With start-up companies especially often seeing business planning more as a chore, large organizations around the world recognize it as a key tool thought which to prepare them selves for the opportunity and challenges that the future may hold. A business plan strategy that has been used with varied success for decades now is that of scenario planning.The scenarios relate closely to key elements of the strategy such as the competition,technology, or geography. The approach is then to develop a “resilient” strategy that can deal with wide variations in business conditions.For instance, each scenario is analysed to determine the optimal setting for each element (What would be the best marketing strategy for Scenario A? For B?) The most resilient option for each strategy element is chosen for each of the scenario-specific settings.
The resilient options are integrated into an overall, co-ordinated business strategy, takeing all scenarios at face value without judging probabilities.This approach makes maximum use of scenarios in strategy development. It provides management with the maximum feasible range of choice and forces careful evaluation of these options against differing assumptions about the future. But it requires effort and patience; and it works best when the decisions -makers participate directly in the scenario process. An example of this approach is the work that United Distillers (now Diageo) has carried out a number of scenario development exercises to assess the future of markets such as India,
South Africa and Turkey and hence the potential for and possible direction of business.
Scenario planning is regularly used at US-based clothing specialist Levi-Strauss by senior management who sit on cross-functional committees at headquarters level. Scenarios have been used to heighten awareness of the challenges facing the business, and to develop strategy in relevant areas such as the environment. They have been used to help thinking in the context of challenges, such as what would happen if cotton no longer existed, or what would be the impact of the deregulation of the cotton industry in the US.Erste Allgemeine Versicherung, an insurance company based in Austria, first used scenarios in 1988. The main areas considered were politics, economics, the insurance industry structure and changes, technology and demographics. The objective was to look at the business environment and how other competitors might develop. As a result of the scenario process, the company anticipated the fall of the Berlin Wall and the opening up of Eastern Europe before it happened. This was identified as part of one of the scenarios in 1988. This enabled the company to be ready to move into Eastern Europe and therefore be one of the first companies to set up in Hungary. Companies were also founded in the Czech Republic,Slovakia and Slovenia.
BA used this approach to develop strategy, taking each scenario through to a full numerical plan. With hindsight, they thought that the last stage – the full numerical plan - had been more work than warranted by the benefit. This seems to be a consensus, that the best use is staying at the descriptive level, to avoid a focus on the detail of the model rather than exploring the underlying assumptions.Strategy Evaluation This method of connecting scenarios to planning uses scenarios as ”test beds” to evaluate the viability of an existing strategy or compare proposed strategies. It is often the best first use of scenarios in a company’s strategic-planning system. The strategy may have derived from a set of implicit or default assumptions or a single- point forecast – the approach identifies quickly “bottom-line” issues and provides senior managers with immediate evidence of scenarios’ utility.It is often used in “management game” mode, where a business unit is played against a competitor under each scenario. This allows the management to assess the likely success of the business in the diverse conditions of the scenarios. In particular, it homes in on opportunities that the strategy addresses and those that it misses, threats/risks that the analysis has foreseen or overlooked, and factors affecting competitive success or failure. This approach normally highlights the options for changes in strategy and the need for contingency planning.For instance, in 1995, ICL’s manufacturing division had been trading as D2D for several years and increasing the amount of work done by the division for organisations outside ICL. D2D’s business plans needed to cover a range of external business conditions and customers. We applied the test bed of our IT industry scenarios to the plans, and realised that the plans were based on a set of default assumptions closely aligned to one scenario. When we ran the plans through the wind test of the other scenario, we found that a number of the operational and business characteristics that D2D had assumed to have very high value were of less interest to the customers in this scenario. The analysis helped us to decide to sell D2D to Celestica, a global contract manufacturing company, in December 1996.Sensitivity/Risk Assessment Scenarios can be used in two rather different ways to assess risk. One way is to Identify key
conditions in the future market/industry environment (such as size/growth of market, changes in regulatory climate, or a technological breakthrough) that would be necessary for a “go” decision on a particular project. The other is or to apply scenarios to a portfolio of projects and to use a technique such as a Market Attractiveness/Capabilities matrix to evaluate the comparative risk of the projects or businesses.Using scenarios to evaluate a specific decision (such as a major plant investment or new business development) is very useful if there is a very clear and specific “decision focus” that lends itself to a “go/no go” decision. For instance, a construction company uses the technique
for “back of the envelope” examinations of business propositions, and as part of its project portfolio management. In more complex cases, computer modelling (with scenarios providing assumptions) can be used to evaluate the strategy’s resilience or vulnerability to differences
in business conditions. So for instance 3M Telecommunications Systems Division has used scenarios, linked to payoff and risk assessment, to implement new strategies following deregulation.Hedging or contingency Planning
This fourth method starts with one particular view of the world – this may be the assumptions behind the current plan, or “the most probable” of several separately developed scenarios. Then a strategy and plan is developed to fit this scenario, maybe using a SWOT (strengths, weakness, opportunities, threats) analysis.The strategies & plans developed for one scenario are then tested against other scenarios to assess resilience and the need for modification, “hedging”, and contingency planning. In its step-by-step process, this addresses many key questions that scenario-based strategy should ask, and avoids the pitfall of focusing on only one scenario.Using probabilities attached to scenarios has been extensively used in France, with Michel Godet’s guidance, as described in (5). Probabilities are also part of the Batelle approach, and the CSM (Comprehensive Situation Mapping) tool, which has been used for instance to model
new banking competitors.Perhaps the issue is that large corporations have more at stake, or perhaps its more a case that these corporations realize what is at steak because of what they have achieved. Entrepreneurs to need to take the issue of planning more seriously. Yes of course we need to be flexible and responsive to what clients, the environment and competitors through at us and having a number of well researched and resourced options to our disposal is half the battle won.
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