How Scenario
Planning Influences Strategic Decisions
A recent study sheds
light on how the use of scenario planning affects executives’ strategic
choices.
by Shardul
Phadnis, Chris Caplice, and Yossi Sheffi
The use of scenario planning once saved a credit union
that had had Enron Corp. as its sole corporate sponsor. In their 2009 MIT Sloan
Management Review article, “How to Make Sense of Weak Signals,” Paul J.H.
Schoemaker and George S. Day described how, after Enron’s sudden collapse into
Chapter 11 bankruptcy and scandal in 2001, the credit union survived, rather
unexpectedly, because its management had taken previous actions to reduce its
dependence on Enron. Management took these actions after considering scenarios
in which the credit union could not depend on Enron for its growth.
Another example of a strategic decision influenced by
the use of scenario planning is UPS’ acquisition of Mail Boxes Etc. in 2001.
This acquisition gave UPS more than 3,500 retail store locations in the U.S. to
complement its network of large hubs used as mail-sorting facilities. A
scenario called “Brave New World” — one of four scenarios UPS senior managers
considered in formulating the company’s strategy — was a huge influence on the
acquisition decision. The “Brave New World” scenario described a deregulated,
globalized marketplace — markedly different from the world UPS was operating in
in 2001. It was this scenario that convinced management to invest in retail
locations.
Despite such anecdotal examples illustrating the power
of scenario planning, empirical evidence of the effect of scenario planning on
executive judgment is almost nonexistent. That fact is surprising, considering
not only that executives use this method to make important decisions, but also
that the method requires extensive resources. What’s more, the few experimental
studies of scenario planning that have been conducted reach conflicting
conclusions.
To examine whether scenario planning produces
measurable benefits, we conducted several workshops, examining whether — and
how — the practice of scenario planning would influence various experts making
long-term investment decisions.
Scenario-Planning
Workshops
As part of a U.S. infrastructure initiative called
Future Freight Flows, which was sponsored by the National Cooperative Highway
Research Program, we designed and ran several workshops for leaders from
private-sector companies and public-sector transportation-planning agencies in
the United States (for example, state Departments of Transportation and
regional planning commissions). Long-range planning of transportation
infrastructure is an ideal context in which to apply scenario planning. That’s
because the planning and implementation can take several years — and most
elements of transportation infrastructure have life spans of decades. The four
scenarios we used were not mere demonstrations; the participating companies and
agencies planned to use the results to inform long-range planning.
We began by conducting a pretest. We asked each
participant, two to six days before the workshop — and before he or she had
seen the scenarios — to assess whether an investment should be made in each of
the selected elements of the region’s freight-transportation infrastructure,
considering needs over the next 30 years. We asked for two responses: (1)
Whether the participant would recommend investing in that element; (2) what the
participant’s confidence in his or her own recommendation was.
We then asked participants the same questions after
they had evaluated the elements first using one scenario and, later, multiple
scenarios. These questions were our posttest. The posttest was conducted either
during the workshop itself (for the single-scenario evaluation) or within one
week after the workshop (for the multi-scenario evaluation). Any changes in a
participant’s judgment — from the pretest to the posttest — we attributed to
the use of the single and/or multiple scenarios.
In every workshop, between 10 and 15 experts evaluated
the chosen infrastructure elements in each scenario. We assigned the experts to
the scenarios by using stratified random sampling to ensure a roughly equal
representation of different stakeholder groups (for instance, government
planners and shippers). We asked the participants to read a brochure describing
the assigned scenario before the workshop. During the workshop, they watched a
video of a fictional newscast describing events in the assigned scenario,
discussed the scenario’s implications for the region’s freight environment, and
evaluated the usefulness of each chosen infrastructure element for the
scenario.
The participants recommended investing in particular
elements of the transportation infrastructure by allotting 100 points according
to the perceived relative usefulness in the scenario. If the participants did
not recommend investing in a particular element of the region’s
freight-transportation infrastructure, they could give the element a veto vote.
We used the votes as estimates of the usefulness of each element for the
particular scenario.
If you are overconfident about your own judgment, you
won’t necessarily become humbled or less confident after your exposure to one
or many scenarios.
Implications for Executives and Long-Range Planners
Based on our findings, we offer three lessons for the
use of scenario planning by executives and planners making strategic and
long-range investment decisions.
1. The use of
multiple scenarios is not necessarily an antidote for overconfidence. One should not assume that simply using multiple
scenarios to evaluate a long-range decision will help alleviate the negative
effects of decision makers’ overconfidence in their own judgment. Scenario
users in our studies were almost equally likely to become more or less
confident in their judgment after evaluating multiple scenarios. This does not
mean that scenarios have no role to play in influencing long-range decisions.
Executive judgment about long-range investment decisions is still likely to
change after the decision is evaluated using a scenario. But our study findings
showed that if you are overconfident about your own judgment, you won’t
necessarily become humbled or less confident after your exposure to one or many
scenarios.
2. Scenarios
influence judgment — and their
content matters. More than half the judgments in our studies changed after
single-scenario evaluations. Scenario users became more favorable of investing
in an element — either by increasing confidence in their original
recommendation to invest, decreasing confidence in their original
recommendation to not invest, or changing their recommendation to favor the
investment — when they found the element useful in a scenario. We found the
opposite effects took place when scenario users found the element wasteful in a
scenario. Since the scenario-influenced changes in executive judgment depend on
the suitability of an investment to the world described in the scenario, it is
important to ensure that the scenarios used are relevant to the strategic decision
under consideration. By extension, scenarios not specifically developed to
guide a specific strategic decision may not be suitable for the task at hand.
3. The use of
multiple scenarios can nudge executives towards more flexible strategies. Executives often choose strategies optimized for a
particular environment. While such strategies may perform well in the
environment envisioned at the time of their implementation, they may not be
easily adaptable to new opportunities or in response to unexpected threats.
Likewise, the likelihood of organizational assets being subject to such
opportunities and threats is high when the assets have long lives — or when the
environment evolves rapidly. Under such circumstances, evaluating strategic
decisions using multiple scenarios can help executives appreciate the
importance of choosing more flexible assets or approaches — even if doing so is
not the most optimal choice for present-day conditions.
Influencing
Strategic Decisions
Although workshop participants, in the aggregate, did
not express less confidence in their judgments during their posttests, a
majority of the participants did change their judgments after using the
scenarios. The judgment changes were one of three types: (1) Switching the
recommendation for an investment in an infrastructure element from yes to no or
vice versa; (2) changing the level of confidence they expressed in their
recommendation (though seldom did they become less confident if they were
confident to begin with); and (3) proposing a different approach for investing
in a particular category of infrastructure elements.
For example, at a Future Freight Flows workshop at the
Washington State Department of Transportation, participants evaluated an
investment in a freight infrastructure element both before and immediately
after the workshop. We ended up with 343 before-and-after pairs of assessments.
Of those 343 pairs of assessments, the participants expressed the highest level
of confidence in 158 assessments before the workshop and 157 after the
workshop. Thus, the level of confidence after using multiple scenarios was
almost identical to that before the workshop.
But what’s noteworthy here is that the participants
changed their confidence in 161 of the 343 cases. In 51 of those 161 instances,
participants lowered their confidence in judgment from the highest level after
a multiple-scenario evaluation. For example, five experts had recommended
investing in cargo airports in the western part of the state of Washington with
the highest level of confidence before the workshop. But after the workshop,
they recommended either not making that investment or recommended the
investment with a lower level of confidence.
Simultaneously, we observed 50 instances of an
increase in confidence to the highest level after multiple-scenario evaluation.
One example of this was the decision to invest in the strategic waterways along
the Columbia and Snake rivers. Six of the experts who had recommended either
not investing or who had recommended an investment with low confidence changed
their recommendation to make the investment with the highest level of
confidence after multiple scenarios. In short, the multiple-scenario
evaluations were just as likely to increase or decrease participants’ confidence
in a particular investment decision.
The Importance of
Flexibility
We also examined if participants would choose a
different approach to implement the chosen strategies after the scenario-based
evaluation. In the Future Freight Flows workshop at the U.S. Department of
Transportation, we asked participants to select one of four approaches for
investing in various types of freight infrastructure segments, such as highway
corridors, border crossings, etc. The four approaches specified varying levels
of flexibility for funding infrastructure improvements projects.
After being presented with multiple scenarios,
workshop participants subsequently expressed significantly higher preference
for a more flexible option — which suggested allocating funds to specific
regions but not to specific projects. Likewise, there was a commensurate drop
in their preference for the least flexible option — which suggested immediate
funding and implementation of specific projects — after the evaluation of
multiple scenarios. In other words, considering multiple scenarios appeared to
have spurred a greater appreciation of the benefits provided by flexible
implementation strategies that keep more options open when faced with high
uncertainty about the future environment.
Considering multiple scenarios appeared to have
spurred greater appreciation of the benefits provided by flexible
implementation strategies that keep more options open.
The Challenges of Scenario Planning
Scenario development is not an easy undertaking.
Creation of the scenarios used in the Future Freight Flows project required
extensive research. The research began with a symposium in which thought
leaders presented the potential future developments in their domains
(technology, economics, demographics, etc.) to a few dozen public- and
private-sector managers invited to the symposium. We then asked the managers to
note their thoughts about the implications of those future developments for the
U.S. transportation infrastructure.
A subsequent brainstorming exercise among them
distilled the findings into the driving forces shaping the U.S. transportation
infrastructure over the next 30 years. We consolidated this information into 12
snapshot scenarios and presented them once more to the managers for feedback.
Based on their feedback, we created a survey, which we administered to public-
and private-sector stakeholders whose work pertains to the U.S. freight
infrastructure (such as governmental transportation planners, shippers,
carriers, and third-party logistics providers). We then analyzed the results of
the survey to identify the key uncertainties and driving forces over the next
30 years — and we used these findings to construct four scenarios.
In addition, we created narratives to describe each
scenario. The stories were complemented by various statistics describing the
world, presented in charts. The story and the charts were compiled in a 12-page
brochure to present a holistic picture of each scenario in words and numbers.
We also developed five-minute long videos presenting a fictional newscast on a
day in the distant future (November 2, 2037) in each scenario. The brochure and
the video were used together to immerse the scenario users in the respective
scenario before asking them to assess long-range investment decisions in
particular elements of the freight infrastructure.
We mention all of this in order to illustrate that
while scenario planning can obviously help leaders make smarter long-term
decisions, effective scenario planning requires a great deal of legwork and
research. Committing to it can be extremely beneficial — and we would recommend
it — but it is a time- and resource-consuming effort.
Scenario Planning
as a Continual Practice
Our studies provide objective evidence that the use of
scenarios influences executives’ judgments about long-range, strategic
decisions. But our study does not provide a comprehensive picture of the
efficacy of scenario planning. The reason? Our results pertain to the effect of
a one-time use of scenario planning on long-term decisions. However, we did not
examine whether the continual practice of scenario planning would help
executives improve when it comes to their long-term decision-making skills.
As Sarah Kaplan and Wanda Orlikowski pointed out in
their 2014 MIT Sloan Management Review article, “Beyond Forecasting: Creating
New Strategic Narratives,” executives create narratives about the future when
making strategic decisions. Often, these narratives are mere extrapolations of
the present trends. Carefully crafted scenarios could provide executives with
narratives that are not constrained by such myopic views. What’s more, leaders
can use multiple scenarios describing plausible visions of the world the
organization may experience in the future. Using these multiple scenarios can
help to ensure that the capital-intensive assets embodying the organization’s
strategy continue to serve the organization effectively over the assets’
lifetime.
Source | MIT
Sloan Management Review – Summer 2016
Regards!
Librarian
Rizvi
Institute of Management
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