The Trouble with Scenarios

More recently (Nov. 19, 2007), I reviewed Michael Raynor’s book The Strategy Paradox, which recommends using scenario planning to manage strategic uncertainty (keep doors open and be aware of and ready to commit to various alternatives as they emerge), to create strategic options (make small risk-conscious strategic investments, each of which will pay off big if that scenario plays out), and to get operating divisions to commit fully to certain short-term strategies (by giving them sufficient resources and indemnifying them from blame if the scenario their efforts are predicated upon does not play out). The idea is that competitive advantage will accrue not to the companies that assume the status quo will continue unchanged (because change is inevitable), but rather to those that take strategic risks across of a whole range of plausible future scenarios.

I’m working currently on a project with Michael to envision and think about a range of options for the 2010-2014 period, that businesses can use to anticipate and prepare for discontinuous risks and opportunities that they might otherwise not consider.

Last week my friend Dave Snowden chimed in with a post on scenario planning in complex environments. In an earlier article, he had proposed three important principles for managing organizations in these new environments:

• Distributed Cognition: using the capacity of diverse networks to contribute to decision making
• Granularity: small things (blogs, anecdotes, crews) are more adaptable and hence useful than large things (books, treatises, organizations)
• Disintermediation: eliminating layers that separate unfiltered information from decision-makers, to improve context and opportunity for important pattern-recognition

As Euan Semple has pointed out, these are aspects of organizations that can be effectively managed — using and encouraging networks, increasing the granularity of information and organizational structures, and disintermediation, are all things that management can actually do, that will improve work effectiveness and enhance decision-making.

In his latest article, Dave says that scenario planning is designed for complicated environments (where one can reasonably anticipate all possible future outcomes) not complex environments (where prediction is substantially impossible). He summarizes the basic scenario planning approach (his diagram is shown above): brainstorm future possibilities; cluster them into a framework; produce a full narrative for a few plausible scenarios at the ‘corners’ of the framework; monitor to detect whether these scenarios are coming true. And, of course, decide what you would/will do if each scenario does appear to be coming true. In my work with Michael, our framework is based on the predominant economic outcomes (positive or negative) and the degree of economic volatility, to create four ‘extreme’ but plausible future economic scenarios; our assumption is that the actual economic future will be somewhere within the bounds of these four scenarios.

Some of the dangers with scenario planning that Dave identifies:

• empirically, it has been shown to expand employee thinking about possible future events, but not to improve resultant decision-making
• the risk of premature convergence on one intriguing idea or well-articulated framework, with most of the brainstormers not thinking critically or creatively about other possibilities
• insufficient consideration of unlikely, discontinuous and unforeseen events (“black swans”) that, if they did occur, would have extraordinary consequences
• failure to look at events outside the business environment (e.g. external political events, resource constraints, changes in suppliers) that could nevertheless significantly affect the business
• lack of diversity in the brainstorming group (and commensurate tendency to groupthink)

Dave argues that instead of trying to anticipate (predict), organizations need to increase their level of “anticipatory awareness” (capacity to imagine, envision and assess how they might deal with, different futures, so that the organization is more resilient — not caught by surprise — and able to react quickly when occurrences that have at least been imagined occur).

To achieve this “anticipatory awareness” Dave suggests increasing the number of people canvassed for their ideas on future possibilities, and the number of future possibilities (“micro-scenarios”) considered, and then using techniques to assess (“signify”), index, and search for patterns in these micro-scenarios. You can see the use of his Distributed Cognition and Granularity principles in this approach. When “monitors” are put in place to early-detect symptoms of any of these micro-scenarios, managers will have a basis to continuously assess the likelihood of each of these micro-scenarios occurring, and the consequences if they were to occur, and make decisions on how to mitigate or adapt to the risks each micro-scenario presents accordingly. So, as Dave explains, even a maverick can proffer micro-scenarios that will capture management attention when the “monitors” suggest those micro-scenarios are becoming more likely — in most organizations, the mavericks with the boldest ideas and predictions tend to be filtered out by middle managers before senior executives hear of them.

After reading Dave’s article, Vera B, one of my readers, commented:

Vera’s comments resonate with my own: That because of our imaginative poverty, and our inability to really understand and follow nature’s model of self-management, we are unable to conceive of, let alone develop “anticipatory awareness” of, discontinuous future events. We can recognize patterns, we can do environmental scanning and constantly watch for ‘weak signals’ that forebode changes ahead, we can extrapolate and project, and we can even (though too rarely) recognize the recurrence of patterns from our past history. But we, and our man-made systems, don’t have the resilience, the sheer numbers of data-providers and of data to draw on, or the billions of years of experience at mitigation and adaptation that nature does, and we can’t hope to. Just look at most science fiction, which presumes that all sentient creatures everywhere in the universe, throughout all time, have and always will look, feel, communicate and act astonishingly like humans today, and will deal with problems depressingly like we do today.

As John Gray tells us in Straw Dogs, our species is preoccupied with the needs of the moment, and despite our fascination with stories about the future, it is just not in our nature to do nature’s job of managing complexity. I read about the inevitability of us using geophysical engineering to “solve” the climate change that our ignorance of complexity has caused, by seeding the upper atmosphere with millions of tons of heat-reflecting metal particles, and I shake my head and sigh. The apes have been left in charge of the laboratory for far too long.