s t r a t e g y
p r a c t i c e
The use and abuse of scenarios
Although it is surprisingly hard to create good ones, they help you ask the right questions and prepare for the unexpected. That is hugely valuable.
Scenarios are a powerful tool in the strategist’s armory. They are particularly useful in developing strategies to navigate thekinds of extreme events we have recently seen in the world economy. Scenarios enable the strategist to steer a course between the false certainty of a single forecast and the confused paralysis that often strike in troubled times. When well executed, scenarios boast a range of advantages—but they can also set traps for the unwary. There is a significant amount of literature on scenarios: theirorigins in war games, their pioneering use by Shell, how to construct them, how to move from scenarios to decisions, and so on. Rather than attempt anything encyclopedic, which would require a book rather than a short article, I have put forward my personal convictions, based on experience in building scenarios over the past 25 years, about both the power and the dangers of scenarios, and how tosidestep those dangers. I close with some rules of thumb that help me—and will, I hope, help you—get the best out of scenarios. The power of scenarios Scenarios have three features that make them a particularly powerful tool for understanding uncertainty and developing strategy accordingly. Scenarios expand your thinking You will think more broadly if you develop a range of possible outcomes, eachbacked by the sequence of events that would lead to them. The exercise is particularly valuable because of a human quirk that leads us to expect that the future will resemble the past and that change will occur only gradually. By demonstrating how—and why—things could quite quickly become much better or worse, we increase our readiness for the range of possibilities the future may hold. You areobliged to ask yourself why the past might not be a helpful guide, and you may find some surprisingly compelling answers. This quirk, along with other factors, was most powerfully illustrated in the recent meltdown. Many financial modelers had used data going back only a few years and were therefore entirely unprepared for what we have since seen. If they had asked themselves why the recent past mightnot serve as a good guide to the future, they would have remembered the Asian collapse of the late 1990s, the real-estate slump of the early 1990s, the crash of October 1987, and so on. The very process of developing scenarios generates deeper insight into the underlying drivers of change. Scenarios force companies to ask, “What would have to be true for the following outcome to emerge?” As aresult, they find themselves testing a wide range of hypotheses involving changes in all sorts of underlying drivers. They learn which drivers matter and which do not—and what will actually affect those that matter enough to change the scenario.
Scenarios uncover inevitable or near-inevitable futures A sufficiently broad scenario-building effort yields another valuable result. As the analysisunderlying each scenario proceeds, you often identify some particularly powerful drivers of change. These drivers result in outcomes that are the inevitable consequence of events that have already happened, or of trends that are already well developed. Shell, the pioneer in scenario planning, described these as “predetermined outcomes” and captured the essence of this idea with the saying, “It hasrained in the mountains, so it will flood in the plains.” In developing scenarios, companies should search for predetermined outcomes— particularly unexpected ones, which are often the most powerful source of new insight uncovered in the scenario-development process. Broadly speaking, there are four kinds of predetermined outcomes: demographic trends, economic action and reaction, the reversal...
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