Using Scenarios as a Strategic Tool
ADDENDUM: In these times of global crisis, Pierre Wack’s articles are as relevant as ever. If you need but one reason for why you should be working with scenarios, here are two:
“Scenarios serve two main purposes. The first is protective: anticipating and understanding risk. The second is entrepreneurial: discovering strategic options of which you were previously unaware. This latter purpose is in the long run more important.”
Today, everyone knows about scenario planning. But to this day, we would argue, many people who claim to know scenarios have not grasped Pierre’s true point about the power of scenarios. He had this to say about what he called common scenarios:
“Most scenarios merely quantify alternative outcomes of obvious uncertainties (for example, the price of oil may be $20 or $40 per barrel in 1995). Such scenarios are not helpful to decision makers.”
These types of scenarios are pervasive in all corporate planning and finance departments, and in strategy consultancies and economic think-thanks. However, scenarios like these often struggle to answer the question ‘So what?’ – little insight for strategic action or executive judgement can be inferred from them.
Scenarios should deliberately wrestle with uncertainty
Pierre understood and worked with ‘second-generation’ scenarios – or decision scenarios, as he preferred to call them – differently. Pierre’s concept of decision scenarios rests on this insight:
“No single “right” projection can be deduced from past behavior.
The better approach, I believe, is to accept uncertainty, try to understand it, and make it part of our reasoning.”
Pierre and his team at Shell developed scenarios that provided a much deeper understanding of how the oil industry worked – ranging from demand, supply, prices, technology, competition, business cycle changes. This understanding gave them the ability to foresee events that other oil companies and Shell’s own management at the time did not. For example, their scenarios in the early 70s indicated:
- The global oil market would switch from a buyers’ to sellers’ market
- There would be changing interfuel competition (from coal, gas, nuclear power)
- Major oil companies could become huge, heavily committed and less flexible
- Inevitably, the Middle East would be the balancing source of oil supply.
Scenarios must inform strategic decisions
With these insights, Pierre and his team also came to understand the complexity of what they called the ‘microcosm’ of corporate decision-making and the ‘macrocosm’ of (national) power struggles in the global oil market. Their objective therefore became to create scenarios that could advance strategic thinking within Shell:
“We now wanted to design scenarios so that managers would question their own model of reality and change it when necessary, so as to come up with strategic insights beyond their minds’ previous reach.”
Fundamentally, Pierre realized that scenarios are key to defining future strategies in times of change, by influencing decision-making behavior:
“Strategies are the product of a worldview. When the world changes, managers need to share some common view of the new world. […] Scenarios express and communicate this common view, a shared understanding of the new realities to all parts of the organization.”
At Rohrbeck Heger, we follow in Pierre’s footsteps and use scenario-based strategizing to help our customers be future prepared – contact us to learn more about how we bring strategy and scenarios together.