Monday, January 5, 2009

Scenario Planning And It's Impotance In Modern Buisness Strategy.

What is Scenario Planning ?

 “Scenario planning is a discipline for rediscovering the original entrepreneurial power of creative foresight in contexts of accelerated change, greater complexity, and genuine uncertainty."

Pierre Wack, Royal Dutch/Shell, 1984

In today’s business world while doing business there is certainly one thing that is certain that is “UNCERTAINTY”. It has become an integral part of the contemporary management concept.Dabbling with uncertainty has become the part and parcel of modern strategic management expert. It the smartness of the management how to eliminate the uncertainty and combat the uncertain  change situations and overcome this at ease or else to carry on with it necessary changes in the management and business process and actions.

Scenario Planning is basically the far sightedness of the management, to what extent it can look beyond and certain unforeseen and unpredictable future and can change fast to combat the turbulent times.

 To manage risks related to innovation investments that extend long into the future, managers must be willing to look ahead and consider uncertainties. But rather than doing that, many people react to uncertainty with denial. They take an unconsciously deterministic view of events. They take it for granted, that some things will or will not happen. Not having tried to foresee surprising events, they are at a loss for ways to act when upheaval takes place. Scenario planning is a tool for helping managers to take a view into the future in a world of great uncertainty. It is the most efficient tool to manage strategic risks and opportunities.


History Of Scenario Planning.

 The scenario planning concept first emerged following World War II, as a method for military planning. The U.S. Air Force tried to imagine what its opponents might do, and to prepare alternative strategies. In the 1960s, Herman Kahn, who had been part of the Air Force effort, refined scenarios as a tool for business prognostication. He became one of America’s  top futurist.

 Then scenarios reached a new dimension in the early 1970s, with the work of Pierre Wack, who was a planner in the London offices of Royal Dutch/Shell in a newly formed department called Group Planning.


Pierre Wack and other planners were looking for events that might affect the price of oil. And they found several significant events that have been in the air. One was, that the United States was beginning to exhaust its oil reserves. At the same time American demand for oil was steadily rising.


The emerging Organization of Petroleum Exporting Countries (OPEC) was showing signs of flexing its political muscle. Most of these countries were Islamic, and they bitterly resented Western support of Israel after the 1967 six-day Arab-Israeli war.

 Looking at this situation, the planning team realized that Arabs could demand much higher prices for their oil and there was every reason that they would. The only uncertainty was when. It seemed likely to happen before 1975 when old  oil price agreements were due to be renegotiated.

 So Pierre Wack and his team wrote up two scenarios – each a complete set of stories about the future, with tables of projected price figures.

 The first story presented the usual opinion at Shell: that the oil price would stay somehow stable. But in order for that to happen, a miracle would have to occur. New oil fields, for example, might have to appear in non-Arab countries. The second scenario looked at the more plausible future – an oil price crisis sparked by OPEC. But after they have presented these scenarios to Shell’s management, there was no change in behaviour happening. The managers understood the implications, but no change in behaviour came.


So Pierre Wack went one step further and described for the scenarios the full ramifications of possible oil price shocks and he tried to make people feel those shocks through the scenario. He warned management, that the oil industry might become a low growth industry that OPEC countries would take over Shell’s oil fields. They described the forces in the world, and what sorts of influences those forces had to have. This was when scenario planning for businesses was born. It helped Shell’s managers to imagine the decisions they might have to make as a result. And it was just right in time. In October 1973, after the Yom Kippur war in the Middle East, there was an oil price shock and of the major oil companies, only Shell was prepared for the change. The company’s management responded quickly and in the following years, Shell moved from one of the weaker of the seven large oil  companies that existed at that time to the second in size and the number one in profitability.

 So to operate in an uncertain world, managers need to be able to question their assumptions about the way the world works, so that they could see the world more clearly. The purpose of scenario planning therefore is, to help managers to change their view of reality, to match it up more closely with reality as it is, and reality as it is going to be. The end result, however, is not an accurate picture of tomorrow, but better decisions about the future.

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