SCENARIO planning Building scenarios at Roland Berger Strategy Consultants

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SCENARIO planning

Building scenarios at

Roland Berger Strategy Consultants

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Contents

Page

A.

Strategy development today

Why scenario planning is important now

3

B.

The Roland Berger-HHL scenario approach

Our approach to building scenarios

12

(3)

A. Strategy development today

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Today our economy faces very high volatility

DOW JONES

[index value]

1)

EUR/USD EXCHANGE RATE

[EUR/USD]

1)

GLOBAL REAL GDP

GROWTH

[%]

15,542 Highest value Oct 2007 14,165 +8,995 1.60 Highest value Apr 2008 1.50 5.4 5.3 3.9 5.1 4 2013-08_RBSE_Building Scenarios.pptx Dec 2005 Jul 2013 10,718 -7,618 Dec 2006 Jul 2013 1.46 1.48 1.32 1.34 1.50 2.8 2007 2006 2012 3.2 2011 3.9 2010 2009 -0.7 2008 1.23 1.27 1.23

1) All values (except highest, lowest and latest) are end-of-month based; highest and lowest values are on daily basis

1.18 6,547

SOURCE IMF, Bloomberg

Lowest value

Mar 2009

Lowest value

Jan 2006

(5)

Due to the high volatility forecasts are extremely difficult –

and very often fail to predict the future

3.3

3.4

3.0

Example: Development of forecasts of

German real GDP growth 2011 [%]

> Economic forecasters use

complex models of economic

Aug 10 Dec 11 1.7 1.9 2.2 2.5 2.8 2.9 3.0

complex models of economic development – but they often failed, e.g. in predicting the crisis > Economic trends are unreliable

andfuture developments unclear

– decisions must still be made > Our job is to interpret the key

factors driving future economic development

(6)

Another consequence of the high volatility is that traditional

planning cycles are no good any more

TRADITIONAL ORGANIZATIONAL STRUCTURE STRATEGIC PLANNING 7 years 7-10

3.2

4.8

6 2013-08_RBSE_Building Scenarios.pptx

Time horizons of traditional corporate planning

and global GDP growth, 2000-2012

[%]

OPERATIONAL PLANNING MEDIUM-TERM PLANNING STRUCTURE 2000 3-5 years 1 2012

3.2

SOURCE IMF

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… fail to reflect

volatility

… can't cope with

complexity

Traditional strategy tools …

And finally follows that traditional strategy tools have

become unreliable

… don't consider

different views

GENERIC COMPE-TITIVE STRATEGIES

ANSOFF MATRIX EXPERIENCE

CURVE

FIVE FORCES PORTFOLIO

(8)

But the planning questions

remain the same

How sharply will

commodity and energy prices

rise?

Can we replace expensive commodities with

less

Which

regions

of the world will grow most?

How can our company

benefit

from that?

How will

regulations

change in my markets?

Will the changes open up new markets

overseas

?

Can we replace expensive commodities with

less

expensive ones

?

How will

demand

for our products change?

What

competing products

will jeopardize our business?

(9)

The solution? Scenario planning can overcome the

shortcomings of traditional planning instruments

… provides different images

of the future to reflect

volatility

SCENARIO

PLANNING …

SCENARIO I volatility … considers numerous influence factors to cope with complexity

… combines internal and external views to identify

blind spots SCENARIO II SCENARIO III

FUTURE

TODAY

Disruption

Counter-action

(10)

But traditional scenario planning often does not meet all

requirements imposed by modern strategic planning

QUOTATIONS FROM USERS

regarding WEAKNESSES …

REQUIREMENTS of MODERN

SCENARIO PLANNING …

1

Reflecting

volatility … … through development of alter-_{native futures}

2

Coping with

complexity … … through consideration of

Scenario projects are extremely complex

Methodologies are not well described and not fully disclosed

Processes are not standardized and highly variable

Fulfilled by traditional scenario planning

2

complexity … … through consideration of _{numerous influence factors}

4

Speed and

simplicity … … based on a set of management _{tools that support an easy process}

5

Flexibility concerning

planning horizon …

… by applicability of different time horizons

3

Identifying

blind spots … … through involvement of internal _{and external experts}

SOURCE ROLAND BERGER

Traditional scenario projects usually take min of 5 months and can last as long as 1 year

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Therefore our new approach builds upon the strengths of

traditional approaches and overcomes their weaknesses

> Planning based on multiple possible futures

… BUILDING ON STRENGTHS

> Standardized method that is easily replicable for planning purposes

… OVERCOMING LIMITATIONS

possible futures

> Integration of outside perspectives

> Broadening management's perspective

> Increased adaptability to changes

in the environment

replicable for planning purposes > Tool based approach eases

application

> Quick executionof scenario-based strategic planning process

> Applicable for shorter time horizons of less than 5 years

ROLAND

BERGER-HHL

APPROACH

to scenario-based

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B. The Roland Berger-HHL scenario approach

Our approach to building scenarios

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We differentiate between

macro-, meso- and micro-scenarios

Macro-level scenarios build the

frameworkfor industry and

CHARACTERISTICS

of our 3-TIERED APPROACH

MACRO-LEVEL

Global scenarios

frameworkfor industry and company scenarios

Meso-level scenarios describe different futures of a branch or a region

Micro-level scenariosfocus on possible futures of one specific company

MESO-LEVEL

Regional and industry scenarios

MICRO-LEVEL

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HHL – Leipzig Graduate School of Management

We cooperate with the HHL Center for Strategy and

Scenario Planning

> Constant exchange with academia,

Selected activities

of the HHL Center for Strategy

and Scenario Planning

> One of the worldwide leading business schools > Regularly ranked as one of the top 3 German

business schools

HHL – Leipzig Graduate School of Management > Constant exchange with academia,

international think tanks and business over scenario contents and methods

> Concrete support on scenario projects of Roland Berger

> Carrying out scenario studies together with Roland Berger

> Conducting scenario workshops and seminars for Roland Berger

> Supervising Roland Berger fellows and PhD candidates

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Roland Berger has advised large clients worldwide to

successfully structure, execute and adopt scenario planning

CLIENT COUNTRY PROJECT DESCRIPTION

UK > Developed 2020 scenarios for Industrial and Marine business, and built up organizational capabilities

Multinational oil and gas company

UK > Built scenarios in life insurance and pension to guide long-term strategy

Multinational insurance

Sample scenario planning client engagements

EXAMPLES

USA > Described and quantified the potential impact of healthcare reform through scenario planning

France > Developed 2020 scenarios and action plans to enhance aftersales strategy for Europe and China

France > Created a scenario planning tool to model business impact of different market conditions and to inform capacity investment decisions

Multinational pharma-ceutical company Multinational auto-motive manufacturer Multinational, producing construction and high performance materials

USA Large chain of home

improvement stores

> Created scenarios describing different consumer behavior

UK > Built scenarios in life insurance and pension to guide long-term strategy development across 14 countries to guide pan-European strategy

Multinational insurance company

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Book publications and scenario studies demonstrate thought

leadership

EXAMPLES

Selected scenario planning documents

Emerging Market

Future Scenarios

Book describing the

RB/HHL scenario

planning approach

Scenarios for The European

Airline Industry

(17)

As an overall framework for our scenario studies and

projects we developed the Trend Compendium 2030

Trend Compendium 2030: Seven Megatrends that will shape the world

Analyzed

relevant trend and future

studies

Discussed and verified data

and statements in

global Roland

Berger network

Detailed

seven megatrends,

each

with three business driving

subtrends

Outlined

recommendations for

(18)

Definition of Scope

Together with the HHL Center we developed a clearly

structured process for scenario projects

Perception

Analysis Trend and _Uncertainty Task: Discuss and evaluate relevant trends

Task: Identify core problems and frame analysis

Task: Identify assumptions and mental models

Tool: Framing Checklist Tool: 360°Stakeholder Feedback Result: Clear conception of

project goal

Result: Good understanding of internal (company) and external (industry) perception; identification of blind spots, weak signals and influencing factors

33 22 11 0.5 weeks1) 18 2013-08_RBSE_Building Scenarios.pptx Analysis _Uncertainty Analysis Scenario Building Strategy Definition Moni-toring

Task: Discuss and evaluate relevant trends

Tool: Impact-Uncertainty Grid

Result: Identification and analysis of key trends and key uncertainties

Task: Develop scenarios based on key trends/uncertainties

Tool: Scenario Matrix

Result: Map of possible scenarios and understanding of which scenarios are most promising and which are most dangerous to the client

Task: Deduct action plans for implementation

Tool: Strategy Manual

Result: Clear blueprint for strategic development of a company

Task: Monitor developments and challenge assumptions

Tool: Scenario Cockpit

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SOURCE ROLAND BERGER

Result: Track of external developments

ongoing 3-4 weeks1)

0.5 weeks1)

1 week1)

2 weeks1)

(19)

Reference project for the automotive industry

1)

:

The scope was defined with the Framing Checklist

ELEMENTS and KEY QUESTIONS

IMPLEMENTATION, AUTOMOTIVE PROJECT

Focus on global development of automotive industry, as our client was a global player in automotive

GOAL OF SCENARIO PROJECT

Definition of the question to be solved: Focus of the scenario analysis

STRATEGIC LEVEL OF ANALYSIS

Shall the scenario planning process be conducted Focus on _{analysis and discussion spectrum for scenarios}industry level as this allows the broadest

A

B

1 –DEFINITION OF SCOPE

Shall the scenario planning process be conducted for the macro, industry/region or company level?

DEFINITION OF STAKEHOLDERS

Which key stakeholders shall be involved in the 360° Stakeholder Feedback?

TIME HORIZON

What time horizon is the planning process tailored to (1,2,5 years or longer)?

analysis and discussion spectrum for scenarios

Focus internally on top management, trend, planning and macroeconomics experts and externally on industry, trend and macroeconomics experts

Strategic advisors of the top management as well as the department heads of trends, strategic planning and capacity planning participated in the workshops

Focus on 10 year horizon as this was the focus of capacity planning

B

E

C

D

PARTICIPANTSHow closely is top management involved in the process? Which members of the respective departments participate in the workshops?

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To gain holistic view on future development in automotive

industry a 360° Stakeholder Feedback was conducted

> Industry specialists > Trend specialists

INTERNAL STAKEHOLDERS

> Top Management > Trend specialists

360

°

Stakeholder

Feedback

EXTERNAL SPECIALISTS

2 –PERCEPTION ANALYSIS 20 2013-08_RBSE_Building Scenarios.pptx

The 360°Stakeholder Feedback asks about

> Influencing factors and indicators > Impact and uncertainty of relevant

factors > Macroeconomics specialists

EXTERNAL STAKEHOLDERS

> Key customers > Key suppliers > Shareholder > Macroeconomics specialists > Capacity planner

Feedback

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The 360° Stakeholder Feedback

comprises two consecutive questionnaires

Open question

concerning STEEP1) influencing factors and indicators:

> Which factors influence the future development of the world automotive industry until 2020 most?

1

2 –PERCEPTION ANALYSIS

Closed questions

concerning rating of synthesized influencing factors on a scale from 1 to 10 regarding impact and uncertainty of each sector:

> How strong is the impact of the factor to the future development of the world automotive industry?

> How certain is the occurrence of the respective factor within a time frame until 2020?

(22)

We identified 30 influencing factors with the

360° Stakeholder Feedback

Social Technological Economic Environmental Political/Legal

2 –PERCEPTION ANALYSIS

Downsizing at customers

Longer period of ownership

Development of alternative powertrains

Improvements of traditional powertrains

Increasing importance of car

Climate change

Growing problems with the production of biofuels Low economic growth in

industrialized markets

Strong economic growth in Increasing pollution of cities Decrease of consumer

confidence Duration of crisis

Tougher environmental regulation, esp. CO2 Growing trade protectionism Decreasing political stability

INFLUENCING FACTORS

22 SOURCE ROLAND BERGER 2013-08_RBSE_Building Scenarios.pptx

S

T

E

P

Longer period of ownership Increasing importance of car assistance systems

Car's image as status symbol declines

Strong economic growth in emerging markets Growing middle class in emerging markets Growing competition from new carmakers

Rising oil price

Rise of new business models (car sharing etc.)

Increasing pollution of cities

Increasing environmental consciousness of consumers

…

Increasing concentration of car makers

Growing trade protectionism

Continuing local content regu-lation in emerging markets Subsidizing own car industry in China

…

… …

(23)

The results were systematically analyzed to understand blind

spots, weak signals and influencing factors

BLIND SPOTS

Factors, which are deliberately or unconsciously disregarded

8,0 10,0

Tougher

environ-mental regulation Rising oil price

Development of alternative powertrains

BLIND SPOT ANALYSIS

(EXCERPT, ILLUSTRATIVE):

IMPACT, INTERNAL/EXTERNAL

THREEFOLD RESULT

ANALYSIS

2 –PERCEPTION ANALYSIS

WEAK SIGNALS

First indicators for important

developments and external changes

INFLUENCING FACTORS

Influencing factors for the scenario development 0,0 2,0 4,0 6,0 8,0 Economic growth in industrialized countries mental regulation Competition from new carmakers

Car's image as status symbol declines

Longer period of ownership

Economic growth in emerging markets

Downsizing at customers

Rising oil price

By comparing the perception of company insiders and outsiders we identified management's blind spots

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The most important trends and uncertainties in the industry

were identified with the Impact-Uncertainty Grid

Potential Impact High _CRITICAL UNCERTAINTIES TRENDS S S S S S T Ec S Ec Ec En En En En T P Ec P Ec Ec Ec P S T Decrease in consumer confidence Climate change Improvements of traditional power trains Growing economic growth in emerging markets Local content regulations Competition from new carmakers Duration of crisis Decreasing political stability Alternative powertrains Growing middle class in emerging markets

CRITICAL UNCERTAINTIES

define the axes of the scenarios – we identified 6 critical uncertainties

> Decrease of consumer confidence > Rising oil price

> Development of alternative powertrains

> Duration of crisis

> Decreasing political stability > Competition from new

carmakers Rising oil price Growing environmental consciousness of consumers Ec S P

3 –TREND AND UNCERTAINTY ANALYSIS

24 2013-08_RBSE_Building Scenarios.pptx SECONDARY ELEMENTS Low Uncertainty Low High T Social

> Increasing environmental consciousness of consumers > …

Technological

> Improvements of traditional power trains > …

Environmental

> Climate change > …

Political

> Continuing local content regulation in emerging markets > …

Economic

> Growing economic growth in emerging markets

> Growing middle class in emerging markets > … Ec S T P Social

S T Technological En Environmental Ec Economic P Political

TRENDS

(relatively secure developments) define the cornerstones of – and remain the same in – the different scenarios. Based on our questionnaires we identified 15 trends along 5 categories (for example)

(25)

The Influence Diagram was used to structure the critical

uncertainties and condensed them in two key dimensions

4 –SCENARIO BUILDING

Duration of crisis

Rising oil price Decreasing

Increasing environmental consciousness Climate

change Growing middle class

in emerging markets Growing economic growth

in emerging markets

Economic

development

Innovation

dynamics

T

im

e

Development of alternative powertrains

Rising oil price Decreasing political stability Competition of new carmakers Decrease of consumer confidence

(26)

By varying key uncertainties and influence factors we were

able to formulate comprehensive scenario storylines

FOUR SCENARIOS DEVELOPED

for global automotive industry until 2020

High innovation dynamic > Economic development > Innovation dynamics KEY DIMENSIONS INFLUENCING FACTORS CHARACTERISTICS - + 4 –SCENARIO BUILDING 26 2013-08_RBSE_Building Scenarios.pptx High economic growth Economic stagnation Industry Decline Dangerous Saturation Golden Decade Forced Technological Evolution

Low innovation dynamic > Duration of crisis

> Decreasing political stability > Decrease of consumer confidence > Rising oil price

> Competition of new car makers > Growing economic growth in

emerging markets

> Growing middle class in emerging markets

> Climate change

> Increasing environmental consciousness of consumers

(27)

The quantitative assessments were used to estimate new

registrations via an automotive specific simulation tool

We took the values/strengths of the key factors and on this basis set parameters (e.g. GDP growth,

unemployment rate, inflation rate, interest rate) on a country-by-country basis for each of the scenarios

We then used the parameters in a simulation tool

specially developed for the automotive industry.

Scenario I Scenario II Scenario III

GDP growth I, unemployment I, inflation rate I, period

GDP growth II, unemployment II, inflation rate II, period

GDP growth III, unemployment III, inflation rate III, period 4 –SCENARIO BUILDING

specially developed for the automotive industry. The tool used the values to calculate the number of new vehicle registrations in key markets for each scenario, as a basis for volume planning

Key points

It is important to understand exactly how the simulation tool works so that any extraordinary effects can be included

inflation rate I, period of owner-ship I, …

(country-specific)

inflation rate II, period of owner-ship II, …

(country-specific)

inflation rate III, period of ownership III, … (country-specific) New registrations I New registrations II New registrations III SIMULATION TOOL

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On the basis of the different scenarios

we developed action plans for the management

The different scenarios showed very different patterns of how new vehicle registrations would developin the future

On the basis of these differences and other features of the scenarios, we developed

recommendations ("action plans") for top 5 –STRATEGY DEFINITION

We then presented the scenarios and action plans to the Head of Sales

Scenarios and action plans must be consistent recommendations ("action plans") for top management in a joint RB/client workshop

Creative solutions that workare the answer to challenging scenarios

Scenario I Scenario II Scenario III

SOURCE ROLAND BERGER

Key points

Action plan I

> …

Action plan II Action plan III

(29)

Finally we implemented a set of indicators to monitor

what scenario pathway the company is currently on

We developed a Scenario Cockpit together with the client

Indicators (e.g. GDP growth, industry-specific indicators such as length of ownership) help

managementunderstand what scenario pathwaythe company is currently on

6 –MONITORING

The Scenario Cockpit should have no more than three clear indicators. This makes it easy for top management to use

If certain thresholds are passed, another scenario comes into play – and with it other action plans

pathwaythe company is currently on

SCENARIO COCKPIT

Indicator 1 Indicator 2 Indicator 3

Key points

(30)

The strengths of our scenario approach:

State-of-the-art scenario building for our clients

Definition of Scope

11

Perception

Analysis Trend and Uncertainty

Analysis

22 ₃₃

DIRECTLY APPLICABLE TO BUSINESS

Our scenarios answer our clients' core strategic and operational questions

1

INTERACTIVELY BUILT

In the scenario team, clients and consultants work together and internal and external experts are consulted as required

2

30 2013-08_RBSE_Building Scenarios.pptx Analysis Scenario Building Strategy Definition Moni-toring 44 55 66

SOURCE ROLAND BERGER

DIRECTLY IMPLEMENTABLE

Detailed recommendations enable immediate adjustment of business according to the scenarios consulted as required

HIGH SPEED

The scenarios are created within a few weeks, using modern information and communication methods

3

SIMPLE COMMUNICATION

The scenarios are clearly formulated and thus easy to communicate internally and externally

4

5

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To sum up: Today we need scenarios and we need to develop

them quickly and systematically

Our world faces more and more volatility –

that's especially true for the economy

1

2

To stay competitive in this environment

companies need to develop scenarios

The Roland Berger-HHL scenario process

enables companies to quickly build scenarios

with an innovative, tool-based approach

2

3

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Do not hesitate to contact us in case you have

questions or comments

32 SOURCE ROLAND BERGER 2013-08_RBSE_Building Scenarios.pptx

PROF. DR. BURKHARD SCHWENKER burkhard.schwenker@rolandberger.com +49 40 37631 4100 CHAIRMAN DR. CHRISTIAN KRYS Product owner christian.krys@rolandberger.com +49 160 744 2917

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