Among the many innovations that the Covid-19 pandemic has brought for businesses, one that stands out in the management field is the growing use of future scenarios as a planning tool for strategic decision making.
Up to now, future scenarios were a common tool in the world of geopolitics and diplomacy, but lately we have seen how they have spread to the business world and are being used in large corporations and small enterprises alike.
The Covid-19 pandemic has been an unexpected external event – there is some debate as to whether or not it is a true Black Swan – that has had a profound impact on companies, and their future is conditioned by decisions that are a matter for external stakeholders.
Scenario analysis is a tool for strategic decision making in high-uncertainty environments
In this context – once they get over the initial shock – companies have to think about the future, and it is very difficult for the management team to plan and reach strategic decisions when there is no knowing when and how their activities will be able to start up.
Scenario analysis is a method for making forecasts. A structured process to think consciously and systematically about the various future scenarios for the firm, a tool for strategic decision making in high-uncertainty environments.
Unlike other management instruments, which are born in business schools or consultancy firms, the first future scenarios were developed in the oil company Shell where, in the mid 1960s, a group of economists, engineers and scientists came together under the leadership of Pierre Wack.
This pioneering “Shell Scenarios” group was reinforced by the oil crisis of 1973 and the market collapse of 1986, as they had given management early warning. Shell still uses scenarios today as a method for devising its strategic plans.
Scenarios do not predict the future; their purpose is to help the firm’s management team to gain a better understanding of the possible future alternatives and the paths their organisation can follow. Several authors – Peter Schwartz, Arie de Geus, Kees van der Heijden, Paul Schoemaker – have researched and disseminated this methodology through their publications.
Future scenarios can help the management team to gain a better understanding of the possible future alternatives
The starting point is to analyse the current situation and the first step is to determine the field (product, business, firm, sector) and the time horizon (short, mid or long term).
The second step is to gather information (on the economic and financial situation, customers, talent, technology, regulation, etc.) in order to be able to build a number of future alternatives, ranked by the degree of continuity or uncertainty.
The third step is to develop the narratives – the stories about the future – and evaluate the scenarios in terms of consistency, relevance and plausibility.
One simple approach is to identify two extreme scenarios: one favourable and the other unfavourable. Another possibility is to establish a continuum of scenarios with regard to the evolution of the economic situation: a V-shaped, a U-shaped or an L-shaped exit; or to situate the scenarios according to their uncertainty: from the most to the least likely.
Scenarios give managers a pair of glasses with which to look at the future differently
Scenarios give managers a pair of glasses with which to look at the future differently, broadening their field of vision and preparing them for uncertainties, by helping them to move better at a distance from false certainties about the future.
A good question to open the reflection on possible scenarios is: What would happen if…? What would happen if we can’t resume activities until this date, if the supply chain fails, or if international customers don’t travel? Another key question is: What decisions are we going to make in this scenario? This can help by providing a stock of decisions to make and swift action to take when this scenario happens.
In some spheres scenario analysis is associated with complex systems and the use of sophisticated computer systems, whereas from other perspectives it is thought that scenarios should strike a balance between the quantitative and the qualitative, giving paramount importance to the process and participation.
Each company must adapt scenarios to its own reality
The idea has also spread – unjustly so – that the scenario method is highly complex. Each company must adapt scenarios to its own reality, whether it is a corporation or a small business, if this method is to be a useful tool for strategic decision making.
Strategic decisions are the responsibility of the management team, and it is very important for them to be designed and shared by those who will subsequently have to implement them, with the support and opinion of external experts who are capable of delivering a variety of points of view that can help to think the unthinkable.
In my opinion, in the situation of the Covid-19 pandemic, with a high level of uncertainty in which firms depend on external factors, management team have at their disposal a tool such as future scenarios that can be of great use in planning the various alternatives and in reaching strategic decisions more flexibly and rapidly.
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