Looking Ahead: How To Make Better Management Decisions
Before organizations make a strategy, they need to make a critical evaluation of their environment first. What is the current environment for their organization? More importantly, what is the future like for your organization? No matter how grand your strategic decision making is, it will still fail if you do not consider the factors affecting the environment in the success of your organization. A good strategy involves looking at the best fit for your company with the environment at the back of your mind. Therefore, it is always important to look at the current environment for your organization, and what to expect in a few years to come.
Of course, companies cannot exactly predict what will happen to them in the future, but based on some indicators and sound analysis, organizations will have a grasp of what lies ahead for them.
One way of examining the future better is for companies to undertake scenario planning.
What is scenario planning?
A strategic tool for business, scenario planning gives managers with a basic route map on what lies ahead. This tool—which basically allows you to “rehearse” the future—is something that Peter Schwartz is telling in his book “The Art of the Long View”. Using scenarios and rehearsing them will allow organizations can pretty much anticipate what is going to happen and enables them to adapt to any scenarios they could be in in the future.
Applying scenarios is basically rehearsing the future. You run through anticipated events as if your business were already living in them. You train and orient yourself to recognize which drama is unfolding right before your eyes. That helps businesses avoid unpleasant surprises.
Thus, scenario planning allows companies to discern better the current conditions in their business environment, to evaluate what these conditions mean to their future, and ably respond and act based on sound and careful analyses of these scenarios.
This piece will help explain a little more clearly what scenario planning means for companies, how to undertake scenario planning, and also give a case study as an example for companies to show how scenario planning works.
Gearing Up For an Uncertain Future
Thinking strategically about your company’s future is not an easy task for managers. In truth, it is a demanding and challenging task to think about what the company might be in the future. The top trends may be quite apparent but there is a good deal of uncertainty when it comes to the future. In addition, there is that ever-present possibility of derailed by events that are entirely unforeseen.
Often times, managements mistakenly expect the future as something like a continuation of the past. Managements think—wrongly—that what has happen before will just continue to happen in the future.
Managements also have the tendency to “group think”—meaning, everyone in the management has the same fixed perspective of the future and thus has similar assessments on where their organization is going. Thus, alternative ways of thinking are not encouraged, alternative courses of action or response not considered.
In some cases, members of the management personnel may do have some different perspectives on what will happen in the future but prefer not to share them with their colleagues, probably because they feel their views are noticeably different from the rest of the group and they do not want to be seen as unusual or even outright dissenters who are out there to sow discord in the company.
So when is it appropriate for a company to do scenario planning?
Here are three indicators:
- When the market is having an extremely great deal of uncertainty
- If there is a past record of unpredicted and costly surprises such as a competitor entry
- In times of significant change, for instance coming out of recession.
Scenario Planning: Your Way to Prepare for The Future
Scenario planning goes a long way back, owing its roots to military circles during the 1940s. Herman Khan, a famous futurologist, began using scenarios in the early 1960s to plot the possible effects of nuclear war. Writing for the magazine “Scientific American”, Gerald Piel described Khan’s famous work as “thinking the unthinkable”. Taking it as a compliment, Khan argued that the only way to keep somebody’s strategic vision from becoming outdated is precisely doing that: thinking the unthinkable.
Scenario planning was likewise used to dramatic effect by the company Royal Dutch Shell to foresee and respond to the great changes that have happened in the oil industry.
Microsoft is another company that at present makes good use of scenario planning to assure that their company can completely capitalize on the various changes happening in the future environment.
Scenarios are tools companies can use to help them get a long take of a world full of great uncertainties. It is not something new in the human experience; throughout history, human beings have anticipated and foretold stories about what the future holds, and essentially tried to describe what is about to happen.
They are known as “scenarios” since they are sort of “scenes” in a theater or screenplay of a movie—a series of various views on one general topic. Scenarios are essentially stories about how the world might become tomorrow and why.
These storylines give various alternative logical, plausible, and compelling takes on the future—not forecasts as such, but more of “pictures” of what could happen in the future. These are stories that may help a company recognize and thus adapt to the evolving aspects of today’s landscape and environment.
The storylines allow the management to study and assess a number of existing as well as alternative strategies, policies, and actions.
The major use of scenarios is in understanding rather than trying to predict the future. It is about trying to create an array of plausible futures. Scenarios do not necessarily provide an accurate picture of tomorrow but enable a company to make better decisions about the future.
Scenarios are generally about doing decisions at present with an innate understanding of how these decisions might turn out. The goal is that the decisions that will be undertaken will turn out to be right and robust given a number of alternative futures. These decisions should likewise prompt an informed dialogue and even debate about key matters within a company.
Scenario planning gives management a method of putting a number of ideas and possibilities together. Scenarios begin by realizing the role of driving forces that are shape the world. These forces can be Political, Economic, Social and Technological (or PEST).
The PEST analysis is a very useful tool to understand the market, as well as the position, direction, or potential for an organization. A business measurement tool, a PEST analysis are used to evaluate the market for an organizational or business unit.
A company can do a sound PEST analysis, but its management should be able to look at what these elements are in their company and how these various forces interact and combine. Thus each force may suggest additional questions than answers, with the possible answers pointing to not one but different futures, each with its own implications and attributes.
In looking ahead, companies are advised to look beyond the present horizons by taking a leap view, for instance, five or even ten years into their future.
Once the key factors in the analysis have been identified, it is important for the management to look at the key uncertainties as well as their possible outcomes. These are all combined to turn into plausible scenarios, with the storyline fleshed out with more details, relating to geographies, people, and events. It is also a great idea to give out warning signs or indicators for the scenarios.
The ideal number of planned scenarios to produce is around four. With two, the future becomes an either or situation. With three scenarios, there is the temptation to choose the middle one.
The scenario planning outputs are:
- A set of critical success factors that have been agreed upon by the management team.
- A solid understanding of the key drivers for change as well as the main uncertainties within the market itself.
- A set of logical and plausible storylines for the market development over time.
- A set of pro-active and robust key options to enable a company to achieve its growth plans.
According to Debbie Robinson, who serves as Director of Food Retail Marketing at the Co-operative Group and a firm believer of scenario planning, scenario planning can become a crucial tool for companies as they struggle with various challenges such as:
- Climate Change
- Increasing affluence of BRICS (referring to the five emerging national economies in the world, namely: Brazil, Russia, India, China, and South Africa)
- Rapidly developing technology
- Terrorist threat
- Population Growth
- Water shortages
- Ageing Population
- Political instability
The worry is not so much about growth. Growth will be inevitable, but the real question is how the growth can be sustained. Scenario planning thus helps companies to think creatively and more pro-actively about their future from a number of perspectives that includes political, economic, social, and technological. Scenario planning allows companies to look at the effect of the changes that may happen. This can give them the competitive edge by ensuring that their business is well poised to take advantage of the future. It also avoids the danger of thinking that the future of the business will be much like the present. Scenario planning is extremely flexible, allowing businesses to look at a number of scenarios before picking the most likely. It raises various issues that may have been non-existent or dormant in a company. Time plays a huge part in this process as the senior management teams view the issues and discuss an effective, agreed, and robust strategy.
The VAiL Case Study
VAiL (Visual Art in Liverpool) is a coalition of arts organizations that are operating in Liverpool. The key aim of the group is “to work together to place Liverpool as the UK’s premier city outside London for the visual arts both in perception and reality.”
The visual arts industry is frequently being challenged by various economic, political, social and technological issues outside its key control.
VAiL addressed the challenges by undertaking a scenario planning exercise.
Participants were picked from various senior management teams within the VAiL companies and also selected a representative of Business In The Arts: North West.
In the first session, discussants looked at the various areas:
- Establishing the VAiL key idea and the key to VAiL’s success.
- Examining the future trends which will affect VAiL, looking at the key uncertainties as well as their possible outcomes.
- Outlining the key scenarios with the use of plausible combinations of these outcomes.
- The outcomes of the different uncertainties the discussants at the workshop provided were combined to set four possible scenarios.
The four scenarios were as follows:
- The New Renaissance, The Arts Ascendant: Outlines economic recovery and a very positive environment in which Art and the VAiL coalition can flourish.
- The New Rationale, The Arts Transformed: Signifies reform and a fresh method of working for the Arts
- Breaking Up, The Arts Fragmented: Outlines a decentralized, tougher environment where limited funds are contested hotly
- Doomsday, The Arts Decimated: Outlines a series of severe cuts and the effects and casualties in the Arts world.
Scenario 1 – The New Renaissance, The Arts Ascendant
To everybody’s surprise, the new government governs harmoniously and efficiently. Slowly but surely, the economy begins to grow again. There are public spending cuts but the Regional Development program remains cut-free and in fact sees a slight increase in the available funds.
Bolstered to action by the inordinate focus on London as the 2012 Olympic Games host, Liverpool as a city reinvents itself as a main center of cultural excellence. This becomes a wise move because visual art has become ultra-fashionable, and is even described by some as “the new rock n’ roll”.
Euphoric over their team’s winning World Cup performance, England footballers like Wayne Rooney emulate their team manager by getting their own art collections.
VAiL plays a main role in this art renaissance. VAiL is regarded as a innovative and pioneering organization, with various arts bodies located in other cities trying to reproduce VAiL’s mode of operation. Success gets funding and the coalition has more funds to spearhead new and ambitious projects. With the success comes a renewed self-imposed accountability to assure funds will be spent wisely, by looking the expenditure against the met targets.
Early warning signs:
- Government invest in culture
- VAiL gets high press coverage. Opinion formers are quite positive about the state of Arts
- Investing in RDAs
- Economic growth
- Well-attended VAiL events and meetings
- Self-measurement in use
- Public care and concern about the Arts
Scenario 2 – The New Rationale, The Arts Transformed
The new government starts an electoral reform. Reasonableness and rationality become predominant themes in public life. There are funding cuts for the Arts but they were not as much as was anticipated.
Expenditure is scrutinized closely, some positions in the Arts are considered redundant, and more jobs are under threat. The infrastructure begins to weaken, but there is a clamor those working in the arts and politicians to keep the status quo. A “Save the Arts” summit by the Vail gets a lot of public attention as getting the zeitgeist of the times.
Art groups become more entrepreneurial to increase revenue, by considering alternative revenue methods like using the visual Arts in wellbeing and therapy. There is more push to completely use existing art collections. An alternative mix of visual arts offer shows up, as the need to become more revenue-driven affects the program. The emphasis becomes the survival even in the short term. Survival plans in the medium and long term planning are put on the back burner. The government calls on the arts industry to have a new business model of working that will be dependent on reasonableness and rationality. Many in the arts field look to the VAiL model as the perfect response to this challenge.
Early warning signs:
- Need for some measurement argued
- Changing nature of offering; additional support for Arts that is being used for wellbeing
- Moderate budget cuts
- Green agenda becomes prevalent
Scenario 3 – Breaking Up, The Arts Fragmented
The public expenditure cuts for the arts field become savage, resulting in unprecedented fundings reductions for the arts. As a result, there is a less cohesive landscape that emerges for the Arts. As the RDA’s begin to tighten their controls, central funding becomes non-existent as budgetary control becomes pushed out within sub regions and to a more local level. Visual Arts companies are forced to engage as well as negotiate with various local authorities to get funding, but usually with little success.
Competition for funding becomes intensified as each visual arts company makes feverish pitches for the same limited money. Securing funding becomes more difficult, takes more effort and time, and for less return. Thus, companies drift away from going to VAiL meetings so that they can liaise with the various array of contact points needed to get funds for their own projects. Arts companies begin to break away from both bottom up and top down in a feeble attempt to meet conflicting needs and demands.
Liverpool as a city becomes stagnant with an antiquated imagery prevailing. No clear plans have been made to revitalize the city brand. Manchester, too, has a difficult time but finally manages to put together an arts collation which has a number of good operators that are skilled at raising funds. As such, Manchester becomes the premier city when it comes to visual arts outside London.
Early warning signs:
- Measurement on the agenda
- More competition to get lottery funding
- More rivalry to get funds
- Individual pricing strategies
- Significant Budget cuts
- Change in RDA
- Fall in attendance or participation at VAiL meetings
Scenario 4 – Doomsday, The Arts Decimated
The coalition government lasts for more than just a year and in the next general election, the voters favored a Conservative majority on the party’s platform of the necessity for strong government. The cuts in public service sectors are regarded as the most drastic in living memory and result in rioting in the streets. Encouraged by the press, the government forces administrative costs to be stripped down to its minimum. Funding for the Arts sector becomes dry as such activities are regarded as a non-essential luxury.
As another option to government funding support, the government eggs the private sectors to support the arts, at least initially, but the private companies show little enthusiasm. Within one year of the initial funding cuts for the Arts sector, arts groups are forced to look for very creative ways to get self-funding. Free entry for the public to various exhibitions and galleries becomes impossible and admission charges are now the norm. The diversity of the arts program becomes sacrificed as arts groups take a more populist offering, to maximize income and to attain financial targets against the draconian budgets they operate with. The universal mantra is to show value for money. Arts organizations become exposed and vulnerable to this mantra; there are heavy casualties in the Art world and some groups are forced to combine together to ensure survival.
Against this scenario, the public is protesting at the charges and public attendance figures for the more expensive arts events and exhibitions dramatically fall over a three year period. Audiences that are driven from their traditional haunts are now turning to “fee-free” digital access. As arts groups strive desperately to get domestic audiences, they are compelled by the government to get income from tourism.
Early warning signs:
- Performance targets are imposed from the top
- Mergers/attrition of Arts organizations
- VAiL meetings are low priority for members
- NWDA/other RDA’s cut
- End to free entry
- More “Internet” shows
- Concluding Thoughts
Basing from this case study, scenario planning can thus provide the link between analyzing about the future and robust and strategic action.
The benefits of scenario planning as a management tool may be summarized as:
- Provides companies with a level of foresight about events in the future as well as preparedness as to what action they should take.
- Positively encourages as well as aligns the management team thinking.
- Assists with the company’s contingency planning; it compels “what if?” considerations of a certain situation.
- A typical future outcome could be confirmation that the key strategy of the organization is sound or that certain new aspects should be developed to assure more robustness.
- Encourages strategic creative thinking.
- Brings research insights and strategy together.
- Tests the robustness of various options
- Sets out the market intelligence tracking agenda. Renewed and more heightened sensitivity to the “early warning” signs that can be seen as precursors of positive and negative futures
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