Transcript U of L Mgt 4451 Risk and ScenariosPresentation.ppt

Effective Planning & Risk
Management in an Uncertain
Business Environment
Risk Management & Scenario Planning
Terry Harbottle
University of Lethbridge
Harbottle Consulting
Key Objectives of the Evening
• Understand the purpose and role of
scenarios in strategic planning and risk
management
• Understand the types of issues and
problems for which scenarios are most
valuable
• Understand the basic methodology /
process in developing scenarios
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A Framework for Integrated Risk Management
Strategic
-technology & information
- knowledge management
-industry value chain transformation
-business model
Environmental Risk
-environmental disasters
-changing environmental regulations
Organization wide
Risk
Identification Impact
Response
Operating Risks
-distribution networks
-manufacturing –gas processing
Commercial Risks
- new competitor(s)
- customer service expectations
- new pricing models
- supply chain management
Market & Credit Risk
-price - interest & fx. rate
-commodity price
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Strategic Management - Context
Internal
Resources, capabilities &
competencies
Forces
(Little or no
Influence )
The World
Financial
The Industry
Communities
Customers
Social
Economic
Organization
Political
Technological
Environmental
Suppliers
Competitors
Politicians
Regulators
Factors
& Actors
(Some Influence)
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Scenarios & Planning … A History
Do we need a strategic plan?
Denial
Leave it to
the Kremlin
1950
Acceptance
The importance
of looking
ahead
1960
Frustration
The impossibility
of predicting
1970
1980
Solution
The rise of
scenario
planning
1990
Integration
Integration
with strategic
change
management
2000
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Strategic Planning Process
Vision
Mission &
Values
Goals &
Objectives
Strategic
Options
Strategy
Development
Implementation &
Evaluation
Feedback & Learning
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Scenarios In Strategic Planning
Future
Business
Environment
(Scenarios)
Vision
Mission
Goals
Learning
& Change
Competencies
Competition
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Scenarios in Strategic Management
Process
Scenarios
Business
Environment
Analysis
5 Year Business
Plans/Budgets
Strategy
Formulation
Management
of Business
Strategy
Implementation
Learning
Performance
Evaluation
Management
of Change
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Why Plan?
• Is the future predictable?
• How do you think about the future?
• How do you plan for an uncertain future?
But plan you must …
“Failure to plan is planning to fail”
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The Illusion of Certainty
• “The phonograph is of no commercial value” Thomas
Edison, 1880
• “There is no reason for any individual to have a computer
in their home.” - Ken Olsen, President of DEC, 1977
• Internal sales forecasts for PCs for the 1980s: 295,000.
Actual sales for PCs in the 1980s: over 25,000,000 - IBM,
1979
• “Anyone who thinks the ANC is going to run South Africa is
living in cloud cuckoo land.” - Margaret Thatcher, 1987
• “They couldn’t hit an elephant at that dist…” - Last words of
General Sedgewick, 1864
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The Challenge of Uncertainty
Who would have guessed?
• The rise of the Internet?
• That long distance telephone calls would cost 5c per minute?
• That electricity would be deregulated and unbundled?
• That the “Standard Oil Trust” would be reunited?
• That a WTO meeting would lead to passionate riots?
• That Nortel faces de-listing from the NYSE?
• That Enron would vanish in 6 months?
• Recent Geo- political events
The future is not predictable, yet we must make decisions & act.
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Decisions and Consequences
“…Strategic planning does not deal with future
decisions but with the futurity of present
decisions…”
—Peter Drucker
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Expectations and Decisions
1970s Oil a declining resource
$100 / bbl inevitable
 Shale Oil
 Barents Sea
1980s Electricity demand growth
 Nuclear
1990s Mexican growth expected
Japan recovery
Asian growth inevitable
Internet business
 ’94 Crash
 Barings demise
 Thailand
 AOL/ Time Warner
2000s Electricity & gas prices
Technology “bubble”
Ethics & Leadership
California / Alberta
 Dot.com Collapse
 Enron / World Com
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Two Perspectives on the Future
Decisions based on Expectations
Future Uncertain
Future Predictable
Range of Futures
Consensus Future
Insight
Accuracy
Robust Strategies
Optimal Strategy
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Predictability & Uncertainty
Uncertainty
Degree
Forecasting
Scenario
Planning
Predictability
Time
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Scenarios… Examine Alternatives
Today
Scenario B
Area of
Plausible
Futures
Area of
Implausible
Futures
Today
Tomorrow
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Scenario Planning
‘
Risk Management and Opportunity
Identification
at the Strategic Level’
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A Scenario Is...
A story, an image, or a map of the future
and
An interpretation of the present
projected into the future
and
An internally consistent story about the path
from the present to a future horizon
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Scenarios = Alternative Futures
• Multiple
– views with different logics
• Qualitative
– dealing with complex structural change
• Objective
– plausible and internally consistent descriptions
• Focused
– key issues and uncertainties
• Open-ended
– outlines, not precise details
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Scenarios Involve Outside-In Thinking
Resources, capabilities &
competencies
Forces
(Little or no
Influence )
The World
Financial
The Industry
Communities
Customers
Social
Economic
Organization
Political
Technological
Environmental
Suppliers
Competitors
Politicians
Regulators
Factors
& Actors
(Some Influence)
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Scenarios and Systems Thinking
Systems
Visible Manifestations
Trends and
Combinations
Causal
Relationships
Scenarios
Events
Patterns
Structure
The Story
Characteristics
& Storylines
Scenario Logic
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Scenarios - Part of a Strategic
Process
Key Strategic Issues
Focal Question
Scenario Development
Implications
Strategy Development
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Value of Scenarios
• Shared articulation of alternative futures
• Coherent “mental maps” of the future
• Analysis of current environment
• Context for developing and evaluating strategy
• Encourage adaptation to change
• Emphasize uncertainty and the need for flexibility
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Features of a Good Scenario
• Plausible
• Recognizable from the signals of the present
• Creative in exploring new ground and ideas
• Relevant and significant to the organization
• Internally consistent
• Challenging
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Developing Scenarios
1. Focal Issue
2. Key Factors
3. Environmental
Forces
8. Early Indicators
5. Scenario Logics
4. Critical
Uncertainties
7. Implications
6. Scenarios
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Scenario Process in Pictures
Forces
Uncertainties
Characteristics
Paths
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Scenarios Ask the Right Question...
“The only relevant discussions about the future are
where we succeed in shifting the question from
whether something will happen to what we would
do if it did happen.”
Arie de Geus
Shell Group Planning
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Key Points
• Scenarios are descriptions of alternative futures
• Scenarios are focused on key issues and
uncertainties facing the organization
• Scenarios are the output of an interactive and
creative process designed to gain insight not
prediction
• Scenarios are part of a larger strategic process
contributing to enhanced strategic thinking,
learning, and decision making
• Scenarios planning is particularly valuable in
turbulent environments facing structural change
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Future of the Railway Industry – A Case Study
The purpose of this case study is to provide an example
based on a real scenario project. It is not a model case.
Timing and logistics force modifications in the 8-step
process. Some worked, some didn’t. All were valuable
in learning more about the challenge and reward of
developing and applying scenarios to organizations.
The viewgraphs to follow trace through each step in
the process.
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Is a Railway Example Relevant?
• The railway industry has a number of distinctive
characteristics. Do these have any relevance to other
industries?
– The industry is very capital intensive
– The industry is concentrated into a small number of major
companies and independents
– The industry is driven by the economy and subject to political
intervention
– The industry competes across RR’s and with other “modes” (e.g.
truck vs. rail) both domestically and internationally
– The industry is increasingly impacted by technological change
and lack of skilled workers
– The industry has much to learn from the experience of others
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Scenario Interview Questions
What are the issues on the minds of managers? What are the strategic issues
the scenarios should address? Try some of these questions in your company.
• Past Changes – What has changed over the past 10 years that has had a
significant impact on the industry / company?
• Lessons from the Past – What has made the company successful in the past?
What lessons do we need to remember? What do we need to forget?
• Current Constraints – What things need to be changed for the company to be
successful in the future? What are the barriers to innovation and change?
• Critical Decisions – What important decisions are on the immediate horizon? What
important decisions are being ignored that should be addressed?
• Dark Spot – There is a dark spot on the horizon. It is not here and now but could
have a major impact on the company / industry in the future. What is it?
• Good Future – If you looked back 10 years hence and the company had been very
successful, what went right? What does a good future look like and what needs to
happen for that good future to occur?
• Oracle – If you could spend time with an oracle or clairvoyant who knew the future,
what question would you ask? What would you really like to know?
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Developing the “Focal Question”
The focal question identifies:
• The key strategic issue facing the company / organization.
• The key decision facing the company.
• The key question you would like to answer.
The focal question should:
• Focus on the company specifically (not the future of the world).
• Highlight the key strategic question (e.g. growth, profitability, industry structure,
competitive position, customer relations, etc.).
• Focus on a single concern (not compound issues).
Examples
• How can ABC penetrate and gain dominance in market W?
• How can LMN maximize growth opportunities?
• How can XYZ strengthen customer relationships?
• How can increase long-term profitability?
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Interviews & Focal Question - RR Example
• Issues Emerging from Interviews
–
–
–
–
–
–
–
Railroad mergers
New transport regulation
New trade flows
Truck competition
Agricultural policies
Customer industries (coal, paper, grain, steel, autos)
Union power
• Focal Question
– Can Railco improve its competitive position and capture
growth?
Dilemma: Short term cost or long term growth? Unable to resolve.
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Factors and Forces
All organizations are embedded in a larger context. The accompanying chart distinguishes the
contextual environment (forces & factors) from the transaction space (actors). A key step in
scenario development is to identify the forces driving change in the external environment.
One approach in identifying major driving forces / factors in a workshop involves 3 steps.
1) “Take 4 or 5 minutes by yourself and identify 4 or 5 factors or forces (no real distinction is
needed) which could impact the focal question.”
2) Go around the room and have each person describe the forces / factors they identified.
Summarize to 4 or 5 words and write them on large post-it notes.
3) Using volunteers, sort the post-it notes into clusters around common themes. Do not use a predefined framework. Select notes randomly and look for another with a common connection, etc.
Build up between 7 and 10 clusters. There should be no more than 10 post-it note ideas per
cluster. Name the clusters reflecting the underlying theme.
The cluster themes may be interpreted as the “forces” driving future change. They also
represent a framework for describing the future. Each “force” must be included in all of your
scenario descriptions although with varying interpretations and importance.
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Context of the Firm
Forces
(Little or no
Influence )
Contextual Environment
Financial
Transaction Space
Social
Customers
Economic
“Firm”
Communities
Political
Regulators
Technological
Environmental
Suppliers
Competitors
Politicians
Factors
& Actors
(Some Influence)
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Key Factors & Forces - RR Example
Process
• Brainstormed factors and
forces
• Grouped into clusters
• Clusters labeled to reflect
major theme / force
Factors & Forces (from clusters)
• Macro-economics
• Global / Asian growth
• Rail performance & competition
• Customer industries
• Rail industry restructuring
• Truck competition
• Labour
• Regulation & Politics
• Ports & Water
• Environment
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Importance and Uncertainty
Forces
Importance
Uncertainty
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
______________________
This chart shows one approach to identifying “critical uncertainties”. These are forces which are both important
and uncertain. Uncertainty means either that they have a wide range of possible outcomes, and hence are
uncertain, or the impact of the driving force has a number of different possible impacts (e.g., technological
change may be uncertain because there is a range of possible new technologies OR because the impacts on
society are highly uncertain)
The task is to rank (or rate) the forces on importance and uncertainty. This can be done in a group by allocating
votes among participants (e.g., 3 votes for each participant) or by rating each force (1 – 5 scale) to identify the
two which are most important and uncertain. The vote should narrow the choice but you should leave room for
discussion before selecting 2 forces as the critical uncertainties.
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Critical Uncertainties - Rating
Importance & Uncertainty
Participants allocated 5 votes each for importance & uncertainty
Macro-economics
Global / Asian Growth
Rail Performance & Competition
Customer Industries
Rail Industry Restructuring
Truck Competition
Labour
Regulation & Politics
Ports & Water
Environment
Importance
6
3
8
11
5
3
4
2
2
1
Uncertainty
14
2
0
6
4
1
6
9
1
2
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Critical Uncertainties - Refining the
Definitions
• Macro-economics (rate and structure of growth) was immediately
identified as a critical uncertainty; Global / Asian growth could be
incorporated into this dimension.
• Customer industries was a second candidate, but this appeared to
be closely linked to macro-economics / growth
• Was rail performance and competition predetermined (I.e. zero
uncertainty)? When we unpacked this cluster it became evident
that performance pressures were “inevitable” but not so clear.
• A second critical uncertainty emerged around competition and
industry structure, which appeared interesting and challenging.
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Example of a Cluster
Rail Competition and Performance
•
•
•
•
•
•
•
•
•
•
Improving asset utilization
Railroad reliability
Seamless intermodal service
Ability to handle information
Rail track / operation separation
Seasonal operating difficulties
Rising customer expectations
Increasing rail to rail competition
Move to schedule services
Info systems in railroads
A wide array of
factors grouped
into a single cluster
Clusters help focus the process but can suppress critical factors
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Scenario Logics
The dimensions are the
critical uncertainties: label
the 2 axes. Then describe
the ends of the spectrum
(2 – 3 words or phrases)
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Scenario Logic Framework - RR
Example
Restrained Competition
Volatile
Nationalistic
Interventionist
Economic Growth
& Structure
Ind. Structure
Low Growth
Competition
Market Power
Scale & Consolidation
High Growth
Global
Technology
Productivity
Open Competition
Customer Driven
Market Share & Open Access
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Scenario Names & Characteristics
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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Scenario Logics - Railway Industry
•Contraction
•Stable Regulation
•Excess Capacity
Low Growth
Economic Growth
Stagnant Growth
•Desperate Customers
•Nationalistic
•Interventionist
Riding the Momentum
•Global Trade
•Consolidation
•Bulk commodities
& Structure
Industry Structure
Dinosaur Park
Competition
Restrained Competition
High Growth
Technology Forced
•Customer Demands
•Seamless Service
•Internal Pressure
Open Competition
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Other Examples – NA Mining
Closed
Divisive
Conflict
Distrust
Self-Interests
Money
Divides
Societal
Perfect
Storm
Economic Performance
High Growth
Prices & Productivity
New
Horizons
Values
Phoenix
Rising
Open
Inclusive
Holistic
Trust
Respect
Low Growth
Prices & Productivity
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Other Examples - Future of NAIT
Open Competition
Public
PROZACTIVITY
COMPETITIVE EDGE
• Political conflict
• Government directed
• Public driven
• Education controlled
• Open markets
• Consumer driven
• Expanded training
• Leading edge technology
• Government driven
• Social Responsibility
• Stability
• Education Integration
• Corporatist
• Business driven
• Partnerships
• Structured Learning
CONTROLLED
GROWTH
DALLAS
Private
Limited Competition
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Developing Storylines
Scenarios are stories, engaging, logical and challenging. Stories need a plot
through time. One way of developing the story through time is to have
participants describe events consistent with the scenario logics in 3 time
frames: near term, medium term and long term. Writing these as
newspaper headlines is one approach which can add fun and creativity to
the exercise (but can become trivial if you are not careful).
The descriptions should reinforce the overall logic of the scenario. They
provide useful material in writing the stories and in developing material. A
useful tool in developing the logic and story of a scenario is to map out the
logic. An example of a “logic map” for the railroad scenario “Riding the
Momentum” is shown in the next viewgraph.
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Logic Map for “Riding the Momentum”
Global
Growth
Rail
Consolidation
Lower Costs
& Market Power
Rising
Transport
Demand
Growth in
Truck Traffic
& Profits
Restrained
Competition
Increased
Profitability
Increased Investment
Ship / Rail Technology
Long Haul Focus
Mapping the
logic helps in
developing the
story through
time
Constrained Competition
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Writing & Communicating Scenarios
Scenario writing is an art. The written scenarios are intended to engage the mind of the reader. To draw
them into the future. To encourage them to explore new ideas. To think differently. The stories must be
logical, internally consistent and believable. The writer does not need to think through every detail.
Indeed, this is counterproductive. The scenarios are necessarily incomplete to let the reader add ideas
and examples from his / her experience.
There is tremendous opportunity to be creative in writing scenarios. Experiment. Try new things. Some
have used dialogue; some have used “newspapers”; some prefer “bullets” to written prose; some have
written in the future tense, present tense and past tense. (I prefer the past tense because stories seem
more real and believable when written as if they have already occurred. )
Some include the logic leading up to the critical uncertainties in their reports; some include an overview
before the stories (my preference); and others plunge right in. Some include both stories and “bullets”
using a “summary comparison table” to encourage comparison across the scenarios (see next
viewgraph). Scenarios should be grounded in recent events. The same event(s) may appear in all
scenarios but with different interpretations leading to distinctly different futures. This links the future to
alternative interpretations of the present and anchors the stories in reality that readers are currently
experiencing.
Written documents are only one form of communication. Presentations are another form. Others have
developed videos; and others have used actors to bring the scenarios alive – literally. The only limit is
writing and communication is your imagination (and budget).
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Summary Comparison Table
Characteristics
Scenario A
Tech Impact
+++
Globalization
Rapid
Scenario B
Scenario C
+
--
0
Slowing
Stable
Rising
Falling
Protection
Scenario D
Growth
Prices
Volatile
Policy
Regulated
Values
Authoritarian
Flat
Free Mkt
Liberal
Reregulated
Regulated
Tolerant
Intolerant
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Scenarios to Strategies
Scenarios
Windtunnelling
Windtunnelling
New
Strategies
Existing
Strategies
Implications
Strategic
Objectives
Strategic
Plans
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Scenarios as a Tool - Implications
Questions
• What are the threats and opportunities in each scenario?
• What factors are critical for success in each scenario?
 Deepen understanding of the scenarios
 Provide a broad context for more specific questions
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Scenarios as a Tool – Competitors,
Suppliers & Customers
• Who will be the major competitors in each scenario?
• How will these competitors respond to our new strategy?
• Could completely new competitors emerge in our business?
• What will be the impact on our relationship with suppliers?
• How will our customers change? What new needs will they
have in each scenario?
 Explicit consideration of key actors
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Scenarios as a Tool – Existing Strategies
“Windtunnelling” – How will our current strategies fly in the
future?
How would our existing strategies perform in each of the
scenarios?
What are the pros and cons?
What are the risks? Where are we vulnerable?
Will our current strategies meet our strategic objectives?
 Ensures articulation of existing strategies and objectives
 Forces managers to think through the consequences of
current strategies
 Encourages discussion of risks and rewards
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Scenarios as a Tool – Generating New
Strategies
If scenario A (B, C, ..) occurred, what should we do?
What strategies should we pursue?
Scenarios
Generate
New
Strategies
Evaluate
(Windtunnel)
Review
Objectives
 Forced generation of different strategies (lateral thinking)
 Active discussion of the consequences of specific choices
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