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Scenario planning

Scenario planning is a strategic planning method that some organizations use to make flexible long-term plans. It is in large part an adaptation and generalization of classic methods used by military intelligence.

The basic method is that a group of analysts generate simulation games for policy makers. The games combine known facts about the future, such as demographics, geography, military, political and industrial information, and mineral reserves, with particular possible social, technical and political trends.

Scenario planning can include elements that are difficult to formalize, such as subjective interpretations of facts, shifts in values, new regulations or inventions.

These combinations of fact and possible social changes are called "scenarios." The scenarios usually include plausible, but unexpectedly important situations and problems that exist in some small form in the present day.

Any particular scenario is unlikely. However, good analysts select the features of scenarios so that the features are both possible and uncomfortable. Scenario planning can therefore help policy-makers anticipate hidden weaknesses and inflexibilites in organizations and methods. When found years in advance, the weaknesses can be repaired or reduced more easily and more correctly than if a similar real-life problem should present as an emergency. For example, a company may discover that it needs to change contractual terms to protect against a new class of risks, or collect cash reserves to purchase anticipated technologies or equipment.

Therefore, the flexible plans to cope with similar problems can have real future value.

Strategic military intelligence organizations also construct scenarios. The methods and organizations are almost identical, except that scenario planning is applied to a wider variety of problems than merely military and political problems.

As in military intelligence, the chief challenge of scenario planning is to find out the real needs of policy-makers, when policy-makers may not themselves know what they need to know, or may not know how to describe the information that they really want.

Good analysts design the games so that policy makers have great flexibility and freedom to adapt their simulated organizations. Then these simulated organizations are "stressed" by the scenarios as a game plays out. Usually, particular groups of facts become more clearly important, so that the intelligence organizaton can refine and repackage real information more precisely to better-serve the policy-makers' real-life needs. Usually the games' simulated time runs hundreds of times faster than real life, so that policy-makers can experience several years of policy decisions, and their effects, in less than a day.

The chief value of scenario planning is that it allows policy-makers to make and learn from mistakes without risking important failures in real life. Further, policymakers can make these mistakes in a pleasant, unthreatening, game-like environment, while responding to a wide variety of concretely-presented situations based on facts.

How scenario planning is done

1. Decide on the key question to be answered by the analysis. By doing this, it is possible to assess whether scenario planning is preferred over the other methods. If the question is based on small changes or a very few number of elements, other more formalized methods may be more useful
2. Set the time and scope of the analysis. Take into consideration how quickly changes have happened in the past, and try to assess to what degree it is possible to predict common trends in demographics, product life cycles et. al. A usual timeframe can be 5 to 10 years.
3. Identify major stakeholders. Decide who will be affected and have an interest in the possible outcomes. Identify their current interests, whether and why these interests have changed over time in the past.
4. Map basic trends and driving forces. This includes industry, economic, political, technological, legal and societal trends. Assess to what degree these trends will affect your research question. Describe each trend, how and why it will affect the organisation. In this step of the process, brainstorming is commonly used, where all trends that can be thought of are presented before they are assessed, to capture possible group thinking and tunnel vision.
5. Find key uncertainties. Map the driving forces on two axes, assessing each force on an uncertain/(relatively) predictable and important/unimportant scale. All driving forces that are considered unimportant are discarded. Important driving forces that are relatively predictable (f.ex. demographics) can be included in any scenario, so the scenarios should not be based on these. This leaves you with a number of important and unpredictable driving forces. At this point, it is also useful to assess whether any linkages between driving forces exist, and rule out any "impossible" scenarios (f.ex. full employment and zero inflation).
6. Check for the possibility to group the linked forces and if possible, reduce the forces to the two most important. (To allow the scenarios to be presented in a neat xy-diagram)
7. Identify the extremes of the possible outcomes of the (two) driving forces and check the dimensions for consistency and plausibility. Three key points should be assessed:
   1. Time frame: are the trends compatible within the time frame in question?
   2. Internal consistency: do the forces describe uncertainties that can construct probable scenarios.
   3. Vs the stakeholders: are any stakeholders currently in disequilibrium compared to their preferred situation, and will this evolve the scenario? Is it possible to create probable scenarios when considering the stakeholders? This is most important when creating macro-scenarios where governments, large organisations et. al. will try to influence the outcome.
8. Define the scenarios, plotting them on a grid if possible. Usually, 2 to 4 scenarios are constructed. The current situation does not need to be in the middle of the diagram (inflation may already be low), and possible scenarios may keep one (or more) of the forces relatively constant, especially if using three or more driving forces. One approach can be to create all positive elements into one scenario and all negative elements (relative to the current situation) in another scenario, then refining these. In the end, try to avoid pure best-case and worst-case scenarios.
9. Write out the scenarios. Narrate what has happened and what the reasons can be for the proposed situation. Try to include good reasons why the changes have occurred as this helps the further analysis. Finally, give each scenario a descriptive (and catchy) name to ease later reference.
10. Assess the scenarios. Are they relevant for the goal? Are the internally consistent? Are they archetypical? Do they represent relatively stable outcome situations?
11. Identify research needs. Based on the scenarios, assess where more information is needed. Where needed, obtain more information on the motivations of stakeholders, possible innovations that may occur in the industry and so on.
12. Develop quantitative methods. If possible, develop models to help quantify consequences of the various scenarios, such as growth rate, cash flow etc. This step does of course require a significant amount of work compared to the others, and may be left out in back-of-the-envelope-analyses.
13. Converge towards decision scenarios. Retrace the steps above in an iterative process until you reach scenarios which address the fundamental issues facing the organization. Try to assess upsides and downsides of the possible scenarios.

The Development of Scenario Analysis

So, why was scenario planning developed? In the past, strategic plans have often considered only the "official future," which was usually a straight-line graph of current trends carried into the future. Often the trend lines were generated by the accounting department, and lacked discussions of demographics, or qualitative differences in social conditions.

These simplisitic guesses are surprisingly good most of the time, but fail to consider qualitative social changes that can affect a business or government.

In the 1970s, many energy companies were surprised by both environmentalism and the OPEC cartel, and thereby lost billions of dollars of revenue by misinvestment. The dramatic financial effects of these changes led at least one organization, the Royal Dutch Shell Company to implement scenario planning. The analysts of this company publicly estimated that this planning process made their company the largest in the world. (See Schwartz, below)

Scenario planning is also extremely popular with military planners. Most states' departments of war maintain a continuously-updated series of strategic plans to cope with well-known military or strategic problems. These plans are almost always based on scenarios, and often the plans and scnearios are kept up-to-date by war games, soemtimes played out with real troops. This process was first carried out (arguably the method was invented by) the Prussian general staff of the mid-19th century.

Scenario planning compared to other techniques

Scenario planning differs from contingency planning, sensitivity analysis and computer simulations.

Contingency planning is a "What if" tool, that only takes into account one uncertainty. However, scenario planning considers combinations of uncertainties in each scenario. Planners also try to select especially plausible but uncomfortable combinations of social developments.

Sensitivity analysis analyzes changes in one variable only, which is useful for simple changes, while scenario planning tries to expose policy makers to significant interactions of major variables.

While scenario planning can benefit from computer simulations, scenario planning is less formalized, and can be used to make plans for qualitative patterns that show up in a wide variety of simulated events.

References

• Peter Scwartz, "The Art of the Long View", Doubleday, 1991, Describes how to use scenario-planning for real-world advantage. It describes in detail how Royal Dutch Shell used scenario planning to gain billions of dollars of long term advantages. Strongly recommended, but quite weak on how to construct an organization to produce scenarios, but see Meyer's little book, below.
• Herbert Meyer, "Real World Intelligence", Weidenfeld and Nicholson, 1987, is a tiny 102 page gem that tells how to construct an intelligence organization, the essential organization that turns data into scenarios. The author was vice-chair of the U.S. National Intelligence Council, and is obviously authoritative. However, Meyer is weak about what to do with the scenarios.

See also futurology, military intelligence, strategic management, strategic planning