Scenario Planning: A Tool for Strategic Thinking
How can companies combat the overconfidence and tunnel vision common to so much decision making? By first identifying basic trends and uncertainties and then using them to construct a variety of future scenarios.
Early in this century, it was unclear how airplanes would affect naval warfare. When Brigadier General Billy Mitchell proposed that airplanes might sink battleships by dropping bombs on them, U.S. Secretary of War Newton Baker remarked, “That idea is so damned nonsensical and impossible that I’m willing to stand on the bridge of a battleship while that nitwit tries to hit it from the air.” Josephus Daniels, Secretary of the Navy, was also incredulous: “Good God! This man should be writing dime novels.” Even the prestigious Scientific American proclaimed in 1910 that “to affirm that the aeroplane is going to ‘revolutionize’ naval warfare of the future is to be guilty of the wildest exaggeration.”1
In hindsight, it is difficult to appreciate why air power’s potential was unclear to so many. But can we predict the future any better than these defense leaders did? We are affected by the same biases they were. It was probably as hard for them to evaluate the effect of airplanes in the 1920s as it is for us to assess the impact over the next decades of multimedia, the human genome project, biotechnology, artificial intelligence, organ transplants, superconductivity, space colonization, and myriad other developments. The myopic statements in the sidebar remind us how frequently smart people have made the wrong assumptions about the future with great certainty.
Managers who can expand their imaginations to see a wider range of possible futures will be much better positioned to take advantage of the unexpected opportunities that will come along. And managers today have something those defense leaders did not have — scenario planning. Unfortunately, too few companies use it. If only General Motors in the seventies had explored more fully the consequences of OPEC, the yuppie generation, globalization, environmentalism, and the importance of quality and speed in manufacturing; or IBM and Digital Equipment Corporation in the eighties, the full impact of the personal computer, which prompted the breakdown of the vertically integrated mainframe business and a shift toward distributed computing. Other examples abound: Federal Express’s fiascos in Europe, Philips’s setback in electronic markets (despite its leading-edge technologies), Disney’s union and image problems with its theme park in France, Sony in movies, etc.
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Scenario planning is a disciplined method for imagining possible futures that companies have applied to a great range of issues.
1. C. Cerf and V. Navasky, The Experts Speak (New York: Pantheon Books, 1984).
2. P.J.H. Schoemaker and C.A.J.M. van de Heijden, “Integrating Scenarios into Strategic Planning at Royal Dutch/Shell,” Planning Review 20 (1992): 41–46.
3. C. Sunter, The World and South Africa in the 1990’s (Cape Town, South Africa: Human and Rousseau Tafelberg, 1987).
4. A. de Jong and G. Zalm, Scanning the Future (The Hague, The Netherlands: Central Planning Bureau, Sdu Publishers, 1992).
5. For an incisive analysis of how the human mind generates explanations and predictions, see: D. Kahneman and A. Tversky, “The Simulation Heuristic,” in D. Kahneman, P. Slovic, and A. Tversky, eds., Judgment under Uncertainty: Heuristics and Biases (New York: Cambridge University Press, 1982), pp. 201–210. For additional psychological analyses, see: H. Jungerman, “Inferential Processes in the Construction of Scenarios,”Journal of Forecasting 4 (1985): 321–327; and R.M. Dawes, Rational Choice in an Uncertain World (New York: Harcourt Brace Jovanovich, 1988). For a forecasting perspective, see: W.R. Huss, “A Move toward Scenarios,” International Journal of Forecasting 4 (1988): 377–388. For a conceptual and behavioral perspective, see: P.J.H. Schoemaker, “Multiple Scenario Development: Its Conceptual and Behavioral Basis,” Strategic Management Journal 14 (1993): 193–213. For a consultant’s approach to scenario planning, see: T.F. Mandel, “Scenarios and Corporate Strategy: Planning in Uncertain Times” (Menlo Park, California: SRI International, Research Report 669, 1982). For the Royal Dutch/Shell approach, see: P. Wack, “Scenarios: Uncharted Waters Ahead,” Harvard Business Review, September–October 1985, pp. 72–89; and P. Schwartz, The Art of the Long View (New York: Doubleday, 1991). For scenario planning from an applied perspective, see: Planning Review, 20 (1992): 2 and 3. For the Dutch Central Planning Bureau’s wide-ranging global scenarios, see: De Jong and Zalm (1992).
6. For connecting scenario planning to project evaluation, using Monte Carlo simulation, see: P.J.H. Schoemaker, “When and How to Use Scenario Planning: A Heuristic Approach with Illustration,” Journal of Forecasting 10 (1991): 549–564. For a methodology to link scenarios to competitor analysis, core capabilities, and strategic vision building, see: P.J.H. Schoemaker, “How to Link Strategic Vision to Core Capabilities,” Sloan Management Review, Fall 1992, pp. 67–81.
7. See Kahneman and Tversky (1982); and A. Toffler, The Adaptive Corporation (New York: McGraw-Hill, 1985). There are several theoretical arguments supporting the hypothesis of underprediction of change from the status quo. First, anchoring on the past or present will likely result in underadjustment away from the present. Second, the availability bias will make it hard to properly weigh new scenarios. Third, overconfidence (with its multiple causes) results in unduly narrow confidence ranges regarding future change. See: J.E. Russo and P.J.H. Schoemaker, “Managing Overconfidence,” Sloan Management Review, Winter 1992, pp. 7–18.
8. S.P. Schnaars, Megamistakes: Forecasting and the Myth of Rapid Technological Change (New York: Free Press, 1989).
9. De Jong and Zalm (1992).
10. Looking at the past is a two-edged sword. It may unduly anchor us to old trends and realities, or things may seem more predictable in hindsight than they were at the time. However, examining the variability and unpredictability of the past may also help us construct broader scenarios. For example, most companies do not plan for the kind of turmoil that they have witnessed over the past decade. The forces that caused past turmoil (from political to technological) should be studied in order to appreciate better the system’s complexity and unpredictability. See: J. Gilovich, “Seeing the Past in the Present: The Effect of Associations to Familiar Events on Judgments and Decisions,” Journal of Personality and Social Psychology 40 (1981): 797–808; and B. Fischhoff, “Hindsight ≠ Foresight: The Effect of Outcome Knowledge on Judgment under Uncertainty,” Journal of Experimental Psychology: Human Perception and Performance 1 (1975): 288–299.
11. M. Godet, Scenarios and Strategic Management (London: Butterworths Scientific, Ltd., 1987).
12. Schoemaker and van der Heijden (1992).
13. For examples of decision scenarios, see: P. Hawken, J. Ogilvy, and P. Schwartz, Seven Tomorrows (New York: Bantam Book, 1982).
14. R.C. Blattberg and J. Deighton, “Interactive Marketing: Exploiting the Age of Addressability,” Sloan Management Review, Fall 1991, pp. 5–14.
15. C.W. Kirkwood and S.M. Pollack, “Multiple Attribute Scenarios, Bounded Probabilities, and Threats of Nuclear Theft,” Futures, February 1982, pp. 545–553.
16. Schoemaker (1991).
17. Sunter (1987).
18. For examples of this approach, see: Schwartz (1991).
19. For statistical elaboration and some consistency tests, see: Schoemaker (1991).
20. Schoemaker (1993).
21. Russo and Schoemaker (1992).
22. Schoemaker (1993).
23. Research has shown that generating reasons often improves probability calibration, even if the subjects generate their own reasons. See: A. Koriat, S. Lichtenstein, and B. Fischhoff, “Reasons for Confidence,” Journal of Experimental Psychology: Human Learning and Memory 6 (1980): 107–118. However, Schoemaker shows that if subjects are asked to generate reasons for extreme outcomes, their confidence ranges may actually shrink (instead of stretch) because of incredulity about the reasons generated. See: Schoemaker (1993).
24. A. Tversky and D. Kahneman, “Extensional vs. Intuitive Reasoning: The Conjunction Fallacy in Probability Judgments,” Psychological Review 90 (1983): 293–315.
25. Schoemaker (1993).
26. Kahneman and Tversky (1982), p. 207.
27. Russo and Schoemaker (1992).
28. A. de Geus, “Planning As Learning,” Harvard Business Review, March–April 1988, pp. 70–74; and P. Senge, The Fifth Discipline (New York: Doubleday, 1990).
29. J.E. Russo and P.J.H. Schoemaker, Decision Traps (New York: Doubleday, 1989).
30. Wack (1985).