Scenario planning: methods and applications

¶ … Planning: A Literature Review

In Steven Covey's 7 Habits of Highly Effective People, habit #2 for success is to begin with the end in mind (Covey, 1989). Nothing epitomizes this habit more than the job of the strategic manager. The strategic manager must be able to visualize the end product of their efforts long before they are realized. Along this journey, there are many steps and many paths that can be taken. Each of these paths will produce a different end result. Scenario planning is a key step in the ability to visualize the effects of one's actions. This literature review will explore current theory and research on scenario planning.

The literature review explores research the importance and process of scenario planning. It examines key research obtained in academic journals that concerns scenario planning and its need in strategic management. It also explores turnaround management and factors that affect the ability to turn a bad business situation around. In most cases, the research explored is recent. However, in some cases older research was included if it is considered to be a piece that is pivotal to the theoretical foundations of the literature in this topic area.

What is Scenario Planning?

The first task to be undertaken is to define what it meant by the term "scenario planning." Scenario planning arises from traditional forecasting tools and methods. Businesses are affected by both internal and external factors. Internal factors are the easiest to predict from the standpoint of strategic management. The manager has their pulse on the company and has a vast array of tools available for this purpose. However, external factors can often take them by surprise.

External factors include downturns in the market, shifts in the market and other whims of customers. A good strategic manager always has their eye on competition and can factor this into the equation. However, sometimes competition might pull an unexpected surprise. In some industries, weather or natural disaster might play a role in business changes. Factors such as the weather and the human factor are difficult to predict and can render traditional forecasting methods ineffective. This was the key reason for the development of scenario planning.

Scenario planning began with military strategy studies. Scenario planning is about "thinking the unthinkable" (NetMBA, 2010). Scenario planning means considering as many possibilities as one can think of and deciding a plan, should they come to pass. This principle was later adapted into business and led to the development of many different theories and processes for conducting scenario planning. Many think that scenario planning is about predicting the future, as its association with "forecasting" would make one suspect. Scenario planning is about considering the possibilities that might lie in the future and making contingencies.

Scenario planning allows the business to act, rather than react to situations. The result of scenario planning is the formulation of a set of distinct future possibilities, each of which has a different effect on the company. Scenario planning often takes place with a brainstorming session among high-level executives in the company. It is seldom the realm of a single person. Scenario planning forces management to break out of their standard views and opinions (NetMBA, 2010). Scenario planning forces them to consider not what is, what has been in the past, but what could be in the future. They must be able to open their minds and to explore the sources of conflict. They must be able to recognize the elements that will signal the beginning of an event so that they can put their contingencies in place. They cannot wait until it has already happened. These are the key elements of effective scenario planning (NetMBA, 2010)

Scenario planning involves the identification of variables and a set of outcomes based on those variables. Several important factors are important to the scenario planning process. According to NetMBA, they are:

1. Determine the scope of planning and its time frame.

2. Develop a clear understanding of what will serve as a common departure point for each of the scenarios.

3. Identify the elements that are likely to occur and what the driving forces for each scenario are.

4. Identify environmental factors and uncertainties that will effect each scenario. Sometimes, this scope might be wide and involve macro-environmental factors, such as the economy or long-term climate predictions.

5. Prioritize the drivers of a scenario and determine which are more likely to affect the outcome.

6. Determine a set of values for each variables that range from extreme to slight. Improbable values are typically avoided.

7. Develop a matrix that allows for the analysis of the interaction between certain variables.

8. The level of detail need not be great, it must only reflect a general ideal. NetMBA suggests writing a more detailed story that will develop the scenario further. However, it might be note that generalizations in the scenario are more predictable than specifics. The event might happen, but it might not happen in the manner that was predicted.

9. The final step is to quantify the effect of the scenario on the organization and to devise strategies accordingly.

Business unit managers often do not take scenario planning seriously, but tend to stick with mainstream views. According to NetMBA, they tend to rely on traditional forecasting methods, rather than "possibilities." Scenario planners can overcome this by developing a scenario based on mainstream thinking and the costs and benefits of such an attitude. Any possibility, including the norm, can be developed into a scenario.

The transportation industry is one area of business that uses scenario planning on a regular basis. As a result the Federal Highway Administration has developed a scenario planning guidebook to help administrators follow effective and current methods for scenario planning. This guide serves as an excellent source for exploring current methodology in scenario planning that can be applied to a number of business situations.

According to the guidebook, effective scenario planning can be divided into six specific steps. The first is to determine the specific goals for scenario planning and to develop a set of analysis tools that are within the capabilities and scope of the organization. Determining the goals of the exercise is the most important step to achieving the desired end-result. The second step is to determine what the current situation is, where they are, and what resources they have available. In the third phase, they must determine who they are and where they want to go.

In Phase 4, they must determine what the future could look like. This is where they have to get creative and list the factors that could affect the various future possibilities. They need to then analyze what effects these future possibilities will have on their operations. Phase 5 involves analyzing the various effects of the future possibilities. The final phase involves determining how the agency or business will react to each scenario, should it come to pass

(U.S. Department of Transportation, 2010). The guidebook applied these principles to the transportation industry, but these six steps can be applied to any scenario planning process. Now that we understand what scenario planning is and have a basic overview of how to do it, let us now examine what academic literature has to say about scenario planning and the scenario planning process.

Why Do it?

Scenario planning is now considered by some to be an alternative management tool. Recently, it has been given a new meaning in terms of strategic planning. We live in a turbulent world where traditional forecasting methods often fail. The ability to react properly in turbulent times does not involve the rationality of the strategic planner as much as it involves the complexity of the business environment. Strategic planners have the difficult task of achieving predictability in an unpredictable world. Scenario planning is gaining popularity as a way to achieve this task.

A recent study that involved the future of a small travel business in Malaysia. Three possible scenarios developed that were classified as stormy weather, blizzards and an occasional shower. According to the authors the recommendations that developed from scenario planning were differentiation, new services, and differentiation/mergers and acquisitions (Sevaguru & Samaun, 2009). The study found that all of these options were available for all of the scenarios that were analyzed.

The problem with this type of study is that is a single case study evaluation. The usefulness of this study is lies in the ability to demonstrate how to apply the principles of scenario planning to a certain case or business setting. However, single case study analyses are limited to scenarios that are similar to those that were used in the case study. They might not be applicable in a different business setting. Another drawback to the study is that the results of the scenarios that are developed have not yet been proven. Researchers do not know which of the scenarios will hold true and if the contingencies developed will have the expected result. The future is uncertain and it is not known whether the planning has resulted in effective strategies in the given future business climates. The value of this case study is demonstrative. It demonstrates how contingency planning can be used, but it says nothing of the results.

A quasi-experimental design was used by Chermack & Kim (2008) to explore the effect of scenario planning on decision-making styles. It was found hat participants in scenario planning have a tendency to make a mental shift towards intuitive-based decision-making styles after their participation in the scenario planning process. This study used a limited sample from a single company. However, the study demonstrates that this might be an area of interest for future studies. It examined the effect of the scenario planning process on individuals, rather than on the firm as a whole. This study was unique in its approach to scenario planning. A majority of the studies found in this literature review approached scenario planning from the standpoint of the entire organization and its affects on the business. This study demonstrated that scenario planning has an effect on the individual, as well as the organization.

The Chermack & Kim study suggests that future research attention needs to be placed on the effects of scenario planning on the individual. The effects of scenario planning demonstrated in this study indicate that the scenario planning process had an effect on changes in business culture and methods. As the individuals within the organization changed, so did their perspective on business strategy. The shifts in thinking that were discovered during this study suggest that scenario planning might have caused a fundamental shift in the organization and the way in which they manage strategy in the future.

Scenario planning is used in an number of applications and industries. Much of the literature focused on scenario planning from a financial standpoint. However, scenario planning can be applied to almost any field. For instance, scenario planning has been applied to the future electricity supply in Indonesia. This scenario planning episode attempted to forecast future demand by observing past trends and then developing scenarios based on those trends. However, it was found that this method of scenario planning fails to include future uncertainties. In order to consider future uncertainties, the scenario must rely less on past experiences. It must be willing to make long-term projections (Rachnatullah, Aye, & Fuller, 2007). This study supports the idea that all scenario planning methods are not the same and that some might be more successful in some scenarios than others.

Not every scenario planning method will work in all circumstances. Some methods might be more successful in certain business climates than in others. The Indonesian electricity example demonstrated the need to rely on past experiences to forecast the future, but it also demonstrates that past experiences are not adequate to make long-term predictions in the future. Although many scenario planning sessions follow the standard form discussed in the first section of this literature review, situations can be found in the literature that require a different type of scenario planning methodology.

Cares & Miskel, (2007) also found that nontraditional scenario planning methods have been developed for use in complicated strategic situations. The authors mention that strategic games are played on the highest level of the U.S. Department of Defense as a method of scenario planning. These war games require teams to move and countermove, with each move representing a time projection into the future. These games represent a form of coevolutionary scenario planning. This form of scenario planning brings in the element of how various factions might react in a competitive environment. The results of this process do not always produce a strategy, but they give the individuals an understanding of how the others might react in a competitive environment.

The studies by Cares & Miskel, as well as that by Rachnatullah, Aye, & Fullter bring up an important point in scenario planning. It is important to formulate contingency plans, but these are not actual predictors of the future. The situations that businesses will face are reactionary. Scenario planning can help to develop ideas that might be used when a certain situation arises, but seldom are the actual situations similar to those that were rehearsed. The general plan might remain the same, but the contingencies must be flexible and able to adapt as the situation changes.

The war game strategy in scenario planning brings in the element of competition. The Rachnatullah, Aye, & Fullter example stressed the importance of relying on the past. Another example from the area of accounting, finance and management focuses on the design of a knowledge-based system that can be used in strategic planning. This example stems from the European Airline industry. In this example several strategies were developed. These resulted in several sound recommendation and rational strategic reasoning. The result was considered to be successful in the development of team consensus. The system required members to draft strategies based on expert system rules that were presented along with the reasoning for these rules. The development of these rules was useful in clarifying thinking of the group and for achieving final group consensus (Davies, Moutinho, & Hurcheson, 2005).

Goal programming is another addition to scenario planning that can aid decision-making under conditions of uncertainty. One of the differences in this methodology that differentiates it from those discussed earlier is that it emphasizes conflict management as a key principle. This scenario planning strategy uses a computer program to structure the scenarios based on probability. The output is a goal-based probabilistic output that represents the most desirable outcome of the scenario-specific goal (Durbach & Stewart, 2003). One of the problems with computer-based scenario planning that was stressed in the work by Cares & Miskel (2007) is that when the scenario involves human decisions, models based on probability might not be the most accurate.

Multi-criteria analysis (MCDA) was found to be a powerful combination when integrated with traditional scenario planning methodologies. This combination allowed decision makers to receive the benefit of thinking about possible future scenarios and it also received the benefit of MCDA, with its ability to support in-depth performance evaluation of each of the strategies. This method not only allows the strategist to devise certain strategies using scenario planning, they can perform an analysis of the strengths and weaknesses of each strategy (Montibeller, Gummer, & Tamidei, 2006). This article also discussed several other scenario planning methods that combined methods such as multi-attribute theory. This method is mathematically simple, but effective method. The study by Montibeller, Gummer, & Tamidei examined two case studies where this method was used to support real-world strategic decisions with success. However, the application of the method encountered several challenges and limitations, which suggests that improvements to the methods need to be made in the future in order to maximize the results.

This literature review thus far, has revealed that there are many different approaches to scenario planning and strategic decision making. The study has examined several methods that could be applied to specific situations and types of businesses. Thus far, no one has been able to develop a method that can be applied to every situation with great success. All of the methods examined have both strengths and weaknesses. The most apparent conclusion that can be drawn from these results is that many different methods for scenario planning have been developed using different strategies and theories. Each of these methods is best suited for certain situations. One of the most important factors in scenario planning is to choose a method that suits the purpose and situation to which it will be applied. Choosing an appropriate scenario planning method is one of the most important factors to ensure its success.

Caughron & Mumford (2008) have divided research into the study of planning techniques into two different lines. The psychological approach to planning techniques focuses on the cognitive processes that are the basis for planning. However, project management researchers have taken a different approach. They have focused on the applications of planning in the organizational setting. The psychological approach focuses on the processes that are used to get to the end. Project management approaches focus on the end result and how it can be applied. Throughout this literature review, this division can be seen among the researchers that have been examined thus far. The literature examined thus far supports this observation.

The purpose of the study by Caughron & Mumford was to examine how formal planning techniques influence the planners' creative problem-solving skills. Three planning techniques were examined. This study addressed Gantt charts, case-based planning and critical path analysis. The results of the study found that participants achieved higher levels of creative problem solving when they were asked to consider events that could prevent them from achieving their goals. The consideration of events that could negatively impact goal achievement were more successful than those were they were using cases from memory or planning specific tasks to be done.

As one can see, there are many factors that can influence scenario planning. Some of the psychological factors that hinder success are those that hinder creativity. Throughout the literature review the themes of scenario planning as a process of linear steps and as a creative process emerged. Some techniques used a set process to develop scenarios. Mathematical methods were also used in conjunction with some of these methods. Other scenario planning methodologies used a more creative approach to the development of scenarios and responses to them. These various approaches to scenario planning have led to the development of several different camps of thought into both the processes and how they are applied in the real-world situations.

In Times of Stress, Turnaround Management

Scenario planning is used in a number of different business situations. It is used when the business wants to expand, when they wish to maintain a secure place in the market, or in response to anticipated competitor actions. Scenario planning is used in good times and in bad. Another part of scenario planning is turnaround management. When a business is in trouble, they must use scenario planning along with other management techniques to regain their place in the market. Turnaround management may occur when the problems are just beginning, but many times companies struggle until things are bad before they begin to consider turnaround management. Scenario planning and turnaround management go hand in hand. The following will examine current research on turnaround management.

The turnaround process was first introduced, as well as its external and internal causes in the early 1990s by Robbins & Pearce, (2006). When a company is in financial decline, these authors found that retrenchment was the first phase of the turnaround process. They further classified the process as entrepreneurial vs. efficiency processes. These early theorists supported the need for reorientation as central to the process of recovery for the firm (Barker & Duhaime, 1997). These same authors found that rather than reorientation as early theorists thought, successful turnaround management resulted from cutback actions and increased efficiency.

Moschieri (2010) explored existing literature and fount that the value creation of divestitures focuses on the antecedents, relating them to their parent company's financial performance. The authors were not able to determine whether the divested unit can create value for itself. Moschieri used a multi-case study approach to explore this issue. It was found that a sense of opportunity was a key driver in the decision to divest from certain assets. This was different than the perspective of cutting one's losses, as was once thought.

Wan & Yiu (2009) found that when corporate acquisitions were obtained during an environmental jolt, they would be more likely to be associated with firm performance than if they were acquired during other times. They suggested that organizational slack would improve firm performance and continue to highlight the association between acquisitions and firm performance. The study used the Asian Economic Crisis to provide the setting for a natural experiment. Based on a sample of companies from Hong Kong and Singapore, the study concluded that firms could capitalize on the opportunities provided by an environmental jolt. This ties in with our previous discussion on scenario planning, the company can only capitalize on these opportunities if they are ready to react to them in a positive way. In this case, scenario planning could provide the proper strategic recommendations to allow the firm to use the environmental jolt to their full advantage. This is one case where scenario planning and turnaround management can be used in conjunction with one another.

Karavli, a. (2007) addressed the issue of inconsistent findings in the performance consequences of new CEO origin. This research used five-decade of empirical research on CEO succession outcomes with the goal of forming a more refined theory of the insider and outsider CEO. CEOs range from those that have a long history with the firm and those that have no experience in the firm and/or limited experience in the industry. It was found that whether the new CEO was an insider or an outsider had not effect on the ability to predict firm performance. Often CEO or upper management succession is a part of the turnaround management process. Understanding the effects of the nuances of these choices will help companies to achieve greater success in the turnaround process. According to this study, whether the new CEO was and insider or an outsider would have no effect on the success of the turnaround.

Turnaround management is about creating value for investors after their previous efforts have failed. When a company has failed to meet the expectations of investors, they face the possibility of losing financial support, further complicating their circumstances as a result. The company must find a way to create shareholder value in order to return to their former success. Turnaround management techniques that recombine the firm's existing stock and resources to create new products, processes, or technologies have a positive effect on the ability of the organization to recover (Morrow, Simon, & Him et al., 2007). They also have a positive effect on investor expectations. However, it was also found that difficult-to- initiate strategies that provide the firm with access to new resources through alliances and joint ventures did not have any effect on investor's expectations of performance. Taking actions that do not add value were found to lead to further decline, both in investor expectations and in the actual decline of the company. The study found that actions that use existing resources in new ways contribute to the greatest organizational recovery.