Industry Scenarios and Competitive Strategy under Uncertainty

How does a firm choose a competitive strategy when it faces major uncertainties about the future? Oil field suppliers currently  are agoniz­ ing, for example, over how long the drop  in drilling activity will last; the estimates range from less than  a year to the rest of the decade. Industry structure is not static, and firms in many industries face considerable uncertainty about how structure will change in the future. The sources of uncertainty  are   numerous  and   originate both  within the industry and in the industry’s broader environment. Most observers would agree that uncertainty has increased dramatically  in the last decade, due to such   things as fluctuating  raw   material  prices, swings in financial and currency markets, deregulation, the electronics revolu­ tion, and the growth of international competition.

Every firm deals with uncertainty in one way or another.  Uncer­ tainty is not often addressed very well in competitive strategy formula­ tion, however. Strategies are frequently based either  on the assumption that the past will repeat itself, or on managers’ own implicit forecasts about the most probable future of an industry. Explicit and implicit forecasts of the future structure are often biased by conventional  wis­ dom, and by their very design may average out all the potential uncer­ tainties facing the industry. M anagers often fail to consider— or underestimate  the probability of—radical  or discontinuous  changes that  might be unlikely but  would significantly alter industry  structure or a firm’s competitive advantage.

A few firms construct contingency plans as part of the strategic planning process, in an attempt to test strategies against  m ajor  sources of uncertainty. Contingency  planning   is   rare   in   practice,   however, and usually tests strategies incrementally against only one or two key uncertainties such as the inflation rate or the price of oil. Contingency plans seldom examine alternative future industry structures, or compel managers to consider their implications. When facing considerable uncertainty,  firms tend to select strategies that  preserve flexibility, despite the costs in terms of required  resources or diminished competi­ tive position.

1. Scenarios as a Planning  Tool

As the perceived need to address uncertainty explicitly in planning has grown, a few firms have begun to use scenarios as tools to under­ stand  the strategic implications of uncertainty  more  fully.   A   scenario is an internally consistent view o f what the future  might  turn out to be. By constructing multiple  scenarios, a firm can systematically ex­ plore the possible consequences of uncertainty  for its choice of strate­ gies. The use of scenarios started  to become  significant after the 1973 oil crisis magnified certain forms of uncertainty.

The scenarios traditionally used in strategic planning have empha­ sized macroeconomic and macropolitical factors— I refer to these types of  scenarios   as    macroscenarios.    Scenario   building   has   concentrated on creating alternative views of the national or global economic and political environment, including such things as the rate of economic growth, inflation, protectionism, regulation, energy prices and interest rates. The use of macroscenarios reflects the fact that  oil, natural resources, and aerospace companies were the early leaders in employing scenarios   for   planning,   with   Royal  D utch/Shell  widely   recognized as a pioneer.12 Global  macroeconomic  and political events can have a profound effect on the success of an international  oil or natural resource company.  Moreover,  scenarios   have   usually   been   developed at the corporate level in diversified firms, hence the attention  to varia­ bles that broadly impact many business units.

Macroscenarios, despite their relevance, are too general to be sufficient for developing strategy in a particular industry.  The implica­ tions of macroscenarios for individual industries are often poorly un­ derstood. Constructing macroscenarios requires the analysis of a broad and highly subjective set of factors. Few aspects of the macroeconomic and   political   environment  have im portant  strategic   ramifications for all but the most basic industries. O ther uncertainties that macroscenar­ ios leave out  such as technological change  and   competitor  behavior can   emerge   as   dominant  factors   driving   industry  structural  change in particular industries. As a result, macroscenarios have encountered skepticism from many operating managers, and  have not become inte­ gral to strategic planning in a widespread way.

2. Industry  Scenarios

Scenarios are a powerful device for taking  acount  of uncertainty in making strategic choices. They allow a firm to move away from dangerous, single-point forecasts of the future  in instances when the future cannot  be   predicted.   Scenarios can   help   encourage  managers to make their implicit assumptions  about  the future  explicit, and to think beyond the confines of existing   conventional  wisdom.   A   firm can then make well-informed choices about how to take the competitive uncertainties it faces into account.

In competitive strategy, the appropriate unit for analysis of scenar­ ios is the industry— I term such scenarios industry scenarios. Industry scenarios allow a firm to translate uncertainty into its strategic implica-tions for a particular industry. By focusing on the industry, macroeco­ nomic, political, technological, and other uncertainties are not analyzed for their own sake but probed for their implications for competition. Industry scenarios also explicitly include competitor  behavior, a key source of uncertainty in the choice of strategies.

This chapter describes how to construct  industry  scenarios, and how to use them to guide the choice of  competitive  strategy.   I begin by describing how to identify the sources of uncertainty  facing an industry and how to translate them into the most meaningful industry scenarios. Next, I discuss how to analyze scenarios, and how to identify those with the greatest implications for industry structure and competi­ tive advantage. I then   show   how   a   firm   can   select the   best   strategy in light of the uncertainties  confronting  it. The  chapter  concludes with a discussion of how industry scenarios should  fit into a firm’s ongoing strategic planning process.

Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.

Leave a Reply

Your email address will not be published. Required fields are marked *