Scenario Development

Contents

List of Abbreviations

Illustrations

Tables

1. Introduction

2. What is Scenario Analysis
2.1. Term “Scenario”
2.2. The Concept of Scenario Analysis
2.3. Accuracy

3. How to Do It
3.1. The Scenario Model
3.2. Eight Step Procedure
3.3. Number of Scenarios to Generate
3.4. Time Horizon

4. Shell´s Scenario Experience

5. Summary

References
Books
Websites

Appendix 1:

List of Abbreviations

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Illustrations

Fig. 1: The Scenario Model

Fig. 2: Eight Step Procedure

Fig. 3: Scenario Planning Success at Shell

Table

Table 1: Evolution of Scenario Building and Use at Shell

1. Introduction

There are many different methodologies for assessing the future environment of an enterprise. But it is quite difficult to anticipate the future development successfully. Three examples illustrate this problem:

- “In 1943 Thomas Watson, who was then chairman of IBM, forecast a world market for about five computers.
- In 1970, Ken Olsen, founder of Digital Equipment Corporation, said no one needed to have a personal computer at home. (Of interest is that Ken´s company was purchased by Compaq – one of the leaders in home computers).
- In 1981, Microsoft´s founder Bill Gates said that 640K would be enough memory for anyone. (Microsoft was also slow to take advantage of the early Internet – releasing Internet Explorer in August 1995, well after Netscape Navigator, which had taken a dominant lead in the early browser market.)”^[1]

These examples show that it can have disadvantageous consequences to rely on one apparently safe forecast. Scenario planning is a technique that allows to operate in planning with more than one possible future. This treatise describes the very interesting methodology of scenario development and demonstrates how to use it in an eight step procedure. Concluding, it shows how the oil company Shell had a remarkable success in the 1970s by using scenario planning and gives an assessment of this remarkable technique.

2. What is Scenario Analysis

2.1. Term “Scenario”

The term ´scenario´ originally comes from the dramatic arts. In the theatre, a scenario refers to an outline of the plot, in movies it is a summary or a set of directions for the sequence of action. Creating a scenario contains answers to questions as: What are the driving forces? What is inevitable? What is uncertain?^[2]

Herman Kahn , the famous futurist^[3], introduced the term ´scenario´ to planning in the 1950s. Scenarios were first used in military strategy studies for the US government. In the 1960s, scenarios were used in an urban planning project for Paris. However, Pierre Wack maintains that it was a group of strategic planners at Royal Dutch Shell that came up with the idea of scenario analysis (see Item 4). Today “political, organizational, and marketing experts use scenarios .. to conjure up visions of alternative favourable and unfavourable business environments.”^[4]

2.2. The Concept of Scenario Analysis

Scenarios are images of the future and are used as analytical tools for assessing the impacts of policies.^[5] No one knows how a companies environment will evolve. “The insights gathered through scenario planning often come as a surprise: 'I would not have thought that this was possible, but it makes complete sense' is a common participant's statement in a scenario project.”^[6] When assessing the future fundamental uncertainties that could drive change in many different directions should be considered. These fundamental uncertainties are called driving forces. Scenario planning gives us the flexibility to plan for several possible futures. By tracking early indicators, it is possible to develop the sensitivity and agility to create an emergent strategy – a strategy that changes directions as events unfold.^[7]

The essential features of scenario planning are these:

- Scenario analysis presents alternative and novel ways of seeing the world.
- This is accomplished by providing a series of qualitative, as distinct from quantitative, descriptions or narratives displaying alternative ways in which the present might evolve into the future.
- The future is projected in plural not singular terms. Thus, more than one possible future is represented. Whereas a forecast is essentially a prediction of what will happen, scenario analysis conceives and represents alternative possible outcomes.
- Central to this analysis is uncertainty. The task of scenario development is to recognize the reality of uncertainty, to comprehend its significance, and to integrate uncertainty into alternative representations of the future. These representations bring together an array of diverse information relating to economic, technological, industrial, social and political change.^[8]

“Thus the essence of a scenario is that it portrays different worlds, different futures, and not, as in forecasting, projected outcomes in the same world. The intention is not to produce one ´right´ scenario but rather a set of possibilities which between them shed light on what is happening in, say, a particular industry and how the major forces in this industry interact.”^[9]

2.3. Accuracy

No scenario is ever probable, scenarios are narrative descriptions of the future that focus attention on causal processes and decision points. Thus, the probability of any scenario ever being realized is minute. So accuracy is not the measure of a good scenario; rather it is plausibility (it should be a rational route from here to there), internal consistency, description of causal processes and usefulness in decision making.^[10] “The idea is that neither scenario is right, but that if you´re prepared for both, you´ll be ready to cope with the real world. The important thing is to think, to break through the manager´s conventional views.”^[11]

The key question is, whether scenario analysis works better than alternative approaches. Schnaars compared two unconditional forecasts prepared using scenario writing with two generated from a simple econometric model. The scenario based approach showed a slight advantage over the simple demand function. This advantage was more pronounced on forecasts where uncertainty was high, and historical relationships were changing.^[12]

3. How to Do It

3.1. The Scenario Model

The purpose of scenario techniques is to construct alternatives in case of uncertainty and to assemble them into highly consistent scenarios. These scenarios are descriptions of the future corporate environment. Very contrasting future situations should be taken into account, because nobody knows what the precise outcome of the future will be. If a company is prepared for very different future situations, it will be able to deal with any scenario between the two extreme archetypes, which build the “edges” of the scenario funnel (see fig.1).^[13]

Fig. 1: The Scenario model

illustration not visible in this excerpt

Source: http://www.ienica.net/fibresseminar/reibnitz.pdf

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^[1] http://www.marketing-intelligence.co.uk/aware/services/scenario.htm

^[2] cf. http://www.futurovenezuela.org

^[3] cf. Schnaars (1990: 154)

^[4] cf. Georgantzas (1995: 22)

^[5] cf. http://www.hicss.hawaii.edu/HICSS36/HICSSpapers/CLGTM01.pdf

^[6] http://www.mce.be/news/tacklingfuture.htm

^[7] cf. www.ogilvy.com/viewpoint/pdf/v2_barnett.pdf

^[8] cf. Hay (1991: 217)

^[9] cf. Hay (1991: 217 – 218)

^[10] cf. http://futurovenezuela.org

^[11] cf. Georgantzas (1995: 35)

^[12] cf. Schnaars (1990: 156)

^[13] cf. http://www.ienica.net/fibresseminar/reibnitz.pdf