Lecture 5: Knowing the World Around Us
One baby vs. 100 Million
A baby‟s birth is a joyous event to be celebrated by the family, but a hundred million births is just a statistic. In addition, 100 million births will have more impact on the world than a single baby. On the other hand, with so many babies being produced, and fewer people dying, the world‟s population is getting bigger. This growth in population has many consequences. If our local community has 100 million people we must provide them with a place where to sleep as well as food to eat. However, a baby is an important consumer even before birth because the mother will be buying extra food; relatives and friends different gifts.
Scanning
The process of identifying significant changes in the external environment- that is, in the world beyond our immediate area of operations- is now generally known as scanning. For example, business scanner and the military scanning “scan, clip and review”.
A business scanner reads magazines, newspapers, government reports, and monitors Web sites, searching for information using key words. The techniques for collecting, reviewing and analyzing current literature were originally developed by military intelligence officers, who would scan publications for clues to what was happening in enemy countries. The results then would be submitted to military chiefs, who would use them in planning strategies. The so-called
“scan, clip and review” was extensively used during the World War II and still many business and governments use it.
DEGEST
Philip Kotler, marketing expert, classified the most significant business trends into six broad categories:
1. Demography – residence, age, gender, health, education, etc.
2. Economy – jobs, income, products, etc.
3. Government – laws, taxes, regulations, administrations, etc.
4. Environment – air, water, roads, buildings, etc.
5. Society (culture) – education, science, religion, media, arts, etc.
6. Technology – computers, telecommunications, etc.
Trend Extrapolation
A technique that allows us to anticipate a future condition based on statistical data available for a trend. For example, freshwater declining worldwide.
Casual Analysis
Seek in identifying the forces that are creating and shaping the trend. Often, these forces are themselves trends, so we may have to probe further to identify the causes of the trends. This analysis is especially important if we want to slow or halt the trends. For example, India an overpopulated nation for most observers, and yet the population continues to grow at a rapid rate, frustrating the efforts of the government to raise living standards, particularly those of its poorest people. The reason why Indian population grow is because of excess of births over deaths. The birthrate was always high, but a high death rate once served to check population growth. Indians
now are living longer, and the birthrate has not declined enough to prevent population from surging.
Impact Analysis
Aims at identifying the effects that the trend is having on other things. A trend can have many surprising consequences, which can be hard to anticipate. Trend analysts learn to identify more of these consequences than an untrained person. For example, a Census Bureau report that the number of U.S. women remaining single at age forty is reaching new highs. This demographic change might offer growing opportunities for companies with products that might interest single women in their forties and fifties; at the same time, products designed for married women over forty might suffer.
Surprise-Free future
A summary of what conditions may be like at some future data. It offers a basis for creating numerous alternative scenarios, because each of the indicators can easily be shifted up or down the surprise-free point. By creating a surprise-free future, we take a serious, albeit modest, step toward determining “wither we are tending”.
Decision making drawbacks:
1. Bold strategic moves.
2. Betting big.
3. Porters Five Forces - a framework that models an industry as being influenced by five forces (rivalry, the threat of substitutes, buyer power, supplier power, and barriers to entry).
4. Binary view of uncertainty – treating uncertainty as all-or-nothing or black-and-white proposition.
Residual uncertainty
It is the uncertainty left over after the best possible analysis of the problem at hand. Residual uncertainty is not what you don’t know – it‟s what you can’t know.
How can decision makers effectively move from mind-set to practice?
1. First, identify the variables that matter in crafting the right strategy. Typically, this includes customer demand (at different product price combinations), drivers of capital and operating costs, technology performance, competitor behavior and even regulatory or legislative outcomes.
2. Identify the relevant time frame to use in evaluating strategy choices. When a
pharmaceutical company is deciding whether to develop a new drug, for example, the time frame of patient is considered. The cash flows during this time frame will determine whether the strategy is successful or not.
3. Ask what is – or can be (with the right analysis) – known about these key variables over this time frame.
Four levels of residual uncertainty:
1. A clear, single view of the future
Source of uncertainty Example decisions Specific level 1 uncertainties Returns on “common”
investments in mature, stable markets
U.S. restaurants locations for McDonalds; U.S. retail store locations for The Home Depot
Customer demand and cost parameters in a stable market environment with relatively stable business models and reliable information sources 2. A limited set of possible future outcomes, one of which will occur
Source of uncertainty Example decisions Specific level 1 uncertainties Unpredictable competitor
moves and countermoves
GP‟s decision to add new paper making capacity Carrefour‟s U.S. entry strategy
Competitor capacity- expansion plans
Whether Wal-Mart was going to attempt to acquire Carrefour
3. A range of possible future outcomes
Source of uncertainty Example decisions Specific level 1 uncertainties Customer demand for new
products or services
Airbus‟s commitment to build the A389
Enron‟s bandwidth-trading strategy
Demand for superjumbo- jets
Demand for bandwidth trades through Enron‟s market makers
4. A limitless range of possible future outcomes
Source of uncertainty Example decisions Specific level 1 uncertainties The outcomes of major
technological, economic, or social discontinuities
Entry into Russia 1992;
entry in South Africa in the immediate post-apartheid era
Extreme ambiguity over likely legal and market institutions, as well as over fundamental supply and demand drivers
True/False Questions:
The level of residual uncertainty is usually determined by the interaction of multiple uncertainties. (T)
Most strategy decisions face level 2 or level 3 uncertainty. (T)
Time influences the level of residual uncertainty. (T)
The level of residual uncertainty is issue-and company-specific, not industry-specific. (T)
Lecture 6: Preparing for the future
Success and Failure are Inevitable
Organizational success is inevitable: there will always be successful organizations. Equally, organizational failure is inevitable. Organizations operating in the world are like football clubs in a competition: they cannot all win and they cannot all lose. Success and failure go together like the positive and negative poles of a magnet: you cannot have one without the other. Most of managers work toward making their organization successful but right from the start we all know that they cannot all end up where they want to be. We know that, however hard they try, some managers are going to be disappointed and each of us should wonder: „Could I be that manager?‟
We do not have to be perfect, only better than the competition.
Success and Failure are Dynamic Notions
We all agree that the world around us is subject to constant and considerable change. It is clear that organizations operating successfully one day may fail totally the next. No matter how
illustrious an organization‟s history might be, all rely on their future business. The game does not remain the same. Winning means changing the way one plays over time. Organizations that want to survive have to adapt. The challenge is that the way that the game is changing remains
uncertain until it is played. This is fundamental: without uncertainty everyone could do the same way. However, it is important to remember that not everyone can win at the same time: there are winners because there is uncertainty or, to put it in a more positive way, without uncertainty there can be no winners. Therefore, instead of seeing uncertainty as a problem, we should start viewing it as the basic source of our future.
Sharpbenders Research
A body of interesting research highlighting the problems for organizations that are inherently unable to detect or respond to change. The people who undertook the research had the bright idea of concentrating on companies that had been failing, but which had been able to turn things around. The word sharpbenders came from a slipping stock value followed by a recovery. The idea was that these companies, having been able to turn things around, would be able to articulate what had gone wrong and why this had happened.
The outcomes of Sharpbenders Research
Researchers interviewed a number of companies that were once failing but managed to recover and then prepared a list of what can go wrong:
Adverse development in market demand or increased competition
High cost structure
Poor financial controls
Failure of big projects
Acquisition problems
The Hygiene Factors and The Business Idea
There are two types of causes of the failure: hygiene factors and business idea.
Hygiene Factors
Organizations have always been trying to discover ways of outsmarting the competition. Not all ideas that are developed are equally effective, but some stick out as clearly being successful.
Initially some organizations develop significant competitive advantage by exploiting these ideas, but over time others see the beneficial effects and will start to copy the ideas in their own
organizations. They can be learned from studying organizations as “the best in class”, through a benchmarking process. They will be codified in textbooks and taught to managers. Once an idea reaches this point it has become a hygiene factor, something that is generally recognized as fundamental in running any healthy organization.
Hygiene factors failures:
Poor controls- credit, working capital, costs, flow or quality.
Immature management style- inflexible CEO, excessive caution, authoritarianism, ineffective delegation and coordination and over-centralization.
Failure to create and communicate purpose and the business idea-both between the top and middle management, and with the workforce.
Stakeholders
Another hygiene factor and maintaining relationships with stakeholders such as shareholders, suppliers and customers- it is vital for all organizations. Shareholders can decide to invest elsewhere, customers may “vote with their feet”; the government can pass unfavorable legislation, and so on.
Business Idea
Distinctive factors and capabilities that are not yet generally codified and available only to one organization.
The business idea failures:
A lack of recognizable strategies in such areas as functional policies, corporate strategy and environmental monitoring.
Poor execution or timing of responses to developments such as declining market demand or increasing competition.
Inappropriate risk-taking, in terms of projects that are too large in relation to the size of the organization taking them on or acquisitions that are assessed too optimistically.
The business idea-related strategic factors that enabled to turn things around were:
An emphasis on customers and their dynamic value systems.
A strong marketing focus.
A clear product focus with a deliberate concentration on what the organization can do best.
Regular reviews of strategy.
A forward-looking approach which invests in the future through plant, equipment, R&D, and training.
Maintaining organizational performance: PROBLEMS The battle of Canon and Xerox
Yahoo! – Competing in fast-moving markets
Building a colorful new future brick by brick – the story of Lego
Lecture 7: Thinking About the Future
Managerial recipe („mechanization of thought‟ or „recipe following‟)
Thought patterns following a routine decision-making approach, which overlook the (much easier) direct solution. These recipes or successful formulas can become deeply ingrained in organizations- particularly ones that have been successful over years. For example, Foster Brothers- a casual menswear retailer who owned shops on most major high streets in the UK in the 1970s. One year, sales began to decline, and the organization responded by reapplying the traditional success formula of cost-effective procurement of finished goods, sourcing cheaper supplies of menswear made to Foster Brothers‟ own designs. Over the next few years, this recipe was repeatedly reapplied and the well-made items of menswear were retailed at very competitive prices in the shops. However, this success was temporary because Foster Brothers went out of business. The reason for this failure can be traced back to the inertia evident in its strategic thinking. Men in UK had become fashion conscious and preferred to shop at Next, Gap, and other menswear retailers because these shops fit with their style. In short, Foster Brothers‟
formula- cost-effective procurement of finished goods from around the globe- was no longer in alignment with customer values. Finally, in order to survive, an organization‟s strategic decision making, must retain or improve in alignment with the external world. That is, recipes should not be routinely followed and should be changed when inappropriate.
Strategic inertia
The degree of commitment to current strategy- grows over time, as current ways of operating become increasingly embedded in an organization.
Organizational stress
Since no strategic choice is perfect, „organizational stress‟ will be high as the alignment between strategy and environment is perceived. Managers pay little attention to strategic choice, as long as organizational performance is satisfactory- that is, when stress is low.
Inappropriate mental methods:
Prevent managers from sensing problems.
Delay changes in strategy.
Lead to action that is ineffective in a new business environment.
Biases in thinking
The roles that people play influence the way that problems are seen, or framed. For example, when profits fell in one cosmetic product, managers started to find out the causes of it. Many of them had different thoughts; some of them said because of the lack of advertising, lack of customer knowledge etc. Poor framing may lead managers to solve the wrong problem, because they have created a framework for a decision with little thought. Changes in customer
preferences mean that past demand is not predictive of future demand. For example, US 70‟s auto industry. The focus was on manufacturing long production runs with minimum redesigns.
By contrast, other countries‟ manufacturing frames were customer-oriented- changes in customer demand was the focus. In the UK and USA, the high level of commitment to a previously
successful production-oriented strategy meant that management was slow to adapt.
The Sparkle of New Coke
The sparkle of New Coke is an example that shows that recognition that a strategy is failing is not enough to guarantee a successful change of strategic decision. The origin of New Coke began with the arrival of „Pepsi Challenge‟ that claimed to be winning head-to-head taste tests. In addition, Coca Cola did their own taste testes but they found disappointing results. In brief, Coca Cola could not prove its superiority against Pepsi. It was clear that the product had a taste
problem and the managers were wondering what to do next. Also, the market shares of Coca Cola were declining because of the competition from Pepsi. The main reason for Coke‟ decline was segmentation: the increase of diet drinks, citrus flavors, caffeine-free coals, and other
beverages that made customers to stay away from sugar cokes like Cola and Pepsi. Even with the introduction of new products, the taste problem was a major issue for Coca Cola Company and it needed to be resolved. While the head of Coca Cola was trying to find a solution for taste, in 1984 Pepsi narrowed Coca Cola‟s market share from 60% to 24%. Those numbers together with taste tests finally convinced the CEO of Coca Cola that it time for a change. Therefore, in April 1985, Coke and Erickson launched the New Coke. The American public's reaction to the change was poor, and the New Cola was a major marketing failure. Many people hated the New Cola even though they never tried it. On 11 July 1985, Roberto announced the return of “The Second Coming”-Coke Classic. Coca-Cola Classic proved phenomenally popular, outperforming New Coke and even overtaking Pepsi early in 1986. Coke executives said that “it is like the fellow who‟s been married to the same woman for 35 years and really didn‟t pay much attention to her until somebody started to flirt with her.”It was a good analogy, yet everyone in the Coca Cola felt about the outcome. No one could explain the renewed appeal of the old formula. New Coke was supposed to be the top cola, with Classic satisfying of the traditionalists. Instead, New Coke virtually disappeared, while Classic began selling better than the original.
The lessons learned of Coca Cola
New Coke was launched after tests showed that its taste outperforms the original Coke and Pepsi. However, the launch of New Coke contained untested assumption – flavor mattered more than the image of Classic Coke. The information gathered served only to confirm the decision that the launch of New Coke should go on. The lesson to be drawn from the Coca Cola
predicament is that companies‟ strategic decision-making may rely too heavily on a natural tendency to seek confirming evidence.
Confirmation Bias
Typically we seek confirming evidence to support continuation of the current, favored strategy.
The following examples illustrate this:
1. The waiter’s dilemma- Imagine that you are a waiter in a busy restaurant, because you cannot give good service to all the people who sit at the tables that you serve, you use your judgments to identify those people who will leave good tips or poor tips. You have developed this ability and in general most of the outcome turns out to be as you have
predicted. But are those predictions accurate? Note that the waiter will give good service to those he thinks will tip well and will ignore those he thinks will not tip. There is a self- fulfilling prophecy. The only that the waiter can test the quality of his judgment is to give poor service to good tip prospects and excellent service to poor tip prospects.
2. A mathematical puzzle-For example a class is told that we have a rule in mind that classifies sets of three integers- which we call triples. Our rule simply “any ascending sequence” (2,4,6), but most participants think that the rule is more complex- for example,
“ascending in equal intervals” (4,8,12,20). People tend to think only of positive tests of their view of the rule that can never be falsified: a bias toward confirmation, rather than disconfirmation, of our decisions.
3. The recruitment dilemma-The decision to hire employees is analogous to waiter‟s dilemma. Most of us feel that we are able to interview fairly and we feel comfortable with our hiring decisions- confident that we can identify the appropriate employees. But we seldom hear what happened to candidates that we declined. Unless we gain feedback on the interviewees that we turned down, we do not know if our decisions were sound. It follows that the only true test of our interviewing capabilities is to hire those that we feel we should reject.
Hindsight bias or “I-knew-it-all-along”
As strategic decision-makers we are likely to seek confirming evidence that our favored strategy is still working well and that it is aligned with the business environment. It seems that we don‟t learn from experience, because we believe it has little to teach us. We rely on our judgments, predictions, and choices.
The problem of overconfidence
One recent study asked individuals to rate themselves as car drivers on a scale from „well below average‟ to „well above average‟. Most ticked a box indicating above average- but by definition, we cannot be all above average! In another study, budding entrepreneurs were interviewed about their chances of business success. Their estimates were unrelated to objective predictors such as post-school education. Moreover, more than 80% described their chances of success as 70% or better- while the true five-year survival rate for new business in only 33%.
Escalation of commitment
It is common that when decisions start to go wrong, or strategy begins to fail, the decision-maker commits further resources to reverse the situation. For example, The R&D example: high
responsibility and low responsibility. Individual respondents are asked to allocate research and development funds to one of two operating divisions of an organization. The organization and the decision context are described in detail and the respondent is then told that, after a year, the investment had either proved successful or unsuccessful, and that they now face a second decision concerning second allocation of funds. This first group was known as the “high responsibility” condition and they have a personal commitment to the original decision taken.
Individuals in the second group were told another financial officer of the organization had made the earlier decision and that it had been either successful or unsuccessful. They were then asked to consider making a second allocation of funds to the division. This second group was called
“low responsibility” condition, as they had no personal commitment to the original decisions.
What are the common elements of decisions that result in inappropriate escalation of commitment?
There is a decision to make, resulting from a previously unsuccessful one.
There is a degree of personal responsibility for the important prior decision.
Managers pay more attention to information that confirms the validity of their earlier decision – confirmation bias.
Since the second decision is made in a situation that is negatively framed, individuals will tend to select risk-seeking options that, potentially, can „recover‟ what has become an adverse situation.
A blame culture within the organization will either magnify the likelihood that failure will be concealed, or it will ensure that additional effort is made in an attempt to turn the situation around.
How to halt such non-rational escalation of commitment?
Evaluate managers based on good decision processes rather than good outcomes.
Good decisions carry the risk of poor outcomes.
Managers should be allowed to reverse decisions if they begin to fail.
Cases: Taurus System, Barings Bank, the Millennium Dome. These three examples show the strength of irrational escalation of commitment.
Taurus
The London Stock Exchange‟s biggest ever computer project, Taurus was halted. Millions of pound had been spent on a project test that was convinced in the early 1980s, as an automated settlement process between stockbrokers. It was a central computer to maintain all records of shareholdings and share transactions. Overall, £75 million was spent on software and hardware with no payoff. In the end, a consultancy revealed that there was no overall architecture for the Taurus System.
Barings Bank
In the mid 1990s, Nick Lesson lost Barings Bank over £800 million in his future market trading.
He attempted to recoup his losses by doubling, then redoubling his stake. He covered up his mounting losses in a secret account for three years.
The Millennium Dome
A MORI poll on January 2000 found that 36% of respondents thought that the Dome should never been built; on 21 September 2000, Cabinet member Shott declared the Dome a disaster that should never have been built. The Dome project had swallowed £628 million and was subsidizing the dwindling number of visitors at £148 a visitor during 2000.
Decisional conflicts
Refer to simultaneous opposing tendencies within the individual, to accept or to reject a given course of action. Symptoms: hesitation, vacillation, feelings of uncertainty, and signs of acute emotional stress. Often, decision-makers defensively avoid the stress of difficult decision dilemmas by adopting coping patterns in their decision behavior.
There are three major copping patterns:
1. Procrastination - entails delaying the decision (waiting for a long time before thinking about the dilemma).
2. Buck-passing (shifting responsibility) – entails passing the ultimate responsibility for the decision to other individuals or groups.
3. Bolstering – involves uncritically boosting the advantages of the „least worst‟ option of those options that are available – often the status quo or business-as-usual option.
Escalation of commitment is characteristic of bolstering.
There are two common outcomes, when we apply any of the defensive avoidance coping patterns:
Incomplete search for and evaluation of incoming information that would aid choice.
Lack of contingency planning in the event that the course of action followed begins to fail badly.
Advice: „be alert‟.
Encourage new ideas and criticism and delay consensus.
Seek a devil‟s advocate viewpoint – welcome opinions and be creative.
Build a frame analysis worksheet.
Lecture 8: Futuring Methods
Scanning
An ongoing effort to identify significant changes in the world beyond the organization doing the scanning. Scanning is based on a systematic survey of current newspapers, magazines, Web sites, and other media for identifications of changes likely to have future importance. Scanning focuses mainly on trends- changes that occur through time; rather than events- changes that occur very quickly and generally are less significant for understanding the future.
Trend Analysis
The examination of a trend to identify its nature, causes, speed of development, and potential impacts. Careful analysis may be needed because a trend can have many different impacts on different aspects of human life, and many of these may not be apparent at first. Longer life spans, for example, increase the number of people whom resources must be provided but also increase the number of people who can contribute to the economy and society through paid and nonpaid labor.
Trend Monitoring
Trends viewed as particularly important may be carefully monitored- watched and reported regularly to key decision makers. For example, a rapidly rising unemployment rate or the appearance of a deadly new disease may have significant impacts on many different organizations and communities.
Trend projection
When numerical data are available, a trend can be plotted on graph paper to show changes through time. If desired, the trend line can then be extended or “projected “into the future on the
basis of the recent rate of change. Such a projection shows where the trend should be at some point in the future assuming there is no shift in the rate of change. Example: A population with a steady 2% rate of annual growth will double in about thirty-five years.
Scenarios
The future development of a trend, strategy, or a wild-card event may be described in the story or outline form. Several scenarios will be developed so that decision makers are aware that future events may invalidate whatever scenario they use for planning purposes.
Polling
Collecting people‟s views on the future and other topics. Data may be collected through face-to- face conversation, telephone interviews, and questionnaires sent by electronic or ordinary mail.
Delphi polling, popular among futurists, uses a carefully structured procedure to generate more accurate forecasts.
Brainstorming
The generation of new ideas by means of a small group gathered together to think creatively about a topic. Group members are encouraged to build on each other‟s ideas and withhold criticism. Brainstorming is useful in identifying possibilities, opportunities and risks. Other idea generating or problem solving methods are also common, such as idea mapping, impact analysis, and the systematic identification of all possible variables. Brainstorming has four basic rules:
— Defer judgment on any of the ideas.
— Try to develop a lot of ideas and not worry about their quality.
— Strive for unusual ideas.
— Build on other people‟s ideas.
Heuristics – the science of discovery (continued):
All ideas are recorded during the brainstorming sessions and evaluated later.
Brainstorming does not work well with broad and complex problems or those problems requiring trial and error approaches.
Idea Mapping
Another way to generate creative ideas; also called a “mind map” or a “thought map”
Idea mapping is a brainstorming method for individuals.
Begin by writing down a main idea and then drawing a circle around it.
Next, think of relevant thing and draw circles around them that connect to the main circle.
Add ideas and draw lines connecting them to the things they relate to.
Relevance trees
Relevance trees are used to create a visual display of choices we need to make (e.g., what we want to do this Saturday night).Relevance trees provide a way to present information without text.
Modeling
The use of one thing (the model) in place of something else that is more difficult or impossible to experiment with. In addition to real-world models, such as miniature airplanes and houses a set of mathematical equations can be used to represent a complex system. The model can then be put in a computer and used to stimulate the behavior of the system under a variety of conditions. For example, a model of the U.S. economy might show the possible effects of a 10% increase in taxes.
Gaming
The stimulation of real-world situation by means of humans playing different roles. In war games, real soldiers may become actors in mock battle, which help them to understand what actual combat is like and helps generals to test out alternative strategies and tactics they may later use.
Historical analysis
The use of historical events to anticipate the outcome of current developments. Often a current situation can be compared to one or more situations in history that seem to be similar. The U.S invasion of Iraq in 2003 was compared by some commentators to the Vietnam War, with the implication that the Iraq War would also prove disastrous.
Visioning
The systematic creation of visions of a desirable future for an organization or an individual. This procedure starts with a review of past events and the current situation, moves on the envision desirable futures, and concludes with identification of specific ways to move toward the desired future. A visioning procedure often prepares the way for more formal goal setting and planning.
Preferred futuring consists of:
1. Review organization‟s common history.
2. Brainstorm what‟s working and what‟s not.
3. Identify what underlying values and beliefs should be kept.
4. Identify events, developments, and trends that have an impact or lead to preferred future.
5. Create a preferred future vision.
6. Translate future visions into action goals.
7. Plan for action.
8. Create a structure for implementation of plan.
Five stages in building a vision:
1. Identify problem.
2. Identify past successes.
3. Identify desires for future.
4. Identify measurable goals.
5. Identify resources to achieve goals.
Caveat
To be effective visions must be shared and the group must believe they can make it happen!
Lecture 9
Scenarios- are conjectures about what might happen in the future.
In the 1950‟s Herman Kahn and colleagues at RAND Corporation began to develop scenarios;
result of scenarios helped to avert thermonuclear war.
Strengths of scenario building – provides a way to deal effectively with any situation that is important but uncertain. Many opposed Kahn‟s method, but by 1960‟s the method became popular with government and business.
Scenarios are used by demographers to ascertain population growth. Scenarios are published by the United Nations Population Division and the U.S. Bureau of Consensus. The multiple scenario approach forces us to think about uncertainties. Economists use scenarios because of great
uncertainties in business activity. To anticipate the future it is important to do many things even if we cannot do them well.
How do you see scenarios?
One technique – for every situation create three scenarios, maybe five.
A surprise-free or continuation scenario – trends will continue with little change. Things will continue much as they are now. They won‟t become substantially better or worse.
An optimistic scenario – trends will be better than in the past. Things will go considerably better than in the past
A pessimistic scenario – trends will be worse that in the past. Something will go considerably worse than in the past.
A transformation scenario- something spectacularly marvelous happen – something we never dared to expect
A disaster scenario - things will go terribly wrong, and our situation will be far worse than anything than we have previously experienced.
Examples: business owner, worker, or student.
For each scenario you need to identify reasons why it may or may not happen. We can give probabilities to each.
Also evaluate the desirability of the scenario (-10 to +10).
Scenario technique can pose thought-provoking questions about our values.
Scenarios encourage desirable action by showing people they may be headed for undesirable future.
Example: Scenario for a student (2 year projection)
Surprise-free: I will do about as well in my exams as I did last year.
Optimistic: I will do better than last year
Pessimistic: I will do worse than last year
Disaster: I will flunk my exams and have to leave school
Transformation: I will do so well in my exams that I win an award for a scholarship.
Backcasting – forecasting backwards from a possible future event, also known as normative forecasting.
Backcasting involves postulating a future goal, event, or circumstance and developing a sequence of steps to explain how the goal came to pass.
Backcasting has three uses:
Explain a past event (e.g., the disappearance of dinosaurs).
Devise a strategy and procedures to achieve the goal (e.g., achieve an increase in revenues of 20%).
Assess whether some imagined future event is possible (e.g., living on Mars).
Personal Backcasting
Helps people to decide whether or not they can achieve some goal.
Personal backcasting helps people to project and plan career goals (e.g., becoming a lawyer).
Scenarios are very useful to help us think in an orderly manner about the future possibilities and their probabilities and evaluate strategies to reach a goal.
Scenarios help us deal with wild cards.
Lecture 11
Scenario Planning Process
Peter Schwartz – The Art of the Long View:
Scenario planning is a creative process much like writing a novel with a plot beginning with current reality. The object is to create a variety of plausible futures and analyze how the enterprise would fare under each of them. It is generally used to assess the risk
associated with a key decision being considered.
This scenario planning process is a condensed version of the one described in great detail by Peter Schwartz in The Art of the Long View.
Step 1. State the focal issue or decision facing the enterprise.
Scenario planning works best when it proceeds from the "inside out" rather than the "outside in".
The best way is to begin with the important decisions that must be made and then progress outward to the environment. This will keep the process focused and prevent it from degenerating into purposeless speculation about infinite futures.
Step 2. List the key factors that influence this decision.
Identify the things that will determine the success or failure of the decision under consideration.
This includes the assumptions that provide the logic for this decision.
What do you need to know to make this decision or resolve this issue?
What will you consider success or failure?
What conditions or events will determine success or failure?
What critical assumptions define the logic for these responses?
Step 3. List the driving forces that influence these key factors.
Identify the driving forces in the macro-environment that drive the key factors you listed. These driving forces can originate in the following areas.
Society and its structure including demographic, economic and political factors, and public opinion.
Markets and customer behavior.
Technology and innovation.
Your industry competitive structure.
Your organizational capabilities and core competencies.
Separate those forces that are highly predictable or predetermined (i.e. demographics) from those which are uncertain (i.e. public opinion). Plausible plot development requires knowing what is inevitable and what is uncertain and open to choice.
Extensive knowledge or research is may be required to identify these driving forces. Systems thinking is needed to understand the structural dynamics creating them.
Step 4. Rank the key factors and driving forces by importance and by uncertainty.
The purpose of this step is to identify the key factors and forces that are the most important and most uncertain. This ranking is based on two criteria.
1. The degree of importance for the success of the decision or issue under consideration.
2. The degree of uncertainty surrounding these factors and forces.
The objective of this ranking is to identify the two or three factors or trends that are most important and most uncertain.
The predictable and predetermined factors are the same in all scenarios and will not be a differentiating feature.
This ranking will identify the factors and forces that will comprise the characters and settings for the set of scenarios that will be developed.
Step 5. Compose plots for alternate futures that could impact the decision.
This is the most creative and most important part of this process. The object is to develop a range of plausible scenarios whose differences all have a bearing on the decision under consideration.
The characters in these plots are either driving forces or institutions. The scenarios describe how these driving forces or institutions might behave under different plots or combinations of plots.
Commonly occurring plots that should be considered for every set of scenarios.
Winners and losers- a zero sum plotline where the strong survive and the weak get weaker.
Challenge and response- an adventure story of overcoming obstacles and being transformed in the process.
Evolution- slow change in growth or decline in response to environmental influences.
Systems thinking is essential for plausible plot development because it looks for structural relationships that create behavior.
Step 6. Evaluate the decision in each of the postulated scenarios.
Each scenario is simulated as if it were actually occurring. Examine how the decision looks in each scenario. If it is good in all scenarios it is a low risk decision but if it looks good in some but not in others it presents a higher risk.
This simulation exercise requires a suspension of belief to recognize that any of these scenarios could happen. This is necessary to enable an unbiased evaluation of the decision in each of these possible futures.
Step 7. Select indicators and signposts for each scenario.
These indicators and signposts will provide advanced insight into which of these scenarios is actually unfolding. This knowledge can provide a significant competitive advantage from knowing what the future holds.
This step is an important product of the scenario planning process because it forces the
recognition that the future is not fixed and that many different scenarios are possible. It creates heightened sensitivity to the events shaping the institution's future and how to deal with them.
Ten Process Pitfalls in Scenario Planning
Scenario process – how the scenario exercise is conducted.
1. Failing to gain top management support early on.
-the first step in any scenario process should be to secure the political support and
involvement of senior executive, because without them there can be no significant change in strategy at the end of the process.
2. Lack of diverse inputs.
-Outside inputs should be actively sought. Sometimes it pays to put outside experts on the team because even managers who are recognized as technological experts or astute students of specify markets may feel uncomfortable addressing issues beyond the familiar boundaries of their industry.
3. Poor balance of line and staff people.
-Scenario -planning process is often driven by staff personnel. Although they initiate the project, they need to make every effort to recruit line managers as project
champions. It is the line managers who must shape the scope and focus of the scenarios.
4. Unrealistic goals and expectations.
-It is important to keep a tight rein on the expectations of those involved in the process.
Some line managers expect the scenario-planning process to contribute to the bottom line within few months. This is unrealistic. The initial purpose of scenario planning is not to produce plans, but to help managers understand what might happen to their current plans in the various possible futures their organization may confront.
5. Confusion about roles.
-It is important at the beginning of the process to clearly define people‟s roles and the steps the group will need to take. Scenario planning may be a new and mysterious activity to many. Moreover, since this is a mental exercise that calls upon both analytical and creative skills, the process may be unsettling and even threatening to those whose basic world view is being challenged.
6. Failure to develop a clear road map.
-The scenario process may start drift if participants do not have a clear road map, and unless dates, tasks, and the people responsible for them are identified. Set clear milestones and deliverables for the process.
7. Developing too many scenarios.
-Some companies overboard and study too many scenarios. This dilutes the attention and energy of senior management.
8. Insufficient time for learning scenarios.
-Most companies have a strong action bias. Their motto is, “Let‟s get it done and move on”.
This attitude is fine for day-to-day operations. However, a slow simmering process can be highly beneficial in scenario development.
9. Failing to link into planning process.
-The scenario process should not be an isolated activity, unconnected to other organizational decision making processes. Ideally, scenario planning should be tied into the existing
planning and budgeting process. However, the transitions from using scenarios as thinking frameworks and intellectual lenses to using them for project evaluations.
10. Not tracking the scenarios via signposts.
-Even when the scenarios and appropriate strategies have been developed, the task is still not complete. Scenarios provide coordinates that help managers better understand the world they‟re now, and the futures they might be heading toward. However, scenarios initially look at the world from the perspective of an orbiting satellite, while day-to-day issues have to be managed on the ground. Thus, the scenarios should be made specific and tracked by
developing specific signposts.
