How to use scenarios to improve decision-making
When thinking about the future, most of us tend to recall past trends and developments and project these into future estimates and scenarios. But as Warren Buffet expressed,
“forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
Because with rapid acceleration and technological innovations, the future is sure to be different than the past. Our challenge is - simply put - that our mind is biased towards an excessive reliance on past practice (often referred to as the “same as last year” approach), which hinders us from discovering or considering an alternative path and lead us to suboptimal or ineffective decisions.
We stumble our way through judgment traps and biases that curtail our ability to identify a plausible set of future alternatives.
Anchored towards the current situation, we lean too heavily on present, available and easily retrievable information as being more likely, more relevant, and more important for our decisions - and miss important warning signals.
We need help to let go of our firm anchors and bounded awareness and one of the best ways to overcome these restrictions is to work with scenarios.What is scenario planning?
Ever since Shell took up scenario planning some 50 years ago, the practice has enjoyed a renaissance in corporate strategy with growing evidence of its effectiveness. Strategic scenario planning is a dynamic approach that adds value through an enhanced capacity to:
interpret and respond to change,
influence on other actors, and
for organisational learning.
At BSG, we have years of experience with strategic scenario planning, utilising Shell’s strategy and uncertainty analysis methodology.Scenario guide lines
First and foremost, it is important to underline that scenarios are not predictions but can provide a deeper foundation of knowledge and self-awareness in approaching the future.
A list of our core assumptions and guidelines in strategic scenario planning are:
Scenarios should be plausible, not probable: Avoid expressing a preference for one scenario over another, as the trap of having a ‘good’ versus a ‘bad’ future is that there is nothing to learn in heaven, and no one wants to visit hell. The scenario quadrant emphasises plausibility, as it encourages judgment rather than just attention to data and other information.
Balance scenarios between relevant and challenging: Scenarios facilitate dialogue in which managers’ assumptions can safely be revealed and challenged. They encourage strategic conversations that go beyond the incremental, comfortable, and familiar. However, scenarios have to be more than disruptive and challenging: they need to be relevant to executives, from the CEO and down.
Scenarios should tell stories that are unforgettable yet disposable: Corporations and humans act on the basis of a agreed upon reality, which in essence is a story. While past and present stories can be based on facts, a future story is just a story. Often, we tend to extrapolate future stories from the present, and this is perhaps the greatest power of scenarios – as distinct from forecasts – that they consciously break this habit and make conversations about strategy different from the present.
Scenarios support narratives with numbers: While scenarios should not be developed from mechanistic modelling, they still have to be associated with quantification to enhance internal consistency, reveal deep story logic and systemic insight, and illustrate outcomes using the language of numbers that characterises most corporate cultures. But the challenge is to realise how, when, and why models linked with them can hide assumptions and constrain thinking rather than refine it.
Scenarios open doors to outside the organisation: Scenarios are valuable in creating external engagement, in employer branding, to add colour to corporate speeches, to open doors to privileged conversations with resource holders and governments, and to build a network of external contacts and clients.
Scenarios can manage disagreement as an asset: Scenarios can engage and open the minds of decision makers so that they pay attention to novel, less comfortable, and weaker signals of change and prepare for discontinuity and surprise. In decentralised organisations, scenarios help provide a shared world view, work as a steering tool for the management and serve as corporate glue. In centralised organisations, scenarios can manage disagreement about strategy or priorities and help disturb the business-as-usual view resulting from wishful or linear thinking.
Scenarios fit into a broader strategic management system: Scenarios, because they are distinctly different from the annual strategy cycle, allow an organisation to see realities that might otherwise be overlooked. Shell identified three essential starting points for corporate strategy: global scenarios, competitive positioning, and strategic vision. The first represents the world of possibility, the second the world of relativity, and the third the world of creativity.
Sustained scenario practice can make leaders comfortable with the ambiguity of an open future. It can counter hubris, expose assumptions that would otherwise remain implicit, contribute to shared and systemic sense-making, and foster quick adaptation in times of crisis, complexity and conflict — managing disagreement while avoiding the extremes of groupthink and fragmentation.
Most important, scenarios help leaders prepare for futures that might happen, rather than the future they would like to create.
This is why we employ scenario planning in behavioural economics.
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