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SCENARIO PLANNING IN ORGANIZATIONSHOW TO CREATE, USE, AND ASSESS SCENARIOS
By THOMAS J. CHERMACK
Berrett-Koehler Publishers, Inc.Copyright © 2011 Thomas J. Chermack
All right reserved.
Chapter OneIntroduction to Performance-Based Scenario Planning
This book describes a method for including the realities of uncertainty in the planning process. Uncertainty and ambiguity are basic structural features of today's business environment. They can best be managed by including them in planning activities as standard features that must be considered in any significant decision.
This book focuses on avoiding crises of perception. Scenario planning is a tool for surfacing assumptions so that changes can be made in how decision makers see the environment. It is also a tool for changing and improving the quality of people's perceptions. Uncertainty is not a new problem, but the degree of uncertainty and the effects of unanticipated outcomes are unprecedented. Learning how to see a situation—complete with its uncertainties—is an important ability in today's world.
This chapter presents some of the challenges posed by today's fast-changing environment. A tool for dealing with those challenges has traditionally been strategic planning. Basic approaches to strategic planning are described; however, the rate and depth of change have increased over time to the point that those methods are no longer useful. Scenario planning emerged as an effective solution in the 1970s, and the ensuing history of scenario planning is discussed here. This chapter also describes a variety of major approaches to scenario planning, including their shortcomings. The fundamental problem with existing approaches to scenario planning is that they are not performance based. Evidence of this critical oversight is presented by reviewing the definitions and outcomes of scenario planning as they are described by major scenario planning authors. The outcomes they promote are generally vague and unclear. Finally, this chapter introduces performance-based scenario planning—which is the contribution of this book.
Some authors prefer to use the term dilemma instead of problem because the term problem can imply that there is a single solution (Cascio, 2009; Johansen, 2008). Most often, strategic decision making involves ambiguity and a realization that numerous solutions are possible. Each usually comes with its own caveats and difficult elements that must be considered. Hampden-Turner (1990) saw dilemmas as a dialectic and used the description "horns of the dilemma" to describe this way of observing specific dynamics in the environment. This way of describing complex dynamics takes a first step into looking for underlying systemic structure.
This book focuses on complex problems or dilemmas with unknown solutions. Therefore, its intent is to develop the understanding and expertise required to explore difficult, ambiguous problems and consider a variety of solutions in a wildly unpredictable and turbulent environment. Because there are no clear answers to questions of strategy and uncertainty, decision makers are compelled to do the best they can. These types of problems are the most complex, most ambiguous, and often the most deeply rooted. Experienced scenario planning practitioners have demonstrated their capacity to detect blind spots, avoid surprises, and increase the capacity to adjust when needed. Most important, modern-day dilemmas take place in an environment the likes of which we have never seen before.
Organizations operate in environmental contexts. These contexts include and are shaped by social, technological, economic, environmental, and political forces. The external environment has received much attention in literature from a variety of disciplines. Emery and Trist published a seminal work on the importance of the external environment in 1965. They suggested a four-step typology of the "causal texture" of the external environment:
Step 1—a placid, randomized environment
Step 2—a placid, clustered environment
Step 3—a disturbed, reactive environment
Step 4—a turbulent field
Few would disagree that most contemporary organizations are heavily steeped in turbulent fields. Turbulent fields are worlds in which dynamic processes create significant variance. These turbulent fields embody a serious rise in uncertainty, and the consequences of actions therein become increasingly unpredictable (Emery & Trist, 1965). These four different types of environments have existed over time, but today we are dealing with turbulent fields beyond the original conceptualization.
Reminding readers of Emery and Trist's classification, Ramirez, Selsky, and van der Heijden (2008) use the ideas of turbulence and complexity to frame their edited book Business Planning for Turbulent Times. They make their case that turbulence and environmental complexity are undeniable features of the business environment by citing research showing significant increases in published material focused on turbulence and uncertainty. It could be argued that these descriptors are more relevant today than they were in 1965.
Another description of the external environment uses the terms volatility, uncertainty, complexity, and ambiguity for the acronym VUCA (Johansen, 2007). VUCA originated at the U.S. Army War College, which has since become known as VUCA University. Indeed, the elements of volatility, uncertainty, complexity and ambiguity are undeniably present in the operating environment of any organization—the only question is the degree to which each element may be in play.
These external environment elements have equal and opposite forces that must be understood and emphasized. For example, to overcome volatility, one must use vision; to address uncertainty, one must develop understanding; complexity yields to clarity; and ambiguity can be addressed with agility. Each of these solutions is based on an open-ended, continuous learning orientation (Johansen, 2007).
The general societal environment and organizations within it continue to evolve to new heights of complexity, turbulence, volatility, uncertainty, and ambiguity. The rate of change is not likely to slow, and most decision makers are simply trying to keep up. Timelines for strategic thinking are short. Organizations operating on a minimum of resources will find that eventually something must be given up. For many, the time to think strategically is sacrificed. Logically, this reaction is just the opposite of what is required if decision makers are to have any chance at navigating a chaotic environment that is challenging them.
A BRIEF EVOLUTION OF STRATEGIC PLANNING
Military planning has long concentrated on strategy principles dating back to early Chinese philosophers such as Sun Tzu and Japanese philosophers such as Miyamoto Musashi, as well as ancient scholars like Niccolò Machiavelli. These early opinions about battle positioning have heavily influenced modern thinking about strategy (Cleary, 1988; Greene, 1998). Through several world and national wars, the notion of planning for strategic warfare positioning has evolved dramatically (Frentzell, Bryson, & Crosby, 2000). While the history of military planning is extensive and has evolved in many ways completely on its own, military strategy has borrowed and contributed concepts from and to corporate planning over the years (Frentzel et al., 2000).
Alfred Sloan advanced corporate planning practices at General Motors in the 1930s. The concept of planning as a central organizational activity was further advanced by Igor Ansoff and Alfred Chandler. These strategy thinkers spent their time in the 1950s and 1960s trying to convince managers that their companies needed strategies. During this period, frequent links and parallels were drawn with military strategy and the events of the era. Economic forecasting was the key tool in the strategist's arsenal of weapons for blasting a path to the desired future. This approach to planning continued through the 1960s and generally involved three phases—namely, defining the desired future, creating the plan (or steps to achieve the desired future), and then implementing the plan (Micklethwait & Woolridge, 1996). These phases also denoted the initial division between strategy formation and implementation, with the formation being a process reserved for senior executives and the CEO, and implementation being the job of managers. Strategic planning became increasingly complex over the next decade with the introduction of several levels of planning. A notable contribution of this time period was the Boston Consulting Group's Growth Share Matrix. The matrix was intended to indicate a general strategy to executives and managers based on templates of opportunities and strategies in any industry.
In response to the demands of World War II, planning became a top priority for most industries. The military also heightened its connection to the research coming out of the RAND Corporation that was headed by Herman Kahn (Kahn & Weiner, 1967; Ringland, 1998). The developments in Kahn's "future-now thinking" quickly translated into military efforts to predict the future (Kahn & Weiner, 1967), and military planning groups added physicists and mathematicians specializing in modeling (Ringland, 1998). Although much of the planning strategies used by the military were classified, it seems clear that the thinking going on in Stanford Research Institute's Futures Group, and that of Herman Kahn himself at the Hudson Institute, provoked what became more widely known as simulations, or events that positioned participants in hypothetical situations.
Later, Forrester's (1961) work at the Massachusetts Institute of Technology also contributed greatly to the development of simulations, and his expertise was sought for military operations on several occasions. One of the applications of Forrester's systems dynamics modeling was to uncover counterintuitive possibilities in the future. The essence of the Forrester systems dynamics models is to develop the underlying causal relationships that drive a specific dynamic. Through a process of identifying and modeling the size of stocks and the strength of flows, complex dynamics could be captured. These models also enabled an evidence-based argument about how specific dynamics might unfold in the future.
Military groups began using simulations to allow individuals to experience situations without the implications of their actions in those situations translating into reality (Frentzel et al., 2000). The emphasis on war games, the advent of computer modeling, and other technology produced by the military and industry in the 1950s and 1960s have led to elaborate training strategies involving virtual reality and devices such as flight simulators. Military planning has incorporated some of the early scenario planning concepts, but the core point of differentiation has been a lasting focus on prediction in military planning (Frentzel et al., 2000).
Michael Porter's work on business strategy took a cue from some of the military planning concepts and applied them to business organizations. His work concentrated on the idea that there can be both unique solutions to strategic problems and general solutions that may be examined for relevance to any strategic situation (Porter, 1985). Porter's work then shifted to the idea of competitive advantage and that, indeed, generic paths for achieving competitive advantage are freely available to any corporation and its planning analysts (Porter, 1985). Porter also stressed the idea that organizations should think of themselves as value chains of separate activities. Planning took a serious turn to focus on analysis until Japanese companies were performing as anomalies in Porter's planning framework. Lengthy, formal, and involved approaches to planning came under tough scrutiny by overseas business leaders; eventually, even the Harvard Business School explored more simplified approaches to strategy.
The shift in thinking toward simplicity had an effect on most organizations. Many corporations ridded themselves of their planning departments as the concept of reengineering took center stage in the 1990s. Strategy consulting firms like McKinsey and the Boston Consulting Group shifted their expertise to reengineering to capture the rising demand. Planning practices in the 1990s and early 2000s became hybrids of everything from formalized annual retreats that attempted to re-create the days of planning, to simple strategies that could be communicated and rolled out to employees on business cards.
In light of the negative and devastating effects of many reengineering efforts, some companies have attempted to revive practices of strategic thinking in their organizations, and some companies have managed to hold onto their formal planning processes. The 1990s also brought about a concentration on developing strategic vision. Jim Collins, in his best-selling book Good to Great (2001), demonstrated how vision-led organizations are sustainably more profitable than others. He combined this point with a leadership theory called Level Five leadership that he described as a combination of fierce resolve and humility. This approach was thought to be the solution—somewhere between the bureaucratic formalized planning that was deemed a failure in the past and a strategy written on a cocktail napkin.
PHILOSOPHICAL VIEWS ON STRATEGY
There are three overarching paradigms of strategy (van der Heijden, 1997, 2005b). These philosophies are critical to understanding the context in which planning takes place. Although it is tempting to "choose" one of these philosophies with which one finds alignment, it is important to realize that all three of these views are valid. To place scenario planning in context, we must consider the backgrounds of each of these views: rationalist, evolutionary, and processual.
The Rationalist School
The rationalist school features a tacit and underlying assumption that there is indeed one best solution. The job of the strategist becomes one of producing that one best solution or the closest possible thing to it. Classic rationalists include Igor Ansoff, Alfred Chandler, Frederick Taylor, and Alfred Sloan (Micklethwait & Woolridge, 1996). The rationalist approach to strategy dictates that an elite few of the organization's top managers convene, approximately once each year, and formulate a strategic plan. Mintzberg (1990) lists other assumptions underlying the rationalist school:
Predictability; no interference from outside
Implementation follows formulation
Full understanding throughout the organization
The belief that reasonable people will do reasonable things
The majority of practitioners and available literature on strategy is of the rationalist perspective (van der Heijden, 1997, 2005b). Although it is becoming clear that this view is limited, and as the belief in one correct solution wanes, the rationalist perspective is still alive and well, and fully embedded in many organizational planning cycles.
The Evolutionary School
With an emphasis on the complex nature of organizational behavior, the evolutionary school suggests that a winning strategy can only be articulated in retrospect (Mintzberg, 1990). Followers of this theory believe that systems can develop a memory of successful previous strategies. In this case, strategy is thought to be a "process of random experimentation and filtering out of the unsuccessful" (van der Heijden, 1997, p. 24). Organizations with strong cultures and identities often have trouble seriously thinking about alternative futures because the company brand is so influential.
The issue with this perspective is that it is of little value when considering alternative futures. This view can sometimes reduce organization members to characters of chance, influenced by random circumstances.
The Processual School
The processual school asserts that although it is not possible to deliver optimal strategies through rational thinking alone, organization members can instill and create processes within organizations that make it a more adaptive, whole system, capable of learning from its mistakes (van der Heijden, 1997, 2000). Incorporating change management concepts to influence processes, the processual school supports that successful evolutionary behavior can be analyzed and used to create alternative futures. Van der Heijden (1997, 2000) offers the following examples of metaphors for explaining the three strategic schools:
The rationalistic paradigm suggests a machine metaphor for the organization. The evolutionary school suggests an ecology. The processual school suggests a living organism.
Excerpted from SCENARIO PLANNING IN ORGANIZATIONS by THOMAS J. CHERMACK Copyright © 2011 by Thomas J. Chermack. Excerpted by permission of Berrett-Koehler Publishers, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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