Strategic Scenario Thinking Principles- Valutrics
Critical to success in fast-moving and complex business environments are adaptation and speed. In a fast-moving world you have to run for your life just to stay where you are, and run twice as fast in order to get anywhere.
Speed is one aspect of adaptation, often emphasized as critical to success in turbulent (that is, complex and fast-changing) environments. The other aspect of adaptation is the ability to handle complexity, illustrated by Ashby’s law of requisite variety . It states that the only way to destroy variety (complexity) is through variety (flexibility, adaptation).
Flexibility is not enough, however, to enable one to respond quickly and cost-effectively to challenges and opportunities in the business environment. The ‘grand challenge’ to strategic management is to manage the balance between stability and flexibility. Managers now face the task of creating a balance between the stability necessary to allow development of strategic planning and decision processes and instability that allows continuous change and adaptation to a dynamic environment. The downturn on the global stock markets during the first years of the new millennium and the collapse of some of the most respected companies are clear illustrations of this.
Because of the dynamism in the new competitive landscape, firms in the new competitive landscape must achieve dynamic efficiency.
Scholars and practitioners rooted in complexity theory have explained that robust strategy in a complex and turbulent business environments must be flexible and adaptive. Just as living species build ‘portfolios’ of options for the future through mutation and ‘DNA experimenting’, corporations must build portfolios of options for the future through an active search for new peaks in the fitness landscape.
Organizations that are strong in the thinking dimension establish a mental lead. They anticipate change earlier than others through arena analysis, alternative thinking (scenario analysis etc.) and environmental opportunity scanning. In that sense they are strategic.
Organizations skilled in the playing dimensions are the entrepreneurs. They are visionary and proactive, emphasizing innovations, adaptive and non-formalistic. While the thinkers explore the future theoretically, the players do it in practice, through continuous innovation and experimental products. They try to predict the future by creating it.
These are seven principles Strategic Thinking related to Scenario planning:
THINK IN PARADOXES
The world is full of paradoxes, and always has been. And so is the business world. Strategic management is essentially the art of managing paradoxes: growth and profitability; innovation and efficiency.
One of the great pitfalls for managers is to neglect the existence of paradoxes, or at least to underestimate the need for paradox management. Professor Henry Mintzberg recently pointed out this mistake in an article on the art and evolution of strategic management. He noted that managers as well as consultants tend to focus on one aspect of strategic management, while neglecting the others:
History and future: Good strategies must be rooted in the organization’s history, tradition, competence and culture – but must at the same time be designed to cope with and to challenge the future, far reaching enough to generate the necessary energy.
Continuity and change: Good strategies, even in times of turmoil, must consist of elements of continuity combined with enough elements of change to enable the organization to undertake necessary moves.
Structure and flexibility: The organizational structure must be loose enough to let things happen, and tight enough to make them happen.
Principles and rule-breaking: To get the necessary stability one has to develop some non-negotiable principles of communication, core strategies, organizational structure and so on, but on the other hand rule-breaking behaviour has to be encouraged in order to cultivate a thinking and playing culture.
Variation and simplicity: To cope with a complex world you need to have a broad repertoire. On the other hand, to build quality you need to emphasize a few specific factors, build your strategy around a few well-defined principles.
Experimentation and concentration: In raplex environments one has to experiment and search one’s way into the future. But to get momentum one has to concentrate on a few carefully selected areas.
THINK IN VISIONS
Fast-growing companies exist in every industry, in boom times and in bust, and are distinguished from more ordinary companies by having different reference points. While the fast grower considers a yearly growth rate of 25 per cent natural, for others 5–10 per cent is excellent. Fast growers expect higher growth levels.
Visions occur in different forms and under different names throughout history. In almost every social science visions (in different terms) are seen as essential for humans as well as organizations and societies. From modern sports psychology we are all aware of the consequences of ‘bad thinking’. What separates the winners from the ordinary is not so much the muscle as the mind.
When golf player Annika Sörenstam set a new standard in women’s golf it was based on new thinking, new reference points. ‘Why use four strikes in this par four lane when you could do it in three,’ she thought, and set out for bogeys.
Strategy researchers Fiegenbaum, Hart and Schendel propose that what is true for individuals also works on the organizational level. Just like individuals, organizations need constantly moving reference points to keep pace with the changing business environment.
Behaviour changes as organizations move beyond their reference points, or in other words, when they surpass their goals or visions. Below this reference point the organization is ‘up and coming’; above it, it behaves as a defender of past success. Thus, we need to think in visions, and to rethink the visions constantly – not only as individuals, but also as organizations.
History is full of excellent vision-driven organizations, and individuals, that moved beyond their own reference points – into mediocrity and failure. Without moving reference points, you might be one of them.
THINK IN JAMMING
Jamming is based on that combination of a few guiding principles, such as a steady beat, combined with improvisation and pragmatism. Thinking in jamming means sorting out what can be controlled from what cannot. It means an emphasis on flexibility that is necessary for future success, and stability that provides the backbone of the organization. For instance, it is generally more important to control language, values and patterns of communication (that is, the culture) than to control individuals’ actions.
In organizational terms jamming means ‘patching’. Patching is dividing the organization into logically internally consistent units, controlling the language and rules of inter-patch communication, and then letting the organization play.
In terms of strategic moves and actions, jamming means getting the broad picture right and getting mentally prepared for the actions – and acting in an improvisational way, based on the broad picture.
Jamming could also be applied as a guiding principle in workshops and project groups. During such processes it is necessary to define the rules, pick the tune, decide who keeps the pace (plays the bass) and so on.
THINK IN TIME
Thinking in time is related to thinking in jamming. The jamming approach is very much time-based, and time is becoming an increasingly important strategic issue. Global consumer goods companies like Nokia often only get one chance to put a new product on the market. If the introduction fails there will be no second chance; the life cycle is just too short. Timing thus becomes a critical issue.
But thinking in time is not only about timing. Time is also about pace. What companies like Nokia and Intel do is to use time as a strategic weapon. Shona Brown and Kathleen Eisenhardt noticed in Competing on the Edge that Intel control their market through their 18-month cycle. By introducing a new generation of chips every 18 months, they set the pace for a whole industry. Other companies, like 3M, use time pacing as an organizational principle to press for innovation. By demanding that a certain proportion of sales from each business unit should come from products not more than three years old, for instance, the corporate management stimulates innovation in the whole company.
To use time pacing as a strategic weapon, companies need to deliver on time. Companies with internally structured processes and the ability to be on time also tend to perform much better than those that constantly miss their deadlines.
A fourth central aspect of time is speed, and specifically speed of innovation. There are thousands of tons of literature on innovation and innovation processes. Innovation in terms of products and markets can be seen as a process that combines systematic recombination and spontaneous innovation. The biological parallels to those two activities are DNA recombination and mutation. Mutation occurs as a spontaneous or enforced process where the genetic material is recoded. Recombination (producing hybrid DNA) means that new genetic material is purposefully added to an existing gene pool. With hybrid-DNA techniques the genetic innovation process has been boosted considerably, and things that were once impossible can now be done as standard procedures. When existing products, markets and business concepts are viewed with the eyes of the genetic engineer, existing innovation processes can be improved in terms of speed and accuracy.
THINK IN RESOURCES
During the 1990s the research-based perspective, in different flavours, became a dominating perspective in strategy. To think in resources, competences and hard-to-copy core competences became standard procedures in most organizations. thinking in resources is fundamental in strategy, and every strategy must match existing resources. But thinking in resources is not only to think of ‘what we have’ and ‘what we need’. It also needs inertia thinking and leverage thinking.
As organizations grow up and mature, they develop specific behaviours, skills and traditions as responses to organizational challenges. They collect and aggregate the tangible and intangible resources needed for the specific time and place. As time passes and the organization faces new challenges, some of those earlier strengths become weaknesses, barriers to the way forward. From real resources they become organizational inertia, dead or dysfunctional ideas, material or behaviours. Thinking in resources demands that we consider such negative resources too. Sometimes inertia can be transformed into relevant strengths, but not always. Sometimes the old barrels are not good enough and need to be replaced.
Small resources can often be leveraged through skilful thinking and acting. There are a number of principles for leveraging resources. Concentration is one, spatially or in terms of focus.
Spatial concentration means that dispersed resources are gathered into one place; it is often a fruitful strategy when it comes to getting more out of research departments or knowledge workers. Concentration of resources on specific goals is another strategy that is often successful.
Accumulation of resources is another strategy, and requires that knowledge and behaviours be codified and ‘saved’. Resources could also be leveraged by borrowing strengths from others, partner companies, suppliers or customers. Complementing this is yet another leverage strategy which means that you simply add what is missing, following the rule of synergy that 1+1>2. Recombination of resources in new ways is also a commonly used leverage strategy, though unfortunately not always practised skilfully. Conserving and recovering resources are yet more leverage strategies.
But essentially, what thinking in resources is all about is viewing and treating the company and its context as a resource pool.
THINK IN LIFE CYCLES
Basic technologies, as well as products, markets and even organizations follow patterns that could be described as life cycles. We have previously said that scenario planning is specifically useful in the turbulent periods characterized by new technology or business concepts.
The life cycle perspective is applicable in a number of situations and central to the understanding of the challenges that organizations face. In immature markets (as well as organizations) market leaders must enforce stability through strategic moves that make followers fall into line. Managers must similarly create an organizational structure that can function as a backbone in the growing body. During the stable growth period the challenges are linked to the exploitation of a growing potential, and during the mature stagnation period the market challenge is cost efficiency and a smooth exit. From the organizational perspective, however, the challenge is usually bigger. At that point the people and organization have to prepare for the great leap to the next wave. Old paradigms need to be de-programmed and old habits need to be changed.
The growth curve or life cycle can also be used as an evaluation tool. Map your projects, products, technologies or new ideas on the curve to find out which one is where, and what to do with them.
Which products have their future behind them, and which have the future ahead? The analysis will not give a complete answer, but adds one more piece to the jigsaw puzzle.
THINK IN EXPERIMENTS AND BETS
Imagine a misty mountain landscape. You are leading your troops forward, upward, but you do not know exactly where you are. Your task is to climb the highest peak, but you do not even know whether you are on the right mountain. What do you do? The only way to handle the situation is to send out scouts – in different directions – and hope that some of them find the right mountain to climb.
This mountaineering challenge is what companies in immature markets face. It is also an illustration of what the future is largely about. The greater the speed and uncertainty, the more misty and mountainous the landscape becomes.
The scouting activity is similar to testing the future out. In terms of product or market development it could be described as low-cost experimentation. The military commander bets on different directions and sends out the scouts, hoping that some of them will get back in one way or another. But a good general does not risk the whole force.
Putting this image in terms of business strategies, the leader handles the future as a portfolio of options, projects or experimental projects. Leaders bet on different scenarios or even different concepts. But, once again, they do it without endangering the key elements. With this slightly conservative risk-sharing strategy they can slowly feel their way into the future. Whenever they find a promising road, they can raise their bets. That is thinking in experiments and bets.
SCENARIO PLANNING
In terms of planning we constantly make plans that include forecasts as well as scenarios and visions, both as individuals and as organizations. As organizations we often rigorously plan with different types of forecast and projections. Under stable conditions and with short timeframes, forecasts are both necessary and powerful. We need risk reduction and certainty to be able to make decisions. And that is what the forecasts provide.
However, the further ahead we look, and the more complex the systems we try to predict, the more irrelevant this type of planning becomes. As uncertainty increases we need other planning tools to uncover and explore the future business environment in order to identify potential risks and opportunities, and to prepare for not one but many possible futures.
At the same time, we cannot explore every possible future. We need to reduce complexity to be able to handle it. That is where scenario writing comes in. Through skilfully crafted scenarios, we can reduce a large amount of uncertainty to a handful of plausible alternative directions that together contain the most relevant uncertainty dimensions.
Forecasts are usually quantitative in form. But sometimes they are presented in scenario format as more or less vivid descriptions of what is to come: what we have to accept, to cope with. The same is true for visions. They are sometimes presented as The Future, but in another sense. They represent a future worth striving for.
But just as forecasts hide risks, so do visions. Visions are by nature uncomplicated. Powerful visions are simple and easily comprehended, but still vague enough to attract many people. In scenario projects, forecasts could be used as input to the scenario development. A revised strategic vision, on the other hand, is often one of the results of a scenario planning process.
It is obvious that scenario planning is an instrument that enables the organization to integrate discussion of the long and mediumterm futures with short to medium-term strategic planning. From that perspective a scenario planning process consists of two phases linked by the scenarios built during the first phase . Each phase consists of several stages, some more creative or intuitive, others more analytical.
When should scenarios be used as a tool in strategic planning?
Scenarios are particularly valuable when it comes to paradigmatic or non-linear change, for instance when product categories are reaching a level of ‘over-maturity’ and need to be replaced with something new, or in the face of rule-breaking competition that is creating a new business logic . This is not the kind of change that traditional linear planning is suited for, but is the home ground of scenario planning.
This leads to the conclusion that, particularly in uncertain times, there is a need for a higher level of strategic thinking that integrates the uncertainty-based futures thinking (scenarios) and more traditional strategic planning methods in order to cope with challenges in business environments, and to be able to exploit the opportunities created . In reality, scenario development often lives its own life, separated from strategic planning. That makes futures thinking a purely intellectual exercise, and strategic planning (at best) planning within an existing paradigm. Sometimes that is enough, but often not.
There are in short seven criteria for a good scenario set for strategy purposes:
• Decision-making power. Each scenario in the set, and the set as a whole, must provide insights useful for the question being considered. Most generic industry or general scenario sets lack this power and need to be complemented for decision purposes.
• Plausibility. The developed scenarios must fall within the limits of what future events that are realistically possible.
• Alternatives. Each scenario should be at least to some extent probable, although it is not necessary to define the probabilities explicitly. The ideal is that the scenarios are all more or less equally probable, so that the widest possible range of uncertainty is covered by the scenario set. If for instance only one of three or four scenarios is probable, you only have one scenario in reality.
• Consistency. Each scenario must be internally consistent. Without internal consistency the scenarios will not be credible. The logic of the scenario is critical.
• Differentiation. The scenarios should be structurally or qualitatively different. Thus it is not enough for them to be different in terms of magnitude, and therefore only variations of a base scenario.
• Memorability. The scenarios should be easy to remember and to differentiate, even after a presentation. Therefore it is advisable to reduce the number to between three and five, although in theory we could remember and differentiate up to seven or eight scenarios. Vivid scenario names help.
• Challenge. The final criterion is that scenarios really challenge the organization’s received wisdom about the future.
Scenarios can be developed in many different ways and be used for a range of and purposes. There are, basically, three major types of scenarios – trendbased, contrasted and normative scenarios – linked to probable, possible and desired/undesired futures. Business decisions can be framed and justified through the use of trend-based scenarios (the most probable type in the future business or decision context) and normative scenarios (visions or challenging scenarios). With contrasted sets of scenarios, the decision context can be explored, existing concepts and other factors be evaluated, and better decisions be made.