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 indus­ tries. Scenarios force a creative search  for possible structural changes. How often scenarios are constructed m ust depend in part on the confi­ dence of top management  in the   objectivity   and   vision   of business unit managers.

An im portant organizational  issue in using industry  scenarios is the relationship between recognizing uncertainty and the level commit­ ment of management to a direction. Scenarios emphasize  the uncer­ tainty 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  sce­ narios 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 uncer­ tainty 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 analy­ sis 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 spon­ sor technological forecasting in core technologies areas or in technolo­ gies 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 com­ plicated 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 build­ ing efforts.

Corporate Risk Analysis. By analyzing  each business unit’s in­ dustry 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 busi­ ness 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 uncer­ tainties— 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 (influ­ ence, hedging, preserve flexibility) or make  a bet on the future mindful of the risk involved. Industry  scenarios also illuminate  the conse­ quences of mistaken forecasts about the future, and  the key information to be acquired in forecasting efforts. Thus industry scenarios are funda­ mentally 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 sub­ stantive conceptual tools for understanding industry structure, com­ petitor   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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