Scenario planning [or scenario thinking or scenario analysis] is a strategic planning method that some organizations use to make flexible long-term plans. It is in large part an adaptation and generalization of classic methods used by military intelligence.
The original method was that a group of analysts would generate simulation games for policy makers. The games combine known facts about the future, such as demographics, geography, military, political, industrial information, and mineral reserves, with plausible alternative social, technical, economic, environmental, educational, political and aesthetic (STEEEPA) trends which are key driving forces.
In business applications, the emphasis on gaming the behavior of opponents was reduced (shifting more toward a game against nature). At Royal Dutch/Shell for example, scenario planning was viewed as changing mindsets about the exogenous part of the world, prior to formulating specific strategies.
Scenario planning shines especially if it includes systems thinking, which recognizes that many factors may combine in complex ways to create sometime surprising futures (due to non-linear feedback loops). The method also allows the inclusion of factors that are difficult to formalize, such as novel insights about the future, deep shifts in values, unprecedented regulations or inventions. Systems thinking used in conjunction with scenario planning leads to plausible scenario story lines because the causal relationship between factors can be demonstrated. In these cases when scenario planning is integrated with a systems thinking approach to scenario development, it is known is sometimes referred to as structural dynamics.
When disclosed years in advance, these weaknesses can be avoided or their impacts reduced more effectively than if a similar real-life problems were considered under duress of an emergency. For example, a company may discover that it needs to change contractual terms to protect against a new class of risks, or collect cash reserves to purchase anticipated technologies or equipment. Flexible business continuity plans with "PREsponse protocols" help cope with similar operational problems and deliver measurable future value-added.
As in military intelligence, the chief challenge of scenario planning is to find out the real needs of policy-makers, when policy-makers may not themselves know what they need to know, or may not know how to describe the information that they really want.
Good analysts design wargames so that policy makers have great flexibility and freedom to adapt their simulated organizations. Then these simulated organizations are "stressed" by the scenarios as a game plays out. Usually, particular groups of facts become more clearly important. These insights enable intelligence organizations to refine and repackage real information more precisely to better-serve the policy-makers' real-life needs. Usually the games' simulated time runs hundreds of times faster than real life, so policy-makers experience several years of policy decisions, and their simulated effects, in less than a day.
This chief value of scenario planning is that it allows policy-makers to make and learn from mistakes without risking career-limiting failures in real life. Further, policymakers can make these mistakes in a safe, unthreatening, game-like environment, while responding to a wide variety of concretely-presented situations based on facts. This is an opportunity to "rehearse the future," an opportunity that does not present itself in day-to-day operations where every action and decision counts.
Scenario planning is also extremely popular with military planners. Most states' departments of war maintain a continuously-updated series of strategic plans to cope with well-known military or strategic problems. These plans are almost always based on scenarios, and often the plans and scenarios are kept up-to-date by war games, sometimes played out with real troops. This process was first carried out (arguably the method was invented by) the Prussian general staff of the mid-19th century.
In the past, strategic plans have often considered only the "official future," which was usually a straight-line graph of current trends carried into the future. Often the trend lines were generated by the accounting department, and lacked discussions of demographics, or qualitative differences in social conditions.
These simplistic guesses are surprisingly good most of the time, but fail to consider qualitative social changes that can affect a business or government. Scenarios focus on the joint effect of many factors. Scenario planning helps us understand how the various strands of a complex tapestry move if one or more threads are pulled. When you just list possible causes, as for instance in fault tree analysis, you may tend to discount any one factor in isolation. But when you explore the factors together, you realize that certain combinations could magnify each other’s impact or likelihood. For instance, an increased trade deficit may trigger an economic recession, which in turn creates unemployment and reduces domestic production. Schoemaker offers a strong managerial case for the use of scenario planning in business and had wide impact.
Scenarios planning starts by dividing our knowledge into two broad domains: (1) things we believe we know something about and (2) elements we consider uncertain or unknowable. The first component – trends – casts the past forward, recognizing that our world possesses considerable momentum and continuity. For example, we can safely make assumptions about demographic shifts and, perhaps, substitution effects for certain new technologies. The second component – true uncertainties – involve indeterminables such as future interest rates, outcomes of political elections, rates of innovation, fads and fashions in markets, and so on. The art of scenario planning lies in blending the known and the unknown into a limited number of internally consistent views of the future that span a very wide range of possibilities.
Numerous organizations have applied scenario planning to a broad range of issues, from relatively simple, tactical decisions to the complex process of strategic planning and vision building. The power of scenario planning for business was originally established by Royal Dutch/Shell, which has used scenarios since the early 1970s as part of a process for generating and evaluating its strategic options. Shell has been consistently better in its oil forecasts than other major oil companies, and saw the overcapacity in the tanker business and Europe’s petrochemicals earlier than its competitors. But ironically, the approach may have had more impact outside Shell than within, as many others firms and consultancies started to benefit as well from scenario planning. Scenario planning is as much art as science, and prone to a variety of traps (both in process and content) as enumerated by Schoemaker .
Though the concept was first introduced, as 'La Prospective', by Berger in 1964 and the word 'scenario' itself was reportedly first used by Herman Kahn in 1967, the theoretical foundations of scenario forecasting were mainly developed in the 1970s, especially by Godet (between 1974 and 1979). By the early 1980s these approaches had developed into a sophisticated forecasting technique which was primarily recommended for the integration of the output from other sophisticated (qualitative) approaches to long-range forecasting. Although it was inevitably based upon judgmental forecasts, its use typically revolved around forecasting techniques which brought together groups of experts in order to reduce the risk involved. These included Delphi and, especially in the context of scenarios, Cross-Impact Matrices, which were popular at that time. Possibly as a result of these very sophisticated approaches, and of the difficult techniques they employed (which usually demanded the resources of a central planning staff), scenarios earned a reputation for difficulty (and cost) in use. Even so, the theoretical importance of the use of alternative scenarios, to help address the uncertainty implicit in long-range forecasts, was dramatically underlined by the widespread confusion which followed the Oil Shock of 1973. As a result many of the larger organizations started to use the technique in one form or another. Indeed, just ten years later, in 1983 Diffenbach reported that 'alternate scenarios' were the third most popular technique for long-range forecasting - used by 68% of the large organizations he surveyed. Practical development of scenario forecasting, to guide strategy rather than for the more limited academic uses which had previously been the case, was started by Wack in 1971 at the Royal Dutch Shell group of companies - and it, too, was given impetus by the Oil Shock two years later. Shell has, since that time, led the commercial world in the use of scenarios - and in the development of more practical techniques to support these. Indeed, as - in common with most forms of long-range forecasting - the use of scenarios has (during the depressed trading conditions of the last decade) reduced to only a handful of private-sector organisations, Shell remains almost alone amongst them in keeping the technique at the forefront of forecasting. There has only been anecdotal evidence offered in support of the value of scenarios, even as aids to forecasting; and most of this has come from one company - Shell. In addition, with so few organisations making consistent use of them - and with the timescales involved reaching into decades - it is unlikely that any definitive supporting evidenced will be forthcoming in the foreseeable future. For the same reasons, though, a lack of such proof applies to almost all long-range planning techniques. In the absence of proof, but taking account of Shell's well documented experiences of using it over several decades (where, in the 1990s, its then CEO ascribed its success to its use of such scenarios), can be significant benefit to be obtained from extending the horizons of managers' long-range forecasting in the way that the use of scenarios uniquely does.
The use of scenarios was audited by Arie de Geus's team in the early 1980s and they found that the decision making processes following the scenarios were the primary cause of the lack of strategic implementation, rather than the scenarios themselves. Many practitioners today spend as much time on the decision making process as on creating the scenarios themselves.
Although scenario planning has gained much adherence in industry, its subjective and heuristic nature leaves many academics uncomfortable. How do we know if we have the right scenarios? And how do we go from scenarios to decisions? These concerns are legitimate and scenario planning would gain in academic standing if more research were conducted on its comparative performance and underlying theoretical premises. A collection of chapters by noted scenario planners failed to contain a single reference to an academic source! In general, there are few academically validated analyses of scenario planning (for a notable exception, see Schoemaker). The technique was born from practice and its appeal is based more on anecdotal than scientific evidence. Furthermore, significant misconceptions remain about its intent and claims. Above all, scenario planning is a tool for collective learning, reframing perceptions and preserving uncertainty when the latter is pervasive. Too many decision makers want to bet on one future scenario, falling prey to the seductive temptation of trying to predict the future rather than to entertain multiple futures. Another trap is to take the scenarios too literally as though they were static beacons that map out a fixed future. In actuality, their aim is to bound the future but in a flexible way that permits learning and adjustment as the future unfolds.
One criticism of the two-by-two technique commonly used is that the resulting matrix results in four somewhat arbitrary scenario themes. If other key uncertainties had been selected, it might be argued, very different scenarios could emerge. How true this is depends on whether the matrix is viewed as just a starting point to be superseded by the ensuing blueprint or is considered as the grand architecture that nests everything else. In either case, however, the issue should not be which are the “right” scenarios but rather whether they delineate the range of possible future appropriately. Any tool that tries to simplify a complex picture will introduce distortions, whether it is a geographic map or a set of scenarios. Seldom will complexity decompose naturally into simple states. But it might. Consider, for example, the behavior of water (the molecule H2O) which, depending on temperature and pressure, naturally exists in just one of three states: gas, liquid or ice. The art of scenarios is to look for such natural states or points of bifurcation in the behavior of a complex system.
Apart from some inherent subjectivity in scenario design, the technique can suffer from various process and content traps. These traps mostly relate to how the process is conducted in organizations (such as team composition, role of facilitators, etc.) as well as the substantive focus of the scenarios (long vs. short term, global vs. regional, incremental vs. paradigm shifting, etc). One might think of these as merely challenges of implementation, but since the process component is integral to the scenario experience, they can also be viewed as weaknesses of the methodology itself. Limited safeguards exist against political derailing, agenda control, myopia and limited imagination when conducting scenario planning exercises within real organizations. But, to varying extents, all forecasting techniques will suffer from such organizational limitations. The benchmark to use is not perfection, especially when faced with high uncertainty and complexity, or even strict adherence to such normative precepts as procedural invariance and logical consistency, but whether the technique performs better than its rivals. And to answer this question fairly, performance must be carefully specified. It should clearly include some measures of accuracy as well as a cost-benefit analysis that considers the tradeoff between effort and accuracy. In addition, legitimation criteria may be important to consider as well as the ability to refine and improve the approach as more experience is gained.
A third limitation of scenario planning in organizational settings is its weak integration into other planning and forecasting techniques. Most companies have plenty of trouble dealing with just one future, let alone multiple ones. Typically, budgeting and planning systems are predicated on single views of the future, with adjustments made as necessary through variance analysis, contingency planning, rolling budgets, and periodic renegotiations. The weaknesses of these traditional approaches were very evident after the tragic attack of Sept. 11, 2001 when many companies became paralyzed and quite a few just threw away the plan and budget. Their strategies were not future-proof and they lacked organized mechanisms to adjust to external turmoil. In cases of crisis, leadership becomes important but so does some degree of preparedness. Once the scenarios are finished, the real works starts of how to craft flexible strategies and appropriate monitoring systems. Managers need a simple but comprehensive compass to navigate uncertainty from beginning to end. Scenario planning is just one component of a more complete management system. The point is that scenario thinking needs to be integrated with the existing planning and budgeting system, as awkward as this fit may be. The reality is that most organizations do not handle uncertainty well and that researchers have not provided adequate answers about how to plan under conditions of high uncertainty and complexity.
The basic concepts of the process are relatively simple. In terms of the overall approach to forecasting, they can be divided into three main groups of activities (which are, generally speaking, common to all long range forecasting processes):
The first of these groups quite simply comprises the normal environmental analysis. This is almost exactly the same as that which should be undertaken as the first stage of any serious long-range planning. However, the quality of this analysis is especially important in the context of scenario planning. The central part represents the specific techniques - covered here - which differentiate the scenario forecasting process from the others in long-range planning. The final group represents all the subsequent processes which go towards producing the corporate strategy and plans. Again, the requirements are slightly different but in general they follow all the rules of sound long-range planning.
The part of the overall process which is radically different from most other forms of long-range planning is the central section, the actual production of the scenarios. Even this, though, is relatively simple, at its most basic level. As derived from the approach most commonly used by Shell, it follows six steps:
Brainstorming In any case, the brainstorming which should then take place, to ensure that the list is complete, may unearth more variables - and, in particular, the combination of factors may suggest yet others. A very simple technique which is especially useful at this - brainstorming - stage, and in general for handling scenario planning debates is derived from use in Shell where this type of approach is often used. An especially easy approach, it only requires a conference room with a bare wall and copious supplies of 3M Post-It Notes! The six to ten people ideally taking part in such face-to-face debates should be in a conference room environment which is isolated from outside interruptions. The only special requirement is that the conference room has at least one clear wall on which Post-It notes will stick. At the start of the meeting itself, any topics which have already been identified during the environmental analysis stage are written (preferably with a thick magic marker, so they can be read from a distance) on separate Post-It Notes. These Post-It Notes are then, at least in theory, randomly placed on the wall. In practice, even at this early stage the participants will want to cluster them in groups which seem to make sense. The only requirement (which is why Post-It Notes are ideal for this approach) is that there is no bar to taking them off again and moving them to a new cluster.
A similar technique - using 5" by 3" index cards - has also been described (as the 'Snowball Technique'), by Backoff and Nutt, for grouping and evaluating ideas in general. As in any form of brainstorming, the initial ideas almost invariably stimulate others. Indeed, everyone should be encouraged to add their own Post-It Notes to those on the wall . However it differs from the 'rigorous' form described in 'creative thinking' texts, in that it is much slower paced and the ideas are discussed immediately. In practice, as many ideas may be removed, as not being relevant, as are added. Even so, it follows many of the same rules as normal brainstorming and typically lasts the same length of time - say, an hour or so only. It is important that all the participants feel they 'own' the wall - and are encouraged to move the notes around themselves. The result is a very powerful form of creative decision-making for groups, which is applicable to a wide range of situations (but is especially powerful in the context of scenario planning). It also offers a very good introduction for those who are coming to the scenario process for the first time. Since the workings are largely self-evident, participants very quickly come to understand exactly what is involved. Important and uncertain This step is, though, also one of selection - since only the most important factors will justify a place in the scenarios. The 80:20 Rule here means that, at the end of the process, management's attention must be focused on a limited number of most important issues. Experience has proved that offering a wider range of topics merely allows them to select those few which interest them, and not necessarily those which are most important to the organisation. In addition, as scenarios are a technique for presenting alternative futures, the factors to be included must be genuinely 'variable'. They should be subject to significant alternative outcomes. Factors whose outcome is predictable, but important, should be spelled out in the introduction to the scenarios (since they cannot be ignored). The Important Uncertainties Matrix, as reported by Kees van der Heijden of Shell, is a useful check at this stage. At this point it is also worth pointing out that a great virtue of scenarios is that they can accommodate the input from any other form of forecasting. They may use figures, diagrams or words in any combination. No other form of forecasting offers this flexibility.
Contingency planning is a "What if" tool, that only takes into account one uncertainty. However, scenario planning considers combinations of uncertainties in each scenario. Planners also try to select especially plausible but uncomfortable combinations of social developments.
Sensitivity analysis analyzes changes in one variable only, which is useful for simple changes, while scenario planning tries to expose policy makers to significant interactions of major variables.
While scenario planning can benefit from computer simulations, scenario planning is less formalized, and can be used to make plans for qualitative patterns that show up in a wide variety of simulated events.
During the past 5 years, computer supported Morphological Analysis has been employed as aid in scenario development by the Swedish National Defence Research Agency in Stockholm. This method makes it possible to create a multi-variable morphological field which can be treated as an inference model – thus integrating scenario planning techniques with contingency analysis and sensitivity analysis.