Scenario Planning from the Royal Dutch Shell

What is Scenario Planning? How to develop scenarios? Where does Scenario Planning come from? And what is the connection between Scenario Planning and Strategy?

Strategy is critical to set the right direction for a company and to ensure that everybody works on what matters most. A simple, but holistic way, to think about strategy is summed up in 3 steps as explained by Richard Rumelt in is book good strategy bad strategy:

• A diagnostic to root your strategy in the reality of the field taking into account the company and its environment.
• The guiding policy to overcome the challenges that the diagnostic identifies.
• A consistent plan of actions providing concrete first steps so the the guiding policy connects to action.

There are several approaches to structure the diagnostic like the famous SWOT or the 5-forces analysis from Michael Porter as developed in this blog. Nevertheless, in a fast changing world, identifying the weak signals is critical. This is where Scenario Planning comes, as it makes possible to leverage the collective intelligence in an organization to identify these weak signals. Then build awareness around their impact and the required actions.

Scenario planning, in short, is a kind of strategic foresight that builds main possible futures based on major uncertainties and capture them as narratives.

Where does Scenario Planning come from? From Herman Kahn and Gaston Berger to Pierre Wack and the Royal Dutch Shell.

Scenario planning emerged in the 1950s in the military area with the work of Herman Kahn at the RAND Corporation. To illustrate, his method is to describe the future like stories that people in the future would have written. He called these stories scenarios. In 1961 he created the Hudson Institute where he extended his scenario method to social and public forecasting.

Concurrently in France, at the Centre d’Etudes Prospectives, Gaston Berger elaborated “La Prospective” a comparable technique. Likewise, this technic produces scenarios of the future to guide building public policy.

In 1971, Pierre Wack expanded scenario forecasting to the world of business in the Royal Dutch Shell in order to guide its strategy. Clearly, it made the difference 2 years later with the Oil Shock. Since then, Shell is the leader in the business world in the use of Scenario Planning and it has elaborated practical ways to implement it.

What are the foundations of Scenario Planning?

Scenario Planning roots in several principles that illustrate the mindset of this method. So it is useful to start by reviewing them before the method itself.

Dialogue and engagement

Worst enemy to identify weak signals is group thinking where everybody thinks the same either because of homogeneity or because of the fear of voicing different points of view. Surely, Scenario Planning needs to fully leverage different points of view to explore outside main and obvious possible futures.

In addition, Scenario Planning covers at the same time the area of facts and data, but also the area of ideas and perceptions. Dialogue is the media to consolidate the last ones. And engagement is the prerequisite for people to share different points of view.

Learning

Reality is too complex to be fully embraced in all its dimensions at the same time. As a result, we develop mental models to understand and manage our surrounding reality. These models are quite useful but they are a simplification of the reality on the constant parameters. And this is where some weak signals and disruptive events may hide.

Scenario Planning enables us to re-perceive or re-interpret our reality, so we can formulate new strategic policies and implement them.

Decision making

Decision making is an important aspect of Scenario Planning. So it is relevant to remind some considerations about decision making in applied contexts:

• Decisions come in series and they are interdependent. Therefore Scenario Planning considers series of decisions rather than a single decision. In addition, taking the good decisions is not enough. Indeed, we should take these decisions at the right time.
• As we take decisions and implement related actions our environment change for a part autonomously and for another part because of our actions. Actually, some parameters are interdependent with the other parameters of the system. They are endogenous. Some other parameters impact the organization but are not dependent on the parameters of the organization. They are exogenous. Clearly, a systemic view is mandatory to have a holistic understanding of the organization and its environment. Then to grasp the interconnection between the parameters with their relative feedback loops.

Furthermore, there are limitations with decision making:

• As human beings, we have limitations on information processing. This is why Scenario Planning uses narratives to communicate a large amount of information and address complexity. In addition, stories provide meaning and facilitate openness to different perspectives.
• Good decisions emerge from different points of view and from the consolidation of fractal pieces of information. This is knowledge friction in Scenario Planning where nuances and double-checks occur in the interactions during the process to elaborate scenarios.

Mental models

“Mental models are the lenses through which we see the world“. They cover people’s values, assumptions, experiences and beliefs. Most of the time, we are not aware of our mental models or the effects they have on our behaviors.

Scenario Planning strives for changing our mental models through learning, so we can see the world a different manner. And as a result, understand it and think about it another way.

Note that our mental models also impact the way we take decisions. So this work on mental models will also impact the decision making as described above.

Leadership

Not only leadership is critical in all activities related to strategy but also in activities relative to the transformation of the organization. Without of doubt, lack of support and involvement of the leadership in Scenario Planning will result in a failure.

Organization performance and change

Ultimate purpose of Scenario Planning and the resulting Strategy is the performance of the organization.

Performance happens and should be considered at 4 levels: organization, process, group, and individual.

Measure of the performance demonstrates how relevant the scenarios are, then how efficient the process of Scenario Planning is. Surely, optimal measure is at the 4 levels of performance: organization, process, group, and individual. Therefore, you may want to supplement your current metrics to fully cover all the levels.

Scenario Planning framework and development process

Project preparation

Without a surprise, Scenario Planning starts like all projects by a preparation step to frame the initiative on the following elements:

• The purpose and the question to address.
• The estimated scope and the timeline.
• The major stakeholders inside and outside the organization who are interested in, and affected by, this purpose and question.
• The scenario team and the defined roles for each team member.
• The general expected outcomes and the related measures to assess the achievement.

Scenario exploration

Diagnostic frameworks

Scenario Planning leverages the usual diagnostic frameworks to analyze the context. This includes the famous:

• The STEEP forces: Social, Technological, Economic, Environmental and Political.
• The SWOT analysis: Strengths, Weaknesses, Opportunities and Threats.
• The 6 thinking hats from De Bono’s to embrace all points of view, factual like subjective, positive like negative: the White Hat (information, facts), the Yellow Hat (what is positive with value and benefits), the Black Hat (what is negative with risks and problems), the Red Hat (what is around feelings and emotions), the Green Hat (what is related to creativity with opportunities and alternatives), the Bule Hat (used to manage the thinking process, equivalent of the meta position in coaching).

Data collection happens through various channels:

• Reuse of existing data:
  • From customers, employees, finance and analytical accounting.
  • But also from previous planning and scenario planning.
• Collection of data through surveys.
• Gathering of information with interviews.
• In addition, observations to understand abstract behaviors.

The 7 questions in Scenario Planning for interviews

In his book Scenario Planning in Organizations, Thomas Chermack proposes 7 types of questions to collect information during interviews:

Scenario Planning development process

Once you have conducted deep research on the driving forces of your industry and your company in its environment, you can start the step where you actually develop the scenarios.

Strategic Scenarios

The target in this step is to develop 2 to 4 strategic scenarios with the following characteristics:

• Relevant: scenarios must be relevant to the managers who are going to use them.
• Challenging: scenarios must stretch the way the organization thinks beyond the obvious foresight of the future.
• Plausible: even if these scenarios differ from the conventional idea the organization has about the future, they are still likely to happen.

The task force will build these scenarios through open dialog, sharing their different viewpoints to build an holistic, complete and up-to-date understanding of their reality. In other words, these scenarios are the roots of a refreshed and shared mental model.

As a matter of fact, for organizations unfamiliar with Scenario Planning, the plain future, in other words, the surprise-free status quo future scenario, can be a basis to elaborate scenarios.

Predetermined elements in Scenario Planning

Some parameters are predictable and do not depend on particular events. There name is predetermined elements and they fall in 4 categories:

• The slow-changing phenomena, in other words, trends, for instance a demographic shift.
• The constrained situations, for example resources that are limited.
• Changes that are in the pipeline, on-going, to illustrate the baby boomers aging.
• Inevitable conclusions, change with obvious consequences, for instance the climate change.

Critical uncertainties

Critical uncertainties contrary to predetermined elements are truly uncertain. Watch out that they may be mixed with predetermined elements. And this is the reason for many errors in Scenario Planning. Therefore, it is important to question your assumptions about predetermined elements to separate what is predictable (predetermined) from what is really open to change (uncertain). These critical uncertainties have different impact and uncertainty. As a result, you need to sort them to identify those that have the highest relative potential impact on the organization and the highest relative uncertainty.

Scenario development process

The steps to develop a scenario in Scenario Planning is as follows:

1. Brainstorming the challenges that the organization is facing.
2. Ranking those challenges according to their relative impact on the organization and their relative uncertainty. In this step you have to pay a special attention to your assumptions to sort predetermined from uncertain parameters as explained above. In addition, some parameters may correlate, so you want to group them to identify patterns and the families of scenario.
3. Identifying the patterns and formulate the scenarios based on challenges with high impact and high uncertainty.
4. Preparing the research agenda for the scenarios.
5. Framing the scenarios with their titles and plots.
6. Writing the detailed narrative of the scenarios.
7. Formulating the communication strategy for the scenarios.

Identifying the patterns

There are 3 ways to combine parameters to identify patterns as the root for scenarios:

• Intuitively: find major themes and story lines that emerge from data.
• Heuristically: select the two most important uncertainties and place them in a matrix that will generate your 4 scenarios.
• Statistically: systematically combine the outcomes of the key uncertainties to identify consistent scenarios.

Elaborating the plot

The plot is the overall structure of the story and you develop it before the story itself, the narrative. Best results come when a group elaborates the plot, not just one individual.

The 3 common plots are:

• “Winners and losers“, this is a struggle between protagonist against antagonist and only one character can win. As a result the others loose.
• “Challenge and response“, here a major event happens and the story is about how characters react to this event.
• “Evolution“, in this plot, there is a slow changing that can drastically accelerate at some time. Catching the early wave makes the difference.

The other common plots are:

• “Revolution“, an unpredictable and extreme change.
• “Cycles“, like the economic cycles of growth and decline.
• “Infinite possibility“, here the plot elaborates on the perception that a force will keep growing indefinitely.
• “Lone ranger“, in this plot a hero confronts a corrupt system.
• “My generation“, this plot is about major social shifts related to significant generational differences.

At last, plots from movies can be a source of inspiration:

• “Friendships“, this starts with a friendship, then a separation, and at last a reconciliation.
• “Epic“, telling the travel of an individual or a group of individuals from a place to another with adventures along the way.
• “Robbery“, about a robbery to happen in a place impossible to access.
• “Coming of age“, a critical moment of life with drama that change characters.
• “Do the right thing“, featuring a character facing an ethical dilemma.

Writing the story, aka the narrative

Here, it is better to have people working alone to write the story, not as a group. The approach proposed in Scenario Planning is to build 2 scenarios:

• The first, written using the third person, sets the scene and the main information about the scenario. To illustrate, this version helps to confirm the consistency of the facts and identify the weaknesses in the plot.
• The second, written using the first person, is the narrative that explains what happens from the beginning to the end of the story. Without a doubt, this narrative is easier to remember and triggers more empathy.

Both forms of stories meet the same best practices:

• They have a beginning, a middle, and an end.
• Some elements are constant, some are changing.
• Characters are key to highlight issues, dilemmas and twists, so use them to build tension and friction between them with dramas and conflicts. Even with abstract elements, like unemployment that could be the bad character and innovation generating jobs and growth the good one.
• At last, use present verb tenses to support the reality you want to depict in the scenarios: ban “might have”, “could have” or any other forms that could imply that this is just a mere speculation.

At last, media to capture the scenarios and communicate them can be:

• Documents, workbooks
• Presentations
• Websites
• Videos or podcasts
• Role-playing activities or workshops

Sanity test of scenarios

In the sanity check step, the group that has been working to build the scenarios, checks them on 2 aspects:

• Matching with the initial questions the scenarios aim at answering. Test questions could be:
  • What did we learn relatively to those initial questions?
  • What is the answer of each scenario to those questions?
  • What additional information would we like to get?
• Widening of our horizons in term of opportunities and potential actions. Review questions could be:
  • What are the new strategic opportunities brought by each scenario?
  • What are the options for the dilemma we face?
  • What are the actions we could conduct based on the learning from these scenarios?

Scenarios as conceptual wind tunnel: simulation and assessment

In the case of Scenario Planning, the implementation is the actual use of the Scenarios as a conceptual wind tunnel:

• Simulation on how the organization would behave can be investigated and even measured.
• Assessment of the assumptions about the environment and the organization thanks to the different worlds embodied by each scenario.

This builds awareness and opens new horizons within the organization, especially for leadership in charge of defining the strategy.

Here Scenario Planning involves the leadership for them to take advantage of the scenarios as conceptual wind tunnel to test 3 strategic dimensions of the organization:

• The strategic assumptions related to the organization, including its mission, its core competencies and its environment:
  • Do our assumptions about the environment, mission, and core competencies match the futures embodied by the scenarios and enable us to take actions.
  • Are these assumptions consistent in each scenario?
  • Would our distinctive competencies still make the difference in each scenario?
• The business model of the organization:
  • Do we still serve a business need with our products/services in each scenario?
  • Do we lose part of our competitive advantage in these scenarios?
  • Is our business model still relevant in each scenario?
• The strategy of the organization itself:
  • How do we meet our strategic goals in each scenario?
  • Is our strategy still relevant in these scenarios?
  • Are some of our strategic goals irrelevant or inconsistent in these scenarios?

In addition, in order to monitor actions identified during this step, it is a good practice to develop triggers based on events and indicators, to notice that the story of a given scenario starts.

As an optional step to go further, the work group may elaborate a learning experience to support members of the organization to dive in these imaginary futures and make them more real. For instance:

• 1 room per scenario with pictures and newspaper articles supporting the scenario.
• 1 cross functional team in each room explaining the related scenario from opening, passing by developing and ending.

Project review

The project can be evaluated over 3 dimensions:

• Feedback about the overall project: the value perceived and the successes to be marketed. But also the areas for improvement for future Scenario Planning to come.
• Learning that is the key output of Scenario Planning and that is the prerequisite to change mindsets and behaviors. This measures the impact of the Scenario Planning on the organization and the consolidated information can be reused for further communication to expand awareness on new horizons.
• Impact on the performance of the organization this is the most difficult to measure given the delay to observe the effects. Both the production output (products or services) and the financial results of the organization may improve thanks to Scenario Planning and resulting actions.

Key Success Factors and Pitfalls with Scenario Planning

Key Success Factors

Like any project, the success of Scenario Planning depends on how much you invest on them:

• Assign the right team both with knowledge and legitimacy to support the project.
• Allocate enough time to frame the problem, collect the required information and analyze.
• Enforce a strong support from management to the project and the team.
• Specify the expectations, outputs and outcomes of the project.
• Concentrate your effort and build a limited number of scenarios: no more than 4. Actually more scenarios will be too much information when people use them.

Then it depends on how you use the scenarios and assess their impact:

• Truly use the scenarios produced to test assumptions, the business model and the strategy.
• Assess learning, impact for further improvement and communication.

Pitfalls

When running a Scenario Planning project, in addition to typical key success factors of projects, you should have in mind following concerns:

• Disconnected scenarios from the field:
  • Unbalanced team between line and staff, and between internal and external contributions, in other words, external experts including from other industries. The risk is to fall in group thinking.
  • Disconnected scenarios from the day to day of the organization but also from the existing processes in this area, like activities around strategy, culture and HR.
  • Irrelevance: not only you should involve the right people, but also make sure that they fully use facts and research.
• Conservative scenarios and state of mind:
  • Failure to take the long view over the coming 5, 10 and even 20 years, to push participants into a space truly unknown to them.
  • Shortcoming in embracing the wide view and look beyond your own industry.
  • Too much focus on the trends, lack of digging on the root causes, status quo on thinking, instead of true real thinking and change of point of view.
  • Failure to create a real breakthrough and identify unplanned events for lack of deep, disciplined thinking about and critical analysis.

What’s next? Learn how to forge a good Strategy!

Check my other posts on Strategy:

• How to assess competition with Michael Porter’s 5 forces model and review competitive advantage.
• How to designing a good and efficient Strategy

Do you want to learn more about Scenario Planning applied in Business? Here are some valuable references

• Book:
  • The good book Scenario Planning in Organizations from Thomas J. Chermack.
• Web references:
  • The article in Sloan Management Review, Winter 1995, from Paul J.H. Schoemaker: Scenario Planning a tool for strategic thinking.
  • The Wikipedia article.
  • An article from Forbes.
  • An article from HBR.
  • The reference from Shell.
  • An article from Herman Kahn.