Workshop 2 Scenario Planning

BUMGT 5926 S d M f ChMaster of Business Administration

BUMGT 5926 Strategy and Management of Change

Workshop 2 Scenario Planning

Dr Abang Nawawi DahlanBSc (Hons) Malaya, MSc (Durham, England), DBA (SCU Australia)

Adj t P f f St t i M tAdjunct Professor of Strategic Management

ObjectivesObjectives• Describe how uncertainty can be managed in

strategy• Define Scenario and Scenario Planning• Identify conditions in which scenario

planning is most appropriatep g pp p• Identify conditions in which scenario

planning is NOT appropriateplanning is NOT appropriate• Outline the process of scenarios

developmentdevelopment• Present a Illustrative case

Reading MaterialsArticle:Article:Schoemaker, P. J. H (1995). Scenario Planning: A Tool

for Strategic Thinking, Sloan Management Review, Wi 25 40 ISSN 15329194Winter, pp. 25-40, ISSN: 15329194.

Book:Book:Ringland, G. (1998). Scenario Planning: Managing for

the Future, New York: John Wiley. ISBN 047197790X047197790X.

Addi i l R diAdditional Readings:Schoemaker, P. J. H (1991). When and How to Use Scenario

Planning: A Heuristic Approach with Illustration Journal ofPlanning: A Heuristic Approach with Illustration, Journal of Forecasting, Vol. 10, 549-564.

Burt G & Chermack T J (2008) Learning With Scenarios:Burt, G & Chermack, T.J (2008). Learning With Scenarios: Summary and Critical Issues, Advances in Developing Human Resources, http://adh.sagepub.com

Tuna, C (2009). Theory & Practice: Pendulum Is Swinging Back on Scenario Planning’. Wall Street Journal, New York, Jul 6, p. B6.

Heicks, H (2010). Scenario Planning: China’s airline industry in 2019. Tourism and Hospitality Research, vol.10, issue 1, p.71-77.

Marren, P.B & Kennedy, P.J (2010). Scenario Planning for economic recovery: short term decision making in a

i S & L d hi l 38 1 11 16recession. Strategy & Leadership, vol 38, no. 1, pp.,11-16.

Th R t f C titi Ad tLet’s recall ……….

The Roots of Competitive Advantage

Integration

Business Level

Strategies

g

Corporate Level

StrategiesCA

Strategies Strategies

Diversification

7S FrameworkNew 7S Framework

Organisational LearningKnowledge Managementg g

Ethics , Governance, CSR

SCA

To facilitate the development and use of distinctive competencies, managers must have the capacity to deal with

• uncertainty

• complexity, and

• intraorganizational conflict - a willingness to hold people accountable for their work and to be held accountabletheir work and to be held accountable themselves.

Uncertainty is considered as not knowing what issues, trends, decisions and events will make up tomorrow.

Managers face uncertainty from a number of sources, including• new proprietary technologiesnew proprietary technologies• rapid changes in economic and political trends• transformations in societal values• shifts in customer demands

ol o

f Bus

ines

s • shifts in customer demands

Such factors interact with each other, thus increasing h bi it d l it f i

Moy

een,

Sch

oo the ambiguity and complexity facing managers as they try to steer their organization in an uncertain context.

© D

r. A

bdul

M

Interorganizational conflicts often surface when decisions are made about which core competencies to

CRICOS Provider Number 00103D

decisions are made about which core competencies to nurture as well as how to nurture them.

In today’s environment particularly after theIn today s environment particularly after the 2008 Economic Crisis, businesses express concern on the complexity and uncertainty of overwhelming proportion.

‘so many critical uncertainties were affectingso many critical uncertainties were affecting businesses that they needed a multivariate equation to

make sense of things’ - Bloomberg Businessweek Aug 2009 in the article ‘Don’t

ol o

f Bus

ines

s Bloomberg Businessweek, Aug 2009 in the article Don t Oversimplify Your Scenarios’ (http://www.businessweek.com).

‘Many executives misjudged issues such as what alters the

Moy

een,

Sch

oo Many executives misjudged issues such as what alters the financing of their customers’ purchase, or what their investors’ or lenders’ ultimate incentives are’ left many companies stranded in

the fall of 2008’

© D

r. A

bdul

M the fall of 2008…The Black Swan: The Impact of the Highly Improbable.

By Nicholas Taleb.


Uncertainty exists in a dynamic environment.

In response to uncertainties, firms seek to craftIn response to uncertainties, firms seek to craft strategies that enhance strategic flexibility.

A strategy can be said to be flexible when it allows aA strategy can be said to be flexible when it allows a firm to react to changing uncertainties by quickly changing course, or better still, allows a firm to position itself to take advantage of the resolution of uncertainty

ol o

f Bus

ines

s itself to take advantage of the resolution of uncertainty.

Moy

een,

Sch

oo©

Dr.

Abd

ul M


Dealing with uncertaintiesDealing with uncertainties

Environmental analysis aims to collapse the many uncertainties confronting a firm into a small number of internally consistent scenarios of the future.

The analysis of competitive rivalry and competitive dynamics helps firms understand how the effectiveness

f th i t t i b t i d

ol o

f Bus

ines

s of their strategies can be ascertained.

Real options analysis quantitatively evaluating the role

Moy

een,

Sch

oo Real options analysis – quantitatively evaluating the role of uncertainty in firm’s investment decision. The options relate to growth, abandonment, switching, defer, compound (multiple options)

© D

r. A

bdul

M compound (multiple options).


From competitors to competitive dynamicsTo gain an advantageous

From competitors to competitive dynamics

Competitors Competitive

advantageous market position

Engage inCompetitors Rivalry

• Through competitive

Engage in

ol o

f Bus

ines

s competitive behaviour• Competitive actions

What res

Moy

een,

Sch

oo actions• Competitive responses

sults?

© D

r. A

bdul

M

Competitive Dynamics


p y• Competitive actions and responses taken by all firms competing in a market

A Model of Competitive

Competitive Analysis• Market Commonality

R i il itCompetitive Rivalry

• Resources similarity

Drivers of Competitive BehaviourDrivers of Competitive Behaviour• Awareness• Motivation• Abilityy

Competitive RivalryLik lih d f Att k

Feedback

ol o

f Bus

ines

s • Likelihood of Attack• First-mover incentives• Organizational size• Quality

Moy

een,

Sch

oo Quality• Likelihood of Response

• Type of competitive action• Actor’s reputation

M k t d d

© D

r. A

bdul

M • Market dependence

Outcomes


• Market position• Financial performance

Decision making biases influencingDecision making biases influencing strategic decisions worsening uncertainties and complexities:p

1. Reliance on previously formed beliefs. Executives bring a number of preconceived ideas into any decision process.

2. Focus on limited objectives instead of thinking broadly. Example, too much focus on budgetary controls

ol o

f Bus

ines

s

may lead managers to focus on selected critical performance targets.

3. Exposure to limited decision alternatives. In an effort

Moy

een,

Sch

oo to simplify decision processes, executives tend to limit the number of alternatives for achieving a particular goal.

4. Insensitivity to outcome probabilities – decision

© D

r. A

bdul

M makers tend to be more influenced by the magnitude of the potential decision outcomes rather than the probability that they will occur.


5. Illusion of control – overconfident or overoptimistic.

By identifying basic trends and uncertainties, a manager can construct a series of scenarios thatconstruct a series of scenarios that will help to compensate for the usual

ol o

f Bus

ines

s errors in decision making –overconfidence, over-optimistic,

Moy

een,

Sch

oo overconfidence, over optimistic,under-estimation.

© D

r. A

bdul

M


Scenario planning

Scenario planning is an approach that has at its

p g

core,• the exploration of uncertainty in the contextual environmentenvironment,• the insights generated from such exploration, andand • their link to the strategic development of the organization.

By accepting the idea of uncertainty it is possible to open up the notion that more than one futureto open up the notion that more than one future is potentially open to an organization.

Therefore, scenario planning is an effective approach to bringing managers together to discuss their concerns and explore the factors creating uncertainty through the development of a number of plausible coherent internallyof a number of plausible, coherent internally consistent scenarios.

This then reveals the antecedents and of potential outcomes of the factors creating uncertainty.

Accordingly, thoughtful management recognizes such a situation and takes care of the strategicsuch a situation and takes care of the strategic choices that they make given the consequences of such choices in an uncertain world.o suc c o ces a u ce ta o d

What is Scenario Planning?What is Scenario Planning?Scenario planning is the art of usingScenario planning is the art of using scenario in decision making A disciplined method for imaginingA disciplined method for imagining possible futuresA shared framework for strategicA shared framework for strategic thinking Part of a process for generating andPart of a process for generating and evaluating strategic options

.

Scenario Planning is the process of anticipating the future, based on the evaluation of the hints and clues from the world around usand clues from the world around us.

Use of scenario planning rose following the 2001 attacks, to about 70% of ,executives surveyed by consultants Bain & Co. in 2002, up from 30% in 1999 – The Wall Street Journal, July 6, 2009.

Scenario planning has enjoyed a recentScenario planning has enjoyed a recent upsurge in interest due to 2008 near-collapse of the global financial system and p g ythe ensuing economic trauma of what has been called ‘‘The Great Recession.’’- Marren & Kennedy, in Strategy and Leadership, 2010.

Four ways in which scenario planning y p gcan be understood:

Making sense ImprovingMaking sense of a puzzling

situation

Improving organizational

anticipation

D l i AdaptiveDeveloping strategy

Adaptive organizational

learning

Source: Adapted from Van der Heijden et al., 2002, p. 233

Critical drivers for anticipating scenarioCritical drivers for anticipating scenarioGrowth. This is obviously of high importance to business organizations

• How fast can the world economy plausibly recover (or decline or stagnate) over the next three years? Plausible scenarios range fromstagnate) over the next three years? Plausible scenarios range from moderately high, stable growth, to a sudden downward spiral precipitated by external shocks (China crisis, major terror event, etc )etc.).

• near-depression outlook, another scenario plays out the implications of a potential ‘‘double dip’’ recession made possibleimplications of a potential double dip recession, made possible by excessive fiscal stimulus that leads to inflation scares and then the inevitable monetary and financial market retrenchment.

• Still another scenario describes a prolonged period of stagnant growth and political gridlock – a US version, perhaps, of Japan’s 1990s ‘‘lost decade,’’ or another protracted recession like that of the , pVolcker period of 1980-1983.

Prices and inflation.

Concerns about the inflation impact of stimulus spending, especially with ongoing wars in Iraq p g, p y g g qand Afghanistan... And now Egypt, Libya, Syria, Jordan...

Markedly higher inflation could appear sooner rather than later,

Inflation will in turn shape many other key drivers: interest rates, Currency value, and real incomes,

thamong others.

Regulations. Development of new regulations after the New Deal of the 1930s.

At the close of 2009, the range of potential new regulatory activity – just at the federal level – isregulatory activity just at the federal level is huge: Banking and finance, healthcare, the environment, real estate, consumer protection, social networks, to just name a few.

New regulations after the 2008 Economic turmoil?New regulations after the 2008 Economic turmoil?

Global affairs. In a globally integrated world, it is impossible to create credible scenarios, even short-term ones, without regard to , , glarger global relationships and commitments.

When is Scenario Planning A i t ?Appropriate?

Uncertainty is highCostly surprises have occurred in the pastCorporate inertiaThe quality of strategic thinking is lowThe industry has experienced significant change or is about to The company wants a common language and framework without stifling diversityTh t diff f i i ithThere are strong differences of opinion, with multiple opinions having merit

When it is NOT Appropriate?When it is NOT Appropriate?When one, overwhelming, tidal wave is about to engulf an organisation or industryto engulf an organisation or industry

Constructing ScenarioConstructing ScenarioTwo common errors in decision making areTwo common errors in decision making are addressed:• Under-prediction (we are losing the war against

cancer) and • Over-prediction of change (robots don't yet outsmart

us)

Scenario planning allows us to chart a middle ground. The challenge is to separate aspects you are very confident about from those that are largely

ncertainuncertain.

Think how hard it would have been a hundred years t i i th f t th t ll d i t i tago to imagine the factors that propelled society into

today's brave, new technological world where cars, airplanes, televisions, stereos, computers are commonplacecommonplace.

It is not important to account for all the possible outcomes of each uncertainty;possible outcomes of each uncertainty; simplifying the possible outcomes is sufficient for scenario planningsufficient for scenario planning.

For instance, you may want to think in terms of three possible interest rates (high, medium, and low) rather than hundreds of themhundreds of them.

The purpose is not to cover allThe purpose is not to cover all possibilities, but to circumscribe them.

Since scenarios depict possible f t res itSince scenarios depict possible futures, it makes sense to invite outsiders into the process, such as major customers, keyprocess, such as major customers, key suppliers, regulators, consultants, and academics, to develop scenarios.

Or start with trends and scenarios that others have developed For example:others have developed. For example:

• de Jong and Zalm's four global scenarios,de Jong and Zalm s four global scenarios, "global shift," "European renaissance," "global crisis," and "balanced growth“.

• Future Strategy Group’s ‘The Miracle’, ‘False Dawn’ ‘Grinding it out’ ‘ Global nightmare’Dawn’, ‘Grinding it out’, ‘ Global nightmare’.

‘‘Miracle’’: Despite the predictions of almost all the experts, the US economy has rebounded from its ‘‘near death experience’’ of 2008 9has rebounded from its near-death experience of 2008-9.

Through a great deal of luck and some deft policy actions, economic growth has resumed in the United States after a shorteconomic growth has resumed in the United States after a short but painful recession.

In mid-2011 employment is picking up markedly after a peakIn mid 2011, employment is picking up markedly, after a peak unemployment rate of 10.5 percent in the winter of 2009-2010.

The federal government remains strongly involved in the banking g g y gsector, but there is already discussion of when an orderly (and, to taxpayers, maybe even profitable) exit might be arranged.

Stimulus spending seems to have actually worked as advertised, and the much-maligned bailouts have been successful in averting catastrophe.

Spending on ‘‘green’’ projects and health care and a plausibleSpending on green projects and health care, and a plausible-sounding ‘‘grand bargain’’ approach to the longer-term entitlement issues, have given this recovery legs. Even consumers have started to spend with optimism causing spikes in auto andstarted to spend, with optimism causing spikes in auto and durable goods sales.

Pent-up demand cannot be restrained now that confidence hasPent up demand cannot be restrained now that confidence has made a true comeback.

The prevailing attitude is one of wary relief and guarded optimism p g y g pcould the good times be coming back so soon?

‘‘False Dawn’’: The good news is that after trillions of dollars in stimulus spending, seemingly unending bail-outs for banks and car companies, and sweeping new financial regulations, the US economy is growing again – and quite substantially.

With employment rising, consumers are venturing back into auto showrooms and shopping malls.

For many, rising prices are a call to buy now.

CNBC declares that happy days are here again or at leastCNBC declares that happy days are here again, or at least around the corner.

But clouds not visible to everyone are gathering over theBut clouds, not visible to everyone, are gathering over the horizon, as the effects of hyper-expansive fiscal and monetary policies stoke inflation and send tremors across global financial marketsmarkets.

In response, the Fed has begun to jack up interest rates, so far without undermining the GDP growth, but the trend is clear – and somewhat worrisomesomewhat worrisome.

Holders of US securities are whispering about an alternative reserve currencyreserve currency.

Many respected economists still believe that growth will bring fiscal imbalances into line but others are less sanguine and seefiscal imbalances into line, but others are less sanguine and see the current growth burst as dependent upon unsustainable levels of government spending.

Many private investors, meanwhile, are waiting on the sidelines, worried over inflation, regulatory over-kill, and the possibility of a ‘‘double dip’’ recession.p

‘‘Grinding It Out’’: There’s the widespread feeling that the economic crisis has passedThere s the widespread feeling that the economic crisis has passed, but that prosperity is not around the corner, not by a long shot.

True, many key indicators are stabilizing and some sectors, notablyTrue, many key indicators are stabilizing and some sectors, notably exports, are starting to pull out of the economic mire.

But a convincingly strong, broad-based recovery remains elusive. g y g, y

Unemployment, which peaked at 14 percent in 2010, is still in double digits.g

Many prominent economists believe that the initial stimulus was inadequate to turn the tide of a shrinking economy.

Others blame the US administration for failing to act decisively on quarantining the ‘‘toxic assets’’ that have weighed heavily on the US fi i l tfinancial system.

Whatever the root causes, neither asset values nor bank credit has recovered sufficiently to propel the economy forward. y p p y

Consumers are stuck in a defensive mode and the moment for the federal government to step up with aggressive, effective measures g p p ggseems to have passed.

By no means is all the news gloomy – the fiscal health of the US is notably improving and the inflation that is afflicting its major trade partners has been controlled. This fact has not gone unnoticed in global financial markets, with increasing numbers of analysts seeing

flight and opportunity at the end of the tunnel.

‘‘Gl b l Ni ht ’’‘‘Global Nightmare’’: ‘‘Remember the good old days of 2009?’’ Hard as it may be to believe that is abelieve, that is acommonly heard refrain nowadays.

The time when the United States could afford to focus inward onThe time when the United States could afford to focus inward on solving its own massive problems is long gone.

Two years ago, we were merely bickering over whether and y g , y gwhom to bail out.

Now that recession has turned conclusively into a 21st century form of depression, and with renewed oil shocks, wars, and the threat of more terrorism, we don’t know where to look next.

By 2011, the US is struggling with deflation, trade wars, actual wars, and bleak prospects for sustained stabilization and recovery.

Americans are curtailing their spendingAmericans are curtailing their spending.

The Fed and the Treasury are completely out of policy bullets –other than printing money to wage war But a surprising numberother than printing money to wage war. But a surprising number of firms are hanging on.

The most agile are finding ways to thrive as new forms ofThe most agile are finding ways to thrive as new forms of commerce and financial transactions evolve and some old practices – like counter-trade and import substitution – enjoy a revival.

But for most, surviving these harsh times is the best that can be hoped for.

Scenario Planning ProcessScenario Planning Process

Define the scope of the analysisIdentify the key trends/drivers for

hchangeBring drivers together into scenario themesthemesReduce the number of scenariosEl b t th t h k fElaborate the story, check for consistency and plausibility Identify the issues arisingIdentify the issues arising

Drivers of ChangeDrivers of Change

Basic Trends Key Uncertainties

Rules of Interaction

Multiple ScenariosMultiple Scenarios

Building Blocks for ScenariosBuilding Blocks for Scenarios

Levels of Scenario Analysis

Evolve toward Decision Scenarios

The Process for 10

Develop Quantitative Models

Decision ScenariosDeveloping Scenarios 9

Identify Research Needs

Quantitative ModelsScenarios8

Check for Consistency and

Develop Learning Scenarios

6

7

Construct Initial Scenario Themes

Plausibility

5

6

Identify Basic Trends

Identify Key Uncertainties

3

4

Identify the major Stakeholders

Identify Basic Trends

2

3

Define the Scope1

Define the Scope1

Set the time frame and scope of l ianalysis

• Time frame can depend on a number of factors: the rate of technology changefactors: the rate of technology change, product life cycles, political elections, competitors' planning horizons, and so forth. co pet to s p a g o o s, a d so o t

• Typical timeframe is 5 to 8 years.• Look back over the changes that have occurred in your department organization industry regionin your department, organization, industry, region, country and even the world. • Next, ask what knowledge would be of greatest value to the organization that far down the road.

• Scope of analysis• in terms of products, markets, geographic areas, and technologies

• Ideally, groups (e.g., the whole management team) will participate in this part of the processpart of the process.

• Their unstructured concerns and anxieties are often good starting points foranxieties are often good starting points for scenario planning.

Identify the major Stakeholders2

Ask: Who will have an interest in these issues?

Identify the major Stakeholders2

Who will be affected by them?Who could influence them?

Obvious stakeholders includecustomers, suppliers, competitors, employees, shareholders, government, society and so forth., g , y

Identify their current roles, interests, and power positions, and ask how they have changed over time and why.

For example, in the environmental area, judges, scientists, lawyers, journalists, and regulators are , y , j , gincreasingly powerful stakeholders.

Identify Basic Trends3

What political economic societal technological

y

What political, economic, societal, technological, legal, and industry trends are sure to affect the issues you identified in step one?

For example, a company concerned with the future of environmental issues might identify trends such as

• increasing environmental regulation,

• continuing growth of environmental interest groups,continuing growth of environmental interest groups,

• scientific advances in molecular biology, and

• an increasingly liberal judiciary due to a change of government.

Briefly explain each trend including how and whyBriefly explain each trend, including how and why it exerts its influence on your organization.

List each trend on a chart or so called ‘influenceList each trend on a chart or so-called influence diagram’ to identify its impact on your present strategy as positive, negative, or uncertain.

Everyone participating in the process must agree that these trends will continue.

Key Trends and Drivers 1Key Trends and Drivers 1

Economic/DemographicIncreasingly educated, sophisticated g y pand demanding customersGrowth in SE Asia/India and China

ith di iddl lwith an expanding middle classTwo billion teenagers worldwide, most i A i d L ti A iin Asia and Latin AmericaWhat else………….


Technology-related trends• Bandwidth explosion and

development of the internetdevelopment of the internet• Processing power increases• What else…….


• Growth• Growth• Prices and Inflation

R l ti• Regulations• Global Affairs

Identify Key Uncertainties4

What events, whose outcomes are uncertain,

Identify Key Uncertainties4

will significantly affect the issues we are concerned with?

Consider economic, political, societal, technological, legal, and industry factors. Will there be a new ruling government next?Will a particular piece of legislation be passed? Will a new technology be developed? What will consumers value in the future?

For each uncertainty, determine possible outcomes ( Will l i l ti d t d ith th(e.g., Will new legislation passed or not passed with the new government?; technology developed or not developed? whether consumers value service or price).

Keep these outcomes simple, with a few possibilities.

You may also want to identify relationships among y y p gthese uncertainties, since not all combinations may occur.

For example, if one economic uncertainty is "level of unemployment" and the other "level of inflation,“ then the combination of full employment and zerothen the combination of full employment and zero inflation may be ruled out as implausible.

Construct Initial Scenario Themes5 Construct Initial Scenario Themes5

Once you identify trends and uncertainties, you have the main ingredients for scenario construction. Three approaches may be adopted:Three approaches may be adopted:

• A simple approach is to identify extreme ld b tti ll iti

1

worlds by putting all positive elements in one and all negatives in anotheranother.

• Note that positive or negative is defined here l ti t th t t t Wh t trelative to the current strategy. What seems to

be a negative scenario at first may later prove to be one of innovation and hidden opportunity.

Alternatively, the various strings of possible outcomes (which jointly define a scenario) can be clustered around ‘high versus low

2

can be clustered around high versus low continuity, degree of preparedness, turmoil’, and so on.

Another method for finding some initial themes is to select the top two

t i ti d th i ll

3

uncertainties and cross them especially if some uncertainties are clearly more important than others.

Check for Consistency and Plausibility6

The simple worlds you have just made are not

Check for Consistency and Plausibility6

The simple worlds you have just made are not yet full-fledged scenarios, because they probably have internal inconsistencies or lack a p ycompelling story line.

Three tests of internal consistency:

Are the trends compatible within the chosen time• Are the trends compatible within the chosen time frame? If not, remove the trends that don't fit.

1

• Do the scenarios combine outcomes of uncertainties that indeed go together? Example: full employment and zero inflation do not go together, so eliminate that

ibl i i i

2

possible pairing or scenario.

Are the major stakeholders placed in positions they do not like and can change?

3

• For example, OPEC may not tolerate low oil prices for very long.) If so, your scenario will evolve into another one Try towill evolve into another one. Try to describe this end scenario, which is more stable.

• The stakeholder test is especially critical h b ildi i i l iwhen building macroscenarios involving

governments, international organizations (e.g., the International Monetary Fund, the(e.g., the International Monetary Fund, the World Bank, the United Nations) or strong interest groups like OPEC."

Develop Learning Scenarios7 Develop Learning Scenarios7

From this process of constructing simple scenarios and checking them for consistency, some general themes should y, gemerge.

• Identify themes that are strategically y g yrelevant and then organize the possible outcomes and trends around them.

• Name the scenarios. A scenario is a story; by capturing its essence in a title, you make the story easy to follow andyou make the story easy to follow and remember.

Some past titles

"Superfund II"

Some past titles…………………..

p"Environmentalists Lose"

"Compromise"“Global shift"Global shift

"European Renaissance" “Global crisis"

“Balanced Growth“Balanced Growth‘The Miracle’ ‘False Dawn’

‘G i di it t’‘Grinding it out’‘ Global nightmare’

Identify Research Needs8

Conduct further research to flesh out your understanding of uncertainties and trends

y

understanding of uncertainties and trends• The learning scenarios should help you find your

blindspots. For example:

» Do you really understand how a key stakeholder (say, a regulator or judge) will behave in a given scenario?scenario?

» Consider the developments in multimedia, where personal computers, telecommunication,

t t i t d t b d t l i ientertainment, databases, and television are merging into new products and markets.

» A company like Apple Computer traditionally» A company like Apple Computer, traditionally focused on making personal computers, must now master new domains, such as electronic miniaturization (to exploit portability), artificial intelligence (to make PCs smarter), information highways (to connect).

Develop Quantitative Models9 Develop Quantitative Models9

Quantify using appropriate models the consequences ofmodels, the consequences of various scenarios in terms of price behaviour, consumer p ,preferences, market share, etc.

• For example, Royal Dutch/Shell has developed a model that keeps oil prices, inflation, GNP growth, taxes, oil inventories, interest rates, and

f th i l ibl b lso forth in plausible balances.

Evolve toward Decision Scenarios10

Converge toward scenarios that will be

Evolve toward Decision Scenarios10

Converge toward scenarios that will be eventually used to test your strategies and generate new ideas.Retrace steps one through eight to see if theRetrace steps one through eight to see if the learning scenarios (and any quantitative models from step nine) address the real issues facing the company. p yAre these the scenarios that you want to give others in the organization to spur their creativity or help them appreciate better the y p ppup- and downside risks in various strategies? If yes, you are done.y yIf not, repeat the steps and refocus your scenarios the way an artist judges the balance and focal point in a painting. Half of this judgment is art, half is science.

How can you determine if your final scenarios are any good?scenarios are any good?

Check for relevance. To have impact, your scenarios should connect directly with the mental maps and concerns of the users (e.g., senior executives, middle managers, etc.). g )

The scenarios should be internally consistent to be effective.

They should be archetypal (generic). That is,They should be archetypal (generic). That is, they should describe generically different futures rather than variations on one theme.

Each scenario ideally should describe anEach scenario ideally should describe an equilibrium or a state in which the system might exist for some length of time, not shortlived.

Ill strati e case onIllustrative case on Scenario Planning

Interpublic Group (IPG)An Advetising AgencyAn Advetising Agency

Group presentation (20%)P t ti d t Group presentation (20%)Each group of FOUR will select an organisation or a strategic business unit, ideally one that is personally familiar to at least one team member, that you have enough information

Presentation dates: 17th September 2011

Group Report: 2rd S t b 2011 available in order to undertake this analysis.

Each member of the group will present the case using powerpoint slides (not more than 5 slides) as follows:

2rd September 2011

powerpoint slides (not more than 5 slides) as follows:

1. Background of the organisation or strategic business unit.2. The scope of analysis and key stakeholders

Member 1

3. Key trends4. Key uncertainties

Member 2

5. The scenario constructs(to include explanation of consistency and plausibility and the implications for the business organization of each

Member 3

scenario).

6. Conclusion - The implications for the business organization of each scenario

Member 4of each scenario.

THE GROUPS SO FAR ….

Athiswary Govindan (L)ShreeAbelallah Mtumwa AmeirThaheer

Mahboobeh Behnamzad (L)Sun DingmeiZhang YuChen Ye Wei

Suzana Zorkeflee

Thaheer Chen Ye Wei

Lee Khong Chuen (L)Ting Kian FattgTan Xin LiLV Si Rui

Background of the Organization

The advertising industry has experienced a flurry of

1The advertising industry has experienced a flurry of takeovers and mergers.

Giant agencies such as Interpublic Group (IPG), Saatchi g p p ( ),& Saatchi, the Omnicom Group, emerged from this development.

In the distant past, advertising agencies had been mostly order takers that simply executed ad placement and charge a 15% commission for such placements.

High media costs in the 1970s and 1980s for television created excessive commissions for agencies.

However, improvements in communications technology and the emergence of mass media reduced the

' l t tagency's placement costs.

Around 1960, clients began to view the continual addition of services as not worth the implicit price they were paying via the 15 percent commissionpaying via the 15 percent commission.

Thus the 12 percent to 15 percent commission structure came under pressure resulting in reductions in thecame under pressure, resulting in reductions in the percentage (to as low as 5 percent to 7 percent) or fee-for-service arrangements.

To justify their higher profit margins, agencies started to add services for clients such as more sophisticated designs, market research, and elaborate pitches for g , , pnew business.

But IPG needed to manage the uncertainties and decided gto develop scenarios that may emerge during the next few years.

To construct the scenario, IPG used Schoemaker’s steps as follows:

• Define the scope• Identify the major stakeholders• Identify the key trends• Identify the key trends• Identify key uncertainties• construct the scenarios• examine the implications for the business organizationexamine the implications for the business organization of each scenario.

1. Defining the scope• This involves identifying the relevant issues by studying

2

• This involves identifying the relevant issues by studying the past, especially its sources of turmoil and change. Table 1 reminds us of the scope and depth of changes in advertising during the past six decadesadvertising during the past six decades.

• A seven-year time frame is considered.• Justification:Justification:

• Changes happen fairly quickly in the fickle world of advertising, so anything beyond seven years is quite uncertain and hard to act on.

(• As assets become more specialized (meaning that their salvage value is low relative to their costs), it pays to think longer term. For example, Royal Dutch/Shell's scenarios project fifteen years ahead given the specialized natureproject fifteen years ahead, given the specialized nature of their investments. Ad agencies, in contrast, are more like speedboats than tankers. They are agile and opportunistic; they can hire and fire quickly and continually d t t th i li tadapt to their clients.

Identifying key stakeholdersWho will have an interest in these issues?

3

Who will have an interest in these issues? Who will be affected by them?Who could influence them?

Obvious stakeholders includecustomers, suppliers, competitors, employees, shareholders government society and so forthshareholders, government, society and so forth.

Identify their current roles, interests, and power positions, and ask how they have changed over time and whyand ask how they have changed over time and why.

Identifying key trends.

Th ti h th th t d t ll

4

The question was whether these trends were mutually consistent within the five- to ten-year time frame and what support existed for each.

We ask the following questions:

• What was the evidence that food consumer and high tech• What was the evidence that food, consumer, and high-tech products are most adaptable to global marketing? • Why might fee compensation, customary in consulting, legal and accounting services be less profitable tolegal, and accounting services, be less profitable to advertising agencies than a commission structure, which is common in real estate brokerage, sports promotion, and book writing?book writing?

By asking such questions, we arrived at the trends in Table 2. Such additional analyses are critical to good scenario y gwork, since they challenge and stretch people's thinking.

Step Four – Identify key uncertainties• After trend analysis we needed to identify the critical

5

• After trend analysis, we needed to identify the critical uncertainties. Part A in Table 3 lists seven identified by industry respondents and our own analysis.

Again, these presumed uncertainties should be examined further. For example, one uncertainty was whether advertisers would remain sensitive to agency account conflicts (when anwould remain sensitive to agency account conflicts (when an agency serves competing clients).

Yet agency account conflict appears not to be an issue in SpainYet agency account conflict appears not to be an issue in Spain or for Dentsu in Japan, which suggests that the assumptions underlying this uncertainty needed to be reconsidered.

It was important that each person identify only a few key uncertainties, so we could get to the core issues.

Next we addressed the interrelationships amongNext we addressed the interrelationships among the uncertainties.

We asked whether a "yes" answer to say U2We asked whether a yes answer to, say, U2 affects the chance of a "yes" answer for U3 or another uncertainty (see Part B, Table 3).

If the chance of a "yes“ goes up, the correlation between U2 and U3 is positive (+);

If the chance goes down, the correlation is negative (-), and otherwise it is zero (0) or indeterminate (?). ( ), ( ) ( )

Since mega-agencies can compete better if their clients are less concerned about potential accountclients are less concerned about potential account conflicts, the correlation between U2 and U3 is positive.

Conversely, the less deductible advertising expenses are, the more likely clients may do it in-house as part or general expenses, resulting in a negative correlation for U4 and U7.

However, it is not clear how some of the other elements might be correlated (e.g., U1 and U3)' and sometimes there is no correlation at allsometimes there is no correlation at all (e.g.,between U1 and U7).

Thi i l t i i ti lThis simple matrix is a practical way for assessing a scenario's

i tconsistency.

Construct initial scenario themes6

We arrived at three possible scenarios for the advertising industry, focusing on the question of global agency viability. These are also called ‘Learningagency viability. These are also called Learning scenarios’. These are scenarios which require further study and shaping before becoming final decision scenariosscenarios.

We placed the positive and negative outcomes of the seven uncertainties into different scenarios to obtainseven uncertainties into different scenarios to obtain the extremes and added a middle-of-the road scenario.

Figure 1 profiles each scenario in terms of theweight given to a "yes" answer for each uncertainty.

Each scenario poses a different set of strategicEach scenario poses a different set of strategic challenges and requisite core capabilities. Exploring them turns the initial learning scenarios i fi l d i i iinto final decision scenarios.

We give each scenario a ‘title’, just like a movie, and then explain the scenarios.

• The globalization scenariog• Requires a strong emphasis on integrative marketing.• First the account manager has to learn howFirst, the account manager has to learn how to sell multiple services at multiple levels within the client organization. • Second the agency's team has to learn• Second, the agency s team has to learn how to approach the client's problems from a marketing perspective rather than just an d ti iadvertising one.

Yet the global marketplace requires integratedYet the global marketplace requires integrated marketing solutions that combine advertising with direct mail, channel, and trade management. And such strategies can be devised only if the market itself isstrategies can be devised only if the market itself is thoroughly understood, which requires stronger market research.

• The "dinosaur" scenarioThe mega-agencies will not like the "dinosaur" world, so a critical question is how they might respond if this scenario q y g pemerged.

• The "Polarization is 'Hot'" scenario It combined two outcomes (a "yes" for U2 and a clear "no" for U3), even though they are presumably positively correlated.

Such tension or slight inconsistency should be an impetus for further analysis of the scenarios, perhaps through quantitative modeling.

IPA is vigorously pursuing the globalIPA is vigorously pursuing the global agency concept, putting its faith in the first scenario.scenario.

• It is upgrading the quality of its local management teams, reducing barriers to cross-agency and cross-country collaboration, building financial muscle, and pursuing global clientspursuing global clients.

But as its motto ("Think global, act local")But as its motto ( Think global, act local ) indicates, IPA is also following the second scenario.

IPA is looking for signals that the third might emergemight emerge.

Implications for businessIPA must decide for itself, once it constructs scenarios,

6

whether

• to gamble the future on one scenario,to gamble the future on one scenario,

• stay flexible to exploit multiple scenarios,

• develop exit routes in case things sour, or

• hedge the risk through strategic partnering or diversification.pa t e g o d e s cat o

Whichever approach you pursue, developing early indicators for each scenario helps you recognize beforeindicators for each scenario helps you recognize, before competitors, which way the world is headed.

S h k P J H (1995) S i Pl i A T lSchoemaker, P. J. H (1995). Scenario Planning: A Tool for Strategic Thinking, Sloan Management Review, Winter, pp. 25-40, ISSN: 15329194

Workshop 2 Scenario Planning

Documents

sloan management

obvious stakeholders

wall street

double dip

year time

develop quantitative

strategic

global financial