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scenario planning

Strategy

Back to the future: The case for scenario planning

Published 26 January 2024 in Strategy • 7 min read

Though they may find it an invaluable tool, scenario planning isn’t just for business leaders. It has also been successfully used in brokering peace between conflicting sides. This is why it should be a high priority for governments as well.

During South Africa’s transition from apartheid to a multiracial government in the 1990s, uncertainty abounded. Looking back some three decades later, we can see how scenario planning played a positive role in bringing stakeholders together to tackle the unknown.

Today, in many parts of the world, we find ourselves again facing a large degree of uncertainty. For example, the current wars in Ukraine and Gaza have laid bare an urgent need to factor uncertainty into our strategic planning – something scenario planning is well equipped to do. I urge us to get back to it.

Why do we avoid discussing future uncertainty in the strategy room?

To be sure, uncertainties are broached in organizations’ strategy rooms. However, a common pitfall is that we conduct just a single exercise and then set whatever is learned from it on the shelf.

Ignoring uncertainties renders organizations and society at large vulnerable to incoming threats. At the same time, non-obvious opportunities can pass us by – leaving us to miss out on their potentially valuable benefits.

How do we usually face the future?

In late 2019, before 2020’s pandemic was yet evident, end-of-year executive committee and board meetings certainly discussed their updated strategic plans for 2020 and beyond. Mapping out the next two to three years, strategy teams worked hard to feed their planning processes with sophisticated analyses of the previous year’s facts and figures. Projected prices, market conditions, customers, and competitors were all surely discussed.

And yet, even if looming uncertainty was addressed, it was often on the strategy report’s final page as a brief mention. Shouldn’t we be better prepared now than we were then?

Over 100 years ago, in 1921, Frank H Knight, the idiosyncratic economist at the University of Chicago, wrote a great book called Risk, Uncertainty and Profit. In it, Knight distinguished between two types of uncertainty:

  1. Uncertainty risk, in which we know potential outcomes in advance and may even know the odds of these outcomes. Think of rolling a pair of dice, as we know the odds before we roll in a game.  
  2. Genuine uncertainty, in which we don’t know the possible outcomes in advance, let alone their probabilities. This is often the case in complex systems, where many actors and forces interact over time, such as in geopolitics, economies, societal transformations, environmental forces, and, undoubtedly, technological changes.

Knight’s critical point is this: genuine uncertainty creates opportunities for profit that are not eliminated by perfect competition. In other words, if we want to innovate successfully in business, we must not only deal with uncertainty but seek it out.

21st century thinking

In their 2001 bestselling book, Mind of a Fox, South Africa-based authors Chantell Ilbury and Clem Sunter look at how we, as human beings, think about events and uncertainty. They offer a useful matrix with two continuums: (1) certainty/uncertainty and (2) control/absence of control.

How we think about events and uncertainty

At the bottom of their matrix, two areas map to Knight’s earlier thinking on uncertainty. Working from right to left:

  • Rules of the game are for events that are certain but out of our control, like public opinion and demographic factors. They may have knowable odds akin to Knight’s “uncertainty risk.”
  • Key uncertainties are uncertain and out of our control, which are akin to Knight’s “genuine uncertainty.”

At the top of this matrix, where there is more control, is where decision-makers naturally tend to be more comfortable:

  • Decisions are made with both certainty and control.
  • Options are based on current and past experiences and data. Strategic planning here builds on analytical strengths but means the actual future may come as a surprise. As Michael Jefferson, former Chief Economist of the Royal Dutch Shell Group, wrote: “Traditional economic theory has been developed in relation to general equilibrium, perfect competition, market clearance and other notions which do little to reflect uncertainty and imperfect knowledge.” This is not enough.

The evolution of scenario planning

Modern scenario planning is generally attributed to the American futurist and game theorist Herman Kahn, who introduced the tool to the US military in the 1950s while consulting for the Rand Corporation.

In the early 1970s, oil executive Pierre Wack helped introduce a form of scenario planning to private-sector strategy in his job at Royal Dutch Shell. Wack’s work was said to help the oil giant anticipate two oil shocks in a decade. He described scenario planning as “a discipline for encouraging creative and entrepreneurial thinking and action… in contexts of change, complexity, and uncertainty,” as Thomas J Chermack wrote in Foundations of Scenario Planning: The Story of Pierre Wack.

In the early 1990s, during South Africa’s transition from apartheid, scenario planning also played a significant role. The Mont Fleur Scenario exercise to imagine South Africa 10 years into the future was a notable example of how a diverse group with very different political beliefs could be brought together to constructively explore ways to transform the nation.

Scenario planning at work

In business, a basic exercise is to first identify the driving forces shaping the future, then map them based on their potential impact and degree of uncertainty involved. That is to say, it’s useful to rank these drivers based on their potential impact on business as well as their degree of uncertainty (with high uncertainty ranking higher on your list).

Successful scenario planning will be built around the forces that have the most potential for high impact at the same time as they are highly uncertain. These are the forces you want to monitor closely over time to foresee future scenarios and analyze them. Select just two of them to continue with our basic exercise.

South Africa
In the early 1990s, during South Africa’s transition from apartheid, scenario planning also played a significant role

These two drivers that you have selected can then be displayed on an axis, with low and high values for each, to create four possible future scenarios. Develop a narrative (story) for each, imagining various plausible futures, revising mental models of the present based on those futures, and using new models to either reinforce or change business strategies to better prepare for what might come to pass.

Recent examples of corporations applying scenario planning

  • Coca-Cola applied scenario planning to analyze potential futures in terms of consumer behaviors, health concerns, and environmental sustainability.
  • Procter & Gamble (P&G) employed scenario planning to anticipate future trends and consumer behaviors in the fast-moving consumer goods industry.
  • Ford Motor Company employed scenario planning to anticipate future trends and challenges in the automotive industry, such as technological advancements, electric vehicles, and autonomous driving.
  • Amazon applied scenario planning to examine the shift in consumer behaviors and the impact of Gen Z and Gen Y.

Amid swift transformations driven by geopolitical events, macro- and microeconomic forces, societal shifts, environmental changes, and the undeniable pace of technological advancements, organizations should (re)turn to scenario planning as a strategic tool. This approach can help us innovate successfully ahead of whatever happens next – and prepare for the future today.

Further reading:

Scenario planning: how to navigate multiple crises – Peter Schwartz, author of the highly influential book  The Art of the Long View, explains to David Bach what needs to be done – and why he remains optimistic about the future.

Authors

Hischam

Hischam El-Agamy

IMD Executive Director, Middle East, Africa and Turkey

As Executive Director of IMD, Hischam El Agamy is responsible for IMD’s activities in Africa, the Middle East, and South-Central Asia, where he teaches and leads development programs. El Agamy’s expertise and teaching experience include scenario planning, business transformation, family business transformation, public-private partnership, and stakeholder engagement. He teaches regularly in IMD custom programs and has taught several IMD open programs, including its EMBA and MBA programs.

For over 14 years, El Agamy has occupied various international functions in seven European countries as part of a long career with major Swiss multinational corporations in Zürich. During these years, he has driven a number of business transformation initiatives in several European countries.

He has contributed to several advisory assignments for governments in the Gulf region and in the area of competitiveness and human capital development for the government of South Africa.

El Agamy obtained two master’s degrees in applied science from the University of Fribourg and Lausanne in Switzerland. He received his Doctorate from the University of Pierre & Marie Curie in Paris.

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