenges, decision makers should not go back to tossing the coin. Fortunately, there are increasing possibilities to get support to deal with complexity. Advances in the computer technologies, not even to mention the emergence of supercomputers, allow us to simulate myriads of potential futures that the decision maker might experience coming at him or her. Artificial intelligence, making use of increased computational power, contributes with further support, especially in cases where elements of pattern recognition, in the broadest meaning, comes into play. The theoretical frontiers and their applications in domains like complexity, systems, chaos etc. are also advancing rapidly.  And virtual reality can support decision makers to experience futures etc. So, we do not need to include ceteris paribus conditions to be able to deal with complexity.

But there is one crucial constraint, our cognitive processing. Most of us are unfortunately not unconstrained in our capacity to deal with loads of information and tons of options to go forward. First, we are very selective in paying attention to information, and biased in how we allow our brains to process the information. Research shows that we tend to go with what is familiar, and, perhaps more worrying, we tend to put a higher probability to something that is in some way familiar to us to happen, than what is unfamiliar. One consequence is that we will face more surprises, the future did not play out as expected. But that expectation did probably not count for the unfamiliar part of the complex world coming at us.

So, tools are available, but all of us are not well prepared to benefit from them in dealing with the complexity of futures. Scenario planning offers one way to cope with the challenge. Pierre Wack, whose work at Shell, established scenario practice as a tool for strategic planners and decision makers to cope with genuine uncertainty in a world of accelerating change and increasing complexity. The manufacturing of logical consistent, analytical and emotionally sticking descriptions of plausible futures enables decision makers to make journeys into futures, futures which are outcomes of very complex dynamics but depicted in an understandable way. This enables cognitive processes to put output from decision support into different, and new perhaps previously unfamiliar, contexts and use it successfully.

Let us make complexity a friend, and enjoy living in a post ceteris paribus time.

Writer:

“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?

1. Scenarios should be used to identify plausible futures – not to predict probable futures.
2. 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.
3. 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 Builder^TM 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.

Quotes from: CNN, CBC, The Guardian

Managers tend to be rational decision makers. Their rationality is mostly bounded by the recognized options available. The preference for rationality is well supported by the corporate calculus machinery. Net present value, or metrics alike, is looked at when considering the next steps in the strategic dance around the competitive equilibrium. Actors are supposed to move in a predictable way. And, as long as predictability reigns, things are very well.

Unfortunately, uncertainty has become the new norm. The options available become both vaguer, and more options might appear on the strategic radar screen. In the preface to the second edition to his seminal book on scenarios, Kees van der Heijden writes ‘Uncertainty has the effect of moving the key to organizational success from the “optimal strategy” to the “more skillful strategy process”’. The subtitle of the book is “The art of the strategic conversation”. Today, more than ever, when a lot of decision processes are highly influenced, not to say paralyzed, by the consequences of Covid-19, managers are well advised to move away from the sphere of illusionistic predictability and adopt another approach to cope with navigation and decision making.

Strategic conversations are about how to find a fit between plausible futures that might come at the organization, and what repertoire of activities the organization can mobilize.  Well designed they bring a multitude of perspectives making the conversation very rich. But the richness will turn into information chaos if there is no way to structure it. The scenario practice has proven to be a very powerful tool to cope with vast amounts of information and uncertainty. Scenarios not only bring structure, they engage in an inspiring way with plausible futures, allowing managers to make journeys into the future, and back. Decision making in the present is then informed by their “memories of the future”.

We see very notable examples how organizations use scenarios as a central ingredient in making the strategic conversation a process. A classical design is to have scenarios informing the strategy review at the beginning of an annual strategy process, and then evaluate the strategy proposal against the scenarios before decisions are taken. Another way to engage with scenarios is to have scenarios to inspire the generation of strategic options. Most scenarios are built on key uncertainties. Another use to stage the strategic conversation based on scenarios is to have a series of workshops, or alike, around the uncertainties, and perhaps, letting the learning not only inform the strategic conversation, but also the scenarios, potentially calling for revisions. We do also see how business intelligence systems are used to track and inform on signals connected to the uncertainties encapsulated in the scenarios.

The turbulence managerial decision makers must cope with, will probably not diminish. To live in a world of predictability is to call for trouble. To design a proper process for the strategic conversation, supported by e.g. scenario thinking, is a way to increase the probability of making intelligent choices in an uncertain world, and sleep well at night.

We very often hear that engaging with scenario work while being simultaneously tasked with delivering the company’s present strategy is a particularly hard undertaking for executives. A good set of scenarios casts new light on many of the assumptions the strategy is built on, and perhaps calls for reconsideration of the present strategy, making life for the executive more difficult. The easy solution is to stick to the strategy and hope that the future will fit the chosen strategy.

The executive dilemma comes from mixing two different conceptual worlds. Richard Normann, who was one of the leading thinkers in management and strategy, distinguished between two conceptual worlds: The World of Management and the World of Business. In the former, executives are focused on making the existing strategy a success, working with the total repertoire of managerial tools. Budgets are set, and they are to be met. Rewards are linked to the agreed goals. As an executive, you tend to limit yourself to the transactional environment while making sure the whole organization is progressing in the same, agreed direction. Thus, no ambiguity about goals and direction exists when you start work in the morning.

The mental model in the World of Business is a different one. You focus on the context of your present business and try to get your head around how that context might change, and how those potential changes might impact and change the transactional environment in which you are executing on your present strategy. This includes a multitude of issues that you cannot control, but the outcomes of which will certainly impact the conditions for your business. Trends and uncertainties occupy your mind. Somebody might even look for a black swan or spot a pink elephant. All in all, this is where scenarios can be helpful. A proper engagement with scenario thinking can help to perceive futures coming at you, carrying with them new opportunities, but also threats. Having spent time in the future, you make the journey back to the present, but with scenarios, the stories of plausible futures, you have the potential to institutionalize memories of the future.

The World of Business meets the World of Management when trying to understand the fit or misfit between future conditions, as described by the scenarios, and the dominating ideas manifest in present strategy. Sometimes you can sleep well, when the future, as understood by you, appears as your current strategy should expect, but more often the need for rethinking the strategy is apparent. The fit/misfit analysis between your strategy and scenarios is not only to be taken as a burden making your life harder, since it may also disclose new opportunities to be exploited or reveal risks that are mounting up. All these impactful steps are taken in the World of Management.

The strategic conversation that brings success to the organization should include a proper, well-structured interplay between the dominating ideas underlined in the present strategy, and the memories of the future, manifest in scenarios. The ability to handle both worlds, Business and Management, as separate logics, and staging the interaction between the two is the key to success.