Review: “How to improve scenario analysis as a strategic management tool”

Greetings!

This blog post is a review for “How to improve scenario analysis as a strategic management tool” for JSGS 882Strategic Management in Public Sector. This journal was co-authored by Franz Liebl and J.B.M Postma in 2003, shortly after the historic the September 11 attacks by a series of four coordinated terrorist attacks by the Islamic terrorist group al-Qaeda against the United States and other unforeseen events.

Let’s start with definitions:

“a postulated sequence or development of events.” – Merriam-Webster

“a written outline of […] or stage work giving details of […] and individual scenes [expectations and or possibilities].” – Cambridge Oxford.

In this paper published on Technological Forecasting and Social Change journal, the authors; Theo J.B.M. Postmaa and Franz Liebl defined traditional uses of scenarios and scenario development as:

…evaluation and selection of strategies, integration of various kinds of future-oriented data, exploration of the future and identification of future possibilities.” (Postmaa and Liebl, 2003).

More generally, scenario analysis aims at influencing managers’ way of thinking by offering managers several fundamentally different future perspectives on the world around them. The duo discussed the conventional scenario methods and their limitations in a fast changing world and suggested methological improvements towards a practical scenario analysis for Line Managers.

About the Authors

  1. German born Franz Liebl served in the military between 1942 – 1945. In 1947 he moved to Bavaria for a teaching job in a primary school after the expulsion of Germans from Czech. From 1957 he taught in the secondary school in Treuchtlingen and then until 1973 as a teacher in Weissenburg. Parallel to his work as a teacher Liebl wrote several works that have been translated into English, French, Spanish and Czech. Liebl died in April 8, 2002.
  2. Theo J.B.M. Postma was a Freelance Researcher at the Faculty of Economics and Business, University of Groningen, Neterlands. Postma did about 85 researches in the areas of Strategic Management, technology assessment and corporate governance. He has stopped his academic career, due to a brain stroke.

Too bad they are both gone in some way – but their work lives. Anyway’s let’s get started!

Conventional Scenario Methodologies

The authors referenced result of surveys done by Ringland to understand various scenarios used by organizations examples of which includes:

  • Battelle Institute (BASICS),
  • the Copenhagen Institute for Future Studies (the futures game),
  • the European Commission (the Shaping Factors–Shaping Actors),
  • the Futures Group (the Fundamental Planning Method),
  • Global Business Network (scenario development by using Peter Schwartz’s methodology),
  • Northeast Consulting Resources (the Future Mapping Method) and
  • Stanford Research Institute (Scenario-Based Strategy Development), etc.. all of which used Pierre Wack Intuitive Logics method, first introduced by former Shell group planner Pierre Wack since early 1980’s.

The authors posited that although Wack’s logics was widely accepted compared to (Godet, 1987) approach, it focused only on concentrates on ‘‘creating a coherent and credible set of stories of the future as a ‘wind tunnel’ for testing business plans or projects, prompting public debate or increasing coherence, but lacking coverage of uncertain and paradoxical occurrences. They made their argument by analyzing some factors considered in traditional (Wack, 1985) methods of scenario formation.

Factors:

  1. constant (structural factors that do not change – eg: need for food, income, etc)
  2. predetermined or uncertain (known factors that change, but with unknown probabilities – eg: demographics, economy, etc).

However, Liebl and Postma believes that practical situations exist that are not in the boundaries of 1 and/or 2 above and hence their questions into scenario building theories.

Authors employed the work of Van der Heijden et al to present scenarios in a Cartesian plain (Fig.1) using the vertical (y) axis as ‘level of impact’ (high/low) and horizontal (x) axis as ‘level of (un)certainty’ (high/low).

Fig. 1: Scenario construction, adapted from (Postmaa and Liebl, 2003).

The two most impact-ful and most unpredictable (uncertain) clusters/factors (4th quadrant) are subsequently chosen for scenario construction. (Schwartz, 1991) suggested that Strategists and Line Managers participate in the scenario formulation process and play out these scenarios to determine plausible causes and effects in a practical setting. This is as opposed to confining selves to only evaluation and selection of strategies, integration of various kinds of future-oriented data, exploration of the future and identification of future possibilities.

What People Think Scenario Building Is:

rehearsing the future while – (Schwartz, 1991)

memorizing of the future – (Van der Heijden, 1996)

scenarios deal with two worlds: the world of facts and the world of perceptions.” – Wack, 1985)

scenario analysis gazes into the future by combining imaginations – Others

For me, it is future learning

You?

What do you think? Please use the comment box below.

The Limitations

The authors were not totally against traditional scenario methods, but we need to understand where they are coming from. Liebl’s military background and Postma’s several researches in recent social and political changes in our recent world could have informed their thinking that scenarios built on the ‘knowables’ no longer captures (or maybe never captured) the ‘unknowables’ and evolving uncertainties. Again this research was done in 2003, just 2 years after 9/11. Could this have had effect on their thoughts and focus? Just maybe! The new thought is that scenarios deal with consistency and fails when situations are inconsistent.

(Schoemaker, 1995) discussed future relevant knowledge by distinguishing between three classes of knowledge:

1. Things we know we know
2. Things we know we do not know
3. Things we do not know we do not know.

A look at Schoemaker’s classes readily indicate that:

  1. type 1 knowledge is evident.
  2. traditional scenarios can help fix 2,
  3. but how about 3?

The challenge is how do we transform knowledge of 3 into 2?  and that is the fundamental problem of every strategic planning and scenario building process.

Scenario formation
Fig 2: Forecasting Scenarios and hope (Van der Heijden). Conventional scenarios capture only a portion of events that can and do happen. But we still need to deal with the predetermineds and uncertainties. Van der Heijden is suggesting we stick to “Hope”?

Consider Randall’s mutually exclusive global trait scenarios for the Internet:

A- ‘‘interactive, entertainment-focused, community-based medium, which has mass market appeal’’;

B- ‘‘passive, narrowly segmented medium, which allows users to receive customized information and niche-oriented services’’;

C- ‘‘interactive, transaction-oriented medium, which provides both consumers and professionals with a range of commerce-based activities’’;

D- ‘‘unorganized, unstructured, chaotic frontier, which offers questionable value to consumer and professional markets’’ – Randall, 1997.

Familiar trends today? You bet! This is the model of a new scenario building that looks at all sides of the coins – the possible and the impossible.

What To Do? The Way Forward

Authors suggested a shift from the traditional scenario formulation methods of taking bases only on ‘knowable causalities’ and extending our coverage to ‘inconsistent unknowables contexts’ and to cover occurrences whose knowledge are beyond causality. To do this, they postulated three (3) methods based on Gregory and Duran (2001) and Ringland (2002):

Their argument? Read in their own words:

We all would agree that some of the messages of this review refer to deriving implausible/unbelievable scenarios, which can be the case when scenarios also include developments that indicate novel, not very well interpretable trends and events.

Method 1: recombinant scenarios

As opposed to regular scenario formulation method that focus on use of causality factors, trends are combined in this method. Authors suggested use of available trends—paradoxical or not; wild cards – for totally unusual events, to prepare for a surprise-free situations and … to help Strategists capture inconsistencies. Examples questions would be “on what condition can GDP grow with unemployment”? “What extreme situation can arise for ‘this to be that’, etc”?

Method 2: Context-based

Particularly good for public sector scenario building. Authors posit that context vary from place to place, people to people, culture to culture, time to time, … A careful consideration of this knowledge would control strategy to plan for unforeseen events before they occur.

Method 3: Inconsistency Analysis

Here the elements of conventional scenario building that focus on cross-impacts are re-aligned to capture paradoxical events. How to do this? Those elements in a cross-impact or a consistency matrix that indicate low probability/high inconsistency are changed into high probability/consistency, respectively. As a consequence, a set of scenarios that were otherwise ruled out as inconsistent becomes possible.

Critics

Liebl and Postma did a good job of reshaping known conventional thoughts around scenario building and ultimately – planning in both private and public sectors. My worry is that their research, although sound, may have been influenced by events that happened at their time, eg: 9/11.

Image Source: Irish Film Critic. Were the signs really there?

While some of the suggestions appear valid, most of them seem impractical. I do not believe in extrapolations or computer simulations to plan for unforeseen events – for instance, of contextual origins.

As a strong advocate of use of hidden stories in numbers, I would still suggest falling back to history and numbers in place of data analysis to be able to reveal hidden information that would help inform options in scenario and brainstorming. This at least would capture predetermineds, cover some inconsistencies and tell some future stories. Over all, good job they did!

References

  • Franz Liebl, J.B.M. Postma, “How to improve scenario analysis as a strategic management tool”, Technological Forecasting & social Change, 72 (2005) 161 – 173
  • P. Wack, Scenarios Unchartered Waters Ahead, Harvard Bus. Re. (1985 Sept. – Oct.) 73 – 89
  • Van Der Heijden, Scenarios: The Art of Strategic Conversation, Wiley, Chichester, 1996.

Your Take!

Please use the comment box to share your thoughts.

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