Scenario Planning: No More Black Swans

The unknown unknown

In his book ‘The Black Swan: The Impact of the Highly Improbable’, statistician Nassim Nicholas Taleb defines the eponymous moments as rare and unpredictable events with severe consequences – both good and bad – that many then claim should have been predictable in hindsight.

The invention of the internet and subsequent widespread availability of personal computers. Franz Ferdinand’s assassination as the impetus to World War I. The tragic 9/11 terrorist attacks on the World Trade Centre. All unpredictable. All with severe consequences.

Now, if we were aware of the possibility and have in fact experienced pandemics and market crashes, why were we unprepared for it yet again?

Every time some great disruption happens, you will hear and read statements like ‘unprecedented event’ and ‘never saw it coming’ in the media and coffee shop conversations. You may have even said it yourself.

That’s how the current COVID 19 pandemic is being described: an unknown unknown.

But is it really? Even Nassim Taleb who was recently interviewed has pointed out that it’s not a black swan, but rather more of a white swan event: a known unknown. Certainly, it is not the first pandemic to hit us. There have been others, far more deadly and contagious. We might not have known the exact date history would repeat, but surely we should have been prepared.

Now, if we were aware of the possibility and have in fact experienced pandemics and market crashes, why were we unprepared for it yet again?

We human beings are so interested in trying to see the future, but often have it wrong.

Look closely and you will see a sucker gazing into a crystal ball

Alan Simon, author and managing principal of Thinking Helmet, observes how complacency can set in, especially after a long period of economic boom. He argues that “this leads to ‘unprecedented’ mega-events that aren’t actually unprecedented, and which might have been interdicted, at least in part“.

So the questions is, are there any tools or approaches out there which could help us with this problem?

I had an opportunity to partner with Peter Schwartz, co-founder of the Global Business Network which was acquired by Monitor group. Through his book The Art of the Long View: Planning for the Future in an Uncertain World and his experience working for the Stanford Research Institute and Royal Dutch Shell he developed his own unique method of scenario planning.

Developing scenarios is more than a theoretical exercise. It is a fundamental, practical and important part of a leader’s role. If leaders are not preparing the organisation for the future, its future will be dependent upon hoping that it can respond to changes after they occur.

Changes in competition occur all of the time with takeovers and mergers and global companies deciding to withdraw from, or seek to penetrate, markets. Innovation or the ending of protection of patents, as with pharmaceutical patents, can have a major impact on how competition in markets develop.

Companies need to be able to analyse markets to identify the key variables that affect both demand and competition. They need to be able to develop scenarios for markets to enable them to consider their impact and to plan for the future as it unfolds. They need to be able to imagine themselves and their competitors within the dynamic evolving market context of now and the future and to be able to identify the strategic options for their future success.

What are Scenarios?

Scenarios are rich, data-driven, stories about tomorrow that can drive better decisions today
Scenarios offer a way to organise and test assumptions about the future despite inherent complexity and uncertainty
Scenarios provide a framework for recognising and adapting to change over time—ahead of time
The goal of scenario planning is not to find certainty but to create a map of uncertainty.
Scenario planning is designed not to reinforce what you know or assume, but to make visible what you are not seeing.
It does not provide one right answer about how the future will unfold, but will help frame and understand multiple plausible futures.

In situation #1, this is a typical situation where organisations tend to develop their strategy using the previous year’s budget as reference. For example, they might increase or decrease the budget based on a best/worst case scenario (where the basis is from previous year’s sales/revenue targets) by +5 or +10%.

The flaw is that these strategies and budgets are developed based on a linear approach where revenue is expected to grow constantly. During development, key drivers such as consumer trends, new competitors or substitute products and driving forces such as natural calamities, changes in political regimes, and regulation are not taken into consideration.

Organisation that have developed scenarios (situation #2) and planned a strategy for each one them would be able to react and adapt quickly and would outperform their competitors and market ahead of time.

READ: Do You Seek Risks?

The goal of scenario planning is not to find certainty but to create a map of uncertainty. Scenario planning is designed not to reinforce what you know or assume, but to make visible what you are not seeing. It does not provide one right answer about how the future will unfold, but will help frame and understand multiple plausible futures.

If you’ve come this far, it’s safe to say you’re interested. Let us now look at the five critical steps needed for scenario planning.

1. Identify a focal question

The process starts with identifying a focal question and we’ve chosen a test case for our example – How is the Indonesian telecom and related business landscape likely to evolve over the next 5 years? What are the opportunities and threats for Company X?

2. Identify key forces

What factors are likely to bear influence on the problem? Key drivers consist of trends or driving forces and are discovered during the following activities via market research and information gathering.

Driving forces

Are fundamental sources of future change – they are more constant
Tend to be from overarching categories like political, economical, social, technological, environmental and regulatory

Trends

Are based on observed changes in the present – they are more dynamic
Tend to be of the following types: Demand, Buyer, Competitor, Supplier, Distribution and Substitute.

3. Prioritise relevant forces

Once you have identified your driving forces and made a list of them, identify the two to four that have the most impact on your business. For example, two of the most important uncertainties for telecom companies are digital growth and consumer demand.

4. Develop a range of plausible scenarios

The goal is now to form a kind of matrix with your two critical uncertainties. Depending on what direction each of the uncertainties will take, you are now able to draw four possible scenarios for the future.

5. Discuss the implications

The scenarios present certain imperatives, as well as specific opportunities and risks for the business. To build upon our example, this is what an exploration of each scenario might look like.

During this final step, it’s imperative to discuss the various implications and impacts (risk and opportunities) of each scenario and start to reconsider the strategy; review the mission and goals while taking into account every scenario.

In short, this integrated approach to strategy development positions the organisation for success across scenarios.

Some pitfalls to avoid

A common trap is to be paralysed by the multitude of possibilities. Don’t try indefinitely new combinations of uncertainties to build your scenarios. Keep it simple and focus on two to four major uncertainties.

Another common mistake is to believe that you have to choose one particular scenario and build your strategy around it. Scenario planning is not about choosing just one option for the future but rather dealing with all of the possible outcomes to develop a strategy that will stand the test of all scenarios.

Also, when developing your different scenarios, try to not look at the short-term, say for your existing market, products or competitors. Do not hesitate to look far ahead, anticipating what the market and competition will be like in years to come. Be creative!