Scenarios and the planning process of the firm

Every plan is based on an industry scenario in one form or another, though the process is frequently an implicit one. The use of explicit industry scenarios brings the uncertainty in planning out into the open, and bases strategy on a conscious and complete understanding of the likely significance of uncertainty for competition. The resistance to employing scenarios will be greatly mitigated if they are seen in this light—as nothing fundamentally new or arcane. Industry scenarios are a useful device for getting a management team involved in thinking about the future systematically, and modifying unrealistic assumptions in a nonthreatening way because scenarios are not intended as forecasts.

Industry scenarios are best developed by business unit managers, with guidance and input from others in the firm as well as outsiders. This places the task of understanding the effects of uncertainty in the hands of those who must actually set competitive strategy, and ensures that scenarios are truly relevant to the business unit. Industry scenarios should be constructed well into the planning process, once basic industry, competitor, and value chain analysis has been done. Industry scenarios will be ineffective without a good base of knowledge, and probably should not be introduced into the planning systems of firms without good basic planning skills. Scenarios are best used to guide the choice of a strategy, rather than as a means of confirming one.

Scenarios are not needed every year for every business unit. They are necessary only when significant uncertainties are present in an industry. However, constructing industry scenarios irregularly runs the risk that managers will overlook key uncertainties in their industries. Scenarios force a creative search for possible structural changes. How often scenarios are constructed must depend in part on the confidence of top management in the objectivity and vision of business unit managers.

An important organizational issue in using industry scenarios is the relationship between recognizing uncertainty and the level commitment of management to a direction. Scenarios emphasize the uncertainty present in an industry, while successful implementation of strategies is usually more effective if there is widespread commitment to the chosen strategy within an organization. This suggests that scenarios should be constructed by the management team of a business unit, but only the chosen strategy should be widely communicated in the organization. Organizations can only cope with so much uncertainty and ambiguity.

1. Corporate Role in Constructing Industry Scenarios

A corporate planning group or other corporate level managers can play a role in industry scenarios, even though industry scenarios should be constructed at the business unit level.

Macroscenarios as an Input. A corporate group can provide macroscenarios to business units, as a part of the environmental analysis needed to construct industry scenarios. Macroscenarios can stretch traditional modes of thinking by business unit managers in a way that is difficult if scenarios are purely business unit driven.

Technology Forecasting. A corporate group can conduct or sponsor technological forecasting in core technologies areas or in technologies with a potentially broad impact on many industries, a suggestion I made in Chapter 5. Such research may help expand the horizons of business unit managers about possible technological impacts on their industries, a key source of uncertainty.

Training and Challenging. A corporate planning group can play an important role in providing training and guidance in the use of the industry scenario technique itself. Constructing scenarios is a complicated task that gets much easier with experience, and experience can be shared within a firm.

In addition to training, an outside perspective can often be useful in identifying scenario variables, determining the most important ones, assigning objective probabilities, probing ways of hedging or preserving flexibility at low cost, and devising ways to influence which scenario will occur. Corporate, sector, or group managers can play a useful role through participating in these ways in business unit scenario building efforts.

Corporate Risk Analysis. By analyzing each business unit’s industry scenarios, higher-level managers can identify scenario variables that have widespread importance for a diversified firm. The overall consequences to the firm should a particular scenario variable turn out one way or another can thus be assessed. In cases where corporate exposure to a particular scenario variable is great, some business unit strategies may have to be modified. At the same time, large investments may be justified in attempting to influence a scenario variable if it affects a number of business units. This approach to corporate risk analysis is based on well-informed assessments of uncertainties by business units. Top-down approaches to corporate risk analysis in many firms tend to be based on aggregate and oversimplified assessments of risks in each business unit by outsiders.

2. Industry Scenarios and Creativity

Most strategic plans are based on single-point estimates about the future, usually the best guess of the managers involved. Rarely are managers able to perceive fundamental shifts in their competitive environment ahead of time, and find imaginative ways of dealing with them. Industry scenarios are a systematic tool for examining the impact of uncertainty on competition by explicitly identifying the key uncertainties—the scenario variables. Scenarios aim to stretch thinking about the future and widen the range of alternatives considered. Scenarios provide a mechanism for improving the chances that views of the future are consistent. Having identified industry scenarios, a firm can then either mitigate uncertainty through its choice of strategy (influence, hedging, preserve flexibility) or make a bet on the future mindful of the risk involved. Industry scenarios also illuminate the consequences of mistaken forecasts about the future, and the key information to be acquired in forecasting efforts. Thus industry scenarios are fundamentally a tool to improve the creativity of strategic planning. They cannot insure creativity, but they can significantly raise the odds.

The industry scenario tool is not sufficient for strategy formulation in and of itself. Rather, scenarios provide a framework for formulating strategy under conditions of uncertainty. When combined with substantive conceptual tools for understanding industry structure, competitor behavior, and competitive advantage, the scenario tool can be an important part of the strategist’s arsenal.

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

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