Scenario Thinking: Preparing Your Organization for the Future in an Unpredictable World

By George Cairns and George Wright

Develops scenario planning methods in ways that link scenario analysis to improved decision making, engage time-poor senior decision makers, attenuate decision makers’ tendency to deflect responsibility for bleak, negative scenario outcomes, and enhance causal analysis within scenario-storyline development.

What if? Two of the most powerful – and frightening – words in business. Almost as bad as “I didn’t see that coming.” Some things that transform the marketplace overnight come from nowhere. Some things that create potentially critical under-performance are genuinely unforeseeable. Sometimes it is impossible to predict how a change in an organizational strategy will play out. Some things and sometimes – but not many and not often.

Decision makers in organizations face more-and-more complex and ambiguous problems that need to be addressed under time pressure - and the need for practical decision support has become essential. The range of methods in this book will enable you to be prepared, proactive and resilient no matter what the future brings.

Based on up-to-date academic research and years of application and iteration in the real world, this book, illustrated with examples of the value delivered in Europe, Australia and the Middle East, will transfer practical skills in scenario thinking using step-by-step instructions.

This thoroughly revised and expanded second edition introduces these new approaches in detail, with clear guidelines and examples to enable the reader to select and implement the most appropriate scenario method to suit the issue at hand – considering the timeframe for its investigation, the resources available and the outcomes expected.

• Language: English
• Publisher: Palgrave Macmillan
• Release date: Oct 13, 2017
• ISBN: 9783319490670

Book preview

© The Author(s) 2018

George Cairns and George WrightScenario Thinkinghttps://doi.org/10.1007/978-3-319-49067-0_1

1. Why Should the Individual and Organization Practice Scenario Thinking?

George Cairns¹  and George Wright²

(1)

QUT Business School, Queensland University of Technology, Brisbane, QLD, Australia

(2)

Strathclyde Business School, University of Strathclyde, Glasgow, UK

Scenarios have been used over decades by governments, businesses and non-governmental and not-for-profit organizations. Across each of these sectors, examples like the Singapore government,¹ Shell Global² and the UK National Council for Voluntary Organisations³ show the value attached to scenarios. In this age of uncertainty surrounding political, social, economic and environmental changes across the world, we see a clear need for all individuals and organizations to use scenario thinking. In the past year, as we complete our writing in early 2017, we have seen the unfolding of events that, as our later examples of scenario projects will illustrate, were found totally implausible, and even laughable, less than a year ago.

In the first quarter of 2015, the idea that Donald J. Trump would be elected President of the United States was scarcely considered. Similarly, the notion that the UK populace would vote to leave the European Union was not seriously considered, not even, apparently, by those that promoted leaving. Now, in 2017, we see calls for similar actions in other EU countries, including France, Italy and the Netherlands . As you read this, there may be clarity, for the present, about such moves. However, we would need to consider the possibilities and potential impacts of them in any scenario exercise undertaken in the run up to various national elections. You should be prepared to seek out similar critical uncertainties that will impact your and your organization’s decisions and actions, considering all plausible possibilities, and challenging what others present as implausible.

Scenario thinking offers a way for individuals and groups to face up to the threats and opportunities of the future and to their potential impact upon the organization or community. As a decision maker in this sort of situation, you may not fully understand the complexities and ambiguities that the future may hold. However, we would argue that in light of the examples above and those we will discuss below, you cannot afford not to think about the future and simply continue with your present course of action.

Business-As-Usual Thinking in a Changing World

The history of business shows that there are many companies that have achieved success and remained household names over long periods by adopting a business-as-usual approach. However, for many firms this success has been challenged in the longer term by new innovations and new market entrants. Comparison of the organizations that dominated the Fortune Global 500⁴ over even the last two decades shows the rate and nature of change. In 2016, the global top 10 comprised a mix of retail, energy, technology and automotive firms from six nations across the globe. Of these, only five appeared in the 2006 list—Walmart/Wal-Mart, Royal Dutch Shell , Exxon Mobil, Toyota and BP. Chinese firms occupied three of the top four positions in 2016, below Walmart in first. In 2006, there were no Chinese firms ranked in the top 10. Comparison with the 1996 list shows even greater movement. In that year, only Royal Dutch Shell came from outside either Japan or the US. Japanese firms occupied six of the 10 positions. Of these, only Toyota moved forward to the 2006 list. Exxon Mobil, Shell and Toyota are the only three organizations that have remained in the Fortune Global top 10 across all three lists.

Why is it that world-class companies, staffed by world-class managers, do not survive in a changing world? Why is it that others survive, but only after facing up to unanticipated threat to their dominance and seeming invincibility? IBM was for decades the world’s leading computer manufacturer and it invented the personal computer (PC). However, it failed to exploit this new technology and product. IBM’s slowness to adapt enabled first Compaq—later to be merged into HP—then Dell to take the lead in PC development, marketing and sales. These companies recognised the need for new business models to sell PCs to a new, non-traditional set of computer users. As these companies created their own brief spell of market dominance in PCs, IBM for a while seemed lost. Latterly, IBM reinvented itself as a global business consultancy organization and rebuilt its brand image and a new global success in this new form. In the meantime, the personal computer market has moved forward, with laptops gaining market share and new providers like Acer, Asus, Samsung and Toshiba entering a competitive global market.

The threats to survival can be multiple and organizations may survive one threat only to be crippled by another that they did not see coming. Over the last decade, the ‘big three’ US automobile manufacturers—Chrysler , Ford and General Motors (GM)—have been among the many affected by the global financial crisis (GFC). These firms dominated the US and global automotive markets for most of the twentieth century. All three appeared in the 2006 Fortune Global top 10, but with Chrysler by then in the guise of DaimlerChrysler and headquartered in Germany. However, none is in the 2016 top 10, with only GM in the top 20, at number 20 (Daimler, now devoid of Chrysler sits at number 16).

These major corporations’ first major error lay as far back as the 1980s, when they failed to adapt to new consumer demands for smaller, more economic and more environmentally friendly vehicles. In that decade, Honda, Nissan and Toyota made major inroads into the US market, first through vehicle imports, then building production plants onshore. For a period in the 1990s and early 2000s, the big three avoided the impact of these demand changes by creating and living off a new craze for ‘sport utility vehicles’ (SUVs). However, the unfolding financial events wiped the sheen off the gas-guzzling top end of that market and they were left exposed.

Looking at the global automobile market for 2016, smaller saloon cars dominate the top ten sales globally, with examples like the Toyota Corolla, VW Golf and Ford Focus from a range of manufacturers who now build and sell their vehicles in a wide range of international settings. However, at number two globally, we find the massive Ford F-Series truck, which dominates the US market ahead of two similar products. So we see that, despite the continuing fallout from the GFC, fluctuating oil prices, calls for action to reduce carbon emissions and the emergence of new hybrid and electric cars, the backlash against large vehicles has not been maintained as a long-term consistent trend.

Looking further back in history, we can consider the example of Xerox , which in the early 1970s held a 95 percent market share of the global copier industry. Its target customers were large corporations and the concept of customer value was that of centrally controlled photocopying. Xerox focused on manufacturing and leasing complex high-speed photocopiers, using its own production and sales service force to provide a complete package to those who leased its machines. Then, along came Canon —who competed head-to-head for Xerox’s large corporate customer base. Why didn’t Xerox appreciate the nature of the threat and respond earlier than it did to Canon’s attack?

Xerox had a very strong business idea, but the very strength and invulnerability of the business idea was its undoing. Xerox was shackled with its own sales force and its leasing policy for its big machines. It could not afford to offer smaller machines to its customer base. It thought that its customers, heads of copying in large corporations, would protect both themselves and Xerox and retain centralised copying, since it was in both the customers’ and Xerox’s interests. Other parties trying the same business idea found that it could not be copied. However, individuals working in those large corporations increasingly wanted the control that the flexible and instant access to copying facilities of Canon offered.

Like IBM , Xerox has survived and continues to thrive, but as an agile and adaptable business that focuses on customer-focused research and innovation to develop ‘innovation at work’ and explore ‘trends (that) are shaping the world of work’.⁵

Lessons from History—Building Agility for the Future

Why is it that major, household name businesses like Chrysler , Ford , GM, IBM , and Xerox felt invulnerable and convinced that the future would be a continuation of the recent past? They seemed totally unprepared for when the worst happened: market forces changed, a competitor came from nowhere and established a stronghold, based on evolving customer value. Why was this? The reason is that these companies and many, many others were the prisoners of their own success. They show how, when things are running smoothly, ways of operating can become ingrained over the years.

Many organizations follow managerial recipes in a similar way to those we have mentioned, allowing their recipes to become routines that guide all thinking and acting. As writers on strategic management have argued, to survive, an organization’s strategic decision making must retain or improve the organization’s alignment with the external world. In other words, recipes should not be routinely followed and should be changed altogether when appropriate and necessary. However, strategic inertia—defined as the degree of commitment to current strategy—grows over time as current ways of operating become increasingly embedded in an organization. Commitment to the status quo will tend to escalate in a smooth, undisturbed fashion, with incremental adjustments or improvements to current strategy over time. However, as we highlight above, escalated commitment to business-as-usual is likely to result, at some stage, in a mismatch with changes in the business environment.

Constrained Thinking and the Global Financial Crisis (GFC)

The GFC and its aftermath offer clear evidence of what can happen when the future is seen as a continuation of a seemingly rosy present. Just before the financial meltdown of 2008, Business Week published its annual survey of business forecasters and asked for their predictions on the US economy in the forthcoming year (published on 20 December, 2007). The economists projected, on average, that the US economy would grow 2.1% from the fourth quarter of 2007 to the end of 2008. This averaged forecast was a slight turn-down from the 2.6% growth achieved in 2007. Only two of the thirty-eight forecasters surveyed predicted a recession. So, economists and financial institutions in the US and across the world appeared to be totally blind to what, in hindsight, appears blindingly obvious—that lending money to those who had no immediate means or prospects of being able to repay the loans could result in serious consequences for the US economy . The reasons that justify why the subprime lending was seen as prudent are widely known. The lending was considered ‘safe’ because there was property as collateral. House prices had always risen in the experienced past years and it was assumed that they would continue to rise. So, there was thought to be ever-appreciating ‘bricks and mortar’ whose increasing value would cover the mortgagee’s loan, plus interest.

We are now aware, of course, that those who did much of the lending were handing out other institutions’ money and were gaining big commission payments for doing so. These lenders were exposed to no direct financial risk themselves—in technical terms the loss function was asymmetric. The subprime mortgage debts were bundled into complex investment packages—so complex that those that bought into them did not really know what they were investing in. But, they did not seem to care. Individuals and organizations saw that their peers and competitors were entering into what appeared to be high return, low risk investments. The bonuses were huge and the lifestyle lavish. Why would any finance professional not be attracted? How could anyone resist? We are not so bold as to assert that application of scenario thinking would have avoided the GFC. However, we think that its wide use should have increased awareness of the possibility of alternative futures beyond the current trajectory and prompted strategic planning to: have a broader awareness of risk, recognise the early signs of an unexpected future unfolding, and be proactive in seeking to mitigate risk.

In this book, we present clear guidelines and examples on ‘how to’ undertake scenario analysis. By being aware of and practised in the art of undertaking this type of analysis, you should be prepared to face up to the future in a proactive way. We outline how use of scenario methods takes you beyond bounded thinking and enables you to think about the future from multiple perspectives at the same time. By its very nature, scenario thinking presents an explicit challenge to ‘business-as-usual’ thinking.

However, while you, as an individual, may recognise the need for adoption of a new approach to dealing with the future, we are only too aware that there are strong cultural constraints faced by those who think differently.

Overcoming Societal Constraints on Challenge to See the Usefulness of Scenario Thinking

In relation to questions of why no one appeared to challenge what was happening in the cases we outlined above, we would highlight a key danger—societal pressures that stand in the way of thinking differently and of thinking laterally. We live at a time when there is much talk of people being encouraged to show their individuality, to be different, to be creative. However, we would assert that the reality is very different. Ours is an age in which there are intense pressures to conform, to ‘go with the flow’, not to ask questions but, instead, to comply passively with increasing regulation and control. Organizations may espouse notions of individuality but, by and large, they expect their members to be predictable corporate citizens.

Although everything from clothing to cars is marketed as enhancing the consumer’s individuality, these differentiated products makes us ‘different’ in the same way as everyone else. Democratic governments appear less and less open to question and challenge from their citizenry, the media or any other authority, even as they make decisions to go to war. At the same time, the media is less independent than in the past, more and more governed by corporate pressures and expectations. From childhood, we are encouraged to be ourselves but, at the same time, required to conform. So, how can we help individuals and organizations to challenge business-as-usual at a basic level—to challenge perceived wisdom? We offer scenario method as a mode of facilitating challenge , not through direct confrontation and opposition, but through setting alternative understandings alongside each other for reflective comparison.

Decision makers within organizations are becoming more aware of the need to be mindful of the impact—positive or negative—of their decisions and actions, hence increasing interest in notions of sustainability and corporate social responsibility in both business school curricula and corporate reporting. The strength of scenario methods as a powerful set of tools for strategic analysis has been brought to the attention of businesses over recent years. In 2013, building on three decades of interest in scenario methods (cf. Wack, 1985a, 1985b), the influential Harvard Business Review published two articles that promoted the application of scenario methods in the present (Courtney, Lovolla, & Clarke, 2013; Wilkinson & Kupers, 2013). The global consultancy firm McKinsey & Company promoted the application of scenarios as a powerful tool in the strategist’s armory (Roxburgh, 2009). However, as we pointed out in our opening paragraph, the value of scenarios has been recognised outside the world of business. The Singapore Government established its Scenario Planning Office within the Prime Minister’s Office in 1995 (Centre for Strategic Futures, 2015), since when it has been engaged, under several names, to identify issues that may lie within blind-spot areas and to coordinate futures thinking across from a whole-of-government perspective. In the UK, the Government Office for Science published a guide to scenario planning to promote medium to long-term strategic analysis and planning (Foresight Horizon Scanning Centre, 2009, p. 5).

At the start of the millennium in Australia the federal parliament published a report that promoted the application of foresight and scenarios to look toward Australia 2020 (James, 2001). However, if we look at the recent history of political decision making in the country, we see evidence of short-term actions to support business-as-usual thinking and action. Federal governments pumped vast amounts of money into what many others saw as lame-duck automobile manufacturing, with all three manufacturers—Ford , Holden and Toyota —ultimately pulling the plug on Australian production in the current decade. Similarly, in the face of growing concerns about climate change and environmental degradation, there have been federal and state government moves to support and develop carbon-dependent and resource-depleting activities, from coal and iron ore mining to coal-seam gas extraction.

Again, as outlined above, scenarios have been promoted for use by non-governmental and not-for-profit voluntary organizations. In the Australian state of Victoria, the Department of Human Services issued a guidance paper on strategy and planning tools for not-for-profits, which included scenario analysis as one of the set (State of Victoria, 2013). Scenario methods have particular value in exploring complex, ambiguous and challenging problems facing society. In the Netherlands , scenario analysis was applied to explore residential requirements for people suffering mental health issues, in the face of an apparent trend towards the re-emergence of institutionalization as the dominant model of response (Bierbooms, Bongers, & van Oers, 2011).

Our organizations, our technologies and our operations are more complex than they have been at any time in the past. They also take place on a much larger scale. Their effects are much greater. What we do now has impacts across the world and into the future. The issues we face and that we create for ourselves and others require new forms of joined-up thinking and analysis that take account of their complexity and trans-disciplinary nature. We need to consider how we deal with business problems from the perspectives of the broadest range of stakeholders, not just our immediate employees and corporate stockholders.

In addition to the uncertainties faced by individual organizations, we nowadays face major challenges that must be addressed at a global level, but which also have local impacts and require local responses. At a global level, we must face up to the fact that climate is changing— climate change appears to be generally accepted, albeit its causes and the nature and scale of its impacts remain subject to debate. At the same time, we face the realisation that the world’s resources are not infinite and others—including, but not restricted to the growing populations of emerging economies such as Brazil, China and India —have legitimate claims upon them. The future that the developed economies have set course towards is reliant upon access to these resources. As we write, threats around access to these resources and other global concerns—terrorism, pandemic, economic uncertainties—persist. Their relative and absolute importance grows and diminishes in line with their prominence in the media and in public perception.

At the same time, we are faced with the promise and possibility of new technologies that may help us satisfy our needs and wants. Some have advocated the use of nuclear power to solve the ‘energy crisis’ and the potential of nuclear fusion technology was promoted in the first decade of the century. However, the Fukushima reactor failure and radiation release following the 2011 earthquake and tsunami led to widespread negative responses to the promotion of nuclear energy, and the closure of several programmes. While there is ongoing debate and conflict over the use of nuclear, there have been growing calls for investment in renewable energy sources. These are developing apace, along with fuel cell and new battery technologies . But again, as we write, the carbon extraction sectors of countries like the US and Australia continue to prosper, in response to demands for cheap fuel and with the support of climate sceptics, who challenge the veracity of seemingly irrefutable scientific evidence and who gain wide exposure through unquestioning at best, biased at worst, media.

In the field of human health and medicine, advances of research in fields such as Alzheimer’s disease, cancers and HIV/AIDS are being reported almost daily. However, we have also seen the emergence of new and unpredicted threats to human health, from the Ebola outbreak of 2014, the Zika virus emergency of 2016 to the re-emergence of bird flu outbreaks and fear of global pandemic in early 2017. In the face of ongoing but ever-changing health threats, we have seen recent development of new ‘context aware’, wearable healthcare technologies . While still in early stages of development, these are predicted to offer opportunities for constant health monitoring, of value to those with chronic conditions or those living in remote areas. However, some see these as also presenting potential threats, such as increased surveillance and control, and selective offers of health cover by insurance companies.

We could go on. Our point is that, at the very local level of the organization, region or community, various opportunities and threats will arise in the future. Our book will demonstrate that the future, while unpredictable, is to a large extent knowable. Scenario thinking will help you, and your organization, to make better decisions in the face of this uncertainty.

What Are Scenario Thinking and Scenario Method?

Scenario thinking contains key components to promote effective exchange of opinions and beliefs among individuals with a shared interest in some critical issue. The construction of multiple futures holds open airtime for differing opinions about the nature of the future and provides a forum for the debate, questioning, and synthesis of complementary, contrasting, and conflicting viewpoints. Those enmeshed in particular fragments of the organization are provided with a process to achieve a synthesis of viewpoints that is likely to unite previously opposed factions. The scenario process combines space not only for differentiation of views, but also for integration of views towards a synthesis through the strategic conversation implicit in it. In this way, it assists decision makers in steering the organization away from the excesses of group think on the one hand and fragmentation on the other.

The practice of scenario thinking, via the intuitive logics scenario method that we present first, is a means of overcoming strategic inertia, since it implicitly accepts that managers’ best guesses about the course of future events and about the appropriateness of strategic choice may be mistaken. Essentially, scenario interventions within organizations construct multiple frames of future states of the external world, only some of which may be well aligned with current strategy. Scenario thinking can facilitate vigilance in strategic thinking—in that alternative futures are thought through and strategic options can subsequently be evaluated against these futures. The process of scenario thinking enhances the evaluation and integration of information and promotes contingency planning for unfolding of both favourable and unfavourable futures.

Multiple scenarios are pen-pictures of a range of plausible futures. Each individual scenario has an infinitesimal probability of actual occurrence but the range of a set of individual scenarios can be constructed in such a way as to frame the uncertainties that are seen to be inherent in the future—like the edges on the boundaries surrounding a multi-dimensional space. Multiple scenarios provide alternate frames on the nature of the future. Also, and crucially, because each of the scenarios—and the space that they frame—is plausible, the events and impacts that they outline must be considered possible for strategic planning purposes.

It is worth comparing and contrasting scenario thinking, as described here, with planning and decision making approaches that require judgmental forecasts and confidence assessments about the future. The judgmental process that produces such numeric forecasts is often not verbalised or recorded, so the decision making may appear to the audience to reside within a ‘black box’. Also, inherent in these alternative methods is the assumption that it is both useful and possible to attempt to predict the future, whereas scenario thinking assumes that the best that can be done is to identify critical future uncertainties and plan for the range of futures that could, plausibly, unfold. Essentially, scenarios highlight the reasoning underlying judgments about the future and give explicit attention to sources of uncertainty without trying to turn an uncertainty into a probability.

A major focus is on how the future might evolve from today’s point-in-time to the horizon year of the scenario—5, 10 or more years hence, depending on the nature and rate of change of the issue under consideration. Scenario thinking analyses the relationships between:

the critical uncertainties (as they resolve themselves)

important predetermined trends (such as demographics), and

the behaviour of actors who have a stake in the particular future (who tend to act to preserve and enhance their own interests).

In the ‘basic method’ and its various augmentations that we discuss first, the scenarios are developed and produced by the key involved and affected stakeholders. As such, the pen-pictures produced are highly plausible to them and they are generally highly motivated to communicate them to a wider audience in the organization or community. However, our own experience and that of others (e.g. Pincombe, Blunden, Pincombe, & Dexter, 2013) is that it can be very difficult to engage pressured and time-poor senior decision makers in the types of exercise that require them to commit to first learning and understanding the scenario approach before applying it effectively to the problem at hand.

On this basis, over the last few years, we have developed a number of alternative approaches, whereby external researchers and scenario experts undertake the first-round analysis and scenario writing. Thereafter, the scenarios are presented to the involved and affected stakeholders who must first confirm, or challenge and correct, the plausibility and possibility of the narratives. Only once this is done, can we move on to explore the causal logics of the scenarios, working back from extreme futures to uncover essential decisions and actions in the present and near future. These can be focused on promoting a best-case future, avoiding a worst-case future, or building resilience in the face of unavoidable negative possibilities. Central to whatever approach is appropriate and adopted is the concept of effective and open communication.

Alternative worldviews can be communicated easily in an organization via the medium of scenario ‘stories’. Additionally, once a story has been read and the reasoning underlying its unfolding understood, a future has been ‘rehearsed’. Thus, once the early events in a scenario occur, the decision maker will be able to anticipate how the future will likely unfold. These ‘trigger events’ will be seen as information among the stream of data that impacts upon the decision maker. Scenario thinking can promote:

Early contingency action. Just as the new purchaser of a car becomes sensitive to the variety of models of that make on the road, the scenario thinker becomes sensitive to a scenario starting to unfold and becoming reality. Such sensitivity can lead to early contingency action to counter an unfavourable future

Early recognition of opportunities. New organizational opportunities can be quickly grasped as soon as favourable scenarios begin to unfold. Such early recognition and reaction to an emerging future is seen, by some practitioners, as more useful than the creation of robust strategic options.

The typical outcomes of the scenario process include:

Confirmation that the overall strategy of a business is sound, or that new underpinning strengths need to be added to create more robustness. (Robustness implies that a strategy performs well in each scenario)

Confirmation that lower-level business choices are sound, or that new, alternative options are more robust

Recognition that none of the business options are robust and, therefore, contingency planning against unfavourable futures is necessary

Sensitivity to the ‘early warning’ elements that are precursors of both desirable and unfavourable futures.

Scenario methods contain components to promote alternative views about the nature of the future and also to challenge potentially inappropriate confidence—both in a single ‘best-guess’ future and in a single, tried-and-trusted strategy.

Our broad analytic approach that underlies all the methods you will read about is, to our minds, essential to inform and support decision making that embraces and integrates consideration of the full set of political, economic, social, technological, ecological and legal (PESTEL) factors that will shape the future. These are wide in range, variable in their interactions, unpredictable in their outcomes, but can be explored and understood by the application of the approach known as ‘intuitive logics’ (Jungermann & Thuring, 1987) that we introduce as you read through this text. Our structured approach to scenario thinking will enable you to:

Identify the forces in the broad business environment that are actually driving the issue forward

Consider the range of possible and plausible outcomes of each of these forces

Understand how the forces interact with each other in terms of cause and effect and chronological order,

and from these to:

Explore the ‘limits of possibility’ for the different futures that might unfold as a result.

Our Approach

Our initial approach to scenario building as set out in the basic method and its augmentations is a team-based one. Those who have to make the decisions should also be those who create the scenarios. This means that senior members of the organization—or organizations—should be intimately involved in scenario development. This group may engage an external facilitator to oversee the project but the external facilitator will simply aid the process of scenario construction rather than add in substantive expertise on scenario content. We realise that there are limitations to this reliance on expertise that is internal within the host organization, but scenario thinking is a learning experience rather than a desk-based exercise to be conducted by external experts. The true expertise lies in the heads of the individuals who are grappling with a strategic issue, rather than in the hands of external consultants. Also, as outlined above, we recognise that the time required for such intimate involvement by key decision makers may be problematic. As such, we offer alternative approaches to initial scenario construction, but built