I found an interesting article in The Wall Street Journal noting how companies are once again turning their attention to scenario planning. The article describes how scenario planning has helped JDS Uniphase more rapidly respond to the the industry downturn. JDS Uniphase is now using the same strategic scenario planning techniques to plan for the eventual business upturn as well.

Of course, scenario planning never really went away. Like any strategic tool, it can get worn by misuse or lack of clarity as to how it can add value. As an example of this, in the comments section of the WSJ article one person summarizes scenario planning as creating worst case, best case, and most likely case scenarios…while such scenarios may be better than nothing, these three scenarios would not be the output of widely accepted approaches to scenario planning. However, it is unclear how rigorous was JDS Uniphase’s use of scenario planning since the article only mentions a “worst case’ revenue scenario.

Given that scenario planning was developed as a way to manage uncertainty, it is not surprising that scenario thinking is making a come back today. Scenario planning picks up where modeling loses relevance. It should not be viewed as a replacement for more quantitative strategic and financial modeling techniques. Rather, scenario planning can be used to help develop the input to these other planning tools. Ideally, a scenario planning process should lead right into an industry monitoring process so that probabilities can be updated in real time.

More about scenario planning:
Scenario Planning Executive Training
Scenario Planning articles and books

In view of this exchange exchange, and other valuable conversations with colleagues and clients, I feel compelled to share my own experience of many years working as a practitioner in scenario planning in both developed and emerging markets (where disruptions are more frequent, but still often “unpredictable”). Here are my thoughts on the topic:
- It is indeed true; scenario planning cannot completely shield you against true Black Swans.
- After all, scenario planning creates a finite number of future archetypes and often bounds the future cone of possibilities at 90% to 95% (a small technical note, but an important one nonetheless, given that black-swans happen at the tails).
- However, the fact that scenario planning cannot completely shield you against Black Swans should not discount its strategic planning and risk management value.
- On the contrary, scenario planning provides a head start for many companies that still conduct straight line projections into the future or are frozen by the current state of events.
Also, the current financial and economic crisis is not a true Black Swan (even by Taleb’s own admission). It was envisioned by various strategy and risk management practitioners and even some contrarians in large organizations (for an intriguing reference, read “Describing the current financial crisis…in 1997!“). To me, the crisis is less a failure of foresight than one of weak governance models and wrong incentives.

This still leaves companies operating in sectors prone to disruptions and Black Swans emerging from the tails. So, what is an executive to do? Here are some suggestions:
a) Start by developing scenarios to expand the current view of the world; in doing so, use industry analogies, wild cards, and other techniques that truly expand the current frame of thinking.
b) Continue by stress-testing your operation (e.g. how big of a hit can we absorb, what could kill our company or derail our strategy) and updating your strategy or operation (focus on the upside as well as the downside)
c) Further the exercise by changing your policies (e.g. how much slack should we add to the operation) and risk management practices (e.g. how much risk should we take / accept, what risks should we scale to a higher level)
d) Finalize by implementing a real-time monitoring process / system and link it to decision-making.
These measures will not completely shield you from true Black Swans, but will increase your level of preparedness and adaptability to manage market disruptions and profit from the emerging opportunities they provide.

In the words of the French scientist Louis Pasteur…”Chance favors the prepared mind”; scenario planning is a powerful means to achieve preparedness of the corporate mind.

If you want to learn more, please contact me at sichel@thinkdsi.com or visit www.thinkdsi.com

More about scenario planning:
Scenario Planning Executive Training
Scenario Planning articles and books

1. Identify Stakeholders
2. Align Arguments to Build Momentum
3. Create and Engagement Strategy
4. Identify Trigger Events
5. Plan to be Wrong

These five steps form the basis for DSI’s Change Management executive sessions. Of course, the challenge in change management is making abstract statements, such as those five listed above, match the complexity of your specific change situation. The key is to use a live change initiative to make the change planning process relevant to your organization.

Below is a clip of Dr. Austin talking about the significance of understanding trigger events (step 4) in change planning. He uses an example from the actions of Branch Rickey, General Manager of Brooklyn Dodgers, and his signing of Jackie Robinson to illustrate the point.

Below is a slideshow Michael has used do describe the scenario.

More about scenario planning:
Scenario Planning Executive Training
Scenario Planning articles and books

In addition to her experience as an academic director at Wharton, Dr. Pearson has helped executive education providers craft realistic and viable long-term strategies.

See the Wall Street Journal article:
Recession 101: Courses for a Crisis

The client was a building supply company. They labeled one of their scenarios “Return to the Great Depression”. Details of this future scenario included a widespread recession with high energy prices, crashing equity prices, a market flooded with foreclosures, and housing starts at a 50 year low.

At the time of the scenario creations, this client assigned a love probability to this scenario. However, by considering the possibility of this future, this company could become more aware of the early warning signs that this future was becoming more of a reality.

More about scenario planning:
Scenario Planning Executive Training
Scenario Planning articles and books

He outlines the three pillars of an adaptive strategic planning process.

Pillar 1: Using multiple frames of reference. Recognize the company view and do not get stuck in one world view. Scenario planning is a good technique to keep a strategic planning process from focusing too narrowly on a preferred worldview.

Pillar 2: Develop a flexible strategy. Use strategic options to focus company resources on the appropriate priorities given the uncertainty in its environment.

Pillar 3: Monitor the environment. Be vigilent for signs of shifts in the environment. Establish a system for monitoring trends and uncertainties and use this intelligence to update the strategic plan, future scenarios, and strategic options.

To summarize, the costs may be limited to management time and an investment in an experienced team of strategic planning facilitators. The benefit is preparing your company to out-compete your competitors in an uncertain future

More about scenario planning:
Scenario Planning Executive Training
Scenario Planning articles and books