Table of contents Volume 31 Number 1 2003
Departments
Feature articles
Access this journal online
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Editor’s letter
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Robert M. Randall
The strategic leader 56 Understanding the triad of great leadership – context, conviction and credibility Brian Leavy What is the essence of great leadership? After a decade of research, the author believes that leadership effectiveness at the highest level can be better understood in terms of three main elements – the context for leadership, the conviction of the leader, and the flow of credibility over time and tenure.
Quick takes
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These brief summaries contain the key points and action steps to be found in the feature articles in this issue of Strategy & Leadership.
Scenario planning after 9/11: managing the impact of a catastrophic event
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Peter Kennedy, Charles Perrottet and Charles Thomas Managers need to use a scenario framework for assessing various kinds of risk and uncertainty that will continue to confront corporate decision makers as the 9/11 event plays out over the following months and years. The lessons learned from coping with the current situation will be applicable to catastrophic events that could occur. Executives should establish an explicit ‘‘futures’’ orientation that contemplates multiple alternative conditions as a backdrop for both very short-term tactical thinking and long-term planning.
Decision-driven scenarios for assessing four levels of uncertainty
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Hugh Courtney Some classes of scenario planning tools and techniques are designed to inform near-term strategic decisions. Of these, some are more appropriate for lower levels of uncertainty, and others are best suited for highly uncertain, truly ambiguous business environments. The author’s typology of scenario planning tools and techniques enables managers to select the right scenario planning tool for near-term strategy decisions, based on the degree of uncertainty they face.
Scenarios and strategies: making the scenario about the business
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David H. Mason and James Herman To persuade top management to actively participate in a scenario development effort linked to major decision making, this method makes the client organization and its strategy alternatives the central focus of the scenarios. A compelling benefit of this form of scenario planning is that it pushes management to see the business and its environment as a system co-evolving over time. The process can become a forum for a healthy debate concerning the scope of the business and the importance of emerging environmental changes.
Competitor scenarios
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Liam Fahey Several leading companies have employed scenarios to better understand both current competitors’ potential moves as well as the possible emergence of new rivals. They have mastered several principles and some ways to avoid process pitfalls. Experienced managers use competitor scenarios as a source of learning about the broader competitive context and of the implications for their firm’s strategy and operations.
Using scenarios to focus R&D
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Gill Ringland Scenarios provide managers of R&D programs with alternative views of the future societies and markets. By previewing what research would be a priority in these possible future environments and what would be constrained or unmarketable, a number of firms have successfully used scenario planning to improve current R&D decision making. A case study of scenarios for an information and communication technology R&D program details the process and its implications for corporate planners.
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Editor’s letter In this issue we look at innovative scenario methodologies for managing discontinuity in the near term. Five feature articles describe various ways of using decision-driven scenarios to gain foresight concerning the next few months and years. J ‘‘Scenarios for planning post 9/11: managing the impact of a catastrophic event’’ by Charles Thomas, Peter Kennedy and Charles Perrottet. J ‘‘Decision-driven scenarios for assessing four levels of uncertainty’’ by Hugh Courtney. J ‘‘Scenarios and strategies: making the scenario about the business’’ by David H. Mason and James Herman. J ‘‘Competitor scenarios’’ by Liam Fahey. J ‘‘Using scenarios to focus R&D’’ by Gill Ringland. By publishing this theme issue we join a long running debate over the proper answer to the question, ‘‘What are scenarios for?’’. Traditionalists – practitioners of the art of the long view, a time horizon sometimes measured in decades – believe scenarios are group learning experiences and culture change exercises that ultimately promote better decisions. But critics complain that traditional scenario planners have ‘‘spent too much time going down paths that most of the organization didn’t feel were the slightest bit relevant’’. As a result, middle and senior managers often find that timeconsuming scenario planning efforts are distractions that provide little insight into the crucial strategic decisions at hand. Recently a few practitioners have begun to use scenarios as decision support methodology suitable for short-term strategy making and execution. In this context, I believe they are still a form of group learning, but the lessons are less about creatively imagining alternative business and social environments and changing cultural awareness and more about understanding the operational implications of devising and implementing strategy in a rapidly evolving business and societal environment. It also seems to me that long and short term scenario planning are complementary. Keep in minds that the techniques described in this issue are experimental. It can be proudly noted that these articles present some of the first accounts of this new technology in practice. But research reports they are not. However, the results of readers’ experiments with these techniques should be known fairly soon – in months perhaps, and certainly in a few years. Managers practicing the techniques offered here can quickly observe whether or not they help ready the organization for discontinuity and speed up decision making. In contrast, the full value of traditional scenarios with a five-, ten-, or 20-year horizon cannot be determined during the tenure of most managers. So we invite readers to put these experimental scenario practices to the test, and to let us know how they perform in your organization. Your comments and case studies are invited. We will be publishing more articles on scenario planning in the next issue. A number of them are about using scenarios to enrich executive insight about the variety of potential medium- and long-term futures. Robert M. Randall Editor
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Scenario planning after 9/11: managing the impact of a catastrophic event Peter Kennedy, Charles Perrottet and Charles Thomas
Charles Thomas, Peter Kennedy, and Charles Perrottet, all former senior practioners at The Futures Group, Inc. have been part of the Strategy Practice of Deloitte Consulting for the past four years. They have recently formed their own firm in Connecticut – The Futures Strategy Group, LLC (
[email protected],
[email protected], and
[email protected])
For the last year, line managers and planners have been wrestling with a serious and potentially paralyzing dilemma: the extent to which corporate plans, strategies and short-term actions need to incorporate the events of September 11, 2001. As they ponder, many corporate executives, still smarting from the dot-com meltdown and ensuing recession, have deferred important decisions because of turbulence and potential risk still playing out in the marketplace. This is an understandable reaction, yet dangerous in the extreme, for it could be years before world events and markets return to anything resembling the robustness and relative predictability of the 1990s. Managers need a framework for dealing with various kinds of risk and uncertainty that will continue to confront corporate decision makers as the 9/11 event plays out over the following months and years. It’s important to put this process in place now because the lessons learned from coping with the current situation will be applicable to future events that have yet to occur. In the year and a half since terrorists destroyed the World Trade Center towers and set fire to the Pentagon, we have worked with many executives grappling with the short-, medium- and long-term decisions that have to be made in one of the most unsettling and confusing business environments since the Depression. Our own observations and the experiences of our clients point to the need to support both very short-term tactical thinking and long-term planning with a ‘‘futures’’ methodology that contemplates multiple alternative backdrops to decision-making. We conclude that scenario planning can – and should – inform decision-making at each point along the decision spectrum, from short-term/tactical to long-term/ strategic. We suggest an innovative scenario process, one that provides business continuity planning and medium-term operational planning with a more rigorous analytical grounding, but without overburdening the process with excessive and ultimately counter-productive complexity. In the first two of the three mini-case examples that follow, we show how the scenario process was modified to meet the more immediate operational challenges following 9/11. The third mini-case highlights a 1998/1999 scenario-based planning process that effectively contemplated the kind of external threat that the 9/11 terrorist acts have now come to characterize. (Editor’s note: Readers new to scenario planning might want to read
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DOI 10.1108/10878570310455006
case three first. It demonstrates a ‘‘classic’’ use of scenario planning for long-term strategy. The other two cases are innovations on this basic technique.)
Pervasive 9/11 effects The aftermath of the 9/11 attack has been neither brief nor transitory. A year and a half later we see direct and indirect evidence of how the event continues to affect and shape the business environment. Because of 9/11, for example: J The airline industry is, metaphorically speaking, on its knees. J Military spending is on the rise and an entire new industry formed around ‘‘homeland security’’ has been born. J Consumer and investor confidence have been seriously shaken – even more so now after the Enron and the Wall Street scandals. J Security controls affecting cargo, shipping and logistics threaten to disturb or complicate supply chains, globally. J Heightened and pervasive uncertainty over domestic security and war, combined with mounting US federal deficits, could lead to a 1970s-like period of prolonged economic stagnation. For managers and planners, the important question is how to think about 9/11 – the totality of the phenomena, not merely that day’s event – in the course of developing strategy, making business plans and executing day-to-day operations. One can argue that 9/11 could turn out to be one of those ‘‘redefining events’’, like the 1973 OPEC oil embargo, that has a profound and enduring impact on society, markets and the overall business environment. Alternatively, it is possible to imagine 9/11 as only a horrific event that mobilizes governments and society in the short term but fades in importance, perhaps because homeland security provisions make possible a significant return to normalcy or alternatively because even worse conditions take center stage. Trying to anticipate one of these extremes or the other is a phony choice. Indeed, the truly agile business planner or strategist should always contemplate the broadest possible, yet plausible, range of future business conditions and assume the inevitability and unpredictability of change. That said, there is a real and practical need for a focused and balanced integration of ‘‘9/11 thinking’’ into decision-making at each stage in the decision-making process, from the very short-term and tactical, to the long-term and the strategic.
Innovations around scenario planning Traditional scenario planning is extremely effective in working through uncertainties, probing conventional wisdoms, and exposing faulty assumptions inherent in even the most expansive planning exercises. The post-9/11 world screams out for this kind of treatment, if for no other reason that so much is still unknown. And yet, at the same time, the actual 9/11 events are not speculative; they happened and other terroristinspired events could happen again, almost anywhere, on a frighteningly large scale. For many companies then the need is not to simply dress rehearse big disruptive events, but actually assume one or more will occur and have ironclad continuity plans in place. This unfortunate reality suggests a different kind of scenario planning approach. We have introduced alternative scenario-based tools to respond to this specific need for continuity assurance and near-term operations planning. As the following cases show,
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are grappling with the short-, medium‘‘ Executives and long-term decisions that have to be made in one of the most unsettling and confusing business environments since the Depression.
’’
we divided our clients’ needs into three areas: business continuity planning, near-term operations planning, and strategic planning. For business continuity planning (with its tactical decision focus) our clients found that a tightly focused set of scenarios using a very simple two-by-two scenario space matrix (only four possible scenarios) worked well. This was because the client’s prime concern was being prepared for specific exogenous events – not anticipation of entire alternative business environments, as is typically the case in classic strategy-oriented scenario planning. Similarly, for operations planning, we found that a three-dimension matrix was adequate, but the focus shifted from the ‘‘event’’ to the range of plausible outcomes that follow the event. Finally, within the context of strategic planning, we have found that our standard process (and four to five dimensions) has stood the test of time. Exhibit 1 summarizes and compares the three types of planning. Note the contrast between the relatively simple scenario framework for business continuity planning, where the focus tends to be very short-term and on specific event anticipation, versus scenario-based strategy, where the timeframe is longer, complexity is greater and therefore more rather than fewer scenario dimensions are typically used. Essentially, the dimensions represent the critical, high-level defining features of the scenario uncertainty space. The more dimensions used, the wider the angle of the scenario lens. And the further out in time one plans, the wider the lens one should use.
Case one: business continuity planning (BCP) Across industries, there is heightened concern and urgency around business continuity in the wake of the September 11 terrorist attacks. And this is perhaps most true in the Wall Street-based financial service sector, which on that day lost many hundreds of experienced, talented people and suffered paralyzing disruptions in operations. In the aftermath of that tragedy, the management of one leading global financial services firm committed to a process of identifying and remedying gaps in the
Exhibit 1 Three types of planning Planning need
Scenario type
Scenario focus
Decision focus
Project time
Business continuity
Two dimensions
Tactical; many key drivers are business model and ‘‘event’’ focused
Actions taken within near and medium term to ensure business continuity
Approximately 6 weeks
One-to three year operations planning
Three dimensions
Business and Industry-model focus with moderate examination of external drivers, especially those affecting reactions
Actions and plans taken to compensate for the political and economic aftermath of ‘‘an event’’ and the national and global reactions that followed
Approximately 6 weeks
Strategy
Four or more dimensions
The external drivers outside of client control, with relatively little attention to specific events
Develop new business model and strategies that are robust no matter how the future unfolds
4 to 6 months
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Exhibit 2 Gaps in readiness and remedial steps
Current State of Asset Readiness Existing levels of asset readiness and recoverability
Gap Variances between states of asset readiness levels
Target State of Asset Readiness Required levels of asset readiness and recoverability
Strategies
The activities and plans that are designed to close the gaps between current and target states of asset readiness
recoverability of its key assets. They decided that the best way to ensure truly ‘‘robust’’ BCP was by adopting a scenario-based approach. In essence, this meant driving toward a set of BCP strategies that was tested across a range of market environments. The initial discovery phase of the engagement was a detailed evaluation of vulnerabilities across all asset categories in each of the firm’s major operating groups. A client-consultant team assessed risks and exposures in facilities location, business partners, technology, human resources, and vital records. Gaps were identified between target states of readiness and actual preparedness. These gaps were the subject of separate strategy workshops in New York and London. The essential goal of the workshops was to develop strategies that would close unacceptable asset recovery gaps. To ensure creative and rigorous thinking, the team developed two very different business-environment backdrops against which workshop participants devised BCP solutions. Each of these two scenarios characterized essential financial service industry conditions and events from 2002 to 2004. One scenario included a return to relatively healthy market conditions with no new significant government intervention. The other scenario described a world with challenged markets, increasing governmental intrusion in financial services, and global conflict and instability. Intentionally, the financial services firm limited the range of structural variability in the scenario set. The scenario ‘‘uncertainty’’ space was kept at a very high level, focusing mostly on underlying equity market growth and stability and government regulations. The very short-term nature of the planning task required that external complexity be limited and manageable. Importantly, however, ‘‘wildcard’’ events that represented direct threats to the continuity of the firm’s operations were explicitly played out. The potential for natural
many companies then the need is not to ‘‘ For simply dress rehearse big disruptive events, but actually assume one or more will occur and have ironclad continuity plans in place.
’’
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(hurricane) and man-made (terrorist) disasters was present in each of the two scenarios. And indeed, the final stage of the BCP workshops was to stress test scenario-contingent BCP strategies against a range of different ‘‘shocks’’ that could directly affect operations. Workshop participants in New York and then in London wrestled with both the challenges of the future business environments and the impacts of specific shocks. The draft strategies that emerged are, understandably, confidential to the client. At a high level, the scenario-based BCP process yielded the following value for the client: J Confirmation around a set of ‘‘must do’’ actions that could be accomplished with acceptable costs and manageable disruption. J Greater understanding of costs and trade-offs associated with more complex and potentially far-reaching decisions around, for example, facilities location, business relationships and alliances. J The start of an important internal dialogue among the firm’s executives, business heads and business continuity managers with respect to BCP goals and priorities going forward.
Case two: medium term operational planning A professional services firm in the weeks that followed 9/11 wanted to evaluate the plausible range of impacts on their business and operations as the US and the world decided on a course of action (whether successful, or not) and terrorist groups responded further. This firm had used scenario planning for its strategic planning in the past. Their requirements were that: (1) this exercise had to be done quickly – in a month and a half; (2) the focus had to be operational – affecting one to three year decisions; and (3) the creativity and rigor of scenario planning, as they had experienced it in the past, had to be preserved.
As with BCP, we again modified our standard approach to scenario planning. Some things remained constant, however. The critical defining features (‘‘dimensions’’) of the planning space remained factors outside of client control. The focus of the strategy effort was on how future customer demands would shift and change in the scenarios and how the regulatory environment might alter. In other words, like all good scenarios, these were still to focus on future market demands and constraints. Some aspects of our approach were customized. First, to shorten and simplify the scenario selection process, we used only three dimensions (rather than the more sophisticated, but complex use of four or more). Thus the client had only eight possible scenarios from which to choose. Second, and more radical, we focused the scenarios and business drivers on near-term issues under the assumption that the fundamentals of the global business environment would not shift dramatically in the next few years. For long-term scenario practitioners, this was a difficult step. However, the client made clear that, while they valued scenario planning for its ability to provide solutions to the full range of future uncertainties, this exercise was not about that. They wanted guidance about market dynamics and the required operational changes that would result from variations on successes or failures in homeland security and the war on terrorism. While not as focused or tactical as business continuity, this planning activity was to be far more tightly targeted than a scenariobased strategy process.
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Exhibit 3 Global services scenario space: post 9/11 3-year horizon Economic dislocation Limited
Extreme
Perceived security threat Low
High
Barriers to US commerce Low
High
New normalcy Water torture
Pyrrhic victory Enduring conflict
The goal of the project was to gain insight into three critical aspects of the firm’s business model in the aftermath of 9/11: J New services their clients would need. J Existing services that should be strengthened, altered or abandoned. J New service delivery models (possibly requiring a major re-engineering of service delivery). The interview and research phase was very brief for four reasons: (1) We knew the firm and its current strategies very well. (2) We had recently completed extensive scenario planning work for part of the Intelligence Community and were quite familiar with emerging national security issues. (3) We had completed scenario planning work for the US Coast Guard two years previous where both terrorism and issues of homeland security had received significant focus. (4) The client was already well versed in scenario planning. Business driver identification was more focused than is typical and resulted in a list of about 75 business drivers, rather than a more typical number such as 300 (plus). Only about 30 of those drivers eventually made it into the scenario development matrix. All 75 drivers, however, contributed to the synthesis process that gave us three defining dimensions for the client’s scenario planning space (see Exhibit 3). Those dimensions were: economic dislocation, perceived security threats, and barriers to global commerce. The four named scenarios above are those selected by the client for planning purposes. It is worth remembering that these scenarios (and this matrix) were not chosen or designed to capture the full range of threats and opportunities for the client’s business. They were focused on helping the client think about the impacts of the potential 9/11 aftermaths on their clients needs and their competitive position. A brief summary is shown in Exhibit 4. The work done here helped this global services firm stress test their existing strategies against a narrowly defined overlay of additional environmental uncertainties. They looked for, and found, new opportunities as well as new vulnerabilities. Outcomes fell into three broad categories. First, our client identified three new service offerings that
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Exhibit 4 Four alternative views of the future to 2004
their clients would need in the few years following 9/11 and the range of aftermaths that were considered. Second, our client redesigned the way the firm would staff some types of projects. (For example, hypothetical regional project management and staffing models were devised in anticipation of future restrictions in air travel.) Third, a new higher priority was assigned to one of the robust strategies from their original scenario planning work (on the strategic level). The results of the ‘‘9/11 exercise’’ highlighted the enduring (but more urgent) utility of that strategy.
Case three: strategic horizon Scenario planning was developed classically to help handle the ambiguities and uncertainties of planning over a strategic time horizon. It is not about prediction; it is not about ‘‘the certainty’’ that events will happen nor is it about specific preparations for any event. It is about managing the range of uncertainty to be faced and the strategies you can put into place that will provide competitive advantage no matter what specific events unfold. In short, the twin goals of scenario planning are opportunity identification and risk mitigation. The measure of success in preparing for massively discontinuous events in a strategic setting, therefore, lies in the ability of scenario planning to anticipate the impact of such disruptive events (as a class) within the larger context of all the forces for change acting within future operating environments. How is that to be done? While there are many steps to building scenarios that will help one anticipate future market needs or missions, the critical point in the process is selecting the dimensions or boundary conditions of the planning space. Dimensions are the parameters of
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one’s future operating environment, the elements of future uncertainty the planner cares most about. For example, a manufacturer and marketer of infant products seeking insight into long-term market needs will want to know about future economic growth, in the US and beyond, as well as some indication of household income. This planner will also want to know about fertility trends. Insight into future distribution models might be important, as well as trade relationships and supply chain trends. These are all examples of potential dimensions. If you do not get the dimensions right, you might as well stop the process until you do. Unfortunately, the critical judgment about whether or not one has them right is not subject to rules and categories. The dimensions and the variability one chooses for them are a matter of creativity and judgment – the inventiveness and business (mission) judgment of the client project team and the creativity and experience of the consultant. As a case example we often draw on work done for the federal government because it is a matter of public record and most details of the project do not violate client confidentiality (as they would for our private sector clients). The lessons apply to the private sector; it is just the dimensions themselves that change. Three years ago we supported the US Coast Guard in developing and using scenarios for very long range strategic planning for their Long View Project[1]. After two months of client-consultant research, interviews and workshops, we developed a scenario space from the following dimensions: J Role of the federal government in US society. J US economic vitality. J Perceived threats to US society. J Demand for maritime services. The USCG scenario space, from which the Coast Guard chose five scenarios, is illustrated in Exhibit 5. From these scenarios, the Coast Guard developed ten basic strategies that would be effective in all five future operating environments. The fourth strategy was ‘‘Acquire full
Exhibit 5 USCG long view scenario planning space Role of federal government Limited
Substantial
US economic vitality Weak
Strong
Perceived threats to USA Low
High
Demand for maritime services Low
High
Balkanized America Planet enterprise
Taking on water Pax Americana Pan American highway
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maritime domain awareness’’. Specifically, this set as a goal for the Coast Guard the ability to acquire, track, and identify in real time any vessel or aircraft entering America’s maritime domain. Within two years, then-Commandant James Loy and Captain Bob Ross wrote a paper highlighting this particular strategy and placing it at the center of US Coast Guard’s strategic intentions. Maritime domain awareness (MDA) turned out to be highly relevant for USCG decision making both before and after 9/11. This is an example of how strategic scenarios are supposed to help anticipate large discontinuous events. The Coast Guard chose their scenario space successfully and developed the specific scenarios fully. The result was a set of strategies (like MDA) that heightened their preparedness for the tragic events of 9/11 and proved well suited to the new and demanding mission priorities set for the USCG in an era of heightened border and port security in the aftermath of the attack.
Observations on scenario planning as a strategic and operational tool For planners and strategists, a common consequence of a major shock event like 9/ 11 is loss of perspective. The tendency to over-estimate impacts in the short-term and under-estimate (or even ignore) impacts once the immediate shock recedes is common. And yet achieving and maintaining a sense of balance in perspective is critical – all the more so with every indication that the world is headed into a prolonged period of acute turmoil and uncertainty. We have long known that scenario planning is an effective and powerful strategy tool for dealing with long-term uncertainty. The Coast Guard example depicts a classic use of scenarios that enabled an extraordinary degree of preparedness for the events and aftermath of 9/11. While the actual 9/11 events were not, of course, predicted in the Coast Guard scenario set, a range of terrorist and homeland security threats were explored across multiple scenario worlds. This informed the ultimate scenarios that were developed and the resulting strategies, which continue in large part to be followed by the Service. It is worth noting that of all the major US federal services involved in the 9/11 response operation, the Coast Guard was singled out for its agility and preparedness.
The scenarios developed for the financial services firm and the professional services company break with classic scenario planning practices in that the uncertainty space was intentionally constrained and the outputs from the process more focused. Neither firm sought long-term, fundamental changes in strategic direction. Yet both firms recognized that assumptions around the business environment into which they were heading were important. The financial services company built its Business Continuity Plans on the basis of a highly simplified two-scenario set, but stress tested its recovery strategies with relevant and plausible wild-card events. The professional services company in case two leveraged a classic scenario-based plan by working critical operational issues through four more narrowly focused business environments to
the actual 9/11 events were not predicted ‘‘ While in the Coast Guard scenario set, a range of terrorist and homeland security threats were explored across multiple scenario worlds.
’’
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ensure maximum preparedness for challenges to employee mobility, project management and new business development. In both cases, even with weighty and pressing operational agendas, the process of examining alternative assumptions and planning backdrops proved fruitful. Scenario planning brought a larger pool of executives into the decision-making process than would typically be the case and as a result plans and actions were more carefully developed. Finally, we observed that for all these reasons the scenario experience engendered significant confidence in planning outcomes, contributing important clarity and energy to subsequent implementation tasks. We conclude that scenario planning offers not only long-term direction to the business strategists, but also guidance and support to a range of operational decisions. In fact, scenarios can greatly enhance operational efficiency by confronting ambiguity head-on and forging critical alignment around big issues. While the classic scenario building and strategy development processes need to be re-scoped and in other ways altered to meet a different set of outcomes, the added rigor and creativity that scenario planning brings is essential for executive preparedness in the face of unknowable shocks and crises. This is perhaps the best safeguard against ‘‘failures of imagination’’.
Note 1. This project enjoyed the active participation of Admiral James Loy, then Commandant of the USCG, and was supervised by Captain Joel Whitehead who assembled the key requirement of a successful scenario planning project - a gifted and hard-working core team.
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Decision-driven scenarios for assessing four levels of uncertainty Hugh Courtney
Hugh Courtney is a lecturer at the University of Maryland’s R.H. Smith School of Business, a senior fellow at the Mack Center for Technological Innovation at The Wharton School, and a management consultant (
[email protected]). He is the author of 20/20 Foresight: Crafting Strategy in an Uncertain World, Harvard Business School Press, 2001.
cenario planning would seem to be the perfect tool for managers making strategic decisions in today’s highly uncertain, turbulent business environments. Yet according to a Bain & Company survey, a declining number of business executives use scenario planning tools[1]. Why have so many companies abandoned scenario planning at a time when one might expect it to be most useful?
S
In too many cases, scenarios have been designed to clarify longer-term visions, without regard for shorter-term decisions. As a result, middle and senior managers often find that time-consuming scenario planning efforts are distractions that provide little insight into the crucial strategic decisions at hand. Too often, scenario planners have ‘‘spent too much time going down paths that most of the organization didn’t feel were the slightest bit relevant[2]’’. These efforts likely failed because there was a fundamental mismatch between what the management team hoped to achieve and what the scenario planning process was designed to achieve. Managers wanted decision-driven scenarios, yet the process was designed to develop vision-driven scenarios. Vision-driven scenarios help management teams think ‘‘outside the box’’ and question their assumptions about the future. They are used primarily to generate new strategic options, facilitate learning and dialogue throughout an organization, and develop a shared commitment to the need for change. Such scenarios, however, are not usually tied directly to any near-term strategic decisions. Decision-driven scenarios, on the other hand, are used to inform a well-specified strategic choice – a choice where the ‘‘best’’ option is unclear due to uncertainty over
scenarios are used to inform a ‘‘ Decision-driven well-specified strategic choice – a choice where the ‘best’ option is unclear due to uncertainty over the impact of that choice.
’’
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the impact of that choice. For example, decision-driven scenarios have been used to help companies decide whether to launch new products given uncertain consumer demand, and whether to build new plants given uncertainty over the capacityexpansion plans of their competitors. In such cases, scenarios are used to evaluate explicit strategic options, determining their pay-offs across different scenarios and their overall risk-return profiles. As Exhibit 1 summarizes, vision-driven and decision-driven scenario planning processes are designed to address very different company needs. If you pick the wrong process, you will undoubtedly be disappointed by the results of your scenario planning exercise. The first essential step in any successful scenario planning process, then, is to clarify the purpose of the process, including its expected end products. These expectations will define which of the two very distinct scenario-planning techniques you will want to consider[3].
Tailoring decision-driven scenarios to the four levels of uncertainty For those focused on near-term strategic decisions, there is no one-size-fits-all approach to developing effective decision-driven scenarios. Whether you should build such scenarios, and if so, how to build them depends on which one of the four levels of uncertainty that you face (Exhibits 2 and 3)[4].
Level 1: a clear enough future Decision-makers face Level 1 uncertainty when the range of possible outcomes is narrow enough that this uncertainty does not matter for the decision at hand. This does not imply that the future is perfectly predictable, but rather that the future is predictable enough to identify a dominant strategy choice that is best across the range of potential outcomes. As you might guess, decision-makers in well-established markets that are not prone to external shocks or internal upheaval are the most likely to face Level 1 uncertainty.
Exhibit 1 Vision-driven vs. decision-driven scenarios Vision-driven scenarios
Decision-driven scenarios
Nature of scenarios
J Emphasis on broad, macroeconomic and global drivers of change J Longer term (5-10-20+ years)
J Focused on specific uncertainties that drive decision J Generally shorter term (driven by time necessary to evaluate pay-off to decision)
Nature of process
J Emphasis on divergent thinking and broad perspectives J Heavy reliance on outside experts, consultants and facilitators
J Data-driven and analytical when possible J Heavy reliance on internal expertise and industry experts (unless major confidentiality concerns)
How scenarios are used
J Generate new strategic ideas J Develop shared sense of possible futures and need for change J Launch follow-on projects and analyses to further develop implications of the scenarios
J Test options for a specific decision against the range of potential outcomes and develop implications for which option to choose
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Exhibit 2 The four levels of uncertainty Level of uncertainty
Description
Example sources of uncertainty
A clear enough future: can define point forecasts that are ‘‘close enough’’ for the decision at hand
J Returns on ‘‘common’’ investments in mature, stable markets J Customer and competitor reactions to strategies that reposition well-established brands
Alternate futures: can define a limited set of possible future outcomes, one of which will occur
J Potential regulatory, legislative or judicial changes J Unpredictable competitor moves J All-or-nothing industry standards competition
A range of futures: can define a range of possible future outcomes
J Demand for new products or services J New technology performance and adoption rates J Unstable macroeconomic conditions
True ambiguity: cannot define even a range of possible future outcomes
J The outcomes of major technological, economic or social discontinuities J Market evolution in markets that are just beginning to form
McDonald’s, for example, generally faces Level 1 uncertainty when it makes its US restaurant location decisions. It can study potential customer demographics, traffic patterns, supply logistics, and the extent of competition in a given location and come up with a reasonably precise forecast of future restaurant earnings. And while such forecasts will be far from perfect, they will tend to be predictable enough to make a dominant yes-no decision on any potential US restaurant location. For example, McDonald’s will not be able to predict a variable like traffic patterns with complete certainty, but it will be able to conclude – say with 95 percent confidence – that the traffic pattern either will or will not support a restaurant in any particular location. Since uncertainty is so low, and dominant strategy choices can be identified, scenarios provide limited insight in Level 1 situations. In such cases, simple simulations and sensitivity analyses are preferred to more time- and expenseconsuming scenario planning efforts. McDonald’s, for example, might vary its traffic pattern parameters within the range of possible outcomes to determine the impact of alternative assumptions on the expected earnings of a new franchise location. Such analyses would help quantify pay-off uncertainty (the ultimate pay-off to the decision is uncertain) even where there is no strategic uncertainty (the pay-off uncertainty is narrow enough that it does not matter for the decision at hand). Sensitivity analyses are easy to automate using standard spreadsheet programs and thus are almost costless to implement, yet
that face Level 2 uncertainty can ‘‘ Organizations define a mutually exclusive, collectively exhaustive set of possible outcomes. ’’
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Exhibit 3 A typology for decision-driven scenario planning
Nature of scenarios
J N/A
J Mutually exclusive, collectively exhaustive (MECE) set of scenarios that describes each potential outcome
J Representative set of 3-5 scenarios that largely covers the range of potential outcomes
J Integrated sets of assumptions that one would have to believe about the future to support different proposed strategic options
Nature of process
J Model the impact of uncertainty through sensitivity analysis, if at all
J Develop implications – financial and otherwise – of each outcome for the industry and company J Assign probabilities to each outcome, if possible J Describe the dynamic path to each outcome
J Choose representative points along the continuum of possible outcomes J Develop implications financial and otherwise of these outcomes for the industry and company J Describe the dynamic path to each outcome
J Work backwards from potential strategic options to scenarios that would support such options J Test for logic, likelihood and internal consistency through analogies and reference cases
How scenarios are used
J N/A
J Assess the pay-offs to each strategic option in each scenario J Assess how each strategic option may influence the probability of each scenario J Combine these assessments with decision analysis techniques to choose the optimal strategic option
J Assess the pay-offs to each strategic option in each scenario J Assess how each strategic option may influence the likelihood of different points along the continuum of outcomes J Combine these assessments with qualitative decision analysis logic to choose the desired strategic option
J Test scenario assumptions through comparison with analogies, reference cases, and executive team experiences J Determine the set of assumptions (i.e. the scenario) that the management team is most comfortable supporting at this time
still provide useful information for financial planning purposes. Sensitivity analyses are a more cost-effective alternative to scenario planning techniques in such relatively predictable, Level 1 situations.
Level 2: alternate futures Decision-makers face Level 2 uncertainty when they can define a limited set of possible future outcomes, one of which will occur, and when the best strategy to follow depends on which outcome ultimately occurs. For example, investors in the US stock market faced Level 2 uncertainty in trying to determine the identity of the next president of the USA throughout the fall of 2000. There was a well-defined set of possible outcomes, one of which would occur – the next president would be either George W. Bush or Al Gore. However, on election day, and even weeks later, no one could say for sure who had won. This uncertainty mattered to investors since the candidates proposed policies that might have divergent effects on the share prices of companies in certain industries. It was widely thought, for instance, that health insurance companies would benefit from a Bush victory.
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Organizations that face Level 2 uncertainty can define a mutually exclusive, collectively exhaustive (MECE) set of possible outcomes. One, and only one, of these outcomes will actually occur. Potential regulatory, legislative, or judicial changes are often sources of Level 2 uncertainty. Will a proposed environmental legislation be passed? Will new regulations be imposed? Will the merger pass antitrust review or not? Similarly, unpredictable competitor moves and countermoves often create Level 2 uncertainty for business strategists. Will a competitor build a new plant? Enter a new market? The potential answers to all of these questions usually define a clear, MECE set of possibilities. Scenario planning exercises under Level 2 uncertainty must define in great detail the MECE set of possible outcomes, and specify the implications each outcome has for the decision at hand. For example, what are the implications for the cost structure of a proposed new chemical plant if a pending environmental regulation is approved or if the regulation is rejected? What does this imply for the decision to build the new plant or not? Scenario builders in this case should also attempt to determine the relative probabilities of these different outcomes, and to specify the dynamic path to each scenario. Will change come quickly, say, following a regulatory decision? Or will it be a gradual evolution, as in the establishment of a new technological standard? This is important information in Level 2 situations since it determines which market variables should be monitored most closely. As events unfold and the perceived probabilities of alternative scenarios change, it is likely that one’s view of the ‘‘best’’ strategy will change. For example, as the chemical company receives more information on whether or not the environmental regulatory ruling is likely to favor new plant construction, it might choose to either accelerate, decelerate, or shut down its construction plans altogether. Once scenarios and their probabilities (or at least a range of probabilities) have been defined, and strategies have been properly evaluated across each scenario, it is time to make decisions. By definition, in Level 2 situations you will not find a strategy that is dominant (has the highest pay-off) across all scenarios (dominant strategies are a feature of Level 1 situations, not Level 2). The strategist must choose between strategic options with different risk-return profiles across the different scenarios. Decision analysis tools can be used to facilitate decision-making when there is no dominant strategy. Given your objectives – in particular, your willingness to accept risk – decision analysis techniques allow you to value strategic options that show different pay-off profiles across a set of scenarios. If you are risk neutral, for example, the strategy with the highest expected value across scenarios should be chosen. Risk-averse decision-makers, on the other hand, will prefer strategies with the most stable pay-offs, choosing to avoid strategies with high pay-off variances across the different scenarios.[5] In any event, keep in mind that the probabilities of different scenarios can be highly dependent on a company’s strategy choices. For example, if you face Level 2 uncertainty over whether or not a competitor will enter a new market, you must take into account the fact that the probability of either scenario may be influenced by your company’s own decision to enter the market or not. Therefore, when evaluating the pay-off to different strategies across scenarios, you must focus on two questions: 1. What is the pay-off to this strategy in each scenario? 2. How does this strategy change the relative probabilities of each scenario?
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Level 3: a range of futures In some respects, Level 3 uncertainty is like Level 2 uncertainty: one can identify the range of possible future outcomes, but no obvious point forecast emerges. In both cases, this range is wide enough to matter for the decision at hand, but there is a very important difference: strategists facing Level 3 uncertainty can only bound the range of future outcomes – they cannot identify a limited MECE set of outcomes, one of which will occur. For example, they might be able to conclude that the five-year market penetration rate of a new consumer electronics product will fall somewhere between 5 percent and 40 percent, but they will not be able to conclude that the rate will be either 5 percent, 20 percent, 30 percent, or 40 percent. Any other rate between 5 percent and 40 percent is also a possibility in this case. Customer demand for new products and services, and new technology performance and adoption rates, are both common sources of Level 3 uncertainty. Airbus, for example, faced Level 3 uncertainty when deciding whether or not to build its new A380 super-jumbo jet. Estimates of the size of the super-jumbo jet market ranged from 350 to 1,500 planes, and Airbus knew that it must sell approximately 500 planes to break even on the A380 investment. Unstable macroeconomic conditions may also create Level 3 uncertainty for decisionmakers. Macroeconomic instability in Argentina, for example, creates Level 3 uncertainty over the growth rate of demand for new telecommunication services there, a key variable for BellSouth to consider when making infrastructure investments in South America. To illustrate the preferred decision-driven scenario approach in Level 3 situations, return to the A380 super-jumbo example. Market research indicates that the demand for super-jumbo jets will fall somewhere between 350 and 1,500 planes. Does this imply that one must develop different scenarios for every market size between 350 and 1,500 planes, determining the implications each would have for Airbus’ product launch and promotion strategies? Or should one instead merely choose a limited set of plausible, representative outcomes between 350 and 1,500 planes to fully develop into scenarios? And if one chooses this route, how does one choose which outcomes to build scenarios around?
There are no simple answers to these questions, but there are a few general rules to follow. First, develop only a limited number of representative scenarios; the complexity of juggling more than four or five alternatives tends to hinder rather than facilitate sound decision-making. Second, avoid developing redundant scenarios that have no unique implications for strategic decision-making. Make sure each scenario offers a distinct picture of the future. Third, develop a set of scenarios that collectively accounts for at least the probable, if not possible, range of outcomes. Some companies prefer to develop ‘‘best’’ and ‘‘worst’’ case scenarios at the extreme ends of the spectrum of possible outcomes, while others develop ‘‘best’’ and ‘‘worst’’ case scenarios that span a tighter range of more probable outcomes. Either approach can work well so long as the ‘‘extreme’’ scenarios are not so extreme that they lose
facing Level 3 uncertainty can only ‘‘ Strategists bound the range of future outcomes. ’’
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credibility within the organization, and the ‘‘probable’’ scenarios are not so closely tied to the status quo that they provide a false sense of future stability and predictability. As with Level 2 situations, once scenarios are defined, the next step is to identify potential dynamic paths to each outcome, and to evaluate each strategic option across each scenario. However, assigning probabilities to different scenarios does not make sense in Level 3 situations. When assigning probabilities you are implicitly assuming that you have identified a collectively exhaustive set of scenarios, one that includes all possible outcomes. But in Level 3 situations, in contrast to Level 2, your scenarios will only represent a subset of possible outcomes. Since probabilities cannot be defined, it is impossible to calculate the expected value, standard deviation, and other key statistics that summarize the risk-return characteristics of a given strategic option. Nonetheless, the logic for evaluating strategic options is very similar in Level 2 and Level 3 situations. In either case, evaluating each option against each scenario allows managers to determine how robust different strategies are, and to assess the overall risk-return characteristics of these strategies. And in either case, companies can assess which scenarios become more and less likely based on their own strategy choices. The only difference is that in Level 3 situations, absent scenario probabilities, these evaluations cannot be reduced to the simple decision-making metrics such as expected values and other key statistics that are so useful to Level 2 decision makers. This implies that while the same, rigorous decision analysis logic applies to both Level 2 and Level 3 situations, qualitative ‘‘business judgment’’ factors will inevitably play a more prominent role under Level 3 uncertainty.
Level 4: true ambiguity Future outcomes for Level 4 uncertainties are both unknown and unknowable. Analysis cannot even identify the range of possible future outcomes with certainty, or the most likely scenarios within that range. Level 4 situations are rare, and they tend to degrade over time to lower levels of uncertainty. They are most likely to occur in markets during and immediately after major technological, economic or social discontinuities, as well as in markets that are just beginning to form. For example, a manager attempting to formulate United Airlines’ security strategy on 12 September 2001 faced Level 4 uncertainty. In the immediate aftermath of the horrific terrorist attacks that occurred on 11 September, even the most prescient security experts could not confidently bound the range of future terrorist activity. Under conditions of Level 2 and 3 uncertainty, strategists analyze the situation to bound the range of possible future outcomes, and then develop scenarios that describe alternative outcomes within that range. Since this is impossible in Level 4 situations, the alternative is to work backward from potential strategic options to define ‘‘what you would have to believe’’ about a future scenario to support this option. For example, a manager was unable to bound the range of demand estimates for a new gene therapy, but he was able to ‘‘back out’’ what demand levels would be necessary to support the proposed research and development investment he was considering. Likewise, the United Airlines’ security manager could work backwards to identify which set of assumptions about future terrorist threats would make it worthwhile to arm pilots or train all flight attendants in the martial arts. In Level 4 situations, a ‘‘scenario’’ is then an integrated set of assumptions about the future that supports a given strategic option. There is no analysis that you can do to determine conclusively whether any such scenario is likely or not; that is the definition
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outcomes for Level 4 uncertainties are both ‘‘ Future unknown – and unknowable. ’’ of Level 4 uncertainty. However, analogies and references cases can be useful in testing the logic, likelihood and internal consistency of Level 4 scenarios. If a proposed strategy requires faster consumer adoption rates than those observed for any analogous product launch, for example, it will probably make sense to reject this strategy in favor of another. Given how different scenario planning exercises are in Level 4 situations, it should come as no surprise that the decision-making model is also unique. The decision analysis techniques favored in Level 2 and Level 3 situations are impossible to implement since the range of outcomes cannot be bounded. Instead, a qualitative, yet systematic checklist of key considerations should drive decision-making: (1) Which sets of integrated assumptions (i.e. scenarios) about the future seem credible given what can be learned from analogous situations and executive team experiences? (2) Of these credible scenarios, which support options that have the lowest downside risk? Highest upside reward? Which are most consistent with our organizational capabilities and long-term strategic goals? (3) Are there likely to be real first-mover advantages, or can commitments be staged over time? Which options allow for such staging, and which require upfront ‘‘big bets?’’ In the end, strategic decision making under Level 4 uncertainty should involve ‘‘getting comfortable’’ with the logic, likelihood and internal consistency of the future scenario, or set of scenarios, that support your chosen strategy.
Getting the most out of scenario planning efforts The typology summarized in Exhibits 1 and 3 can help you identify the scenario planning technique that is most appropriate given your company’s goals and the level of uncertainty that it faces. But identifying the right tool for the job does not necessarily guarantee success. Fortunately, three decades of business scenario planning applications have identified a number of best practices that help increase the
Exhibit 4 Keys to successful scenario planning regardless of which approach you take J Ensuring top management sponsorship and involvement J Collecting diverse inputs (internal and, when appropriate, external) J Linking explicitly to strategic planning and capital allocation processes J Crafting internally consistent scenarios, each supported by a dynamic story that makes sense J Relying upon fact- and logic-based discussions and support analyses J Avoiding the tendency to be overconfident in one s ability to predict the future J Focusing on both adapting to and shaping future scenarios J Maintaining an ongoing process to monitor and update scenarios over time
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probability of success regardless of which particular technique you choose to follow (see Exhibit 4)[6]. Armed with the right techniques and the right support practices, your scenario efforts are more likely to generate the valuable foresight that leads to clearer strategic visions and better strategic decisions.
Notes 1. Only 21.5 percent of North American executives in the Bain survey used scenario planning in 1999, a usage rate that was approximately 50 percent lower than the rate in 1994. For more Bain survey results, see Darrel Rigby (2001), ‘‘Management tools and techniques: a survey’’, California Management Review, Vol. 43 No. 2, Winter, pp. 139-59; Darrel K. Rigby (2001), ‘‘Putting tools to the test: senior executives rate 25 top management tools’’, Strategy & Leadership, Vol. 29 No. 3, pp. 4-12; and www.bain.com. 2. Darrel Rigby, Director, Bain & Company, as quoted in Bruce Melzer (2001), ‘‘The uncertainty principle’’, CIO Insight, Vol. 1 No. 2, 1 June. 3. Exhibit 1 also suggests that vision- and decision-driven scenario techniques are both essential components in any company’s strategy toolkit. Companies should use concrete, decisiondriven scenarios to make the right capital investment, marketing campaign and other strategic decisions when uncertainty implies that there is no ‘‘obvious’’ answer. At the same time, companies that sponsor vision-driven exercises every 1-3 years will be best positioned to recognize and capture the new opportunities and manage the risks inherent in today’s rapidly changing business environments. These exercises help set valuable strategic and organizational priorities, and provide the necessary context for all decision-driven scenario efforts. Vision and decision-driven exercises are highly complementary, and the typology in Exhibit 1 tells you when – not if – to apply either one. 4. For more details on and examples of the four levels of uncertainty, see Hugh Courtney (2001), 20/20 Foresight: Crafting Strategy in an Uncertain World (Harvard Business School Press); and Hugh Courtney et al. (1997), ‘‘Strategy under uncertainty’’, Harvard Business Review, November-December, pp. 66-79. 5. For more information on decision analysis, consult one of the many practitioner-oriented textbooks such as Robert T. Clemen (1996), Making Hard Decisions: An Introduction to Decision Analysis (Duxbury Press), or David C. Skinner (1999), Introduction to Decision Analysis: A Practitioner’s Guide to Improving Decision Quality (Probabilistic Publishing). 6. For more on scenario planning best practices and pitfalls, see Paul J.H. Schoemaker (1998), ‘‘Twenty common pitfalls in scenario planning’’, in Liam Fahey and Robert M. Randall (Eds), Learning from the Future: Competitive Foresight Scenarios (John Wiley & Sons). The Fahey and Randall compilation is a fine general resource for scenario planning techniques and best practices.
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Scenarios and strategies: making the scenario about the business David H. Mason and James Herman
David Mason, a veteran scenario developer, is a Partner in Skylight Associates LLP. He was President of Northeast Consulting Resources, the organization that created and trademarked ‘‘Future Mapping’’, now owned by NerveWire (
[email protected]). James Herman, a Partner in Skylight Associates LLP, is an information technology and management consultant, with experience helping large, global organizations develop strategies for coping with business and technology change (
[email protected]).
Scenario development has traditionally been an outward looking process designed to enhance awareness of potential change in the external business environment. A set of techniques is presented here for bringing the business and its internal issues directly into the scenario development effort from the beginning. By casting strategies as scenarios, companies can gain many of the benefits of traditional scenario planning while accelerating the strategic decision making for organizations in high change environments. Perhaps the greatest challenge for scenario practitioners is engaging the management team fully and creatively. The problem of achieving such engagement is especially severe if you try to get top management (corporate officers, board members, etc.) to consider radically different business conditions that may occur in the future. It is typically easy to recruit lower-level managers and senior staff for these exercises, which are often fun and provide an opportunity to take a wider perspective on the environment in which the business operates. Most large companies, we find, have a cadre of ‘‘professional meeting goers’’: people who sign up for one task force or committee after another. These people love scenario planning! But, they usually have little or no influence on the key business decisions of strategic direction, future investment, business scope, new partnerships, or acquisitions/divestitures. To really have an impact on the business, you must get senior management to participate in scenario development and consideration of the decisions implied by the results.
Making scenarios relevant to business managers As a start they must be convinced of the relevancy of the scenario exercise to the current challenges facing the business or the decisions that must be made now. Unless top managers can be persuaded to actively participate in a scenario development effort linked to major decision making, they are unlikely to learn much that is useful from the process. To find ways to make scenario development more immediately relevant to senior management at both the corporate and business unit levels, our solution was to experiment with ways to incorporate the future of the client’s business itself into the scenarios we were developing about the external business environment. At first, this
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top managers can be persuaded to ‘‘ Unless actively participate in a scenario development effort linked to major decision making, they are unlikely to learn much that is useful from the process.
’’
meant asking management to hypothesize how they would respond if a particular external environment materialized at some point in the future. For each external state, there was a future state for the business. If an external scenario described a new, much lower cost, approach to similar markets, for example, one response is to adopt a low cost strategy, a second might be to provide value-added services aimed at vertical markets. It is the alternative responses that get management thinking in new ways. Traditionally, scenario developers strive to consider the external environment independent of the business in order to ensure that they were really considering a full range of possible outcomes, not just those that were easy for management to deal with (e.g. political upheaval, cyclical economics, long term demographic shifts and consumption patterns, to name a few). However, this process was often just too theoretical for our clients. In addition, most industry leaders cause change in their industry; co-evolution is more common than independence. Ultimately, we got to the point where we actually made the client organization the central focus of the scenarios – the scenarios were about the business strategy alternatives (e.g. low cost, differentiate, focus on products offered or markets served). Although this technique has some drawbacks and may not be the ideal way to use scenario planning, on balance it was a good approach because it did engage top managers and forced them to make critical decisions while they still had time to employ their resources effectively to manipulate the future.
‘‘Future Mapping’’ scenarios Our ability to introduce the client organization itself into the heart of the scenario development process is, in part, due to the way scenarios are structured in our Future Mapping methodology. First, we work with the participants in the scenario development process to propose multiple outcomes for the industry, market, technology and/or society the organization operates within. We call these outcomes endstates. Each imagines a set of outcomes on the organization’s planning horizon (usually 3 to 10 years in the future) involving the range of issues management needs to consider to develop a business strategy (e.g. Internet adoption as: mass market media; a business platform; and a personal communications system). These logically consistent endstates describe how things turn out in the future without precisely defining how these conditions came to be. Next we divide the participants into teams, where each team considers one of the endstates. They are challenged to think about what must happen between the present and the timeframe of their endstate in order for the endstate to come about. We ask them to also consider what must not happen for their endstate to occur. They write out newspaper headlines that describe the specific events that would drive toward their endstate (e.g. ‘‘broadband Internet services purchased by 60 percent of US households’’). The event path leading to an endstate constitutes a scenario in this
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approach. A different event path would make the Internet a business platform vs. a mass market medium.
Scenarios and strategies Given this method, it is relatively easy to introduce the client organization and its strategy into the process from the very beginning of the exercise. An endstate, which already describes a consistent set of outcomes for an industry (competition, regulation, technology adoption, economic cycles, politics, etc.), now includes a section describing an outcome for the organization itself, including such things as scope of the business, partnerships, market position, internal organization, culture, etc. If the client wanted to develop a strategy dependent upon the Internet as a mass market media, their actions would obviously be different than a strategy aimed at using the net as a business platform. Specifics would depend upon the nature of the client’s business; a telephone company, a computer vendor and a drug company would approach each strategy differently.
Scenarios and strategies Events are no longer entirely external, but include actions the client organization might take. Now, the scenarios incorporate both internal and external events, a subset of which translates readily into the skeleton of an implementation plan e.g. for critical events, a desired outcome, tactics, resources and timeframe for a shortlist of events). Importantly, the client’s own actions are complemented by a list of external events that must ‘‘go right’’ for the strategy to succeed (e.g. broadband penetration into US households). The scenarios can also be complemented with a timeline of changes in critical business metrics (e.g. market share, margins, adoption rates by customers, etc.), which serve as milestones along the way to the endstate. This approach puts forth a rich notion of strategy that combines a clear definition of the aspirations of the business – what it wants to become or attain – with a timeline of specific internal and external actions and interventions that are needed in order to succeed. Often, the business will want to move forward with more than one of these strategies – either to be prepared to shift strategy if conditions do not go the way they want, or because each strategy is expected to produce results on different timescales (e.g. one might be a short-term play that pays off within two years while another is a long term bet that will not really unfold for three or more years). For this work to pay off the client organization must track the actual events and metrics (internal and external) that occur to see which scenarios are really developing (Key event occurrences then trigger strategy re-evaluation and course correction). For example, if only 15 percent of households ever subscribe to broadband by 2007, the net will fail as a mass media in that timeframe. Many of our clients were determined to try to create the conditions needed for their success rather than just waiting to see what happens around them. For example, a
we actually made the client ‘‘ Ultimately, organization the central focus of the scenarios – the scenarios were about the business strategy alternatives.
’’
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major computer systems manufacturer had a significant position in the high-end personal workstation market that was under threat from a shift toward server-based computing (so-call ‘‘thin client’’ model). The manufacturing firm developed five endstates (A through E) that outlined their major ideas for business strategies over the next five years: J A. Consolidation: consolidate this maturing industry, aim for market share that is 3› the nearest competitor, and play out the end game. You can grow revenue and profit in a shrinking industry. J B. Focus and harvest: focus on existing customers and harvest cash from the business and related services and add-ons, investing the proceeds in strategic initiatives elsewhere across the company, ensuring market leadership in newer, faster-growing markets. J C. Low cost: co-opt the competitive PC value chain, leveraging its superior economics and scale to dramatically lower costs and increase volumes in the workstation business. J D. Solutions: focus on solution-oriented segments requiring traditional competencies of systems design, graphics performance, reliability, transparent networking, and applications focus, pulling these into an overall horizontal or vertical solution that cannot be matched by competitors’ systems. J E. Create a new product set: morph the whole business into a new product concept – create mass-produced, low-cost, flexibly interconnected CPU boxes that can be deployed in configurations tailored to various classes of customers. These strategy options assumed a variety of changes in technology architecture and industry structure, as well as refocusing of the client’s own business. The client managers were not content to wait and see where the industry went. They were going to decide which outcome they wanted and strive to intervene in ways to ensure that these conditions came about. These managers were so knowledgeable about their competitive situation that they did not need to use scenarios as an environmental scan. Instead they needed the scenario process to establish a context for a structured debate of the strategy choices they were facing.
Different scenarios for different clients Over the years we experimented with different ways of incorporating the business into scenario development, driven by client objectives and unique needs. In the above example, the scenarios are very explicitly strategies, incorporating both the outcome achieved and the means to that end. External events and conditions play a secondary role. But the strategies are designed to have a major impact on the industry and market – in some cases causing restructuring and economic disruption. In that sense, they remained outwardly focused. In other situations, the scenarios were more inwardly focused on the future of the organization, its mission, vision and values, and the ways in which it must transform to remain healthy and competitive as in the Los Alamos Lab example below. Here the endstates described the culture and structure of the Lab in the future. Events were primarily decisions the organization had to make about scope of activity, organizational structure, work process re-engineering, new investment, partnerships, outsourcing, etc. Used this way, the scenario exercise became an early stage change management effort. The exercise enabled managers (sometimes at many levels) to envision the behavioral changes required on their own part in order to achieve the desired organizational transformation.
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Our work at Los Alamos National Laboratory in the mid 1990s is a good example of this use of scenario planning. The Lab explicitly wanted to redefine itself in the postcold war era and engaged us to help them create five scenarios for the future of the Lab: J A. The National Security Lab: the Lab is almost completely focused on a broad array of military oriented national security issues. J B. Leading the environmental cleanup: with military spending significantly reduced and national security issues defined more in terms of environmental and economic concerns, the Lab is now refocused on a wide array of efforts under the banner of sustainable development technologies. J C. Leading work at the intersections of disciplines: the Lab has focused on problems at the interfaces of converging fields of science (e.g. bio/mechanical, opto/electronic oceanic/atmospheric, nanotech machines, artificial life, evolutionary software, information physics, etc.). J D. Entrepreneurial Lab: the Lab is primarily focused on individuals, rather than programs or specialized facilities. The Lab is working on many more projects and fewer big programs. J E. The virtual Lab: the Lab’s strategy is to use the nation’s advanced communications and information infrastructure and its strong relationships with leading research partners to become an important participant in the nation’s emerging virtual laboratory system. This kind of exercise is appropriate if there is a lot of knowledge and little controversy over the evolution of external conditions. This is often not the case, and client assertions that it is, should be suspect. Some clients do not even have agreement on current conditions, much less future expectations. These situations require more basic groundwork. Thus, we do encourage clients to engage in a traditional, externally focused scenario planning exercise prior to attempting one focused on business strategy or organizational transformation. This allows for development of a consensus around the evolution of the external environment. The second step can be to consider the mix of strategies the organization will pursue. The problem with this two-stage approach is that it is time consuming and costly. Many clients do not have the resources or management commitment to conduct such a thorough exercise. To abbreviate the process but retain some of its best features, in some cases we tried an approach in which we developed both a set of external endstates and a set of strategies the client might pursue. After some period of developing the external scenarios, the participants were then asked to pick one or more strategies that they believed would serve the business well under the conditions posited in their external scenario. But it is a rare management team that can think through all this is a typical workshop timeframe. Most of these engagements are now structured so enough analysis is done beforehand to suggest the most promising pairings of endstate and
do encourage clients to engage in a ‘‘ We traditional, externally focused scenario planning exercise prior to attempting one focused on business strategy or organizational transformation.
’’
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strategy. Then, a single scenario development exercise was held with an equal balance of external and internal content. The endstates described a set of future external conditions and an outcome for the business. The following two examples illustrate these kinds of scenarios. In the first case, a regulated monopoly (called ABC here) was preparing for a more free-market oriented existence in an ever-more integrated Europe. The endstates here embody this mixture of internal and external drivers for change and transformation: J A. The customer-centric company: focusing on the customer, customer interfaces, and knowledge about the customer are the winning strategies for value creation. ABC puts its investment into customer-facing capabilities and services for customer management. It outsources and divests back-end production assets, creating a business with strong returns on capital. J B. The ‘‘clicks and mortar’’ company: rapid rise in the use of online services has led to a drop in the traditional, physically oriented side of the business. ABC straddles the physical and virtual worlds, becoming adept at converting bytes to atoms and vice versa. Investment has been directed toward developing a rich set of e-services and modernizing core physical services.
Different scenarios for different clients J C. The distribution and supply chain services leader: changes in global competition and restructuring of value chains create increased opportunities for outsourced logistics and distribution services. ABC focuses its investment in becoming a leader in this area. J D. The financially managed company: ABC manages itself as a highly profitable public portfolio company. It exits unprofitable businesses, including most logistics services and invests in those parts of the business that deliver profitable business growth. This illustrates how the scenario development process can become a forum for a healthy debate among the management team concerning such topics as focus and scope of the business, the importance of environmental changes like the Internet, and the governance and decision-making principles on which they will run the business. In the next example, the endstates are about the technical architecture of the public network in a major European country and the investment options that this large incumbent carrier (here called PTT) faced with regard to it: J A: Play to win in the low cost battle: traditional public net services are subject to severe price competition. Customers choose voice and dial-up data services largely based on price, and are unwilling to pay more for advanced services. PTT focuses on driving as much cost out of its network operation as possible in order to stay competitive and hold onto as much of its customer base as possible. It structures the Public Net Services Division as a separate unit. J B. Narrowband services keep moving forward: narrowband access to the Internet remains sufficient for the vast majority of users and applications. Broadband-only sites are a niche business. Customers prefer the added sound quality and valueadded features of the traditional wire line network to the poorer quality wireless or Internet offerings of competitors. PTT continues to enhance and extend its
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scenario development process can become a ‘‘ The forum for a healthy debate among the management team concerning such topics as focus and scope of the business, the importance of environmental changes like the Internet, and the governance and decision-making principles on which they will run the business.
’’
narrowband services delivered through the digital switched network and its copper wire plant. J C. Converged service bundles over diverse access: converged wireless and wire line, voice and data services are very popular. Medium to large businesses are the main users of broadband, while consumers and small businesses still largely use narrowband services. PTT is organized into customer-facing, market-driven units that offer integrated bundles of diverse services tailored to their respective segments. It leverages a new, common optical broadband core network across all of its lines of business (wireless, wire line voice, broadband for business), while preserving the utility of its existing, diverse access networks. J D. Broadband for everyone: consumers and businesses of all sizes adopt the Internet and broadband communications services in large numbers. There is strong competition from cable companies, broadband wireless access providers, and startup carriers for the most desirable customers. Most narrowband services are included for free with broadband offerings. PTT has invested in a major replacement of the existing narrowband access and switching network with an end-to-end broadband IP network. By the end of this scenario development workshop, the participants had created a map of the key external and internal events that would trigger the investment decisions and other actions embodied in these strategies (e.g. a percentage of homes paying subscription fees for broadband vs. narrowband services above or below certain levels would trigger a change in the PTT’s investments going forward). It became the basis for a decision tree with an associated timeline of events. The major benefit of this approach is that it kept the business and its choices part of the discussion throughout the exercise. These kinds of endstates, for example, were a lot easier to get senior management excited about. This approach turned the scenario development process into a strategy development process that balanced external and internal issues.
Is this really scenario planning? The heritage of scenario planning is external scanning – an ‘‘outward-in’’ approach designed to get people to rise above the current concerns and viewpoints. Does the inclusion of the organization itself in the scenarios let management get away with internal think and avoid serious contemplation of future conditions they do not particularly like? The answer to this depends on the client and what they know about their industry, whether they already have a good view into the likely evolution paths for the market or industry, etc. For some clients, it is clearly a mistake to skip the development of external scenarios that capture a full range of possible outcomes, some good and
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some bad for them. For them, the two-stage approach described above is best. But for many clients, especially those seeking a proactive approach to strategy development, the more direct technique served them well and accelerated their time to strategy decision-making. This kind of application of scenario planning is based on a particular way of structuring and developing scenarios as sequences of events leading to endstates. Traditional scenario planning which focuses on finding the two dimensions of high external uncertainty with the greatest impact on the business does not translate well into creating scenarios about the organization itself. Typically, strategy development and organizational change management are started after scenario development is complete. The approaches we have tried, however, integrate them into a single, sometimes very intense process that has been able to have a profound effect on the participants and changed the course of the organization. We believe strongly that this kind of approach to scenario development will be more successful and taken more seriously than traditional, more intellectually pure exercises in many kinds of companies.
Is this really scenario planning? In our view, these kinds of techniques still confer most of the key benefits of scenario planning, while integrating them into the strategy development process. They force management to consider multiple, alternative strategies, just as traditional scenario planning pushes management to consider more than outcome for the environment. As we have seen above, going this route does not mean that external scenarios are never developed. To the degree that time, budget and attention allow, external scenarios are still developed, but they are integrated with potential strategies for the business. In most cases, management develops strategies tailored to different kinds of external environments and begins to execute on them to the degree they believe the associated external conditions are coming about. This evidence-driven approach to strategy management uses scenario planning as a framework for gathering data that will be seen as immediately relevant to senior management. The scenarios and paired strategies developed for a leading mid-west US bank in the late 1990s illustrate how this can help management move quickly to make major shifts in strategy. The bank had concluded from its scenario and strategy development effort that it should focus on developing a set of IT-enabled premium services in order to capture the most profitable and desirable customer base of the future. They began to pursue that course. There was another scenario, however, in which the US banking industry consolidated rapidly and in which this bank was surely to be changed greatly through acquisition and mergers. About 15 months into the execution of the first strategy, major financial services mergers began (e.g. Bank of America and Nations Bank, Citibank and Travelers, Fleet and Bank Boston to name the biggest) and the management team changed course almost immediately toward the associated strategy for the consolidation scenario. In considering multiple strategies, these techniques often promote the introduction of new, radically different strategies, rather than merely incremental tweaks to existing strategies. In some cases, they have unleashed the imagination and creativity of the participants, generating truly fresh insights and new ideas. Such a process can give airtime to advocates of strategic shifts or force consideration of what have been to date taboo issues or looming problems that, for whatever reason, have remained
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the most compelling benefit of this form ‘‘ Perhaps of scenario planning is that it pushes management to think in a dynamic timeline – seeing the business and its environment as a system co-evolving over time.
’’
unacknowledged by the management team as a whole. By introducing these issues or new strategies anonymously through the endstate development process, some aspects of internal politics can sometimes be defused that inhibit clear consideration of all the possible strategic directions for the organization. Perhaps the most compelling benefit of this form of scenario planning is that it pushes management to think in a dynamic timeline seeing the business and its environment as a system co-evolving over time. Helping management to gain perspective about business change over time is one of the defining purposes of scenario planning. In our experience, these approaches push management to develop more unique strategies. As Harvard’s Michael Porter emphasizes, a strategy must be distinctive and make hard trade-offs to be effective. The future-proof strategies created by some scenario practitioners are, almost by definition, me-too strategies that have a little of everything. In contrast, making scenarios that are strategies allows an organization to define targeted strategies that exploit specific future conditions that may emerge. In a few cases, the organization was actually able to bring about the events that drove the external scenario they wanted to develop in order to maximize the success of their selected strategy. Client demands for a faster, more relevant scenario process drove us to develop these techniques. By integrating scenario and strategy development, you shorten the time to strategy decision when there is limited by allocated by management for this kind of process, while still retaining many of the benefits traditionally associated with scenarios.
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Competitor scenarios Liam Fahey
Liam Fahey is internationally recognized as a leading consultant on competitor analysis, competitive strategy, and scenario learning (
[email protected]). Of the seven books he has published on these topics, his three most recent are: Learning from the Future (1998), Competitors: Outwitting, Outmaneuvering and Outperforming (1999), and The Portable MBA in Strategy, Second Edition (2001). Based in Needham, Massachusetts, he is an adjunct professor of strategic management at Babson College, a visiting professor of strategic management at Cranfield School of Management in the UK, a founder and principal of Leadership Forum Inc, and a Contributing Editor of Strategy & Leadership.
Editor’s note This is the second Strategy & Leadership article in Professor Fahey’s series on understanding competitors. The first one, ‘‘Invented competitors: a new competitor analysis methodology’’ appeared in the November/December issue, Vol. 30 No. 6. cenario learning and competitor assessment are two tools for looking at the future that leading edge companies are learning to use efficiently and effectively in combination. Given other demands on management attention, not many companies can expend the resources to annually investigate a wide range of future possibilities via scenario planning. Likewise, few companies can afford to continually track the details of their competitors’ every strategic move. But almost all companies need to periodically weigh potential competitive threats, and now a proven methodology provides a look at rivals new and old in several scenario settings.
S
Managers need to be familiar with scenarios of future markets that are not merely extrapolations of current trends. This is because history teaches that the most potent competitors often emerge unexpectedly – from surprising sources and under unanticipated circumstances. For example, a decade ago book-retailing chains were expanding at a record pace as they decimated their competition, small locally owned bookshops. However, the overnight success of Amazon.com’s Internet store – a potent combination of new marketing concepts, new technology, and new channel strategy – forced the chains to reassess the future of book retailing and as a consequence make significant changes to their historic strategy.
Liam Fahey
teaches that the most potent competitors ‘‘ History often emerge unexpectedly – from surprising sources and under unanticipated circumstances.
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DOI
Even long-time competitors sometimes do things completely out of character with their strategic and organizational modus operandi. For example, large diversified firms may suddenly decide to shed many businesses to concentrate on a few products and technologies. Another shift of marketplace power can occur unexpectedly when rivals make acquisitions that provide them with new competitive potential. Scenarios are a proven means to identify and examine pathways into alternate futures for which most managers, because of their focus on taking advantage of current conditions, are currently unprepared. Scenarios of futures where the business environment is distinctly different from current or anticipated conditions can help managers project and analyze competitors’ futures: what competitors might do, how they might do it, and why. After a few years of experience, several leading companies that employ scenarios to better understand both current competitors’ potential moves as well as the possible emergence of new rivals have learned several principles and some ways to avoid various pitfalls. Their basic technique, and their suggestions for avoiding missteps, can now be shared. In almost all cases, competitor scenarios produced actionable insights about these firms’ own strategy alternatives. To demonstrate how this competitor scenario process works in practice, this article has a three-part structure: J First, to acquaint managers with the typical content of a competitor scenario. J Second, to explain the different types of competitor scenarios that can be created and the purposes associated with them. J Third, to show what managers can learn from different competitor scenarios and how they can use the understanding and information gained to improve strategy development and execution.
Competitor scenarios: purposes, key elements, and principles A competitor scenario starts with a logical narrative that considers what a competitor might do over some specified time period, how its managers would do it, and why they would choose to do so. As with all scenarios, we must remember that any competitor scenario represents one projection of what a competitor might do. It is not a prediction of what it will do. The following competitor scenarios examine three broad aspects of marketplace strategy: in which product-customer segments the competitor chooses to compete (scope); how it competes (competitive posture); and what it seeks to achieve (goals). Competitor scenarios, of course, often focus on other issues or topics including: J How a competitor might guide and manage its R&D efforts. J How a competitor might build and manage an integrated supply chain. J How a competitor might develop and manage a networked enterprise around a series of alliances with many types of external entities. Competitor scenarios consist of the four key elements common to all scenarios: an end-state, plot, logics, and driving forces. For a brief description of each of the elements, see Exhibit 1. Note that there is no one right way to develop and interrelate these four elements. As will become evident in the following discussion, constructing competitor scenarios is an iterative process[1]. End-states are shaped by what is learned in the process of articulating and detailing the plot and the driving forces. In this article, we start the scenario process by asking different types of what-if questions
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Exhibit 1 Competitor scenarios: key elements The components of every competitor scenario are: an end-state, plot, logics, and driving forces. End-state
The end-state details the competitor’s marketplace strategy – scope, posture, and goals at the end of the scenario period. A radical new strategy would require the scenario developers to lay out what is radical about the strategy: how the products are revolutionary, what changes the products would imply for channels and customers, and other ways in which the strategy would be dramatically different from rivals’ current approaches to competing and winning in the marketplace.
Plot
The plot or story describes what the competitor must do to get to the end-state. What would the competitor have to do to develop, design, manufacture, market and sell the revolutionary products? Frequently, such plots must also address change within the competitor – for example, the change in culture, systems, operating processes, assets, and leadership that would be required to facilitate and lead the drive toward a radical new marketplace strategy.
Driving forces
Driving forces constitute the forces that shape or drive the plot. Some forces may be what is happening or likely to happen in and around the marketplace: what customers may do, trends related to sales of particular products, the emergence of new entrants, and governmental policies and regulations. Other forces are specific to the competitor such as changes in its goals or leaders, culture, competencies, etc.
Logic
Finally, the scenario logic constitutes the explanation or rationales for the content, direction and intensity of changes postulated in the plot. The logic addresses the why questions: Why does the competitor want to pursue a revolutionary strategy? Why would customers respond to the proposed products in one particular way or another?
about competitors’ likely future marketplace strategies. From the answers we craft the end-states that describe what the competitor strategy would look like. Competitors serve as one useful, and in some respects, ideal focal point for scenarios for a number of reasons. First, competitors are always at the heart of every significant analysis of the competitive or industry context[2]. Thus, competitor scenarios provide one critical means of learning about the current and potential competitive environment. Second, strategy, however designed and executed, must win against current, emerging, and potential competitors in the marketplace. Customers and channels almost always possess the option to switch to rivals. Thus, competitor scenarios enable unique insights into the rivals that will shape the nature, direction, and intensity of marketplace rivalry. Third, once the notion of relevant competitors extends beyond large market share rivals, competitor scenarios generate learning about both competitors and the competitive context that would otherwise be unlikely to occur. Finally, because of the frequently intense emotions and feeling about rivals, managers and others often bring heightened energy and commitment to constructing and learning from competitor scenarios. Principles
Some fundamental principles should always guide the construction and use of competitor scenarios (Exhibit 2). Sometimes these principles may seem counterintuitive. For example, why should learning about competitors not be the prime goal of competitor scenarios? The answer is that too often, competitor scenario developers become enamored of the possibility of crafting the most perfect scenario about the competitor – one that is surprisingly comprehensive, self-evidently internally
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Exhibit 2 Competitor scenarios: guiding principles Scenario purposes 1. The purpose of competitor scenarios is not to learn about competitors 2. Competitor scenarios should be used to learn about the competitive context beyond competitors (both the competitive or industry context and the macro environment) 3. Competitor scenarios should serve as one input to identifying, challenging and refining the organization’s knowledge (including its beliefs, assumptions and projections about future) 4. Competitor scenarios should also serve as one input to outwitting, outmaneuvering and outperforming rivals 5. The ultimate purpose of competitor scenarios is to develop knowledge and insight that aids decision makers (in identifying strategy alternatives, making decisions faster, etc) Scenario analysis 6. Scenario construction and scenario assessment require distinct frames of reference, skills, and knowledge 7. A competitor scenario should be fully constructed before it is assessed for its competitive, strategy, and organization implications 8. However, strategy developers should not seek the perfect scenario before moving to assessment 9. Scenario developers need to disengage themselves from their own firm 10. Competitor scenarios should be constructed for a range of rivals (and not just large market share rivals)
consistent, elegantly articulated, and of course strikingly imaginative in everything it addresses and says about the competitor. Ultimately this commitment to constructing the perfect scenario limits the usefulness of the scenario project and consumes resources that are better employed elsewhere. Experienced managers instead use competitor scenarios as a source of learning about the broader competitive context and of the implications for their firm’s strategy and operations. Competitor scenarios work best when they produce knowledge and insight that broadly informs and prepares decision makers to act rapidly as competitive conditions change. Which competitors should be the focus of competitor scenarios? The guiding principle should be, apply scenario thinking beyond your current large market share rivals. The reason is, competitor scenarios that address functional substitute rivals, small emerging rivals, and even invented rivals (that is, rivals that do not exist today but might exist at some point in the future) generate insights into the emerging and potential marketplace that often simply cannot be obtained no matter how acutely managers develop scenarios around the leading market share rivals. There are two distinct types of competitor scenarios that originate in two quite different forms of what-if questions: unconstrained what-if scenarios and constrained what-if competitor scenarios.
leading companies have employed ‘‘ Several scenarios to better understand both current competitors’ potential moves as well as the possible emergence of new rivals.
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Unconstrained what-if scenarios Unconstrained or open-ended questions encourage scenario developers to pose any question that occurs to them pertaining to one or more rivals’ marketplace strategies. Unconstrained what-if questions are limited only by the experience, imagination and creativity of those involved in thinking about the possible strategies of rivals. Four categories of what-if questions lead to competitor scenarios with different foci. Standard questions
The standard questions that are frequently used to initiate unconstrained scenarios are noted in Exhibit 3. These questions have high relevance to most firms. Shaping these questions leads to determination of the relevant end-state – a statement of what the competitor’s marketplace strategy might be. Clearly, such statements can be detailed considerably beyond the examples cited in Exhibit 3. However, they should not exceed a half-page of carefully constructed narrative. A plot can then be detailed that leads to the end-state. This stage severely tests the knowledge and foresight of the scenario developers. Indeed, plot development all too often points up issues and questions that require access to external expertise. In this way, articulation of plots becomes a source of extensive knowledge for those involved. Sometimes plot elaboration forces managers and others to come face-to-face with issues and questions that are as challenging and insightful as they as unexpected. As one computer peripherals firm found, for example, in shaping the plot that explained how a rival’s marketplace strategy resulted in product and technology dominance, it suddenly discovered how critical alliances in particular components would be to any firm’s future success in this product space.
Base question scenarios
A different but related way to generate unconstrained competitor scenarios stems from asking a set of questions that are frequently raised in firms about rivals’ strategies. These, unfortunately, rarely receive any kind of formal analysis (see Exhibit 4). This
Exhibit 3 Unconstrained what-if competitor scenarios: some typical questions J What if the competitor commits to a diversification of its product line (new products for existing and new customers) through a combination of current and new technologies? J What if the competitor launches a series of new products (source internally and externally)? J What if the competitor launches a sequence of extensions to its current product lines (with the specific aim to attract new customers into the market) J What if the competitor suddenly divests a number of its product lines and/or pulls out of a number of geographic regions J What if the competitor moves rapidly to a customization-driven strategy? J What if the competitor fundamentally changes its core value proposition—how it competes to win customers in the marketplace? J What if the competitor commits to gaining significant market share (and to do so as quickly as possible) without regard to the its long-term consequences (either for the firm itself or for the marketplace)?
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Exhibit 4 Competitor scenarios: baseline questions Scenario title
Basic question
Why create the scenario
Scenario benefits
The ‘‘dumb’’ scenario
What might the competitor do that would be least in its own strategic interest?
Learn what could most negatively affect one or more rivals
May be possible to ‘‘aid’’ the competitor to commit to these actions
The ‘‘ideal’’ scenario
What would be the ideal strategy for the competitor?
Learn what might be in the short-term interest of the competitor
May be possible to inhibit some of these benefits accruing to the competitor
The ‘‘best long-term’’ scenario
What would be in the competitor’s long-term best interest?
Learn what the competitor would have to do to win in the long-term
Some of these decisions and actions may also be appropriate for us
The ‘‘most helpful’’ scenario
Which strategy might the competitor pursue that would most ‘‘help’’ our firm?
Learn how and why a competitor’s actions might benefit our firm
May indicate new ways to view actions of rivals; may indicate actions we should take
The ‘‘most hurtful’’ scenario
What strategy might the competitor pursue that would most ‘‘hurt’’ our firm?
Learn how a competitor could make our firm most vulnerable
May be possible to identify preemptive actions
method often produces unique insights into competitors’ strategies and their implications. These base-question scenarios exemplify how rich insights can many times be gleaned without fully elaborating and detailing the relevant end-states, plots and logics. This is so in part because end-states and associated plots and logics based upon these what-if questions lead in turn to further questions (and insights) about rivals that in all likelihood would remain unasked (and not obtained). A case
Consider the case of one electronics firm that asked the ‘‘dumb’’ what-if question: What strategic move might the competitor make that would be least in its own strategic interest? After an extensive analysis of the change in the marketplace, including emerging technologies and the recent emergence of new competitors promoting new product forms, the analysis team concluded that the least advantageous future strategy for this particular market share leading competitor would be to stick tenaciously to its current strategy – that is, continue to incrementally improve its current products and to enhance its value added for customers in small but consistent steps. The team concluded that this strategy would be ‘‘dumb’’ because the competitor would likely find itself losing the competitive, market and technology war that was about to breakout in this particular market space. A number of significant strategy implications emerged that required the electronics firm’s immediate attention: J First, it needs to quickly analyze whether it would suffer a similar fate if it too did not radically shift from its current product portfolio. J Second, the firm had to develop one or more projections, in scenario form, of the potential paths the technologies might take, and their potential interactions, over the next five years. New competitors
Unconstrained competitor scenarios are ideal for tackling one of the most fundamental issues that confronts the creators and advocates of any strategy:
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managers use competitor scenarios ‘‘ Experienced as a source of learning about the broader competitive context and of the implications for their firm’s strategy and operations.
’’
How might new types of competitors come into the market? New types of competitors include any organization that would provide a product or solution unlike the firm’s current product or solution but which customers would purchase instead of its offering. Although issues and questions pertaining to the emergence of potential new types of competitors often arise in the course of strategy discussions inside most firms, few firms seem to devote any serious analytical thinking to them. Most do not consider the potential impact of such new entrants until either they actually have products in the market or they announce their imminent arrival. Indeed some management teams have remained aloof from any attention to such rivals even after the relevant staff teams such as a competitor analysis unit or a team with strategic planning responsibility had documented the (potential) emergence and threat of these rivals.
New competitors Two avenues have proved especially useful in identifying new types of competitors – the search for functional substitute rivals and interactions across technologies. Functional substitute rivals
Here the dominant unconstrained what-if question is quite straightforward: How might functional substitute products or solutions come to be and what kind of firm might create and bring them to the market? Developing even tentative answers to these questions, however, is not nearly quite so straightforward. One reason why this is so quickly becomes evident when a team of managers and others begin to develop this type of competitor scenario. It requires considerable knowledge and expertise outside the firm’s historic comfort zones. Yet even preliminary efforts to develop this scenario can generate substantial returns in terms of new knowledge about current and emerging technologies, changing customer needs, potential new marketplace dynamics, and new competencies in many functional areas including R&D, manufacturing, marketing, and sales. The basic what-if question is: What if a functional substitute emerged that had the following specific product features? Consider the case of a medical equipment manufacturer manager who asked: What if a pharmaceutical firm were to develop a drug that would relieve or eliminate the medical problem for which one of our product lines is used in surgery? The analysis team then had to call upon many external sources of knowledge and expertise to identify which pharmaceutical firms were conducting relevant research or already had potential products in the early stages of development or clinical trials. Then they had to determine what the development and product lifecycle of such products might be. They used this data to generate an endstate that specified what the product might be, the strategy required to take it to market, the plot that described how the firm could develop, test, and introduce the
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product, and a set of logics explaining why the firm would go through with the research, commit the resources required for an expensive product launch, and eventually win in the market against a number of existing products. In sum, a pharmaceutical product might be chosen by hospitals and doctors instead of a surgical procedure as a preferable form of treatment for the particular medical condition for which surgeons now use one of the firm’s product lines. Consideration of this competitor scenario led to new understanding into: J How and why pharmaceutical products evolve. J How they could compete against the firm’s traditional medical instruments. J The forces shaping treatment decisions within hospitals. J How and why the firm’s long established and highly successful products could be vulnerable to products that many managers simply did not see as being part of ‘‘the industry’’. Technology linkages
As evident in the discussion of functional substitutes, technology change leads to the emergence of new products and solutions. The critical question guiding the efforts of competitor scenario developers thus becomes: How might technology developments interact to give rise to new customer offerings? Ultimately, this question becomes: What if these technologies were to develop in particular ways? When technology is defined broadly to include all spheres of R&D, technology linkages as a source of competitor scenarios prove to be critical for firms in almost every industry. But even in product areas not thought to be technologically advanced, linkages across a variety of technologies, some of which may seem at first glance not terribly related, can sometimes give rise to new competitors. Some financial services companies now find themselves competing directly for the same customers with far smaller providers who have used Internet and communications technologies along with database and related technologies to deliver superior value along a number of dimensions. Invented competitors
A distinct class of competitor scenarios revolves around invented competitors[3], that is, competitors that do not exist today but which could exist at some point in the future[4]. Invented competitors possess the great merit of shifting the frame of reference in projecting and assessing rivals’ strategies from current or emerging rivals to one or more rivals that, by definition, are strikingly dissimilar to any rival managers have had to contemplate to date. As a consequence, invented competitors enable managers and others to challenge their underlying assumptions – indeed their whole world-view of competition – in a unique way. Unconstrained what-if questions are personified by the notion of invented competitors: only the imagination and creativity of those involved limits the range and character of the competitors that might be invented. Let us take the case of a financial services firm that used an invented competitor scenario to establish a radically distinct perspective on its future marketplace from which to assess its current strategy and its key underlying assumptions. The guiding what-if question was, What if a competitor emerged that possessed a marketplace strategy characterized by: J Interactions with external entities – principally channels and customers – that were exclusively electronic.
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J A full commitment to attracting new customers into the market. J A driving aim to ‘‘dominate this particular market segment’’. In detailing this end-state, the team carefully built a rich narrative around the following: J How the firm would reach customers and channels electronically. J How many types of customers could be reached. J The electronic methods employed to reach customers. J How the methods would be used to develop two-way flows of information. J How the firm could use data and information gathered from customers in almost real time to amend the ‘‘offer’’ to individual customers. J What the elements of the product offer or solution would be to customers (that is, what the financial product would be that customer would actually be purchasing). For the next step, the team had to detail what plot or story would explain how the invented competitor reached this end-state over the next four years. Each year’s plot affected what would or could take place in subsequent years. A significant element of the plot described how the invented competitor would actually come to be, that is, what would have to happen for it to come into existence and then grow and develop as a company. The chronology of the plot revolved around the following items: J A small group of individuals with extensive experience in the relevant product domain exiting an existing financial services firm. J Select individuals from other financial services firms then join them. J This set of individuals then initially develops a loose alignment with a small boutique with considerable expertise in a variety of aspects of doing e-business. J The firm develops a technology platform to interact with customers. J At the same time, it begins to develop the first outlines of what the ‘‘offer’’ would be to customers. J It then works with one large institutional customer as a ‘‘test-bed’’ for the offer as a location to develop a serious trial of the platform technology. Because of the radical nature of the proposed strategy and especially because of the degree of change involved for customers – for example, all facets of how they would interact with a financial services provider – it was critical to set out and assess the logics underlying the plot. Central issues and questions were identified for each major step in the plot and for the plot as a whole. Key questions included:
J Why would different segments of the invented competitor’s customers move to an electronic mode of doing business? J What advantages would its customers gain from buying via e-business? J How would developments in e-technologies facilitate what the invented competitor wanted to achieve? J In what ways, might the invented competitor be able to leverage success with the proposed customer solutions into other customer offerings?
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scenarios work best when they ‘‘ Competitor produce knowledge and insight that broadly informs and prepares decision makers to act rapidly as competitive conditions change.
’’
Constrained what-if competitor scenarios Constrained competitor scenarios start from a common point of departure: What would the competitor do if a specific set of marketplace or macro environmental endstates or conditions were to arise? These scenarios start with some specification of what the world would look like at some point in the future and then ask, ‘‘What would the competitor do under these conditions?’’. Thus, these scenarios explore the initiatives a competitor might take if it were to find itself in a particular world endstate (such as emerging new technologies and new product regulations) or how it might react to the strategic moves of rivals. They are therefore constrained what-if questions. Constrained competitor scenarios are especially appropriate when your firm wants to identify and assess: J What would a particular competitor do under specified marketplace conditions?
Constrained what-if competitor scenarios J Why a competitor would adopt one strategy rather than another? J Which marketplace changes might lead one or more competitors to adopt a particular strategy? The competitive context that serves as the ‘‘constrained what-if’’ can be established in at least two distinct ways. First, industry or competitive scenarios, if already developed for other purposes, provide one ideal context. Second, carefully articulated what-ifs that describe a brief set of future competitive conditions can also serve as the backdrop for constrained competitor scenarios. A number of such constrained what-ifs are briefly described in Exhibit 4. Although at first glance they may seem relatively simple and obvious, more often than not, development of such short what-if lists typically requires extensive reflection on what could happen in the next few years and which what-if questions would give rise to the most productive competitor scenarios. It may require considerable dialogue around what could happen, before scenario developers converge on one or two what-ifs that raise interesting and perplexing questions about how one or more categories of rivals might respond to the stipulated competitive conditions. For example, a projected competitive context dominated by e-business may not lead to difficult strategy choices for a particular competitor but the potential emergence of a substitute product might lead to strategy choices ranging from divestment from the industry to acquiring or aligning with a provider of the substitute product. When existing industry or competitive scenarios constitute the first critical step in shaping and using constrained competitor scenarios, the end-states serve as the principle focus of the competitive conditions. Although industry or competitive
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scenarios can be created in multiple ways, constrained industry or competitive endstates are typically crafted around a small set of key uncertainties. Exhibit 5 illustrates one such set of constrained competitive end-states constructed by a research and development intensive company that was confronting two key uncertainties: (1) A number of emerging ‘‘technologies’’ at varying stages of development that may or may not advance further, but if they did, they could dramatically affect research breakthroughs and thus new products; and (2) Considerable regulatory flux that could directly effect the ability of all current rivals to market and sell new and existing products or major product line extensions in various channels and to different end-customer segments. The four scenario cells shown in Exhibit 5 depict four quite different worlds. A strategy designed to win in one world, for example, extended status quo, could well fail miserably in the unbridled battle world. The steps in constructing competitor scenarios are then relatively straightforward: J Identify the strategy issues for the competitor. J Develop the scenario plot outline. J Detail the scenario plot. J Articulate the logics. J Determine the business issues to be addressed. When a firm identifies key competitor strategy issues associated with each end state – new marketplace opportunities, threats to traditional ways of competing or to the firm’s planned strategies – it establishes a more refined understanding of the competitive context within each end-state. As a result its managers can better understand the strategy challenges that would confront the competitor in each endstate. For example, a preview of the intensive nature of the vehement rivalry unleashed
Exhibit 5 Four competitive end-state worlds
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Modest regulatory change
Extensive regulatory change
Low level of technology change
Status quo In this end-state, rivals continue to slowly adapt their customer solutions in the historic customer segments. Rivalry is moving toward an emphasis upon service elements. Rivals are still prohibited from entering significant market segments
Customer skirmish In this end-state, rivals compete with slowly changing products. But they now compete fiercely in the pursuit of new customer segments. Rivalry is now intense as the number of rivals has increased in all customer segments
High level of technology change
Product fragmentation In this end-state, product modifications unfold at a rapid rate. Some new products challenge the dominance of old solutions in some customer segments. Customers can choose from clearly differentiated solutions. Rivalry has shifted to product or solution superiority
Unbridled battle In this end-state, both product change and market change persist. Continuous product change keeps shifting the range of available customer solutions. And, rivals can aggressively pursue most customer segments
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Exhibit 6 Examples of constrained what-if competitive conditions J What if our competitive context in four years time is dominated by e-business connections between all players in the industry, resulting in solution segmentation, consolidation in traditional channels, and competitor fragmentation? J What if over the next three years, technology propels the emergence of new products, including functional substitutes that are significantly more sophisticated than current products? J What if rivalry intensifies but it is solely among the current dominant players in this specific product space and all firms commit extensive new resources to the battle? J What if the economy continues in stagnation and technology increases in importance as the platform for both new products and new ways of competing in the marketplace?
in the unbridled battle end-state clarifies the what-if set of conditions in which the competitor will have to identify and choose its preferred strategy: J A blizzard of new products. J The relentless search for new opportunities to enter into any channel. J Offering an entirely new range of enticements to customers and channels. In order to develop a scenario plot (and sometimes perhaps more than one) for each end-state represented in Exhibit 5, the core competitor scenario question must now come to the fore: What would the competitor do (that is, what strategy would it pursue) were it confronted with the competitive context in each end-state? It is important to note that the strategy options may vary dramatically from one end-state to another. For example, the competitor staring into the unbridled battle world might consider: J Divesting entirely out of this product range (due to the intensity of the rivalry and the absence of the necessary resources to stay the course). J Concentrate on one product segment (perhaps as a way to avoid the head-on clashes guaranteed with other firms if it develops a full product portfolio). J Develop a full line of products (perhaps by developing alliances with a number of other firms). J Move to become more of a research and development firm and less of a manufacturer and distributor (perhaps by leveraging its current and potentially accessible technology skills and capabilities). Execution
Once a scenario plot has been outlined, managers can then detail what it would take to execute the projected strategy. In other words, choosing a strategy option does not identify or explain how it could be executed. Indeed, understanding how the competitor might execute a particular strategy often represents the core learning that emanates from these constrained competitor scenarios. Scenario developers gain insight not only into how the strategy might win in the marketplace but also into what the competitor would have to do both in the marketplace and within the firm in order to realize the opportunity at the heart of the strategy. The logics in these competitor scenarios address one fundamental question: Why would the competitor pursue this strategy? What forces within and external to the competitor would support or drive the competitor to adopt this strategy becomes the
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central question. The relevant external forces and how they affect a projected strategy may be specific to individual end-states (see Exhibit 5). In the unbridled competitive end-state, specific regulatory developments (not evident at all in the status quo world) might lead the competitor to seriously consider reducing its presence in, or even withdrawing entirely from the product-market sector. As a last step, it is essential to ask: What business issues emerge from each scenario that pose opportunities and threats that the organization must explore? Again, the issues can vary significantly across the end-states. The reward: insight and alternatives
Competitor scenarios provide a methodology to enable managers and others to construct and assess a variety of potential strategies that rivals might adopt. They require both imagination and creativity on one hand, and considerable knowledge and understanding of what strategies might be available to rivals, and how and why they might pursue them. In almost all cases, competitor scenarios lead to rich insight into the firm’s own strategy alternatives – and sometimes to alternatives that were previously not on the firm’s radar screen.
Notes 1. For a more elaborate and detailed discussion of the generic analysis process involved in both constructing and assessing competitor scenarios, see Liam Fahey, ‘‘Competitor scenarios: projecting a rival’s marketplace strategy’’, in Liam Fahey and Robert M. Randall (1998), Learning from the Future: Competitive Foresight Scenarios (John Wiley & Sons), pp. 223-45. 2. Readers interested in constructing industry or competitive scenarios, see Liam Fahey, ‘‘Industry scenarios’’, in Liam Fahey and Robert M. Randall (1998), Learning from the Future: Competitive Foresight Scenarios (John Wiley & Sons), pp. 189-222. 3. For a discussion of the invented competitors, see Liam Fahey, ‘‘Invented competitors: a new competitor analysis methodology’’, Strategy and Leadership, Vol. 30 No. 6, November/ December. 4. Invented competitors, of course, can be used to identify potential new forms of competitors.
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Using scenarios to focus R&D Gill Ringland
Gill Ringland, a Fellow of St Andrew’s Management Institute (SAMI), focuses on using future studies and scenarios to improve decision making in the present (
[email protected]). She first worked with scenarios while Group Executive, Strategy, for ICL, now part of the Fujitsu Group. She is the author of three recent books – Scenarios in Business, Scenario Planning: Managing for the Future, and Scenarios in Public Policy.
Traditional methodologies for selecting R&D projects Most managers with responsibility for a number of research & development projects routinely employ a number of portfolio management tools explicitly designed for ranking R&D projects and managing R&D programs. For instance Philip A Roussel’s ‘‘Third Generation R&D’’, published by Harvard Business School Press, describes a portfolio method for prioritizing projects. Three axes measure the relative potential cost/benefit/competitive position of R&D projects: J Competitive position and technological maturity. J Size of reward and probability of success. J Annual budget and years to completion. Managers then plot portfolio of possible projects on these three axes, providing a framework for discussion and decision with corporate planners and marketing. Stanford Research Institute (SRI) uses a similar method for labeling a portfolio of R&D projects to facilitate discussion of priorities. They normally choose the axes: J Timescale of market impact. J Cost of project. The costs, timetables and budgets in an R&D project are usually well understood, if not precisely predictable – for instance the time from the lab to development, or the rate of development of technological capability can usually be estimated. But the market factors – the competitive position, the size of reward, probability of success and the market impact are harder to anticipate. In judging these factors, R&D managers, corporate planners and marketers will normally base their judgment on the trends to date.
DOI 10.1108/10878570310455042
VOL. 31 NO. 1 2003, pp. 45-55, MCB UP Limited, ISSN 1087-8572
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But many new products emerge into a changing world, with: J New competitors. J Changed user wants and needs. J Changed price structures. J Changed regulatory environment. These factors are determined by changing industry structures, by new global competitors, and most particularly by changes in user perceptions, lifestyles and desires. To preview these possible future environments, a number of firms have successfully used scenario planning to improve R&D decision making. Scenario developers have helped managers explore a range of possible futures encompassing uncertainties, such as the rate of adoption of technology. The R&D manager can then compare the sensitivity of the R&D projects’ success criteria to the detailed assumptions about the future. As a case in point, microwave ovens were available at least 20 years before they became popular for their efficiency at heating up pre-cooked frozen meals at high speed. The changes in society that made them popular after two decades were the number of working women who needed meals that could travel from freezer to microwave to dinner table in minutes. So, if the inventors of the microwave oven had developed alternative views of the future, one in which most women worked away from the home and another in which most women were at home cooking gourmet meals with gas and electric ovens, they would have realized that the sales of microwave ovens would be dependent on lifestyle changes increasing the number of working women.
Forecasts, scenarios and foresight Three important terms are widely used in the process of thinking about and assessing the future: (1) Forecast: a conjectural estimate, based on present indications, of the course of events or condition in the future[1]. (2) Scenarios: a set of logically consistent but distinctly different views of what the future might be[2]. (3) Foresight: a process for developing research policies with a long-term perspective using networks of knowledgeable agents who possess improved anticipatory intelligence[3]. So, a forecast combines current trends and renders them into a single value or range of values for a variable. Forecasts of timescale, cost, etc are widely used for technology developments, because there is a well-trodden path from the lab to the
range of possibilities was the extent to ‘‘ One which communities were rigid or evolving, represented by two extremes: ‘community open’ or ‘community closed’.
’’
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customer. Forecasts are usually based on expert opinion, often collected by the iterative Delphi process. Forecasts are an important component of scenarios for the future. Given the forecasts of the available technology, scenarios can then explore the possible future societies and how they may react to these products. So in the case of the microwave oven, scenarios of alternative futures could have been developed, and the potential markets for microwave ovens explored in each. Affecting the market would be growth in wealth, business activity, and social changes (such as single person or single parent households), increasing education of women, the nature of leisure activities, and the move away from rural areas to cities. It is sometimes possible to identify specific events that would give early indicators of a scenario playing out. Scenarios provide a simple but powerful way of capturing and exploring multiple images of the future. The analytical process of using a combination of scenarios and forecasts to ensure that an organization focuses its R&D on the most effective areas is what we call ‘‘Foresight’’. This typically combines desk-based investigations and literature searches, forecasting, use of a wide range of inputs for building of scenarios, and the use of business intelligence or market intelligence to monitor early indicators. This article focuses on the scenarios part of this process, while recognizing that without good forecasts and an ongoing decision process, the scenario stage will be of limited value. The role of scenarios is to provide the tool for understanding the major areas of uncertainty. Glen Hiemstra[4] identifies key areas of uncertainty over the next 50 years as: J The impact of: j The digital revolution, biotechnology and nanotechnology. j Shrinking populations in the developed world. j The preponderance of the aged in the developed world. J The nature of: j Work – its duration, location, content. j The home - returning perhaps to its pre-industrial revolution role. j Education, learning and information gathering. J The balance between: j National governments and NGO’s in handling major problems. j The private sector and government in handling infrastructure issues, with the funding and timescale implications.
Scenarios used to formulate an R&D portfolio in information, communications, and technology The ‘‘Business in the Third Millennium’’ (BIT3M) program was a consortium to study the effect of ICT on business. It was run by Watts Wacker of think tank FirstMatter (www.firstmatter.com) and was active from 1996 to 1999. The delegates of the member companies of the consortium used scenarios to define and prioritize research projects to be initiated by the consortium. Both the company I worked for then, ICL (now Fujitsu Services), as well as Fujitsu Business Consulting of Japan, were partners.
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The hypothesis behind BIT3M was that the combination of Information, Communication, and Technology (ICT) would have a major impact on the way business evolves – or changes discontinuously – in the next few decades. While the supply chain and the customer interface have already been substantially changed by ICT, we hypothesized that an even more radical shift could be happening – that the balance of power between the company and its customer was beginning to change. Since it was possible even probable – that this effect might appear differently in Asia, the USA and Europe, the consortium sought members based in all three geographies to ensure sensitivity to the potential cultural differences. The BIT3M program started with the construction of scenarios to describe possible ways that digital information could influence and change society. When we started we described society as being composed of three entities: business, the consumer, and government. We soon added another entity – community. Traditionally, communities are local, as in a village community or a university community. However a major change facilitated by information, communications and technology was the creation of communities of interest that communicate electronically. These communities were showing signs of forming very effective lobbying groups, and also banding together for purchasing, or for sharing information on parenting, products, and diseases and their treatment (Exhibit 1).
In parallel with the rise of virtual communities we noticed that the boundary between people’s behavior as a citizen and behavior as a consumer was blurring. People expected governments to provide services as the private sector does, and they changed their consumption choices in line with political opinions. Boycotts of goods were evolving into selective investment in ethical trusts. The individual – operating variously as consumer, citizen, leader, manager, and increasingly enabled by the information, communication and technology infrastructure – had increased power in the post-ICT world. These individuals gain added leverage by joining communities that have political or market clout. For instance, an ad hoc buying club for Lexus cars negotiated major discounts from a dealer. Greenpeace[5], using email effectively, organized across country boundaries to humble Shell Oil Company over the disposal of an oilrig in the North Sea. In many ways, there are signs that the balance of power in the new world is
Exhibit 1 Role of the individual
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shifting towards the individual and ad hoc communities, and away from business and governments. In contrast, one of the projects set up by the consortium identified the decreasing capability of national governments to control business, community or individual activities within their geography. For instance, legalized gambling has now moved back into many countries after the realization that revenues were leaking offshore. In spite of the best efforts of the Chinese, Saudi and Iranian governments, individuals there access information electronically. Governments face problems in ensuring a stable tax base as individuals become mobile and choose their domicile. These and similar observations led us to institute a watch for signs and signals that this trend was strengthening or waning. We also observed the increasing role of NGOs in the business environment. For instance, NGOs were the main drivers in defining the International Kyoto Treaty environmental agreement standards.
Four scenarios for 2010 By 1998, we wanted to explore the potential effects of these factors on business. So we built some scenarios at a workshop of the consortium delegates during three days of interactive work. The scenarios also utilized information from literature searches, expert interviews and discussions.
Four scenarios for 2010 Two key drivers of the scenarios were: J The nature of communities, whether geographic or virtual. The major question was the extent to which communities were rigid or evolving, represented by two extremes: ‘‘community open’’ or ‘‘community closed’’. We observed that the sense of community is strongly linked to individual and lifestyle choices. J The capability of business to adapt to a new environment with a potentially changed power structure. We expected that the ability of government to adapt would usually lag that of business. We assumed that the adaptability of both the social infrastructure – education, health, law and order – and technical infrastructure – were linked to business agility. The two extremes in this range of possibilities were ‘‘business traditional’’ and ‘‘business agile and adaptive’’. These two drivers produce four scenarios describing the business environment in 2010 (Exhibit 2). In Liberation Works, a sense of local community develops to provide a rich and wellbalanced social environment, while business practices remain those of the 1990s. This is a ‘‘Greenpeace’’ world that reconciles global and ecological concerns with business and individual interests. Government funds the majority of technology infrastructure.
two extremes in the other range of scenario ‘‘ The possibilities were ‘‘business traditional’’ and ‘‘business agile and adaptive’’. ’’
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Exhibit 2 Scenarios for 2010
In Gung Ho, there is also a sense of community, but since the business and social infrastructures have adapted to the newly powerful individual, many of these communities will be dependent on common interests rather than geography. Business has found ways of meeting their customers’ new demands. Lags in the adaptability of government mean that business has taken over some of the regulatory roles of government, and has taken a lead in implementing the technology infrastructure. MegaCorp is a world in which large companies have established new rules. Virtual communities of individuals, geographic communities, and governments, are less powerful because of the rules imposed by the MegaCorp organizations. This is a divided world, with gated communities and social unrest. This is the nearest scenario to the future envisioned by Aldous Huxley in Brave New World. In it, the private sector implements Infrastructure. Finally, in Organization Rules there is a strong sense of community, but it acts to reduce business agility, a result perhaps of the hierarchic constraints of society. The technology infrastructure is supported by state investment and may also be operated by the state.
Research portfolio In developing the portfolio of research projects from the scenarios, we brainstormed the different topics that would be relevant in each scenario. Then we looked to find common themes and topics to explore the underlying drivers of the scenarios. So for instance, in all four scenarios, since the basic science was already evident, we assumed that the technological rate of advance would continue in the laboratory for the next decade. After then, the differing assumptions about the scope of government
scenario process, by delineating the social ‘‘ The issues that might prevent technology adoption, helped participants build more robust R&D programs and set up early warning indicators to monitor the pace and the directions of evolution.
’’
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start to make an impact on technology availability. For instance the extent of local loop broadband or third generation wireless technology will depend on: J Who will pay for the upfront investment in networks and will this be different in the USA, Europe and Asia? J Are there any new disruptive technologies and where would they emerge? J Who will lead the adoption of new technology and how much will they be willing to pay? Under the heading of community and the related lifestyle issues, we saw that the there would be major differences in each scenario. For instance, local communities would be strong under Liberation Works, and virtual communities of special interest groups would be important players in Gung Ho. This meant that we needed to investigate the sources and nature of the differences, seeking answers to questions such as: J How does the relationship between the individual and society change in each scenario? J How will this alter customer’s expectations of business? J What are the forces driving business in the third millennium? Research topics, which emerged on lifestyles and communities, included: J How do communities evolve in each of the scenarios? J What are the role models – people and organizations – for each scenario? J What is the evolution path of each scenario as seen in terms of individual/ community decisions such as election results? J What causes each scenario to flourish or become unstable? J How and why are the boundaries between work and leisure different in each scenario? J In what ways are the individual and community uses of visual and verbal media different in each scenario, and what effect does this have? J What are the types of community and how are they changing? For instance, would Gung Ho support more or fewer virtual communities and NGO’s than MegaCorp? The Business Agility axis prompted research topics related to the way in which digital information accelerated or held up change in organizations. J What is the role of information, communication and technology in making organizations more agile in Gung Ho and MegaCorp? Which scenario is more sustainable for businesses influenced by MegaCorp but not aspiring to be a dominant international player? J Which scenario creates most value and which least? J How do the culture and business processes differ in each scenario? For instance, we could see that businesses in a Gung Ho world would need processes that were flexible and reviewed regularly J What are the new value chains in each scenario, if any? The governance environment will also be different for each scenario: the research topics are: How will governments evolve to meet the new environment? In what ways
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will regulation encourage or discourage the new world? How will governments fund themselves? So, in MegaCorp, regulation would be strongly influenced by a few market leaders, and their investment would be aligned to increasing the penetration of the virtual world, at least in cities where connection costs are lower. Governments find it difficult to control and predict tax revenues in this world, due to the power and international nature of dominant international organizations. In contrast, Organization Rules is a world in which governance is by nation states and there is little momentum for change.
Early indicators Early indicators are specific events that are relatively easy to watch for and which can give an indication of which way the world is evolving. So for instance the rise of a political party or politician can indicate that changes are likely and the direction that they will take. One example of this is Shell’s decision on investment in North Sea gas fields. The bidding was intense and prices high: Shell asked the question, Would Russia’s extensive gas fields start to contribute to international supply? They identified this key indicator: if a politician named Mikhail Gorbachev moved into national prominence it was likely that Russia would open up. They saw his career start to develop, and so did not take part in the bidding war for North Sea reserves. Shell later bought gas from Russia at an advantageous price.
Early indicators In BIT3M, we saw some early indicators being satisfied for both MegaCorp and Gung Ho, for instance: J The rise of defacto standards in telecoms, media and computing industries replacing slower traditional mechanisms of agreements between national bodies J The rise of virtual communities for hobbies, health and family information sharing, and for trading online J The success of some brick and mortar retailers in creating electronic trading arms (for instance food retailers in the UK and restaurants in the USA), as well as the survival of some dotcom start-ups. J Regulation moving away from national governments towards NGO’s, for instance in the computer industry and for Internet and Web standards. As a result we proposed that some industries at least would evolve along the MegaCorp or Gung Ho. So we focused our research project portfolio into digital information in the retailing, ICT and media industries.
Prioritizing research projects The participants in the consortium workshop then categorized the list of 30 possible research projects into three groups: J Expensive – those costing the entire budget for at least one year. J Medium – we could afford 3-5 of these. J Quick/cheap – less than 10% of the budget.
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Once we had a defined and costed set of research projects we categorized them into high, medium and low impact projects, and which scenario they were relevant to (Exhibit 3). Some projects were central to an understanding of all the scenarios; others were of interest only under one or two. We focused on projects relevant to MegaCorp and Gung Ho. The projects that the participants felt had the most impact on Business in the Third Millennium related to: J The role of ICT in making organizations more or less agile. J The changes in the value chain. J Who would pay for network implementation? J Disruptive technologies. J The nature of virtual communities and their interaction with business. J Mobility of individuals across national boundaries. J What were the early indicators for MegaCorp vs. Gung Ho? Three of the projects, those on network implementation, disruptive technologies and early indicators were in the quick/cheap category. We scheduled the study of network implementation and early indicators, but left the research project on disruptive technologies until later. We could only afford to do one of the other three projects, on value chains, the connection between information, communication and technology and agility, or virtual communities and business. We chose to study the interaction of virtual communities and business, across both scenarios, since we could see other groups working on value chains and to a lesser extent on information, communication and technology and business agility. We found a think tank that was willing to share results with us on the effect of mobility of individuals across national boundaries, and the effect of this on the tax base of governments.
Lessons for practitioners We used scenarios to define a portfolio of research projects twice in the BIT3M Program. In both cases, the portfolio of projects that emerged was significantly different from our initial instincts.
Exhibit 3 Prioritizing research projects
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By going back to the underlying forces and asking questions about the discontinuities that may emerge, the scope of the portfolio widened and many new potential research questions were raised. Our list of research topics was dauntingly long before we applied the prioritization process – about 30 separate topics – costing about seven times our budget. By looking at the early indicators, we could narrow down the number of scenarios to consider from four to two, and the projects from 30 to 20. We then decided to focus on the projects that were important in both of the scenarios, and to delay others until some of the early indicators leading to either MegaCorp or Gung Ho had been observed. We had expected that the internal issues for business such as value chains and ICT and agility would have emerged as top priority topics. Instead we found that the questions of the inter-relation of business with its customers emerged from the process as most significant.
Conclusions The BIT3M case study used scenarios to: J Widen the range of discussion about the research program. Many of the participants were from technology companies. Introducing scenarios helped them to think about the adoption of technology, market issues and the effect of ICT on society
Conclusions J Engage sponsors and stakeholders in exploring the context of the proposed research topics in the program, as a prelude to decision-making and funding. The process, with interviews before the workshop and three days of interaction within a disciplined process at the workshop, underpinned the efforts of the participants to sell the research program back into their organizations. J Link technological issues into societal issues. This required an examination of a wider set of backgrounds than was traditional for planning R&D. The role of Watts Wacker, a consumer futurist skilled at exploring societal issues, was crucial. J Build a more robust research program by understanding the social issues that might prevent technology adoption and set up early warning indicators to monitor the pace and the directions of evolution. The participants shared the monitoring of early indicators among their business intelligence groups. Key questions related to investment in network infrastructure and sources of regulation. J Prioritize research topics for investment, through use of the early warning systems, which showed indicators for MegaCorp and Gung Ho. By focusing on MegaCorp and Gung Ho we were able to focus on the role of business, and to define a portfolio of research projects spanning these two scenarios.
Implications for corporate planners Lessons corporate planners can learn from the case study are: J Business agility is a key requirement in the present business climate. Many of the factors originally identified by BIT3M are central to today’s business climate.
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J The range of factors that need to be considered in plans is now much wider than only a few years ago. Markets have changed from product push to consumer desire driven, a result of changes in lifestyles and increased consumer information. These factors are more difficult to forecast than technological issues. J In considering the shape of society and new forces, scenarios can capture some of the dimensions of uncertainty, allow for the creation of robust strategies and understanding of early warning indicators of new phenomena. However, a word of caution. Scenario development projects do not always produce transformational insights and innovative thinking. In scenario work as in forecasting, it is difficult for planners to shake off the blinders of their current worldview. Veteran scenario developer Barbara Heinzen[6] enumerates many ways in which scenarios may fail to tackle the seminal issues for an organization, and the reasons why they flounder. Causes of failure include: planners taking too narrow a view of the topic, not getting the attention of decision makers, or accepting a culture that cannot confront the question of change. As an example of this last pitfall, she recalls asking the question while building scenarios for Asia in 1996, ‘‘Could we have a financial crisis?’’ and getting the answer, ‘‘That is not possible’’.
Nevertheless scenarios surely fit among the toolkit of every manager responsible for planning. They provide a process, mechanism and framework for anticipating change, watching for early warning signs, and creating more robust plans.
Notes 1. Oxford Compact Dictionary (1991), Clarendon Press, ISBN 0-19-861258-3. 2. Porter, M. (1985), Competitive Advantage, Free Press, New York, NY, ISBN 0-68484-146-0. 3. Irvine, J. and Martin, B.R. (1984), Research Foresight, Continuum International Publishing, ISBN 0-861-87496-X. 4. Ringland, G. (2002), Scenarios in Business, Wiley, ISBN 0-470-84382-9. 5. Davis-Floyd, R. (1997), ‘‘Storying corporate futures: the Shell scenarios’’, International Journal of Futures Studies, Vol. 1. 6. Ringland, G. et al (1999), ‘‘Shocks and paradigm busters’’, Long Range Planning, October.
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Using scenarios to focus R&D Gill Ringland
Gill Ringland, a Fellow of St Andrew’s Management Institute (SAMI), focuses on using future studies and scenarios to improve decision making in the present (
[email protected]). She first worked with scenarios while Group Executive, Strategy, for ICL, now part of the Fujitsu Group. She is the author of three recent books – Scenarios in Business, Scenario Planning: Managing for the Future, and Scenarios in Public Policy.
Traditional methodologies for selecting R&D projects Most managers with responsibility for a number of research & development projects routinely employ a number of portfolio management tools explicitly designed for ranking R&D projects and managing R&D programs. For instance Philip A Roussel’s ‘‘Third Generation R&D’’, published by Harvard Business School Press, describes a portfolio method for prioritizing projects. Three axes measure the relative potential cost/benefit/competitive position of R&D projects: J Competitive position and technological maturity. J Size of reward and probability of success. J Annual budget and years to completion. Managers then plot portfolio of possible projects on these three axes, providing a framework for discussion and decision with corporate planners and marketing. Stanford Research Institute (SRI) uses a similar method for labeling a portfolio of R&D projects to facilitate discussion of priorities. They normally choose the axes: J Timescale of market impact. J Cost of project. The costs, timetables and budgets in an R&D project are usually well understood, if not precisely predictable – for instance the time from the lab to development, or the rate of development of technological capability can usually be estimated. But the market factors – the competitive position, the size of reward, probability of success and the market impact are harder to anticipate. In judging these factors, R&D managers, corporate planners and marketers will normally base their judgment on the trends to date.
DOI 10.1108/10878570310455042
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But many new products emerge into a changing world, with: J New competitors. J Changed user wants and needs. J Changed price structures. J Changed regulatory environment. These factors are determined by changing industry structures, by new global competitors, and most particularly by changes in user perceptions, lifestyles and desires. To preview these possible future environments, a number of firms have successfully used scenario planning to improve R&D decision making. Scenario developers have helped managers explore a range of possible futures encompassing uncertainties, such as the rate of adoption of technology. The R&D manager can then compare the sensitivity of the R&D projects’ success criteria to the detailed assumptions about the future. As a case in point, microwave ovens were available at least 20 years before they became popular for their efficiency at heating up pre-cooked frozen meals at high speed. The changes in society that made them popular after two decades were the number of working women who needed meals that could travel from freezer to microwave to dinner table in minutes. So, if the inventors of the microwave oven had developed alternative views of the future, one in which most women worked away from the home and another in which most women were at home cooking gourmet meals with gas and electric ovens, they would have realized that the sales of microwave ovens would be dependent on lifestyle changes increasing the number of working women.
Forecasts, scenarios and foresight Three important terms are widely used in the process of thinking about and assessing the future: (1) Forecast: a conjectural estimate, based on present indications, of the course of events or condition in the future[1]. (2) Scenarios: a set of logically consistent but distinctly different views of what the future might be[2]. (3) Foresight: a process for developing research policies with a long-term perspective using networks of knowledgeable agents who possess improved anticipatory intelligence[3]. So, a forecast combines current trends and renders them into a single value or range of values for a variable. Forecasts of timescale, cost, etc are widely used for technology developments, because there is a well-trodden path from the lab to the
range of possibilities was the extent to ‘‘ One which communities were rigid or evolving, represented by two extremes: ‘community open’ or ‘community closed’.
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customer. Forecasts are usually based on expert opinion, often collected by the iterative Delphi process. Forecasts are an important component of scenarios for the future. Given the forecasts of the available technology, scenarios can then explore the possible future societies and how they may react to these products. So in the case of the microwave oven, scenarios of alternative futures could have been developed, and the potential markets for microwave ovens explored in each. Affecting the market would be growth in wealth, business activity, and social changes (such as single person or single parent households), increasing education of women, the nature of leisure activities, and the move away from rural areas to cities. It is sometimes possible to identify specific events that would give early indicators of a scenario playing out. Scenarios provide a simple but powerful way of capturing and exploring multiple images of the future. The analytical process of using a combination of scenarios and forecasts to ensure that an organization focuses its R&D on the most effective areas is what we call ‘‘Foresight’’. This typically combines desk-based investigations and literature searches, forecasting, use of a wide range of inputs for building of scenarios, and the use of business intelligence or market intelligence to monitor early indicators. This article focuses on the scenarios part of this process, while recognizing that without good forecasts and an ongoing decision process, the scenario stage will be of limited value. The role of scenarios is to provide the tool for understanding the major areas of uncertainty. Glen Hiemstra[4] identifies key areas of uncertainty over the next 50 years as: J The impact of: j The digital revolution, biotechnology and nanotechnology. j Shrinking populations in the developed world. j The preponderance of the aged in the developed world. J The nature of: j Work – its duration, location, content. j The home - returning perhaps to its pre-industrial revolution role. j Education, learning and information gathering. J The balance between: j National governments and NGO’s in handling major problems. j The private sector and government in handling infrastructure issues, with the funding and timescale implications.
Scenarios used to formulate an R&D portfolio in information, communications, and technology The ‘‘Business in the Third Millennium’’ (BIT3M) program was a consortium to study the effect of ICT on business. It was run by Watts Wacker of think tank FirstMatter (www.firstmatter.com) and was active from 1996 to 1999. The delegates of the member companies of the consortium used scenarios to define and prioritize research projects to be initiated by the consortium. Both the company I worked for then, ICL (now Fujitsu Services), as well as Fujitsu Business Consulting of Japan, were partners.
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The hypothesis behind BIT3M was that the combination of Information, Communication, and Technology (ICT) would have a major impact on the way business evolves – or changes discontinuously – in the next few decades. While the supply chain and the customer interface have already been substantially changed by ICT, we hypothesized that an even more radical shift could be happening – that the balance of power between the company and its customer was beginning to change. Since it was possible even probable – that this effect might appear differently in Asia, the USA and Europe, the consortium sought members based in all three geographies to ensure sensitivity to the potential cultural differences. The BIT3M program started with the construction of scenarios to describe possible ways that digital information could influence and change society. When we started we described society as being composed of three entities: business, the consumer, and government. We soon added another entity – community. Traditionally, communities are local, as in a village community or a university community. However a major change facilitated by information, communications and technology was the creation of communities of interest that communicate electronically. These communities were showing signs of forming very effective lobbying groups, and also banding together for purchasing, or for sharing information on parenting, products, and diseases and their treatment (Exhibit 1).
In parallel with the rise of virtual communities we noticed that the boundary between people’s behavior as a citizen and behavior as a consumer was blurring. People expected governments to provide services as the private sector does, and they changed their consumption choices in line with political opinions. Boycotts of goods were evolving into selective investment in ethical trusts. The individual – operating variously as consumer, citizen, leader, manager, and increasingly enabled by the information, communication and technology infrastructure – had increased power in the post-ICT world. These individuals gain added leverage by joining communities that have political or market clout. For instance, an ad hoc buying club for Lexus cars negotiated major discounts from a dealer. Greenpeace[5], using email effectively, organized across country boundaries to humble Shell Oil Company over the disposal of an oilrig in the North Sea. In many ways, there are signs that the balance of power in the new world is
Exhibit 1 Role of the individual
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shifting towards the individual and ad hoc communities, and away from business and governments. In contrast, one of the projects set up by the consortium identified the decreasing capability of national governments to control business, community or individual activities within their geography. For instance, legalized gambling has now moved back into many countries after the realization that revenues were leaking offshore. In spite of the best efforts of the Chinese, Saudi and Iranian governments, individuals there access information electronically. Governments face problems in ensuring a stable tax base as individuals become mobile and choose their domicile. These and similar observations led us to institute a watch for signs and signals that this trend was strengthening or waning. We also observed the increasing role of NGOs in the business environment. For instance, NGOs were the main drivers in defining the International Kyoto Treaty environmental agreement standards.
Four scenarios for 2010 By 1998, we wanted to explore the potential effects of these factors on business. So we built some scenarios at a workshop of the consortium delegates during three days of interactive work. The scenarios also utilized information from literature searches, expert interviews and discussions.
Four scenarios for 2010 Two key drivers of the scenarios were: J The nature of communities, whether geographic or virtual. The major question was the extent to which communities were rigid or evolving, represented by two extremes: ‘‘community open’’ or ‘‘community closed’’. We observed that the sense of community is strongly linked to individual and lifestyle choices. J The capability of business to adapt to a new environment with a potentially changed power structure. We expected that the ability of government to adapt would usually lag that of business. We assumed that the adaptability of both the social infrastructure – education, health, law and order – and technical infrastructure – were linked to business agility. The two extremes in this range of possibilities were ‘‘business traditional’’ and ‘‘business agile and adaptive’’. These two drivers produce four scenarios describing the business environment in 2010 (Exhibit 2). In Liberation Works, a sense of local community develops to provide a rich and wellbalanced social environment, while business practices remain those of the 1990s. This is a ‘‘Greenpeace’’ world that reconciles global and ecological concerns with business and individual interests. Government funds the majority of technology infrastructure.
two extremes in the other range of scenario ‘‘ The possibilities were ‘‘business traditional’’ and ‘‘business agile and adaptive’’. ’’
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Exhibit 2 Scenarios for 2010
In Gung Ho, there is also a sense of community, but since the business and social infrastructures have adapted to the newly powerful individual, many of these communities will be dependent on common interests rather than geography. Business has found ways of meeting their customers’ new demands. Lags in the adaptability of government mean that business has taken over some of the regulatory roles of government, and has taken a lead in implementing the technology infrastructure. MegaCorp is a world in which large companies have established new rules. Virtual communities of individuals, geographic communities, and governments, are less powerful because of the rules imposed by the MegaCorp organizations. This is a divided world, with gated communities and social unrest. This is the nearest scenario to the future envisioned by Aldous Huxley in Brave New World. In it, the private sector implements Infrastructure. Finally, in Organization Rules there is a strong sense of community, but it acts to reduce business agility, a result perhaps of the hierarchic constraints of society. The technology infrastructure is supported by state investment and may also be operated by the state.
Research portfolio In developing the portfolio of research projects from the scenarios, we brainstormed the different topics that would be relevant in each scenario. Then we looked to find common themes and topics to explore the underlying drivers of the scenarios. So for instance, in all four scenarios, since the basic science was already evident, we assumed that the technological rate of advance would continue in the laboratory for the next decade. After then, the differing assumptions about the scope of government
scenario process, by delineating the social ‘‘ The issues that might prevent technology adoption, helped participants build more robust R&D programs and set up early warning indicators to monitor the pace and the directions of evolution.
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start to make an impact on technology availability. For instance the extent of local loop broadband or third generation wireless technology will depend on: J Who will pay for the upfront investment in networks and will this be different in the USA, Europe and Asia? J Are there any new disruptive technologies and where would they emerge? J Who will lead the adoption of new technology and how much will they be willing to pay? Under the heading of community and the related lifestyle issues, we saw that the there would be major differences in each scenario. For instance, local communities would be strong under Liberation Works, and virtual communities of special interest groups would be important players in Gung Ho. This meant that we needed to investigate the sources and nature of the differences, seeking answers to questions such as: J How does the relationship between the individual and society change in each scenario? J How will this alter customer’s expectations of business? J What are the forces driving business in the third millennium? Research topics, which emerged on lifestyles and communities, included: J How do communities evolve in each of the scenarios? J What are the role models – people and organizations – for each scenario? J What is the evolution path of each scenario as seen in terms of individual/ community decisions such as election results? J What causes each scenario to flourish or become unstable? J How and why are the boundaries between work and leisure different in each scenario? J In what ways are the individual and community uses of visual and verbal media different in each scenario, and what effect does this have? J What are the types of community and how are they changing? For instance, would Gung Ho support more or fewer virtual communities and NGO’s than MegaCorp? The Business Agility axis prompted research topics related to the way in which digital information accelerated or held up change in organizations. J What is the role of information, communication and technology in making organizations more agile in Gung Ho and MegaCorp? Which scenario is more sustainable for businesses influenced by MegaCorp but not aspiring to be a dominant international player? J Which scenario creates most value and which least? J How do the culture and business processes differ in each scenario? For instance, we could see that businesses in a Gung Ho world would need processes that were flexible and reviewed regularly J What are the new value chains in each scenario, if any? The governance environment will also be different for each scenario: the research topics are: How will governments evolve to meet the new environment? In what ways
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will regulation encourage or discourage the new world? How will governments fund themselves? So, in MegaCorp, regulation would be strongly influenced by a few market leaders, and their investment would be aligned to increasing the penetration of the virtual world, at least in cities where connection costs are lower. Governments find it difficult to control and predict tax revenues in this world, due to the power and international nature of dominant international organizations. In contrast, Organization Rules is a world in which governance is by nation states and there is little momentum for change.
Early indicators Early indicators are specific events that are relatively easy to watch for and which can give an indication of which way the world is evolving. So for instance the rise of a political party or politician can indicate that changes are likely and the direction that they will take. One example of this is Shell’s decision on investment in North Sea gas fields. The bidding was intense and prices high: Shell asked the question, Would Russia’s extensive gas fields start to contribute to international supply? They identified this key indicator: if a politician named Mikhail Gorbachev moved into national prominence it was likely that Russia would open up. They saw his career start to develop, and so did not take part in the bidding war for North Sea reserves. Shell later bought gas from Russia at an advantageous price.
Early indicators In BIT3M, we saw some early indicators being satisfied for both MegaCorp and Gung Ho, for instance: J The rise of defacto standards in telecoms, media and computing industries replacing slower traditional mechanisms of agreements between national bodies J The rise of virtual communities for hobbies, health and family information sharing, and for trading online J The success of some brick and mortar retailers in creating electronic trading arms (for instance food retailers in the UK and restaurants in the USA), as well as the survival of some dotcom start-ups. J Regulation moving away from national governments towards NGO’s, for instance in the computer industry and for Internet and Web standards. As a result we proposed that some industries at least would evolve along the MegaCorp or Gung Ho. So we focused our research project portfolio into digital information in the retailing, ICT and media industries.
Prioritizing research projects The participants in the consortium workshop then categorized the list of 30 possible research projects into three groups: J Expensive – those costing the entire budget for at least one year. J Medium – we could afford 3-5 of these. J Quick/cheap – less than 10% of the budget.
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Once we had a defined and costed set of research projects we categorized them into high, medium and low impact projects, and which scenario they were relevant to (Exhibit 3). Some projects were central to an understanding of all the scenarios; others were of interest only under one or two. We focused on projects relevant to MegaCorp and Gung Ho. The projects that the participants felt had the most impact on Business in the Third Millennium related to: J The role of ICT in making organizations more or less agile. J The changes in the value chain. J Who would pay for network implementation? J Disruptive technologies. J The nature of virtual communities and their interaction with business. J Mobility of individuals across national boundaries. J What were the early indicators for MegaCorp vs. Gung Ho? Three of the projects, those on network implementation, disruptive technologies and early indicators were in the quick/cheap category. We scheduled the study of network implementation and early indicators, but left the research project on disruptive technologies until later. We could only afford to do one of the other three projects, on value chains, the connection between information, communication and technology and agility, or virtual communities and business. We chose to study the interaction of virtual communities and business, across both scenarios, since we could see other groups working on value chains and to a lesser extent on information, communication and technology and business agility. We found a think tank that was willing to share results with us on the effect of mobility of individuals across national boundaries, and the effect of this on the tax base of governments.
Lessons for practitioners We used scenarios to define a portfolio of research projects twice in the BIT3M Program. In both cases, the portfolio of projects that emerged was significantly different from our initial instincts.
Exhibit 3 Prioritizing research projects
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By going back to the underlying forces and asking questions about the discontinuities that may emerge, the scope of the portfolio widened and many new potential research questions were raised. Our list of research topics was dauntingly long before we applied the prioritization process – about 30 separate topics – costing about seven times our budget. By looking at the early indicators, we could narrow down the number of scenarios to consider from four to two, and the projects from 30 to 20. We then decided to focus on the projects that were important in both of the scenarios, and to delay others until some of the early indicators leading to either MegaCorp or Gung Ho had been observed. We had expected that the internal issues for business such as value chains and ICT and agility would have emerged as top priority topics. Instead we found that the questions of the inter-relation of business with its customers emerged from the process as most significant.
Conclusions The BIT3M case study used scenarios to: J Widen the range of discussion about the research program. Many of the participants were from technology companies. Introducing scenarios helped them to think about the adoption of technology, market issues and the effect of ICT on society
Conclusions J Engage sponsors and stakeholders in exploring the context of the proposed research topics in the program, as a prelude to decision-making and funding. The process, with interviews before the workshop and three days of interaction within a disciplined process at the workshop, underpinned the efforts of the participants to sell the research program back into their organizations. J Link technological issues into societal issues. This required an examination of a wider set of backgrounds than was traditional for planning R&D. The role of Watts Wacker, a consumer futurist skilled at exploring societal issues, was crucial. J Build a more robust research program by understanding the social issues that might prevent technology adoption and set up early warning indicators to monitor the pace and the directions of evolution. The participants shared the monitoring of early indicators among their business intelligence groups. Key questions related to investment in network infrastructure and sources of regulation. J Prioritize research topics for investment, through use of the early warning systems, which showed indicators for MegaCorp and Gung Ho. By focusing on MegaCorp and Gung Ho we were able to focus on the role of business, and to define a portfolio of research projects spanning these two scenarios.
Implications for corporate planners Lessons corporate planners can learn from the case study are: J Business agility is a key requirement in the present business climate. Many of the factors originally identified by BIT3M are central to today’s business climate.
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J The range of factors that need to be considered in plans is now much wider than only a few years ago. Markets have changed from product push to consumer desire driven, a result of changes in lifestyles and increased consumer information. These factors are more difficult to forecast than technological issues. J In considering the shape of society and new forces, scenarios can capture some of the dimensions of uncertainty, allow for the creation of robust strategies and understanding of early warning indicators of new phenomena. However, a word of caution. Scenario development projects do not always produce transformational insights and innovative thinking. In scenario work as in forecasting, it is difficult for planners to shake off the blinders of their current worldview. Veteran scenario developer Barbara Heinzen[6] enumerates many ways in which scenarios may fail to tackle the seminal issues for an organization, and the reasons why they flounder. Causes of failure include: planners taking too narrow a view of the topic, not getting the attention of decision makers, or accepting a culture that cannot confront the question of change. As an example of this last pitfall, she recalls asking the question while building scenarios for Asia in 1996, ‘‘Could we have a financial crisis?’’ and getting the answer, ‘‘That is not possible’’.
Nevertheless scenarios surely fit among the toolkit of every manager responsible for planning. They provide a process, mechanism and framework for anticipating change, watching for early warning signs, and creating more robust plans.
Notes 1. Oxford Compact Dictionary (1991), Clarendon Press, ISBN 0-19-861258-3. 2. Porter, M. (1985), Competitive Advantage, Free Press, New York, NY, ISBN 0-68484-146-0. 3. Irvine, J. and Martin, B.R. (1984), Research Foresight, Continuum International Publishing, ISBN 0-861-87496-X. 4. Ringland, G. (2002), Scenarios in Business, Wiley, ISBN 0-470-84382-9. 5. Davis-Floyd, R. (1997), ‘‘Storying corporate futures: the Shell scenarios’’, International Journal of Futures Studies, Vol. 1. 6. Ringland, G. et al (1999), ‘‘Shocks and paradigm busters’’, Long Range Planning, October.
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The strategic leader Understanding the triad of great leadership – context, conviction and credibility Brian Leavy
Brian Leavy is AIB Professor of Strategic Management and former dean at Dublin City University Business School (
[email protected]). His research is focused on strategic leadership, competitive analysis and supply chain strategy. The author of more than 40 articles on these topics, he has also published two books – Strategy and Leadership, 1994 (co-authored with David Wilson) and Key Processes in Strategy, 1996 (and reprinted in 2001).
What is the essence of great leadership? Every time a leadership guru proposes a new theory that tries to define it in terms of particular personality traits or styles of behaviour, we can easily think of successful executives who do not fit their model. For example, few experienced managers would disagree that Jack Welch, former CEO of General Electric, is one of the outstanding business leaders of his generation. Yet Welch is hardly a prime example of either of two leadership traits that researchers have identified as essential in two recent best-selling books. Not to take anything away from his accomplishments, Welch does not personify either ‘‘emotional intelligence’’ (Daniel Goleman) or ‘‘level 5’’ leadership (Jim Collins). Though concepts like emotional intelligence and level 5 leadership may be useful, they fall well short of providing insight into the essence of outstanding leadership, particularly at the institutional level. Theories based on traits or styles work well at middle management level, but tend to provide less insight into institutional leadership, where whole organisational populations have to be inspired but leaders have little opportunity for personal interaction. A
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Leadership effectiveness at this highest level can be better understood in terms of three main elements, the context for leadership, the conviction of the leader and the flow of credibility over time and tenure.
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decade of research has led me to the view that leadership effectiveness at this highest level can be better understood in terms of three main elements – the context for leadership, the conviction of the leader and the flow of credibility over time and tenure.
Context – defining the opportunity Leadership impact at the institutional level is always shaped by context. Great leaders make history, but not always in circumstances of their own choosing (to paraphrase Karl Marx). Former US president Richard Nixon proposed that the formula for placing any leader among the great had three elements, ‘‘a great man, a great country and a great issue’’. Without the second two, he believed, potential greatness will remain unrecognised and unfulfilled. Churchill once said of a talented predecessor that he was unfortunate to have lived at a time of great men and small events. In the movies, an Oscar-winning performance begins with securing the right role, a truth that applies to real life as well. In the business world, leadership roles are shaped by corporate history and the context of the time. If General Electric had chosen Stan Gault to be CEO in 1981, and Jack Welch had gone to Rubbermaid, how would they both be viewed today? In many ways, Gault’s performance over the years was just as impressive as Welch’s, but Rubbermaid is like off-Broadway
DOI 10.1108/10878570310455051
theatre compared with the scale of drama at GE. Business leaders typically play out one of three main roles, builders, revitalisers or inheritors. The first two offer the greatest opportunity to make a personal mark, whether through building great enterprises like Bill Gates (Microsoft) or Ted Turner (Turner Broadcasting), or revitalising formerly great companies, as Roberto Goizueta did at Coca-Cola or Michael Eisner did at Disney. In contrast, the contributions of skilful inheritors, like David Glass at Wal-Mart, tend to be seen as less dramatic, making it more difficult for them to stand out or to be seen as charismatic.
Conviction – providing the drive Having the opportunity to make an impact, however, is not the same as making one, and the individual leader must still have the talent to meet the challenge and the conviction to rise to it. At the CEO level, imagination and drive are more likely to distinguish outstanding performance than professional expertise. Yet many of the categorizations of the energy and enterprise of great CEOs are too generic, and fail to uncover the deeper wellsprings of inspirational leadership, which are always context specific. Take the idea of executive vision, for example. Without context, it is little more than image or fantasy. This is one reason many corporate mission statements turn out to be ineffective and lack ‘‘gut-grabbing meaning’’, as Built to Last authors Jim Collins and Jerry Porras have often argued. Leadership that truly transforms is deeply rooted in values, convictions and principles of a more transcendent nature. For psychologist Howard Gardner, the essence of inspirational leadership lies in the ability to create and act out compelling stories, particularly stories of collective identity, which appeal to both
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Another problem develops when the senior executives who report to the CEO start to behave like acolytes, an ominous sign that credibility has shifted to credulousness.
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reason and emotion. Great enterprises, like Wal-Mart, are built on potent founding stories, embodied in largerthan-life characters like Sam Walton. Talented inheritors, like David Glass, keep the spirit alive and maintain its momentum. In their turn, great revitalizers reinterpret shared legacy and make it relevant to new and formidable challenges. For example, in the aftermath of the 11 September terrorist attack, the world watched mayor Rudolph Giuliani brilliantly rediscover the spirit and resilience of ‘‘The New Yorker’’ and articulate it in a new and compelling way that helped rally the city at a time of great uncertainty and distress. Likewise, over more than a decade, we have seen how Jack Welch has re-interpreted the spirit of General Electric and rekindled the American dream within the country’s leading business institution. What Welch accomplished reaffirms to the business world that entrepreneurial flair need not be lost with scale, in spite of much depressing evidence to the contrary.
Credibility – generating the currency The third element in this perspective is credibility. All great leaders recognise credibility as the dynamic currency of leadership, yet it rarely figures in traditional theories. Any theory of institutional leadership has to concern itself with how credibility is created and destroyed over time. In the first place, an examination of credibility helps us to recognise our natural tendency to romanticise our leaders and exaggerate the credit that we give to them for the things that happen, both good and bad. However, arguments over whether leadership is more style than substance miss a key truth. As a case in point, veteran Washington correspondent
Helen Thomas continues to rate president Kennedy ahead of his successors because he rallied Americans to aspire to noble goals at a time of national self-doubt. What the ‘‘Camelot’’ presidency illustrates is how symbol and substance can work together to be transforming. The flow of credibility also depends on performance in the arena, and leaders are continually trading in this currency throughout their tenures at the top. The focus on styles and attributes tends to make us too preoccupied with how leadership capacity differs from person to person. However, it is just as important to understand how it varies in any given individual over time. Too much credibility can be as harmful as too little. As credibility grows, the line between confidence and hubris often becomes very thin, as Jack Welch learned several times in his GE CEO job, and again in his ‘‘retirement’’ years too. Another problem develops when the senior executives who report to the CEO start to behave like acolytes, an ominous sign that credibility has shifted to credulousness. For instance, former president of Honda, Kiyoshi Kawashima, stepped down early when he found that his senior people had taken to agreeing with him much too often. It’s a pity more leaders do not follow his example. At the other end of the spectrum, credibility can be lost in trying to move too quickly in advance of key constituencies. Jacques Nasser’s failed bid to re-invent Ford Motors as a consumer services company is a dramatic example. At the time of his appointment as CEO, Nasser was widely seen as the best in the business, yet, ‘‘somehow during the course of his tenure he managed to
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create a lack of trust among virtually every constituency’’, as one of his board members put it. Other leaders lose their effectiveness over time because their spirits get tired or their stories get old. Thomas Jefferson once described the US presidency as a ‘‘splendid misery’’, and no incumbent aged more quickly over his years in office than Lincoln, one of the greatest American presidents. Clearly exemplary leadership takes its toll. Even where great leaders manage to remain strong in body and spirit over lengthy tenures, few are able to reinvent themselves and their stories when the original version no longer excites and emboldens those they would lead. Margaret Thatcher still felt like she could go ‘‘on and on’’ at the time that her political career ended in tears and she failed to recognise that her story had run its course. As another example, Ken Olsen of Digital was lionised in the business press for more than 20 years, but arguably he undermined a great legacy by holding on to the top job too long. Jack Welch recognised this danger at General Electric when he told a forum of Asian business leaders that he was ‘‘not retiring because I’m old and tired’’ but because ‘‘an organization has had 20 years of me’’ and has to ‘‘renew itself’’. The perspective on leadership presented here has three major implications that should be considered. Selecting leaders: matching talent and role
Oscar Wilde once remarked sardonically: ‘‘All the world’s a stage, but the play is badly cast’’. Good casting is key to leadership effectiveness at institutional level, but business history is littered with examples of poor selections that have destroyed value and damaged reputations. Casting is an art in itself, whether in business or the performing
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arts, and there are few reliable guides to getting it right. Success in supporting roles is no guarantee of effectiveness at institutional level, because top leadership is different in kind as well as degree from that at all other levels of management. Few expected Wal-Mart to succeed so well under David Glass, because Sam Walton was seen to be an impossible act to follow. Even fewer would have foreseen the tenures of Jacques Nasser at Ford, Doug Ivester at Coca-Cola or Eckhardt Pfeiffer at Compaq all ending so abruptly. These three talented executives had major achievements to their credit prior to taking the top job. For example, Nasser first successfully ran Ford Europe. Ivestor’s departure from Coca-Cola was also hard to understand because it was widely believed that no understudy had ever been as well groomed for succession. Pfeiffer’s firing was equally unexpected. At the time of the Digital acquisition in early 1998, Ben Rosen, chairman of Compaq, described Pfeiffer as ‘‘unquestionably one of the industry’s most talented executives’’ with ‘‘a tremendous strategic sense, an ability to execute and an ability to lead’’. A year later, Rosen fired him, and said he regretted not having done it sooner. The lesson to be learned is that institutional leadership seems to require the right blend of passion and pragmatism, and most of the miscasting that we see in the business world tends to come from getting this balance wrong. The right blend can change over time. For example, we have seen strong passion to achieve unique technological solutions create great enterprises like Polaroid and Apple, and later the same passion almost brought these enterprises to their knees. The histories of enduring enterprises tend to be marked by cycles of gradual and radical change. During the evolutionary phase, an
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existing business model is clarified, refined and finessed. This phase often requires steady adaptation. During the evolutionary phase, passionate leadership can be dysfunctional, as happened at Apple in the mid-1980s. On the other hand, conviction leadership is needed where great enterprises have become over-adapted to old realities and radical change is required. For instance, in 1985, John Ackers was the obvious choice of most IBM watchers for CEO. At the time, Big Blue looked as if it were on course to dominate every segment of the computer industry and become the world’s biggest company within a decade. Given this prospect, Ackers had been chosen as a steady hand on the tiller to keep this strategy on course. He was neither cast for, nor could he find the inspiration to fulfil, the transformational leadership role that IBM urgently required in the early 1990s. In contrast, part of the genius of General Electric to date has been the effective selection of passionate and pragmatic leaders to match its revolutionary and evolutionary cycles over its long history, according to the renowned management consultant Richard Pascale. Educating leaders: perspective not prescription
While good casting is essential, there is no role that fully prepares someone for leadership at the top, and new incumbents must learn quickly once in office. Most CEOs pick up their most valuable professional skills and knowledge on the way to the top. So how do they upgrade their leadership skills? Jeff Immelt, the new CEO at General Electric, is an avid reader of history and biography, but rarely reads business books, and he is not unusual. During his heyday at Citigroup, John Reed read deeply into the history of scientific ideas, studying ‘‘how ideas evolve’’ and how great scientists
develop ‘‘a sense of where the breaks are coming’’, and he was an unusually innovative banker for his time. What leaders like these seek most is perspective, not prescription. Yet academic and consultants continue to bombard them with advice on attributes, styles and behaviours and wonder why so many take no notice. If effectiveness depends on the ability to create and embody a compelling story that will reach into the hearts and minds of every stakeholder, then CEOs need to learn how to uncover the deeper values that they share with their followers. Then they need to articulate these values in fresh and compelling ways that link their company’s future opportunities with its history. If too many CEOs show little capacity for visionary leadership, it is not because they lack advice on lateral or creative thinking. More likely it is because their interests are too narrow, their deeper values remain untapped and they are failing to stretch themselves beyond the ‘‘completeness of a limited man’’, to use the phrase of John Stuart Mill. In these dynamic and uncertain times, it seems timely to look again at the role that the humanities might play in the education of leaders, particularly at the institutional level, where a humanist perspective is most needed. ‘‘Wherever did we get the notion that in management there is a reasonable separation of the intellect and the spirit?’’ asks CEO James Autry of Meredith Corporation. Yet, much of our traditional approach to the training of leaders seems to reflect this view. The distinguishing mark of the liberal arts is their emphasis on integration and wholeness, and we might all now benefit from recognising anew what many business leaders and academics of the post-war era believed over half a
‘‘
century ago, that an immersion in the humanities can help an executive become not only a wiser, broader person, but also a wider, broader businessperson. Few advanced executive development programs go near to developing this capacity today, and many do not even try. During the early 1950s, the world was embarked on a long struggle ‘‘between opposing ideals, opposing ways of life’’, as Donald David, then dean of Harvard Business School, described it at the time. Today, we are facing this struggle afresh, at a time when business has become the leading institution in geo-political development, and the need for the humanist perspective at CEO level is now more pressing than ever. In leadership studies generally, we still do not know fully know where great transcending ambition comes from, but if history is any guide, then the kind of ambition that built the cathedral at Chartres, painted the Sistine Chapel or circumnavigated the globe for the first time with a starving and mutinous crew, does not come from personal ego or the search for material success alone. An earlier generation of business leaders believed that management, like the arts and education, should serve a higher purpose than just the needs of business. It now seems timely to recover this value if our institutional leaders hope to be able to inspire their employees and help make working lives more meaningful in this postmodern world. Changing leaders: protecting legacies and reputations
Finally, inspired casting at the institutional level is likely to remain very challenging well into the future. Many leadership tenures end prematurely due
An immersion in the humanities can help an executive become not only a wiser, broader person, but also a wider, broader businessperson.
’’
to poor selection from the start, others because incumbents fail to grow in office. However, in today’s dynamic and uncertain world, good selection also comes unstuck because the requirements of the role shift radically over time. CEOs are being removed more rapidly than ever before when firms hit difficult times, and the process is rarely handled well. Shareholders are often outraged when they see massive payoffs to failed executives, like the deal Disney offered CEO Michael Ovitz. For their part, departing CEOs, like Jacques Nasser or Doug Ivester, feel used and betrayed after years of dedicated service, and many leave with their confidence shattered and their reputations in tatters. Stories of careers being revived at this level are rare, and this represents a shameful loss of talent to the corporate world. We have to find a better way, and the main responsibility lies with the board. Today, miscast CEOs tend to bear too much of the blame. No wonder many demand golden parachutes at the outset, though few expect to use them. If Ivester was basically wrong for CocaCola, was this not a failure on the part of Guizueta and the board? Boards must held more accountable for casting errors, and the argument for separating the roles of chairman and CEO seem more pressing than ever. Strong boards with independent chairs are also needed to take both timely and appropriate action when leaders who become miscast or lose their credibility over time have to be removed in the wider interest. This was why Compaq was able to act faster than most. Some CEOs are one-strategy specialists – ruthless cost cutters – like Al ‘‘chainsaw’’ Dunlop, were brought in to strengthen the balance sheet and cash flow in times of difficulty but proved to be incapable of growing the business once the storm was weathered. Moreover, those who are
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most effective at embodying their original strategy may become so typecast in the eyes of their followers that they only generate confusion when they try to re-invent themselves. There are also times when companies need to change their leaders for reasons more symbolic than substantive. In times of crisis, the drama associated with leadership change itself can help prepare an institution for transformation, generating a selffulfilling dynamic. Several decades ago, the choice of Don Petersen to lead a Ford Motor Company that had grown stodgy, symbolized the need to change and helped to bring about ‘‘the comeback of the 1980s’’ by successfully implanting a compelling new story of participative management
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that was very foreign to the company’s tradition. Boards need to find a better approach to the management of casting problems and to deal in a more equitable manner with CEOs who must make way in the company’s overall interest. The first consideration is timing. Boards shouldn’t move too quickly and remove a talented executive at the first crisis he or she encounters. If Coca-Cola CE Goizueta had been axed after the New Coke fiasco, or John Reed had been forced out during Citgroup’s trauma of the early 1990s, those firms would have lost two of their most outstanding CEOs. In other cases, however, boards delayed too long because they judged performance solely on the numbers
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and fail to monitor internal morale. For example, as the shares at Abbott Laboratories soared, Bob Schoellhorn became widely seen on the outside as somewhat of a hero, while rapidly losing the respect of his own executives for the arrogance and excess that eventually led to his downfall. Boards also tend to delay too long when a founding entrepreneur has to go. Rare are the CEOs who are right for all contexts, and rarer still the casting directors who never get it wrong. Greater acceptance of these realities, and greater care in distinguishing loss of credibility from lack of competence, will help boards take more timely actions and explain them to their wider publics.
Quick takes ‘‘Quick takes’’ presents the key points and action steps in each of the feature articles Page 4 Scenario planning after 9/11: managing the impact of a catastrophic event Peter Kennedy, Charles Perrottet and Charles Thomas
Post 9/11 is one of the most unsettling and confusing business environments since the Depression. Executives are grappling with the short- medium- and long-term decisions that must be made in the face of unknowable shocks and crises. How to respond? Consider decisiondriven scenario planning, which is extremely effective in working through uncertainties, exposing faulty assumptions, and probing conventional wisdom. Scenarios focused on the near term greatly enhance operational efficiency by confronting ambiguity head-on and forging critical alignment around big issues. Alternative scenario-based tools: traditional scenario planning can be retooled to address the current, specific need for continuity assurance and near-term operations planning. Three areas of needs are described in this article with case studies to show how each matches a modified scenario planning process. The processes are:
Page 14 Decision-driven scenarios for assessing four levels of uncertainty Hugh Courtney Catherine Gorrell is president of Formac, Inc., a Dallas-based strategy consulting organization (
[email protected]), and a contributing editor of Strategy & Leadership
J Near-term (1-3-year) operations planning – the focus is on the range of plausible outcomes that follow the ‘‘event’’. The case study works through critical operational issues in four narrowly focused business environments to ensure maximum preparedness for challenges to employee mobility, project management and new business development. J Strategic planning – the focus is on development of new business model and strategies that are robust no matter how the future unfolds; four or more dimensions are used. J A third case describes the development of a new strategy by the US Coast Guard prior to 9/11. The process has been credited with helping this service quickly adjust to the post 9/11 environment.
J Business continuity planning – the focus is on tactical responses to an ‘‘event’’; the use of a tightly focused set of scenarios using a very simple two-by-two scenario space matrix works well. The case study is of a financial services firm that used twoscenario set to build its plan but stress tested its recovery strategies with relevant wild-card events.
In the first two cases, scenario planning brought in a larger pool of executives into the decision-making process than would typically be the norm. As a result, plans and actions were more carefully developed and the outcome engendered greater confidence, clarity and energy for subsequent implementation. The greatest benefit, though, may be the rigor and creativity to defining ways to meet a different set of outcomes. Scenario planning is an excellent tool at this time. This is perhaps the best safeguard against our previous ‘‘failure of imagination’’.
To get the most out of the scenario planning efforts, select the process designed for the outcome anticipated. Practitioners should choose between two basic techniques: vision-driven and decision-driven scenario processes, both essential components of any company’s strategy toolkit. Companies that sponsor vision-driven exercises
every 1-3 years will be best positioned to recognize and capture the new opportunities and manage the risks inherent in today’s rapidly changing business environment. These exercises help set valuable strategic and organizational priorities, and provide the necessary context for all decisiondriven scenario efforts.
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This article focuses on the less wellknown decision-driven scenarios and explains how to match the right process with the level of uncertainty the scenario addresses. Companies should select concrete, decision-driven scenarios to make the right capital investments, marketing campaign and other strategic decisions when uncertainty implies that there is no ‘‘obvious’’ answer. Visionand decision-driven exercises are highly complementary. For those focused on near-term strategic decisions, the use of decisiondriven scenarios should be tailored to the correct level of uncertainty being faced. Points are presented in the article to assess when and how to apply each type of process. The four levels of uncertainty are: J Level 1: The future is predictable enough to identify a dominant strategy choice, such as McDonald’s US restaurant location decisions.
Page 23 Scenarios and strategies: making the scenario about the business David H. Mason and James Herman
Armed with the right technique and right support practices, scenario efforts are more likely to generate valuable foresight that leads to clearer strategic visions and better strategic decisions.
A methodology practiced by the authors makes scenario planning more relevant to senior business managers. ‘‘Future Mapping’’ incorporates the future of the client’s business itself into the scenarios being developed about the external business environment. For each external state, there is a future state for the business. The organization is the central focus of the scenarios – scenarios about the business strategy alternatives (e.g. low cost, differentiate, focus on markets served). This approach to scenario planning offers three key benefits:
J It turns the scenario development process into a strategy development process that balances external and internal issues.
J It is much easier to get senior management excited and engaged
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J Level 4: True ambiguity equates to future outcomes that are both unknown and unknowable. Analysis cannot identify the range of possibilities, let alone scenarios within the range. An example is formulating an airline’s strategy on 12 September, 2001. At this level, it is best to work backwards from potential strategic options to define ‘‘what you would have to believe’’ about a future scenario to support this option. A systematic checklist of key considerations would drive decisionmaking.
J Level 2: Alternative futures are possible and the best strategy to follow depends upon which outcome occurs. The strategist must choose between strategic options with different risk-return profiles across the different scenarios.
J It keeps the business and its choices apart of the discussion throughout the exercise
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J Level 3: The range of futures is unbounded. Customer demand for new products and new technology adoption rates are common sources of Level 3 uncertainties. General rules to follow are presented. Qualitative ‘‘business judgement’’ factors play a more prominent role here than in Levels 1 and 2.
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Overview of the steps: J Step 1 is to propose multiple outcomes for the industry, market, technology and/or society within which the organization operates. J Step 2 is to develop an event path linking today to the endstate. This is the ‘‘scenario’’. J Step 3 is to describe, for each endstate, an outcome for the organization itself. Events are not longer entirely external, but include actions that the organization might take. (This co-evolution is more
realistic than consideration of the external environment independent of the business.) The company’s own actions are complemented by a list of external events that must ‘‘go right’’ for the strategy to succeed. The scenarios can also be complemented with a timeline of changes in critical business metrics. This approach puts forth a rich notion of strategy that combines a clear definition of the aspiration of the business – what it wants to become or attain – with a timeline of specific internal and external action and interventions that are needed in order to succeed.
Page 32 Competitor scenarios Liam Fahey
Combining scenario learning and competitor assessment provides a methodology to enable managers to efficiently and effectively assess their rivals (both new and old) in a variety of settings. Not only does this process expand the thinking of managers (who are usually only focused on current conditions) but also offers them rich insight into their company’s own strategy alternatives (including ones not yet on its radar). This article demonstrates how the competitor scenario process works in practice and, with many examples, offers learned principles and ways to avoid various pitfalls. Briefly, a competitor scenario starts with a logical narrative that considers what a competitor might do over some specified time period, how its managers would do it, and why they would choose to do so. The scenarios can focus on a variety of topics such as: J Which product-customer segments the competitor chooses to compete (scope) J How it competes (competitive position). J What it seeks to achieve (goals). J How a competitor develops and manages a network of alliances or an integrated supply chain.
Several variations of this approach, with a different mixture of internal and external focus and steps, allows this scenario planning process to be tailored to the unique needs of any business. For example, using this methodology, scenario planning can be used as the first step for a change management effort. Or it can be used as the forum for a healthy debate among the management team concerning critical topics, such as the scope of the business, the importance of environmental changes like the Internet, and the governance principles upon which they will run the company.
There are two distinct types of competitor scenarios that originate in two quite different forms of what-if questions: unconstrained and constrained what-if competitor scenarios. J Unconstrained (or open-ended) questions encourage scenario developers to pose any question pertaining to one or more rivals’ marketplace strategies. Unconstrained questions are limited only by the experience, imagination and creativity of those involved. The questions can be mapped into four categories that lead to competitor scenarios with different foci. J Constrained competitor scenarios start from a common point of departure: what would the competitor do if a specific set of marketplace or macroenvironmental end-states or conditions were to arise? This type of scenario work is best if your firm wants to assess: j What would a rival do under specific market conditions? j Why would a rival adopt one strategy versus another? j Which marketplace changes might lead a rival to adopt a particular strategy? The five steps in constructing competitor scenarios are relatively
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Page 45 Using scenarios to focus R&D Gill Ringland
straightforward; they are discussed with examples. The last step being the essential question: what business issues emerge from each scenario that pose opportunities and threats that the
organization must explore? The issues will vary significantly across the endstates. This is the power and richness of the competitor scenario process.
Scenarios provide a process, mechanism and framework for anticipating change, watching for early warning signs, and creating more robust plans. This case examines how this applies to the research and development decision-making processes (ranking R&D projects and managing the R&D programs). The logic is simple:
This case recounts the use of the scenario process to discover ways that digital information is influencing and changing society. Emerging R&D technology could be assessed in scenarios that looked at how the combination of Information, Communication, and Technology (ICT) was influencing the way business evolves – or changes discontinuously.
J Business agility is a key requirement in the present business climate.
When using scenarios to define a portfolio of research projects, experience has shown that the portfolio that emerges is often significantly different than the one defined by initial instincts. This is just the first of several benefits for using scenarios for understanding the major areas of uncertainty for R&D projects. Other benefits are:
J The range of factors that need to be considered in planning R&D projects are much wider now than only a few years ago, increasing the difficulty to successfully forecast. J Scenarios can capture the dimensions of uncertainty, thus allowing R&D managers to create robust strategies because they can anticipate change and watch for early warning indicators of new phenomena. This is possible because mangers can view the sensitivity of their R&D projects’ success criteria in terms of the detailed assumptions about the future. Three components – forecasting, scenarios, and foresight – are all important in the ongoing R&D decision process. Forecasts combine current trends and render them into a single value or range of values for a variable (timescale of market impact, cost of project, competitive position). Scenarios capture and explore the multiple images of the possible future societies and how they may react to the R&D products. Foresight is the analytical process of using a combination of scenarios and forecasts to ensure that the company focuses its R&D on the most effective areas.
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(1) Widen the range of discussion about the research program to encompass not just technology but also market issues and the effect on society. (2) Engage sponsors and stakeholders in exploring the context of the proposed research topics in the program as a prelude to decision making and ‘‘selling’’ the research program for company funding. (3) Link technological issues to societal issues (4) Build a more robust research program by understanding the social issues that might prevent technology adoption and set up early warning indicators to monitor the pace and directions of evolution. (5) Prioritization of research topics for investment though the use of the early warning systems.
