The "What if?" exercise (Episode Three)

So far we’ve seen what scenario thinking is about, and when it is suitable to apply this kind of technique. Last time I promised to go over the steps to be followed when building scenarios, so let’s get to it! The figure below shows the complete cycle… in this post I’ll present the first three steps.

Step 1 Focus on the main issue

If you look at the cycle represented in the figure, the first step would be choosing the topics we want to explore by using scenarios. Remember we’ll be getting into this process when addressing major decisions, so the situation to analyze will be probably something like how the future of a company is going to be fifteen years from now, or how a certain market will evolve over the next decade or so.

Say you’re an executive running a retail company operating in markets that are already developed. Of course you can’t ignore the fact that more and more people are choosing to shop online instead of stores… so you’ll probably want to find out what would be the ideal virtual-VS-traditional-store mix in the future.

If your company belongs to the energy sector, you’ll want to know what the future will look like in terms of the exploitation of different sources. What kind of renewable energies would you invest in? Is the region your company operates in going to switch to alterative energies, or will it stick to oil and nuclear? Are biofuels really going to play a significant part in the story? I find this example especially illustrative, because investments in capital intensive industries are really like the long term investments… it’s not only about R&D: you also need special equipment for obtaining and processing the products, a lot of trained people, a strong infrastructure for distribution, and so on and so forth.

What if you were in the service industry… say you’re a logistics company. It’s pretty clear that paperless processes are becoming more and more common, which is in theory bad news for your business. But it’s also true -forget about the crisis for a minute- that global trade has been growing substantially so, bingo! You have a major opportunity if you manage to offer a good overseas service. Since I’ll be developing the logistics case later in this series, let’s leave this here for now.

One last example: what if instead of being part of a company you were a government official thinking about the future position of your country in the world market? You probably know the world population is growing, and that people in some emerging countries are starting to have better life standards. Why not satisfy part of these new needs by producing food, for example?

I got all excited and this is only the beginning, but the thing is: whoever you are and regardless of the field you operate in, you’ll want to explore the possible shapes the future could take, and start to visualize the tendencies that are developing in the present.

Step 2 Identify the uncertainties

We already accepted that things are going to change ten or twenty years from now. If you’re lucky enough, some variables will be somehow constant or at least predictable, but some others definitely wont.

Going back to the retail-exec case, it’s undeniable that people are getting used to shopping online… perhaps most of your target consumers prefer this option nowadays. But is this tendency going to be sustainable? What is your competition going to do, have both stores and a website, or just one of them? Maybe a new competitor is going to show up, with a fancy online store and no “real” operations apart from warehousing and distribution. The latter would mean no cost for maintaining stores and paying employees working in them, which could translate into costs tat are lower than yours, and therefore that this new actor could sell cheaper products that would and steal your clients, or have a better profit margin.

So the outcome of this step would be a list of the variables that are significant for the future of your business, and whose behavior is particularly hard to predict.

Step 3 Investigate the driving forces

So far we have the tendencies and the uncertainties... but what are the underlying motives that could lead your stakeholders in one direction or another?

For instance, what makes people buy books in Amazon, or get their clothes online instead of going to a shopping mall? As an example, I have a friend living in Australia that always gets t-shirts from Threadless, a website that sells pretty unique designs. He told me that he prefers this option instead of going to regular stores because everyone in Australia has quite similar clothes and it’s hard to stand out (he’s kind of a design freak… I say it in a good way, Jxe :P), and buying online is cheaper than traditional shopping, even after paying the shipping from the US.

This step is crucial in the process: you basically have to sit down and determine why your customers, your suppliers, the government, and your competition would behave like this or like that; what they do today, and what they are going to do in the future, and why. Of course, the different combinations of these tendencies will take the shape of the scenarios.

How should you do this? I’d suggest trying to get as many different relevant voices as you possibly can, and engage these actors into workshops, focus groups or any other sort of meeting you can think of.

Having fun so far? Great, because we have five more steps ahead, and some examples of real usage of this technique... leave your comments and be back soon! :)

The "What if?" exercise (Episode Two)

Back in the first episode of this series I gave a very general idea of what the scenario thinking technique implied. If we go to a more detailed explanation, this method for planning is a structured process of thinking and anticipating the future, but assuming that the future is not predictable, determinable, or even able to be influenced in a major way. Instead, the objective is to identify the underlying driving forces that make systems evolve, in order to set the path for proper decisions. The outcome of the process is a number of narrative descriptions (the famous scenarios!) depicting possible ways the future could look like for some particular topic (or product, or market, or country, and many other ors); and based on these pictures of the possible future, a set of strategies to be implemented.

In simpler words, companies working this way would have a number of action plans that would help them act faster than those who don’t use this tool, no matter how the future unfolds. So far it sounds amazing, almost like magic: it’s like “Ok, our company can’t control the future, but no matter what happens we’ll be ready to be on the battlefield and perform fantastically well”. The bad news: first of all, building scenarios is not exactly simple (it’s not rocket science either, but it requires a lot of effort); and second of all, as any other tool, it’s not useful for just any case.

I found an interesting article on strategic planning in the McKinsey Quarterly written by Hugh Courtney, from where I borrowed the figure below:

What this figure represents are different levels of uncertainty a company -or any other organization or group of organizations: a particular sector or market, a government, a number of countries- can be immerse into when facing a certain situation. In fact, whoever we’re speaking about will be probably dealing with all four levels of uncertainty at the same time in different aspects of their operations.

Let’s take a company from the consumer goods sector as an example. If they have to buy copy machines for a new office, they can just study their consumption in the past years and decide based on those numbers and some estimations on whether the number of copies has been growing or reducing over the recent times. It wouldn’t make much sense to gather a group of specialists to interpret what are the underlying driving forces and making up descriptions and action plans.

We could assume that this same company is doing good in its market (that’s why they opened the new office): they have launched a product some months ago that the consumers are enthusiastic about, and their Marketing department has conducted some studies that indicate that in the near future the sales will keep on growing. In this situation, the company could be facing a crossroad: for working at a larger scale, they could purchase new equipment, work more hours, or outsource part of the production. This situation is clearly more complex than the one regarding the copy machines; still, a good decision tree seasoned with the opinions of some of the executives would probably be enough.

But now let’s say that this company is looking further than just the near future, and that they perceive some trends in the market. Like people wanting to consume healthier food, or expecting more from the products but paying the same price, or paying less for what the company offers today. These matters are way more complex, and probably less tangible or countable. What would be better, to launch a healthier line of products, or to modify the existing ones? To start operating in less developed markets, where the consumers wouldn’t expect so much from the products? And last but not least, what would the competitors do if the company decided to implement any of those strategies? (What’s worse, they could make the first move.)

I’m pretty sure you get the picture by now: scenarios are more appropriate for decisions belonging to levels 3 and 4 of the figure. Fantastic, now that we now when to and when not to use this technique, the next question is how to do it… find out next time!