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LESSON 8 SCENARIO PLANNING

BBA312 – Decision Analysis

‘In time of rapid change, strategic failure is often caused by a crisis of perception (that is, the inability to see an emergent novel reality by being locked inside obsolete assumptions), particularly in large, well-run companies’

Pierre Wack

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

Source: https://www.armyupress.army.mil/Portals/7/military-review/Archives/English/MilitaryReview_20160831_art001.pdf

Assumptions of scenario planning 1. Managers are not able to make valid

assessments of probabilities of unique future events

2. Best guesses of the future may be wrong

3. Minority opinions should be allowed "airtime " .

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

What are scenarios?

• A scenario is not a forecast of the future -multiple scenarios are pen pictures encompassing a range of plausible futures

• Each scenario has an infinitesimal probability of occurrence, but the range of the set of scenarios is constructed to BOUND uncertainties seen to be inherent in the future

• Unlike probability judgments, scenarios highlight the reasoning underlying judgments about the future

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

More on scenarios

• A major focus is how the future can evolve from now to the horizon year

• Relationship between critical uncertainties, predetermined trends and behavior of actors are thought through.

• Decisions are then tested for robustness in the 'wind tunnel' of the set of scenarios.

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

Scenario construction: the extreme world method

1. Identify the issue of concern & horizon year 2. Identify current trends that have an impact on the issue of

concern 3. Identify critical uncertainties 4. Identify whether trends & uncertainties have a negative or

positive impact on issue of concern 5. Create extreme worlds 6. Add predetermined trends to both scenarios 7. Check for internal consistency 8. Add in actions of individuals & organizations

Examples of predetermined trends

Demographic: population growth, birth rates Technology: growth rates, production

capacity Political: power shifts, budget deficits Cultural: changing values, spending

patterns Economic: disposable incomes, investment

levels

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

Semiconductor trends & uncertainties example

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

(a) (b)

Semiconductor trends example

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

(a) (b)

Using scenarios in decision making: an illustrative idea for a business school

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

Testing the robustness of strategies against scenarios

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

An output of the driving forces method

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

Steps in scenario construction

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

Stakeholder structuring space (I)

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

Stakeholder structuring space (II)

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

When should a company use scenario planning?

1. When uncertainty is high 2. Too many costly surprises have occurred in

the past 3. Insufficient new opportunities are perceived

or generated 4. The industry has experienced significant

change, or is about to 5. Strong differences of opinion exist, each of

which has its merits

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

Typical outcomes of scenario planning

• “This is what we have to do” (developing new business opportunities)

• “We better think again” (understanding outcomes of plans better)

• “ We better watch those dots on the horizon” (perceiving weak signals of new

developments) • “We are in the right track”

(moving forward with more confidence)

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

Scenario storylines and strategic options

I. Flexible

II. Diversified

III. Insurable

BBA312 – Decision Analysis (Lesson 8) Dr Diego Navarra: [email protected]

• Handbook of Decision Analysis, by Gregory S. Parnell, Terry Bresnick, Steven N. Tani, and Eric R. Johnson (2013); Publisher John Wiley & Sons, 9

• Decision Analysis for Management Judgment, 4th ed., Goodwin & Wright, Chapter 16