“In hindsight, the greatest value of scenarios is that they
created a culture where you could ask anyone a question,
and the answer would need to be contextual. Answering,
“Because I’m the boss” or “Because the business case is positive”
was out-of-bounds.”
-Ted Newland
On Thursday, September 22nd, a tropical storm brewing off the coast of Africa began heading westward. By September 28th, it reached the US Virgin Islands. The following day, Tropical Storm Matthew reached hurricane strength and weatherman began issuing alerts about its likely path. I am not sure how meteorologists predict where a storm will hit, but in this case, they were earning their pay.
By Saturday, October 1, NASA reported that hurricane Matthew had briefly Matthew reached category 5 status before dropping back to category 4.[1] By this point, Matthew had the attention of local and national weather forecasters. On Monday, October 3, Matthew was about to pound the Caribbean and residents of Florida were paying attention. Prognosticators were calling for it to hit Charleston, but I was not too worried. After all, I had spent 10 years in Virginia Beach, so I was used to hurricanes. Besides, direct hits from hurricanes are infrequent in Charleston. The last direct hit was in 2004. Before that was Hugo in 1989 and Gracie in 1959.[2]
In 2005 I moved from Virginia Beach To Lynchburg. Lynchburg is in central Virginia, about 4 hours West. When I moved to South Carolina, I found to my surprise that though I was only 20 miles from the coast, I had moved further West than when I lived in central Virginia because the South Carolina coastline curves in where it meets Georgia. Florida and Northeast North Carolina stick out, but in Charleston, we are safely tucked away—most of the time.
At 4 AM on Tuesday morning, I could not sleep for unrelated reasons, so I went to Wal-Mart at a time when no one would bother me. I was surprised to see the bottled water aisle was nearly cleaned out. I seized the opportunity to stock up, just in case, but I did not think much more about it. In hindsight, this was my first sign.
Just after 11:00 AM I found out that CSU had cancelled the Christian Business Faculty Association (CBFA) conference that we had planned to host from Thursday to Saturday. By early afternoon, we received word that the university would shut down as of 5 PM for the remainder of the week. That night, Governor Haley was urging South Carolinians to evacuate if they live near the coast. The evacuations were voluntary on Tuesday, but by 3 PM on Wednesday, evacuations in Beaufort and Charleston were mandatory.
By Wednesday, entire sections of Wal-Mart (e.g., bottled water, batteries, flashlights, certain camping supplies, etc.) we cleaned out as people prepared to write out the storm. Gas stations had also run out as those considering evacuating prepared for long journeys.
As I was thinking about this lesson on scenario planning, I was struck by how different people took different approaches to prepare for the same event. At Wal-Mart, I was passed by a harried middle-age woman stocking up on toilet paper that, by my calculations, should last her well into next year. A man in jeans and a camouflage shirt was walking the other direction. He was quite calm. I glanced at his cart and he seemed to be preparing to barbecue when the power goes out. Some were complaining about the bottled water being gone, but a number of savvy shoppers had apparently concluded that they could drink Coke and Dr. Pepper if their water supply was affected. Then there was the young couple that appeared blissfully unaware as they walked to their car, carrying a pizza and holding hands.
Preparation and Scenario Planning
At my house, my wife and I naturally divided labor between us. I checked to be sure that emergency supplies were in order (e.g., canned food, water, candles, Sterno cans, and charcoal) while my wife began to pack in case of a mandatory evacuation. After I was sure that I had sufficient supplies, I began looking for a hotel while my wife packed just in case we had to leave.
My wife has been asking me to clean out the garage for nearly a year, but I hadn’t “had the time” to do it. Yet, in two days, the garage was organized with enough space to park the minivan. Our children cleared all the toys out of the backyard after I explained that during a hurricane a toy truck could become a projectile that could break a window. In an afternoon, they completed something they have not been capable of doing in the last five years.
What do the various types of shoppers have in common? Where did our sudden burst of domestic energy come from? The answer is found in scenario planning.
Scenario planning
According to the U.S. Army Corps of Engineers:
Scenarios are divergent stories about the future. The story format allows people and organizations to envision possible future consequences of complex interactions among economic, political, social, and environmental forces. Scenarios are not predictions of the future, and in most cases the scenarios are not likely to occur exactly as written, but they do need to be plausible. They describe events which could happen, which might happen. They are designed to take an outside-in focus, beginning with external forces and ending with internal actions that the organization might take to prepare for and cope with the eventualities depicted in the scenarios. The idea is to focus on the issues most relevant to the missions of the organization.[3]
Scenario planning can be traced back to Cold War military planning in the late1940s—and more specifically to Herman Kahn. Kahn was a military strategist and “Senior staff physicist of the RAND Corp., the Air Force ‘think factory,’ [and a] consultant for the Atomic Energy Commission and the Office of Civil and Defense Mobilization.”[4] In 1960 he wrote On Thermonuclear War. In his book, he created credible and compelling scenarios that explained what could trigger a nuclear war and how it might be survivable. While at RAND, Kahn,
started telling brief stories to describe the many possible ways that nuclear weapons technology might be used by hostile nations. (For this, Scientific American described Mr. Kahn as “thinking the unthinkable,” a characterization he embraced gleefully.) Near RAND’s Southern California offices, Mr. Kahn hung out with screenwriters and moviemakers — one of whom, Stanley Kubrick, used him as a model for Dr. Strangelove, and another of whom, Leo Rosten, suggested the name “scenarios” for these storytelling exercises.[5]
A 1961 review in Time magazine, described his use of scenario planning as follows:
Kahn’s basic point is that nuclear war need not bring an inevitable ‘end of civilization’ or even the ‘mutual annihilation’ of the combatants. It is a part of U.S. Atomic Age folklore that there is no use trying to prepare for nuclear attack, that once deterrence fails all is lost. This attitude largely accounts for the feebleness of the U.S.’s civil defense programs. Backing up his case with a thicket of facts and figures, Kahn argues that advance preparations could make a difference between, say, 20 million and 80 million casualties.[6]
Scenario-planning was soon picked up by Stanford Research Institute (SRI), Royal Dutch Shell, and other major corporations. Later, Peter Schwartz would bring the concept mainstream in his book, The Art of the Long View.[7] Royal Dutch Shell would become most associated with Scenario planning when Pierre Wack, a disciple of Herman Kahn, famously used it to predict the oil crisis of 1973.
Angela Wilkinson and Roland Kupers are former Shell planners who wrote a history of Royal Dutch Shell entitled: The Essence of Scenarios. In a Harvard Business Review article, they explained that the drive at Shell was not to predict the future, but provide plausible alternative futures. They explained that “What happens at a scenario’s horizon date is not as important as the storyline’s clarity of logic and how it helps open the mind to new dynamics.”[8]
Most organizations plan for the future much like they do their budgets. They use the current year and add three percent. While this strategy is grounded in their present reality, it is all but designed to miss game-changing events. At Shell, scenario planning was not about predicting the future, but constructing valid alternative models of the future. This would allow them to build capacity to existing organizational processes so that they could brace for whatever may come.[9]
Seeing the Unforeseeable
For much of the 20th century, oil was inexpensive. Before World War II, Western oil companies prospected for oil in the Middle East. These included British Petroleum, Standard oil, Royal Dutch Shell, and Gulf. Arab oil fueled supplied gasoline for the automobile boom.[10]
After World War II, political relations changed between the West and the Middle East. In 1948, Israel was reborn in Palestine, and Arab nations largely united in opposition. This led to Israeli War for Independence (1947-1949), the Six Day War (1967) and the Yom Kippur war (1973). At the same time, the cold war was heating up between Western and Eastern Bloc states. When the Soviet Union began to supply Arab nations during the Yom Kippur war, President Nixon requested “$2.2 billion in emergency aid to Israel.” According to the State Department,
The Organization of Petroleum Exporting Countries (OPEC) imposed an embargo against the United States in retaliation for the U.S. decision to re-supply the Israeli military and to gain leverage in the post-war peace negotiations. Arab OPEC members also extended the embargo to other countries that supported Israel including the Netherlands, Portugal, and South Africa. The embargo both banned petroleum exports to the targeted nations and introduced cuts in oil production.[11]
This event “quadrupled the price of oil from $2.90 a barrel before the embargo to $11.65 a barrel in January 1974.”[12] Most of the world was stunned by the crisis, but Royal Dutch Shell was prepared. “Called the ‘Ugly Sister’ by Forbes for its relatively weak financial position in the late 1960s, Shell moved to become one of two breakout leaders (Exxon was the other) of the industry” because they were ready for the oil shock of 1973.
The Power of Scenario Planning
In 40 Years of Shell Scenarios, the company boasts: “IN 1973, THE GLOBAL ECONOMY WAS SHOCKED BY A MAJOR OIL CRISIS. SHELL WASN’T.”[13] In fact,
Scenario planning alerted Shell’s managing directors (its committee of CEO equivalents) in advance about some of the most confounding events of their times: the 1973 energy crisis, the more severe price shock of 1979, the collapse of the oil market in 1986, the fall of the Soviet Union, the rise of Muslim radicalism, and the increasing pressure on companies to address environmental and social problems. The method has since become widely popular outside Shell, not just in corporations but in some governments.[14]
How did they do it? Pierre Wack explained that the original 1971 and 1972 studies on long-term planning convinced them that while prices had been stable and growth had been good, they realized that the “expansion simply could not continue and [they] predicted that the oil market would switch from a buyers’ to a sellers’ market, with major discontinuities in the price of oil and changing interfuel competition.”[15]
But how did they specifically foresee the 1973 Oil Embargo? The answer is that they didn’t. What the planners anticipated was the certainty that oil-producing countries would need to slow their production and they also plausibly assumed an oil disruption that would occur during the 1975 Tehran price agreement renegotiation. In fact, they had it wrong—but they had anticipated a sudden energy crisis.[16]
In 1970, it was hard to imagine that oil would not continue to flow abundantly and cheaply. Yet, the 1971 and 1972 scenarios anticipated a power shift from demanders to suppliers.[17] The planners at Shell understood that it would happen even if they could not predict precisely when the crisis would come. They told their managers that they needed to prepare for different possibilities. Wack explained:
No matter what happened in particular, prices would rise rapidly in the 1970s, and oil production would be constrained—not because of a real shortage of oil but for political reasons….
We developed three simulations. In the first, the oil shock occurred before the cyclical downturn; in the second, the events were simultaneous; and in the third, the oil shock followed the downturn. These simulations led us to prepare for a far more serious economic decline than might otherwise have been expected….
We hit planning pay dirt with the 1973 scenarios because they met the deepest concerns of managers. If any managers were not fully convinced, the events of October soon made them believers.[18]
Getting Started with Scenario Planning
According to Charles Roxburgh, in a Report for McKinsey&Company, scenarios are powerful because they expand your thinking and help you uncover the likely future. Roxburgh asked his readers to focus on predetermined outcomes such as demography, the laws of economics, the extrapolation of trends, and looking past our planning horizons.[19]
Demography: Population size and racial composure is easy to track and the future consequences of present actions take time to materialize. For example, according to the Chamber of commerce, 43 people are moving into Charleston (net) every day. That is a gain of 15,695 people in the region within the year, or more than 150,000 in the region within a decade if the trends hold. If you work in Charleston, what will that mean for your business?
Economic trends and the extrapolation of trends: The law of supply and demand has not changed. A change in one condition is predictive of a change in another condition if you know how to read the signs. Economic cycles repeatedly ebb and flow, and every new prediction of the end of business as we know it has predictably ended in a bubble—and bubbles just as predictably burst. If you pay attention, certain futures become obvious. As Roxburgh explained, “Trees don’t grow in the sky.”[20]
Looking past normal planning horizons: In our last lesson, we talked about long-term planning, and we recognized in Eisenhower’s and Moltke’s quotations that long term plans are not to be followed like an instruction manual. Rather, they exist to help you anticipate and prepare for the future. Long-term planning is an art, not a science. To engage in long-term scenario planning, follow these basic rules:
- Name your scenarios with short, catchy titles to make them memorable.[21]
- Remember that you are not engaged in predicting the future but creating plausible scenarios.[22]
- Because you are not predicting a particular future, multiple stories (2 to 6) are necessary.[23]
- Use these stories to ask the right questions in order to prepare for the future.[24]
- Look for what is likely based on the trends, but don’t rule out any legitimate possibilities.[25]
Scenario Planning for Hurricane Matthew
Ordinary people chose to follow particular scenarios as they planned for the hurricane. Some ignored it, some prepared, and others avoided it. Here are a few of the more common scenarios:
- The Ostrich: In this scenario, you are either not paying attention or are in denial. You hope that nothing will happen, but hope is not evidence.
- The Boy Scout: In this scenario, you do not know whether something will happen, but you prepare to ride out the storm. You plan ahead and stock up on batteries, charcoal, and perhaps toilet paper.
- First to Flee: In this scenario, you reason that if something happens and you must evacuate, you will be in competition for hotel rooms with a million other evacuees. You are not buying water; you are filling your gas tank and arranging your predetermined hotel room 5 hours away before displaced persons from Florida, Southeast Georgia, and the South Carolina coast beat you to it.
What Happened Next
As hurricane Matthew was making landfall over Jacksonville, Florida, we started to get rain in Charleston. This was Friday afternoon, October 7th. By midnight, the rain and the wind had picked up. At 7 AM, Matthew made landfall over Charleston. By this point it had reduced to a Cat 1 and by the afternoon it had passed. We lost power on Saturday and Sunday, but we were prepared.
What is important to understand is that when the crisis comes, you don’t want to be thinking up your plans. You want to execute—that will be the topic of our next lesson.
At this point you may be thinking something like: “All this talk about scenario planning is interesting, but how does it apply to my business? After all, Royal Dutch Shell is the world’s 5th largest company according to Fortune’s Global 500[26] and I am on the other end of the spectrum.” But you can use scenario planning at any level.
As Peter Schwartz explained, “Though scenarios have been used mostly by huge corporations such as Shell and AT&T, small businesses are even more vulnerable to the kinds of surprises and uncertainties that often overwhelm the plans of giants.”[27]
How can you use scenario planning? What does the future look like for your business? What will you do if the bottom falls out of the economy or a competitor builds a better mousetrap and dominates your industry, or an unexpected war breaks out? What scenarios can you construct that will help you weather the storms? In the Virginia Ratification convention, James Madison noted that, “The best way to avoid danger is to be in a capacity to withstand it.”[28] Are you in in a capacity to withstand what may come?
Actionable items:
Construct 3-5 scenarios that affect your business. Name them and present the alternative futures that each represents:
1.
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2.
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3.
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4.
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5.
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End Notes
[1] http://www.livescience.com/56361-why-hurricane-matthew-strong.html
[2] Charleston South Carolina’s history with tropical systems. (n.d.). Hurricanecity.com. Retrieved from http://www.hurricanecity.com/city/charleston.htm
[3] Cann, A. (2010). Scenario-based strategy planning in the U.S. Army Corps of Engineers Civil Works program. Institute for Water Resources. U.S. Army Corps of Engineers. Retrieved from http://www.iwr.usace.army.mil/Portals/70/docs/iwrreports/Scenario-BasedStrategicPlanning.pdf
[4] The waning nuclear deterrent. (1961). Time, 77(1), 16-17.
[5] Kleiner, A. (2003, Feb 12). The man who saw the future. Strategy+Business.com. Retrieved from http://www.strategy-business.com/article/8220?gko=0d07f
[6] The waning nuclear deterrent. (1961). Time, 77(1), 16-17.
[7] Kleiner, A. (2003, Feb 12). The man who saw the future. Strategy+Business.com. Retrieved from http://www.strategy-business.com/article/8220?gko=0d07f
[8] Wilkinson, A. & Kupers, R. (2013). Living in the futures. Harvard business review. Retrieved from https://hbr.org/2013/05/living-in-the-futures
[9] Wilkinson, A. & Kupers, R. (2013). Living in the futures. Harvard business review. Retrieved from https://hbr.org/2013/05/living-in-the-futures
[10] Finnegan, S. (2002). Middle Eastern Oil: An historical perspective and outlook. Free Republic. Retrieved from http://www.freerepublic.com/focus/news/918168/posts
[11] Oil Embargo, 1973-1974. (n.d.). Department of State. Retrieved from https://history.state.gov/milestones/1969-1976/oil-embargo
[12] Corbett, M. (2013, November 22). Oil Shock of 1973-1974. FederalReserveHistory.org Retrieved from http://www.federalreservehistory.org/Events/DetailView/36
[13] 40 Years of Shell Scenarios (2013). Shell.com. Retrieved from http://s05.static-shell.com/content/dam/shell-new/local/corporate/corporate/downloads/pdf/shell-scenarios-40yearsbook080213.pdf
[14] Kleiner, A. (2003, Feb 12). The man who saw the future. Strategy+Business.com. Retrieved from http://www.strategy-business.com/article/8220?gko=0d07f
[15] Wack, P. (1985). Scenarios: Uncharted waters ahead. Harvard Business Review. Retrieved from https://hbr.org/1985/09/scenarios-uncharted-waters-ahead
[16] Wack, P. (1985). Scenarios: Uncharted waters ahead. Harvard Business Review. Retrieved from https://hbr.org/1985/09/scenarios-uncharted-waters-ahead
[17] Wilkinson, A. & Kupers, R. (2013). Living in the futures. Harvard business review. Retrieved from https://hbr.org/2013/05/living-in-the-futures
[18] Wack, P. (1985). Scenarios: Uncharted waters ahead. Harvard Business Review. Retrieved from https://hbr.org/1985/09/scenarios-uncharted-waters-ahead
[19] Roxburgh, C. (2009). The use and abuse of scenarios. McKinsey&Company. Retrieved from http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-use-and-abuse-of-scenarios
[20] Roxburgh, C. (2009). The use and abuse of scenarios. McKinsey&Company. Retrieved from http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-use-and-abuse-of-scenarios
[21] Roxburgh, C. (2009). The use and abuse of scenarios. McKinsey&Company. Retrieved from http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-use-and-abuse-of-scenarios
[22] Wilkinson, A. & Kupers, R. (2013). Living in the futures. Harvard business review. Retrieved from https://hbr.org/2013/05/living-in-the-futures
[23] Wilkinson, A. & Kupers, R. (2013). Living in the futures. Harvard business review. Retrieved from https://hbr.org/2013/05/living-in-the-futures
[24] Wilkinson, A. & Kupers, R. (2013). Living in the futures. Harvard business review. Retrieved from https://hbr.org/2013/05/living-in-the-futures
[25] Roxburgh, C. (2009). The use and abuse of scenarios. McKinsey&Company. Retrieved from http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-use-and-abuse-of-scenarios
[26] Fortune Global 500 (n.d.). Fortune. Retrieved from http://beta.fortune.com/global500/
[27] Schwartz, P. (1996). The art of the long view: Paths to strategic insight for yourself and your company. New York: Doubleday. (p. 16)
[28] Elliot, J. (1828). The debates, resolutions, and other proceedings in Convention on the adoption of the Federal Constitution as recommended by the General Convention at Philadelphia, 1787. (Volume II). Washington, D.C. (p. 238).