Choose Your Problem
What kinds of problems are best suited for scenario planning? John Parkinson, a strategy consultant at Ernst & Young LLP, suggests two circumstances in which scenario planning is particularly useful. "One is when you're facing a high degree of uncertainty and none of your predictors are being very helpful in showing you what the future is going to be like. Looking at the broadest set of possible outcomes lets you identify common themes or factors that may make a lot of difference," he says. "The other is when all of the trend lines are clearly unsustainable, so that the predictors, though they can tell you things, can't be telling you the truth." When Parkinson and his group were tracking the early stages of commercial activity on the Internet, they began seeing "compound monthly revenue growth rates in the mid-teens," he says. "Revenues by 2003 that were represented by the Net were coming in at 40 times GDP. No way could you say that's going to happen for the next three years." The point: Know when to take your scenarios with a grain of salt.
Utilities, telecom companies, healthcare concerns and other businesses suddenly thrust into either unregulated environments or global marketplaces are prime candidates for scenario planning; indeed, many are turning to it as a safety net against future uncertainties. "If the amount of turmoil in your operating environment is increasing, this is a great tool for you," says Deloitte's Thomas. "If there isn't a lot of turmoil and your marketplace has a lot of clarity about it, you don't need this."
In the face of rapid technological change in the insurance business, Steve Andriole, CTO of insurer Cigna Corp. from 1995 to 1997, turned to scenario planning to determine the impact of the Internet on the medical industry, insurers and the IT needs for each of his company's nine divisions.
"I don't care about technology," Andriole recalls telling each business president. "What I care most about is your business. So help me help you think about your business strategy. And after we have a consensus, then we'll think about the technology investments we need." To win buy-in from the president of each business line, he paid for the scenario consultants.
In 1995, Andriole convened teams of executives from each of Cigna's business units, such as property and casualty, healthcare and investment services, as well as IT managers and IBM consultants. The assignment: Determine the future structure of the industry, identify and understand the competition, then examine the role of technology and the Internet in healthcare.
Starting from sample scenarios developed by IBM, Cigna's team developed its own list of major uncertainties and business driving forces. The resulting four-scenario matrix was based on two key uncertainties that made up the two axes of the grid: the role of technology and the role of the government. In one scenario, called Big Brother, "many of the business processes were defined by extraordinarily complex regulations" involving privacy, patient rights and the Internet-based provision of healthcare, Andriole says. At the opposite extreme was the Wired, Wired World, where the Internet was ubiquitous and everything and everyone was wired together.
Cigna's team developed specific outcomes and assigned probabilities to each scenario. The team was 75 percent sure, for instance, that in the Wired, Wired World, within five years people would use the Internet to pick a primary-care physician, schedule appointments, exchange medical records and perform other healthcare tasks.
Next Cigna asked, "If that's true, what do we have to do to prepare?" recalls Andriole. The team created a prioritized list, complete with cost estimates, of things they'd like to have if the scenarios were true. Adding in costs "forces people to rethink the list," Andriole notes.
Andriole used the results to prepare his strategy for the next budget cycle, won buy-in for the top priorities on his listnetwork infrastructure and application developmentand gained credibility for the vital role of the CIO in the strategy process.
At the same time, Cigna chose not to make the strategic investment in data warehousing and data mining needed to support a significant push into cross-selling. "The expected value of cross-selling didn't justify the investment," says Andriole, "especially since the company was planning to divest some of its business lines, such as personal life insurance."
As successful as the technique can be, scenario planning isn't the magic solution for every strategy problem. In fact, it appears to be losing some of its allure. Since 1993, management consultants Bain & Co., Inc. has surveyed executives to find out which management tools they use most often. Bain's most recent survey shows the usage rate for scenario planning has slipped from 38 percent in 1993 to 30 percent in 2000. "That's a fairly high defection rate," says Darrell Rigby, the Bain director who oversees the study. "I must admit it's a disappointment to me."
In follow-up interviews, Rigby found that executives who abandoned scenario planning said it was just too much effort for the results they got out of it. "What they have often done is to go into extraordinary detail in developing scenarios that were a little far-fetched," Rigby says. Dissatisfied users also "spent too much time going down paths that most of the organization didn't feel was the slightest bit relevant." And, Rigby notes, "there is always an element of waste in planning for contingencies that never occur. After all, 70 percent of scenarios never come to pass."
Says Hugh Courtney, an analyst at McKinsey & Co.: "Most companies have no formal process for embedding the scenario method into corporate strategy, and that's the key." Critical to that effort is avoiding a common pitfall of the process: treating scenario planning as a predictive tool. But using scenario planning to develop strategy presents a thorny logical problem, one conceded by all scenario planners: How do you plan if the scenarios seem to point the company in several directions at once?
One solution, used by British e-business consulting firm International Computers Limited, is diagrammed in the chart on page 39. It suggests an iterative process that generates "critical success factors" for doing business in the kinds of markets resulting from your scenarios. That way, an overarching strategic plan is laid out that prepares the company to respond to a variety of possible futures.
In the end, however, "a planning technique is only as good as the implementation," says Roy Lowrance, vice president of The Boston Consulting Group, Inc.'s North America IT practice. There's a risk that CIOs and others may latch on to scenario planning as the "tool of the hour," bringing to it unrealistic expectations. At the same time, scenario planning, like any new technique, "can capture the mind and get people excited. And if this is the technique that gets people excited, then take advantage of it."
The key value in scenario planning, says Schoemaker, is not to accurately predict the future but rather to start thinking more intelligently about it. "Build in more flexibility, and then your own creativity becomes the only limit on your ability to exploit the future," Schoemaker says. Easier said than done, perhaps, but in today's uncertain world, scenario planning can be a check on strategic planning that many companies can no longer afford to ignore.
Bruce Melzer, a senior editor at NPR Online, is the former business editor at ABCNEWS.com. Comments on this story can be sent to firstname.lastname@example.org.