BCG Growth/Share Portfolio MatrixITOTW 1

All Rights Reserved to Aurora WDC Page 1 of 9

Scenario AnalysisIntelligence Collaborative - Mastering the Methods Series

Scenario Analysis

This White Paper is #8 in a series of intelligence methods being offered to members of the Intelligence Collaborative. It was developed by Dr. Craig S. Fleisher to provide a concise overview of how to apply key intelligence methods to support analysis. Although every effort is made to ensure that the information is accurate and fit for its purpose, the author and Aurora WDC make no implied or explicit warranties as to its applicability or use in your particular work context.

Please direct any questions about this paper to its author at the following:Craig S. Fleisher, Ph.D.

Aurora WDCEmail: craig.fleisher@aurorawdc.com

http://IntelCollab.com

Other White Papers are available on a regular basis from http://IntelCollab.com. Related Methods in the series are:

STEEP/PEST Analysis

Enhanced SWOT Analysis

Value Chain Analysis

All Rights Reserved to Aurora WDC Page 2 of 9

Scenario Analysis

Copyright ©2013 Intelligence Collaborative powered by Aurora WDC. To order copies or request permission to reproduce materials, please call Dr. Craig Fleisher at +1.608.630.5869, write to him at Intelligence Collaborative powered by Aurora WDC, 215 Martin Luther King Blvd #32, Madison, Wisconsin, 53701, USA or go to http://IntelCollab.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any other form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of Intelligence Collaborative powered by Aurora WDC.

All Rights Reserved to Aurora WDC Page 3 of 9

Scenario Analysis

Abstract

Scenario analysis (SA) is meant to help companies and their executives explore into the future on the basis of current trends and developments. Underlying the method is the premise that the future often unfolds in different ways (these are the “scenarios” underlying scenario analysis). This analysis method is meant to support the organization and its employees to be more ready to deal with whatever the future will bring.

The Method’s Primary Value

When used specifically for the purpose of competitive analysis, scenarios help us to generate understanding of rival’s potential strategies, capabilities, and actions. They:

• Provide opportunities to generate knowledge about current and future competitors’ strategy choices.

• Help us explore the nature and type of competitive dynamics that might characterize various future product-customer segments.

• Generate critical input to the development, execution, and monitoring of the organization’s own strategies and action plans.

When effectively performed, scenario analysis pushes executives to consider what lies ahead, around the corner, encroaching on the industry/market periphery, and what actions their company should undertake now to get ready for and stay ahead of alternative future contexts.

All Rights Reserved to Aurora WDC Page 4 of 9

Scenario Analysis

Overview of the Method

Scenario analysis is a structured analytical method to help executives assess different views of what may transpire in the future. It is commonly used as an aid to financial, operational, and strategic planning. It was first used in the business world within the energy industry, most prominently at Royal Dutch Shell in the 1970s, where its application was widely credited with helping the company weather the 1973 oil crisis more effectively than most of its rivals. Since then, scenario planning has been used by a diverse array of organizations in every sector such as the Finland Government, British Airways, Corning, Disney, The “Generals” - Electric and Motors, The US Department of Homeland Security, Mercedes, Procter & Gamble, UPS, and The World Bank, among many others.

All scenarios will have the following four elements in common:1. End-state – what the competitor’s goals, scope, and posture will be at the end of the scenario

period. 2. Story – describes what the competitor must do to get to the end state.3. Driving forces – forces (often specific to the competitor) that help shape the competitor’s

evolution toward end-state. I would encourage you to review the Mastering the Methods resources on driving forces analysis to learn more about these.

4. Logics – explanations for the content of the story (answers why will forces or people behave as they do?).

Where the Method Fits in Planning and Strategy

Contemporary enterprises in today’s globally competitive and uncertain environment do not have the luxury of anchoring themselves to one view of what the future may look like and then putting all their eggs into that basket. Advancing technology, innovative business models, ever-changing consumer preferences, and global economic interdependence increase complexity and uncertainty for organizations. It does not take long for ones who fail to adapt to the new realities to fail; tomorrow’s winners will be those that are able to respond effectively and quickly in seizing opportunities and disempowering threats. Scenario analysis enables organizations to plan for an uncertain future, and empowers them to adapt to it with confidence in a more-timely manner.

Scenario analysis will be of highest benefit in the following kinds of situations:• Managers facing high uncertainty about the future of key business lines, products, technologies

or their industry• Industries where costly (to their company, at least) surprises occurred in past• Firms that have great difficulty in generating or perceiving new opportunities• Companies where the quality of strategic thinking is lower than desired• For executives in industries experiencing/about to experience significant change• Where the company needs common language and frameworks without stifling thought• Strong differences of merit-worthy opinions are held among key executives• Competitors use the technique to their advantage and your disadvantage

All Rights Reserved to Aurora WDC Page 5 of 9

Scenario Analysis

• The organization is open to making changes and establishing multi-directional dialogue• There is at least one executive champion who supports the scenario process• There is enough time available before needing to take action to step back for reflective and

creative conversation• The necessary resources can be mobilized for a successful initiative (including good facilitator)

Cautions with Applying this Method

A potential SA shortcoming of scenario analysis occurs when companies use it to replace strategy formulation and planning. Scenario analysis allows a company to see the possible consequences of a predetermined strategy, whether it is the company’s current or possible future strategy. As such, this is an analytical technique. While it may support, decompose, and formalize a particular strategy, it does not, in and of itself, create new strategies.

The tendency to select the scenario that best fits the company’s current strengths must also be avoided. Analysts need to divorce themselves from this natural tendency and remain objective to the very real possibility of each scenario materializing independent of the company’s current competitive position.

The need to get management to agree on scenarios is critical but not always a task that is easy to manage. As scenarios often include both “soft” and “fuzzy” as well as quantitative and analytical information, getting people to agree on their labels can require much effort and time. There are always trade-offs to be made in developing simple versus complex scenarios.

Scenarios are also often appealing due to their conceptual simplicity. A difficult trade-off to make in scenario development is that between “accuracy” and “direction.” However, getting managers and decision makers to drill down from base scenarios to the level of competitive and financial implications can be difficult, given that most scenarios are constructed at a broad, macro level.

Applying the Method

All Rights Reserved to Aurora WDC Page 6 of 9

Scenario Analysis

The process we describe here for developing scenarios is the one promoted most notably by Schoemaker1.

1. Define the scope of the analysis. Set the timeframe and the scope of the analysis in terms of products, markets, customer groups, technologies or geographic areas. The timeframe is dependent on several factors, including industry or product life cycles, political elections, competitors’ planning horizons, rate of technological change, economic cycles and so on. Once the appropriate timeframe has been determined, ask what knowledge would be of the highest value to your company at that point in time.

2. Identify the major stakeholders. What parties will have an interest in the development of issues of importance in the future? Who will be affected by these parties and who will affect them? Identify the stakeholders’ current roles, interests and power positions, and then assess how they have changed over time.

3. Identify basic trends. What industry and STEEP trends are likely to affect the issues you identified in the first step? Briefly explain each trend, including how (positively, negatively or neutrally) and why it influences your company. Those trends in which there is disagreement over their likely continuation are dealt with in the following step.

4. Identify uncertainties. What outcomes and events are uncertain or will significantly affect the issues you are concerned about? For each uncertainty, determine possible outcomes (that is, legislation passed or defeated, or technology developed or not developed). Also attempt to determine whether relationships exist among these uncertainties and rule out those combinations that are implausible (for example, steadily increasing government and private debt and deficits with steadily declining interest rates).

5. Construct initial scenario themes. Several approaches can be utilized, including (a) selecting the top two uncertainties and evaluating them; (b) clustering various strings of possible outcomes around high versus low continuity, degree of preparedness, turmoil and so on; or (c) identifying extreme worlds by putting all positive elements in one scenario and all negative elements in another.

6. Check for consistency and plausibility. Assess the following (a) are the trends compatible within the chosen timeframe? If not, remove those trends that do not fit. (b) Do the scenarios combine outcomes of uncertainties that indeed fit together? If not, eliminate that scenario. (c) Are the major stakeholders placed in positions they do not like and can change? If so, your scenario will evolve into another one.

7. Develop learning scenarios. Some general themes should have emerged from performing the previous steps. Your goal is to identify themes that are strategically relevant and then organize the possible trends and outcomes around these themes. Although the trends appear in each scenario, they should be given more or less weight or attention in different scenarios, as appropriate.

1. Schoemaker, P. J. H. (1992a). ‘How to link strategic vision to core capabilities. Sloan Management Review, 34(1), 67–81. — — — . (1992b). ‘Multiple scenario development: Its conceptual and behavioral foundation.’ Strategic Management Journal, 14, 193–213. Also - (1995). ‘Scenario planning: A tool for strategic thinking.’ Sloan Management Review, 36(2), 25–39.

All Rights Reserved to Aurora WDC Page 7 of 9

Scenario Analysis

8. Identify research needs. You may need to delve more deeply into your blindspots and improve your understanding of uncertainties and trends; for example, consider if you really understand how stakeholders are likely to behave in a particular scenario.

9. Develop quantitative models. Re-examine the internal consistencies of the scenarios and assess whether certain interactions need to be formalized via a quantitative model. The models can help to quantify the consequences of various scenarios and keep managers from straying toward implausible scenarios.

10. Evolve towards decision scenarios. Iteratively converge toward scenarios that you will eventually use to test your strategies and generate innovative ideas. Ask yourself whether the scenarios address the real issues facing your company and whether they will spur the creativity and appreciation of your company’s decision makers.

These steps should ideally culminate in three or four carefully constructed scenario plots. If the scenarios are to function as learning tools, the lessons they teach must be based on issues which are critical to the success of the decision. Only a few scenarios can be fully developed and remembered, and each should represent a plausible alternative future, not a best case, worst case and most likely continuum. Once the scenarios have been fleshed out and made into a narrative, the team identifies their implications and the leading indicators to be monitored on an ongoing basis.

Complementary Methods

• Blindspot Analysis• Competitive Simulations• Functional Capability and Resource Analysis• Industry Analysis• Issue Analysis• Stakeholder Analysis• STEEP Analysis• SWOT Analysis

Additional Resources

See chapter 10 (pg. 167-186) on Scenario Analysis in the (2013) book Analysis without Paralysis: 12 Tools to Make Better Strategic Decisions, 2nd Ed., by Babette E. Bensoussan and Craig S. Fleisher, Upper Saddle River, NJ: FT Press.

Business and Competitive Analysis: Effective Application of New and Classic Methods by Craig S. Fleisher and Babette Bensoussan, 2007, Upper Saddle River, NJ: FT Press.

All Rights Reserved to Aurora WDC Page 8 of 9

Scenario Analysis

Strategic and Competitive Analysis: Methods and Techniques for Analyzing Business Competition by Craig S. Fleisher and Babette Bensoussan, 2003, Upper Saddle River, NJ: Pearson/Prentice Hall.

Schoemaker, Paul, J.H., “Scenario Planning: A Tool for Strategic Thinking,” Sloan Management Review, 1995, Winter, 36(2) pp.25-39.

Schoemaker, Paul, J. H. (1992a). ‘How to link strategic vision to core capabilities. Sloan Management Review, 34 (1), 67–81.

Schoemaker, Paul, J.H. (1992b). ‘Multiple scenario development: Its conceptual and behavioral foundation.’ Strategic Management Journal, 14, 193–213.

Wack, Pierre, "Scenarios: Shooting the Rapids," Harvard Business Review, 63(5), 1985, pp. 139-150.

Zentner, Rene, D., “Scenarios, Past, Present and Future,” Long Range Planning, 1982, June, 15(3) pp.12-20.

All Rights Reserved to Aurora WDC Page 9 of 9

Scenario Analysis

Strategic and Competitive Analysis: Methods and Techniques for Analyzing Business Competition by Craig S. Fleisher and Babette Bensoussan, 2003, Upper Saddle River, NJ: Pearson/Prentice Hall.

Schoemaker, Paul, J.H., “Scenario Planning: A Tool for Strategic Thinking,” Sloan Management Review, 1995, Winter, 36(2) pp.25-39.

Schoemaker, Paul, J. H. (1992a). ‘How to link strategic vision to core capabilities. Sloan Management Review, 34 (1), 67–81.

Schoemaker, Paul, J.H. (1992b). ‘Multiple scenario development: Its conceptual and behavioral foundation.’ Strategic Management Journal, 14, 193–213.

Wack, Pierre, "Scenarios: Shooting the Rapids," Harvard Business Review, 63(5), 1985, pp. 139-150.

Zentner, Rene, D., “Scenarios, Past, Present and Future,” Long Range Planning, 1982, June, 15(3) pp.12-20.

All Rights Reserved to Aurora WDC Page 9 of 9