Playing to Win and Scenario Planning
Last week, a client asked me about the link between Playing to Win (PTW) and scenario planning. This was far from the first time that particular question has been asked, so I thought I would do this, my 17th Playing to Win Practitioner Insights (PTW/PI)on the topic of Playing to Win & Scenario Planning. (Links for the rest of the PTW/PI series can be found here.)
Some History & Context
Like many business tools, scenario planning started life in the military. Its origins are generally attributed to physicist Herman Kahn who introduced the tool to the US military in the 1950s while consulting to the military from the Rand Corporation. He argued that the US military would reduce vulnerability by imagining and planning for more than a single likely battle threat.
The technique migrated to the business world in the 1970s and much is made of the successes Royal Dutch Shell had using scenario planning in and around the two OPEC-induced hikes in the price of oil — 4X in 1973–1974 and 2X in 1979–1980. These events altered asset values dramatically, and Shell was reportedly much better prepared because its scenarios included potential discontinuous action by OPEC.
Now scenario planning is in widespread practice. Twenty-five years ago, if a management team brought a scenario analysis to its Board, it would have had a good chance of being asked: “What the hell is that?” Now, if it doesn’t, the Board is more likely to ask: “Where is your scenario analysis?” Now, there are numerous individuals and firms that offer scenario planning services and education, like the one whose matrix is shown above.
In my experience, there is one downside to scenario planning, and it is actually a similar downside to Five-Forces Analysis in the early 1980s and SWOT analysis right up to the present. That weakness is that it is analysis for analysis sake and there is no prescriptive “so what.” I remember in the very early days of Monitor Company, when Mike Porter’s Competitive Strategy book was in its greatest glory as the first business best-seller, companies would come to us to do a Five-Forces Analysis for them — just like they read about in the book. And we dutifully and excitedly did one for them — or one for each business. At first, clients were happy, but then they started asking: “OK, we know the structural attractiveness is medium-high, what now?” As a result, we had to develop a real strategy practice!
This continues to be the case for SWOT analysis to this very day. It is the least actionable and useful analysis in all of strategy. And it can be the case for scenario analysis. It is cool. There can be interesting insights. But only if it is tied directly into the strategy process is it a truly valuable exercise.
In my view and experience, scenario planning can be productively integrated into the strategy choice structuring process in three ways/at three stages in it as follows:
1) A More Robust Definition of the Problem
I have argued previously in the series that strategy is a problem-solving exercise. As such, the quality of the output of a strategy exercise is gated by the robustness of the definition of the problem. If the problem definition doesn’t capture the real problem, then the strategy will solve a problem that may not matter. [And remember, an unexploited opportunity is as much of a problem as a threat to the business.]
For example, in the late 1970s, GM/Ford/Chrysler defined the strategic problem behind the growing penetration of Japanese autos into the US market as the Japanese OEMs having small cars while Detroit didn’t. The strategy prescription was to rush smaller cars to market. Lack of a small car line-up indeed was part of the problem. But the real problem was the poor and declining quality, reliability, and durability (QRD) of US automobiles in the face of dramatically improving QRD from the Japanese producers — especially Toyota. The rush to get small cars to market, resulted in the GM launch of its infamous X-car lineup for the 1980 model year, a lineup that included the first new car I ever bought — a 1980 Pontiac Phoenix. The QRD of the X-cars was so disastrously bad that it both widened the QRD gap with the ascending Japanese OEMs and convinced an entire generation of car buyers (me included) that they could never trust GM. The fix of the secondary problem made the real problem much worse.
I often get asked, how do you know you have defined the right problem? My answer is that you never know for certain, in part because it isn’t a binary thing: right or wrong. The problem definition is just better or worse. That is why I urge repeatedly adjusting the problem definition as you go through the Strategic Choice Structuring Process and gain new insights as to the nature of the problem.
But another technique for generating a more robust problem definition is scenario planning. It can expose problems that don’t arise out of simple linear extrapolation of current conditions — as was OPEC flexing its muscles as never before with its embargo of the US (and several other countries) in 1973.
2) A Richer Motivating How Might We Question
A more robust definition of the problem can lead directly to a motivating how-might-we-question (HMWQ) that is richer. For example, if one has a scenario planning exercise in hand, it may be more possible to have a HMWQ such as: How might we position ourselves to win big if the world evolves as Scenario A, while giving us the time and capacity to adjust if it evolves to Scenario D, the most problematic scenario for us. That HMWQ would be difficult if not impossible to formulate without some form of scenario planning exercise.
3) A More Comprehensive Range of Possibilities
Perhaps the most valuable contribution to strategy of scenario planning is that it should help ensure a more comprehensive range of possibilities. One of the challenges in strategy is generating a broad and comprehensive range of strategic possibilities. The easiest ones to come up with are the ones that are closest to a linear extrapolation of the present.
However, if a scenario planning exercise comes up with the classic four scenarios based on two opposing variables (as above), each can be used as a motivator to search for a possibility for winning under each of the four scenarios. In my experience, it is motivational because if you can’t come up with any way of winning under one particular scenario, it means that the company is completely vulnerable if the world evolves to that scenario. Typically, a group motivated in this fashion can come up with at least one legitimate possibility for each scenario. It is my experience that one or more of the resultant possibilities wouldn’t have occurred to the team had it not been motivated by the existence of the scenarios.
4) An Added Bonus
As you may recall, the strategy process involves reverse engineering each of the possibilities by asking the question: what would have to be true (WWHTBT) for the possibility to be the optimal choice? That is, what would have to be true about the industry dynamics, customer needs, company capabilities/cost position, and competitor moves? I encourage the team responsible for the strategy to take the WWHTBT analysis from the chosen option and tack it up in front of their desk because it serves as a great early-warning indicator — the proverbial canary in the coal mine. If any morning, you come to work and you assess the WWHTBT as ceasing to be entirely true, you have been given an early warning that you need to reassess your strategy choice — sooner rather than later.
When you do scenario planning as part of strategy, it enables you to do a more comprehensive version of this. You can identify the optimal strategy choice for each scenario. Then instead of tacking up the single WWHTBT in front of your desk, tack up all four (or whatever number of scenarios you used). If you ask which of these WWHTBT seem to be trending in a direction of being most true, you will get an early indicator of which scenario is coming to fruition, and that can give you a valuable jump on shifting course.
Scenario planning can be a valuable tool, but only if it is diligently tied to strategy development. Use the scenarios generated to come up with a more robust definition of the problem and a richer HMWQ. Then, when generating possibilities, make sure that you don’t stop until you have a winning possibility under each scenario.
Instead of just keeping the WWHTBT for the chosen strategic possibility for daily scrutiny, keep the WWHTBT for the leading possibility under each scenario. That way, if the WWHTBT for your chosen strategy is trending toward being less true while the WWHTBT for a possibility under another scenario is trending toward being truer, you can start the process of considering whether to shift to that possibility because it looks as though a different scenario than the one you assumed under your initial choice is emerging. And if that scenario does come to dominate, it may well be imperative to shift strategy — sooner rather than later.