MasterofBusinessAdministration BUMGT5926StrategyandManagementofChange BUMGT 5926 S dM f Ch

Workshop 2

Scenario Planning
Dr Abang Nawawi Dahlan
BSc (Hons) Malaya, MSc (Durham, England), DBA (SCU Australia)

Adjunct Professor of Strategic Management Adj tP f f St t i M t

 Describe how uncertainty can be managed in strategy Define Scenario and Scenario Planning Identify conditions in which scenario p planning is most appropriate g pp p Identify conditions in which scenario planning is NOT appropriate Outline the process of scenarios development Present a Illustrative case

Objectives

Reading Materials
Article:
Schoemaker, P. J. H (1995). Scenario Planning: A Tool for Strategic Thinking, Sloan Management Review, Winter, pp. 25-40, ISSN: 15329194. Wi 25 40 ISSN 15329194 Book: Ringland, G. (1998). Scenario Planning: Managing for the Future, New York: John Wiley. ISBN 047197790X. 047197790X

Additional R di Addi i l Readings:

Schoemaker, P. J. H (1991). When and How to Use Scenario Planning: A Heuristic Approach with Illustration, Journal of Illustration Forecasting, Vol. 10, 549-564. Burt, Burt G & Chermack T J (2008) Learning With Scenarios: Chermack, T.J (2008). Summary and Critical Issues, Advances in Developing Human Resources, http://adh.sagepub.com Tuna, C (2009). Theory & Practice: Pendulum Is Swinging Back on Scenario Planning. Wall Street Journal, New York, Jul 6, p. B6. Heicks, H (2010). Scenario Planning: Chinas airline industry in 2019. Tourism and Hospitality Research, vol.10, issue 1, p.71-77. Marren, P.B & Kennedy, P.J (2010). Scenario Planning for economic recovery: short term decision making in a recession. S i Strategy & L d hi vol 38, no. 1, pp.,11-16. Leadership, l 38 1 11 16

Lets recall .

The Roots f Competitive Advantage Th R t of C titi Ad t

Integration g

Business Level Strategies

Corporate Level Strategies

Diversification

CA

7S Framework New 7S Framework Organisational Learning Knowledge Management g g Ethics , Governance, CSR

SCA

To facilitate the development and use of distinctive competencies, managers must have the capacity to deal with uncertainty complexity, and intraorganizational conflict - a willingness to hold people accountable for their work and to be held accountable themselves.

Uncertainty is considered as not knowing what

issues, trends, decisions and events will make up tomorrow. Managers face uncertainty from a number of sources, including new proprietary technologies rapid changes in economic and political trends transformations in societal values shifts in customer demands Such factors interact with each other, thus increasing the ambiguity and complexity f i managers h bi it d l it facing as they try to steer their organization in an uncertain context.

Dr. Abdul Moyeen, Schoo of Business M ol

Interorganizational conflicts often surface when

decisions are made about which core competencies to nurture as well as how to nurture them.
CRICOS Provider Number 00103D

In today s environment particularly after the todays 2008 Economic Crisis, businesses express concern on the complexity and uncertainty of overwhelming proportion.
so many critical uncertainties were affecting so businesses that they needed a multivariate equation to make sense of things
Dr. Abdul Moyeen, Schoo of Business M ol

Businessweek, Don t - Bloomberg Businessweek Aug 2009 in the article Dont Oversimplify Your Scenarios (http://www.businessweek.com). Many Many executives misjudged issues such as what alters the financing of their customers purchase, or what their investors or lenders ultimate incentives are left many companies stranded in the fall of 2008 2008 The Black Swan: The Impact of the Highly Improbable. By Nicholas Taleb. Uncertainty exists in a dynamic environment.
CRICOS Provider Number 00103D

In response to uncertainties, firms seek to craft strategies that enhance strategic

flexibility.

Dr. Abdul Moyeen, Schoo of Business M ol

A strategy can be said to be flexible when it allows a firm to react to changing uncertainties by quickly changing course, or better still, allows a firm to position itself to take advantage of the resolution of uncertainty uncertainty.

CRICOS Provider Number 00103D

Dealing with uncertainties

Environmental analysis aims to collapse the many uncertainties confronting a firm into a small number of internally consistent scenarios of the future.

Dr. Abdul Moyeen, Schoo of Business M ol

The analysis of competitive rivalry and competitive dynamics helps firms understand how the effectiveness of their strategies can be ascertained. f th i t t i b t i d

Real options analysis quantitatively evaluating the role of uncertainty in firms investment decision. The options relate to growth, abandonment, switching, defer, compound (multiple options) options).

CRICOS Provider Number 00103D

From competitors to competitive dynamics

To gain an advantageous market position Competitors Engage in Competitive Rivalry Through competitive behaviour Competitive actions Competitive responses

Dr. Abdul Moyeen, Schoo of Business M ol

p y Competitive Dynamics Competitive actions and responses taken by all firms competing in a market
CRICOS Provider Number 00103D

What res sults?

A Model of Competitive Rivalry

Competitive Analysis Market Commonality R Resources similarity i il it

Drivers of Competitive Behaviour Awareness Motivation Ability y

Feedback
Dr. Abdul Moyeen, Schoo of Business M ol

Competitive Rivalry Lik lih d of Attack Likelihood f Att k First-mover incentives Organizational size Quality Likelihood of Response Type of competitive action Actors reputation M k td Market dependence d Outcomes Market position Financial performance
CRICOS Provider Number 00103D

Decision making biases influencing strategic decisions worsening uncertainties and complexities: p
1. Reliance on previously formed beliefs. Executives
bring a number of preconceived ideas into any decision process.

2. Focus on limited objectives instead of thinking broadly. Example, too much focus on budgetary controls
Dr. Abdul Moyeen, Schoo of Business M ol

may lead managers to focus on selected critical performance targets. 3. Exposure to limited decision alternatives. In an effort to simplify decision processes, executives tend to limit the number of alternatives for achieving a particular goal. 4. Insensitivity to outcome probabilities decision makers tend to be more influenced by the magnitude of the potential decision outcomes rather than the probability that they will occur. 5. Illusion of control overconfident or overoptimistic.
CRICOS Provider Number 00103D

 Dr. Abdul Moyeen, Schoo of Business M ol

By identifying basic trends and uncertainties, a manager can construct a series of scenarios that will help to compensate for the usual errors in decision making overconfidence, over-optimistic, over optimistic, under-estimation.

CRICOS Provider Number 00103D

Scenario planning p g
Scenario planning is an approach that has at its core, the exploration of uncertainty in the contextual environment, environment the insights generated from such exploration, and their link to the strategic development of the organization. By accepting the idea of uncertainty it is possible to open up the notion that more than one future is potentially open to an organization.

Therefore, scenario planning is an effective approach to bringing managers together to discuss their concerns and explore the factors creating uncertainty through the development of a number of plausible coherent internally plausible, consistent scenarios. This then reveals the antecedents and of potential outcomes of the factors creating uncertainty. Accordingly, thoughtful management recognizes such a situation and takes care of the strategic choices that they make given the consequences o suc choices an uncertain o d of such c o ces in a u ce ta world.

What is Scenario Planning?

Scenario planning is the art of using scenario in decision making A disciplined method for imagining possible futures A shared framework for strategic thinking Part of a process for generating and evaluating strategic options
.

Scenario Planning is the process of anticipating the future, based on the evaluation of the hints and clues from the world around us us.

Use of scenario planning rose following the 2001 attacks, to about 70% of , executives surveyed by consultants Bain & Co. in 2002, up from 30% in 1999 The Wall Street Journal, July 6, 2009. Scenario planning has enjoyed a recent upsurge in interest due to 2008 nearp global financial system and y collapse of the g the ensuing economic trauma of what has been called The Great Recession. - Marren & Kennedy, in Strategy and Leadership,
2010.

Four ways in which scenario p y planning g can be understood:

Making sense Improving of a puzzling organizational situation anticipation Adaptive organizational learning

Developing D l i strategy

Source: Adapted from Van der Heijden et al., 2002, p. 233

Critical drivers for anticipating scenario

Growth. This is obviously of high importance to business
organizations
How fast can the world economy plausibly recover (or decline or

stagnate) over the next three years? Plausible scenarios range from moderately high, stable growth, to a sudden downward spiral precipitated by external shocks (China crisis, major terror event, etc.). etc ) near-depression outlook, another scenario plays out the implications of a potential double dip recession made possible double dip recession, by excessive fiscal stimulus that leads to inflation scares and then the inevitable monetary and financial market retrenchment. Still another scenario describes a prolonged period of stagnant growth and political gridlock a US version, perhaps, of Japans , p 1990s lost decade, or another protracted recession like that of the Volcker period of 1980-1983.

Prices and inflation.

Concerns about the inflation impact of stimulus spending, especially with ongoing wars in Iraq p g, p y g g q and Afghanistan... And now Egypt, Libya, Syria, Jordan... Markedly higher inflation could appear sooner rather than later, Inflation will in turn shape many other key drivers: interest rates, Currency value, and real incomes, among others. th

Regulations.
Development of new regulations after the New Deal of the 1930s. At the close of 2009, the range of potential new regulatory activity just at the federal level is huge: Banking and finance, healthcare, the environment, real estate, consumer protection, social networks, to just name a few. New regulations after the 2008 Economic turmoil?

Global affairs.
In a globally integrated world, it is impossible to create credible scenarios, even short-term ones, without regard to , , g larger global relationships and commitments.

When is Scenario Planning Appropriate? A i t ?

Uncertainty is high Costly surprises have occurred in the past Corporate inertia The quality of strategic thinking is low The industry has experienced significant change or is about to The company wants a common language and framework without stifling diversity There are strong differences of opinion, with Th t diff f i i ith multiple opinions having merit

When it is NOT Appropriate?

When one, overwhelming, tidal wave is about to engulf an organisation or industry

Constructing Scenario
Two common errors in decision making are addressed:
Under-prediction (we are losing the war against cancer) and Over-prediction of change (robots don't yet outsmart us)

Scenario planning allows us to chart a middle ground. The challenge is to separate aspects you are very confident about from those that are largely uncertain. ncertain Think how hard it would have been a hundred years ago t i to imagine the factors that propelled society into i th f t th t ll d i t i t today's brave, new technological world where cars, airplanes, televisions, stereos, computers are commonplace. commonplace

It is not important to account for all the possible outcomes of each uncertainty; simplifying the possible outcomes is sufficient for scenario planning. For instance, you may want to think in terms of three possible interest rates (high, medium, and low) rather than hundreds of them. them The purpose is not to cover all possibilities, but to circumscribe them.

Since scenarios depict possible f t res it futures, makes sense to invite outsiders into the process, such as major customers, key suppliers, regulators, consultants, and academics, to develop scenarios. Or start with trends and scenarios that others have developed For example: developed. de Jong and Zalm's four global scenarios, Zalm s "global shift," "European renaissance," "global crisis," and "balanced growth. Future Strategy Groups The Miracle, False Dawn, Dawn Grinding it out, Global nightmare. out nightmare

Miracle:
Despite the predictions of almost all the experts, the US economy has rebounded from its near death experience of 2008 9 near-death experience 2008-9. Through a great deal of luck and some deft policy actions, economic growth has resumed in the United States after a short but painful recession. In mid 2011, employment is picking up markedly after a peak mid-2011 markedly, unemployment rate of 10.5 percent in the winter of 2009-2010. The federal government remains strongly involved in the banking g gy g sector, but there is already discussion of when an orderly (and, to taxpayers, maybe even profitable) exit might be arranged. Stimulus spending seems to have actually worked as advertised, and the much-maligned bailouts have been successful in averting catastrophe.

Spending on green projects and health care and a plausible green care, plausiblesounding grand bargain approach to the longer-term entitlement issues, have given this recovery legs. Even consumers have started to spend, with optimism causing spikes in auto and spend durable goods sales. Pent up Pent-up demand cannot be restrained now that confidence has made a true comeback. The prevailing attitude is one of wary relief and g p g y guarded optimism p could the good times be coming back so soon?

False Dawn:
The good news is that after trillions of dollars in stimulus spending, seemingly unending bail-outs for banks and car companies, and sweeping new financial regulations, the US economy is growing again and quite substantially. With employment rising, consumers are venturing back into auto showrooms and shopping malls. For many, rising prices are a call to buy now. CNBC declares that happy days are here again or at least again, around the corner. But clouds, not visible to everyone are gathering over the clouds everyone, horizon, as the effects of hyper-expansive fiscal and monetary policies stoke inflation and send tremors across global financial markets. markets

In response, the Fed has begun to jack up interest rates, so far without undermining the GDP growth, but the trend is clear and somewhat worrisome worrisome. Holders of US securities are whispering about an alternative reserve currency currency. Many respected economists still believe that growth will bring fiscal imbalances into line but others are less sanguine and see line, the current growth burst as dependent upon unsustainable levels of government spending. Many private investors, meanwhile, are waiting on the sidelines, worried over inflation, regulatory over-kill, and the possibility of a double dip recession. p

Grinding It Out:
There s Theres the widespread feeling that the economic crisis has passed passed, but that prosperity is not around the corner, not by a long shot. True, many key indicators are stabilizing and some sectors, notably exports, are starting to pull out of the economic mire. But a convincingly strong, broad-based recovery remains elusive. gy g, y Unemployment, which peaked at 14 percent in 2010, is still in g double digits. Many prominent economists believe that the initial stimulus was inadequate to turn the tide of a shrinking economy. Others blame the US administration for failing to act decisively on quarantining the toxic assets that have weighed heavily on the US financial system. fi i l t

Whatever the root causes, neither asset values nor bank credit has recovered sufficiently to p p the economy forward. y propel y Consumers are stuck in a defensive mode and the moment for the federal government to step up with aggressive, effective measures g p p gg seems to have passed. By no means is all the news gloomy the fiscal health of the US is notably improving and the inflation that is afflicting its major trade partners has been controlled. This fact has not gone unnoticed in global financial markets, with increasing numbers of analysts seeing light and opportunity at the end of the tunnel. f

Global Ni ht Gl b l Nightmare:
Remember the good old days of 2009? Hard as it may be to believe, believe that is a commonly heard refrain nowadays. The time when the United States could afford to focus inward on solving its own massive problems is long gone. y g , y g Two years ago, we were merely bickering over whether and whom to bail out. Now that recession has turned conclusively into a 21st century form of depression, and with renewed oil shocks, wars, and the threat of more terrorism, we dont know where to look next. By 2011, the US is struggling with deflation, trade wars, actual wars, and bleak prospects for sustained stabilization and recovery.

Americans are curtailing their spending spending. The Fed and the Treasury are completely out of policy bullets other than printing money to wage war. But a surprising number war of firms are hanging on. The most agile are finding ways to thrive as new forms of commerce and financial transactions evolve and some old practices like counter-trade and import substitution enjoy a revival. But for most, surviving these harsh times is the best that can be hoped for.

Scenario Planning Process

Define the scope of the analysis Identify the key trends/drivers for change h Bring drivers together into scenario themes Reduce the number of scenarios Elaborate the story, check for El b t th t h kf consistency and plausibility Identify the issues arising

Drivers of Change

Basic Trends

Key Uncertainties

Rules of Interaction

Multiple Scenarios

Building Blocks for Scenarios

Levels of Scenario Analysis

The Process for Developing Scenarios

8 7 6 5 4 3 2 1

10

Evolve toward Decision Scenarios

Develop Quantitative Models

Identify Research Needs

Develop Learning Scenarios Check for Consistency and Plausibility

Construct Initial Scenario Themes Identify Key Uncertainties Identify Basic Trends

Identify the major Stakeholders Define the Scope

Define the Scope

Set the time frame and scope of analysis l i

Time frame can depend on a number of factors: the rate of technology change change, product life cycles, political elections, co pet to s p a competitors' planning horizons, a d so forth. g o o s, and ot Typical timeframe is 5 to 8 years.
Look back over the changes that have occurred in your department organization, industry region department, organization industry, region, country and even the world. Next, ask what knowledge would be of greatest value to the organization that far down the road.

 Scope of analysis
in terms of products, markets, geographic areas, and technologies Ideally, groups (e.g., the whole management team) will participate in this part of the process. process Their unstructured concerns and anxieties are often good starting points for scenario planning.

Identify the major Stakeholders

Ask: Who will have an interest in these issues? Who will be affected by them? Who could influence them?

Obvious stakeholders include

customers, suppliers, competitors, employees, shareholders, government, society and so forth. ,g , y

Identify their current roles, interests, and power positions, and ask how they have changed over time and why. For example, in the environmental area, judges,

scientists, lawyers, journalists, and regulators are , y ,j , g

increasingly powerful stakeholders.

Identify Basic Trends y

What political, economic societal, technological, political economic, societal technological legal, and industry trends are sure to affect the issues you identified in step one?
For example, a company concerned with the future of environmental issues might identify trends such as increasing environmental regulation, continuing growth of environmental interest groups, scientific advances in molecular biology, and an increasingly liberal judiciary due to a change of government.

Briefly explain each trend including how and why trend, it exerts its influence on your organization. List each trend on a chart or so called influence so-called influence diagram to identify its impact on your present strategy as positive, negative, or uncertain. Everyone participating in the process must agree that these trends will continue.

Key Trends and Drivers 1

Economic/Demographic
Increasingly educated, sophisticated gy p and demanding customers Growth in SE Asia/India and China with an expanding middle class ith di iddl l Two billion teenagers worldwide, most in Asia d Latin America i A i and L ti A i What else.

Key Trends and Drivers 2

Technology-related trends
Bandwidth explosion and development of the internet Processing power increases What else.

Key Trends and Drivers 3

Growth Prices and Inflation Regulations R l ti Global Affairs

Identify Key Uncertainties

What events, whose outcomes are uncertain, will significantly affect the issues we are concerned with?
Consider economic, political, societal, technological, legal, and industry factors. Will there be a new ruling government next? Will a particular piece of legislation be passed? Will a new technology be developed? What will consumers value in the future? For each uncertainty, determine possible outcomes (e.g., Will new l i l ti passed or not passed with th ( legislation d t d ith the new government?; technology developed or not developed? whether consumers value service or price).

Keep these outcomes simple, with a few possibilities.

You may also want to identify relationships among y y p g these uncertainties, since not all combinations may occur. For example, if one economic uncertainty is "level of unemployment" and the other "level of inflation, then the combination of full employment and zero inflation may be ruled out as implausible.

Construct Initial Scenario Themes

Once you identify trends and uncertainties, you have the main ingredients for scenario construction. Three approaches may be adopted:
1 A simple approach is to

identify extreme worlds by putting all positive ld b tti ll iti elements in one and all negatives in another.

Note that positive or negative is defined here relative t th current strategy. What seems to l ti to the t t t Wh t t be a negative scenario at first may later prove to be one of innovation and hidden opportunity.

Alternatively, the various strings of possible outcomes (which jointly define a scenario) can be clustered around high versus low high continuity, degree of preparedness, turmoil, and so on. Another method for finding some initial themes is to select the top two uncertainties and cross them especially t i ti d th i ll if some uncertainties are clearly more important than others.

Check for Consistency and Plausibility

The simple worlds you have just made are not yet full-fledged scenarios, because they p probably have internal inconsistencies or lack a y compelling story line. Three tests of internal consistency:
1 Are the trends compatible within the chosen time frame? If not, remove the trends that don't fit. 2 Do the scenarios combine outcomes of uncertainties that indeed go together? Example: full employment and zero inflation do not go together, so eliminate that possible pairing or scenario. ibl ii i

3 Are the major stakeholders placed in positions they

do not like and can change?

For example, OPEC may not tolerate low oil prices for very long.) If so, your scenario will evolve into another one Try to one. describe this end scenario, which is more stable. The stakeholder test is especially critical when b ildi macroscenarios i h building i involving l i governments, international organizations (e.g., the International Monetary Fund, the World Bank, the United Nations) or strong interest groups like OPEC."

Develop Learning Scenarios

From this process of constructing simple scenarios and checking them for consistency, some general themes should y, g emerge. y g y Identify themes that are strategically relevant and then organize the possible outcomes and trends around them. Name the scenarios. A scenario is a story; by capturing its essence in a title, you make the story easy to follow and remember.

Some past titles titles..

"Superfund II" p "Environmentalists Lose" "Compromise" Global shift Global shift" "European Renaissance" Global crisis" Balanced Growth Balanced Growth The Miracle False Dawn Grinding G i di it out t Global nightmare

Identify Research Needs y

Conduct further research to flesh out your understanding of uncertainties and trends
The learning scenarios should help you find your blindspots. For example: Do you really understand how a key stakeholder (say, a regulator or judge) will behave in a given scenario? Consider the developments in multimedia, where personal computers, telecommunication, entertainment, databases, and television are t t i t d t b dt l i i merging into new products and markets. A company like Apple Computer traditionally Computer, focused on making personal computers, must now master new domains, such as electronic miniaturization (to exploit portability), artificial intelligence (to make PCs smarter), information highways (to connect).

Develop Quantitative Models

Quantify using appropriate models, models the consequences of various scenarios in terms of p price behaviour, consumer , preferences, market share, etc.
For example, Royal Dutch/Shell has developed a model that keeps oil prices, inflation, GNP growth, taxes, oil inventories, interest rates, and so f th in plausible b l forth i l ibl balances.

10 Evolve toward Decision Scenarios

Converge toward scenarios that will be eventually used to test your strategies and generate new ideas. Retrace steps one through eight to see if the learning scenarios (and any quantitative models from step nine) address the real issues facing the company. p y Are these the scenarios that you want to give others in the organization to spur their creativity or help them appreciate better the y p pp up- and downside risks in various strategies? y you are done. If yes, y If not, repeat the steps and refocus your scenarios the way an artist judges the balance and focal point in a painting. Half of this judgment is art, half is science.

How can you determine if your final scenarios are any good?
Check for relevance. To have impact, your scenarios should connect directly with the mental maps and concerns of the users (e.g., senior executives, middle managers, etc.). g ) The scenarios should be internally consistent to be effective. They should be archetypal (generic). That is, they should describe generically different futures rather than variations on one theme. Each scenario ideally should describe an equilibrium or a state in which the system might exist for some length of time, not shortlived.

Illustrative Ill strati e case on Scenario Planning

Interpublic Group (IPG)

An Advetising Agency

Presentation dates: P t ti d t 17th September 2011 Group Report: 2rd S t b 2011 September

Group presentation (20%)

Each group of FOUR will select an organisation or a strategic business unit, ideally one that is personally familiar to at least one team member, that you have enough information available in order to undertake this analysis. Each member of the group will present the case using powerpoint slides (not more than 5 slides) as follows:

Member 1

1. Background of the organisation or strategic business unit. 2. The scope of analysis and key stakeholders 3. Key trends 4. Key uncertainties 5. The scenario constructs (to include explanation of consistency and plausibility and the implications for the business organization of each scenario). 6. Conclusion - The implications for the business organization of each scenario. scenario

Member 2

Member 3

Member 4

THE GROUPS SO FAR .

Athiswary Govindan (L) Shree Abelallah Mtumwa Ameir Thaheer Mahboobeh Behnamzad (L) Sun Dingmei Zhang Yu Chen Ye Wei

Lee Khong Chuen (L) Ting Kian Fatt g Tan Xin Li LV Si Rui

Suzana Zorkeflee

1 Background of the Organization

The advertising industry has experienced a flurry of takeovers and mergers. Giant agencies such as Interpublic Group (IPG), Saatchi g p p( ), & Saatchi, the Omnicom Group, emerged from this development. In the distant past, advertising agencies had been mostly order takers that simply executed ad placement and charge a 15% commission for such placements. High media costs in the 1970s and 1980s for television created excessive commissions for agencies. However, improvements in communications technology and the emergence of mass media reduced the agency's placement costs. ' l t t

Around 1960, clients began to view the continual addition of services as not worth the implicit price they were paying via the 15 percent commission commission. Thus the 12 percent to 15 percent commission structure came under pressure resulting in reductions in the pressure, percentage (to as low as 5 percent to 7 percent) or fee-for-service arrangements. To justify their higher profit margins, agencies started to add services for clients such as more sophisticated designs, market research, and elaborate pitches for g , , p new business. But IPG needed to manage the uncertainties and decided g to develop scenarios that may emerge during the next few years.

To construct the scenario, IPG used Schoemakers steps as follows: Define the scope Identify the major stakeholders Identify the key trends Identify key uncertainties construct the scenarios examine the implications for the business organization of each scenario.

1. Defining the scope 2

This involves identifying the relevant issues by studying the past, especially its sources of turmoil and change. Table 1 reminds us of the scope and depth of changes in advertising during the past six decades decades. A seven-year time frame is considered.
Justification: Changes happen fairly quickly in the fickle world of advertising, so anything beyond seven years is quite uncertain and hard to act on. As assets become more specialized ( (meaning that their salvage value is low relative to their costs), it pays to think longer term. For example, Royal Dutch/Shell's scenarios project fifteen years ahead given the specialized nature ahead, of their investments. Ad agencies, in contrast, are more like speedboats than tankers. They are agile and opportunistic; they can hire and fire quickly and continually adapt to their clients. d t t th i li t

3 Identifying key stakeholders

Who will have an interest in these issues? Who will be affected by them? Who could influence them? Obvious stakeholders include

customers, suppliers, competitors, employees, shareholders, government shareholders government, society and so forth forth.
Identify their current roles, interests, and power positions, and ask how they have changed over time and why why.

Identifying key trends.

The Th question was whether these trends were mutually ti h th th t d t ll consistent within the five- to ten-year time frame and what support existed for each. We ask the following questions: What was the evidence that food consumer and high tech food, consumer, high-tech products are most adaptable to global marketing? Why might fee compensation, customary in consulting, legal, legal and accounting services be less profitable to services, advertising agencies than a commission structure, which is common in real estate brokerage, sports promotion, and book writing? By asking such questions, we arrived at the trends in Table y good scenario 2. Such additional analyses are critical to g work, since they challenge and stretch people's thinking.

5 Step Four Identify key uncertainties

After trend analysis we needed to identify the critical analysis, uncertainties. Part A in Table 3 lists seven identified by industry respondents and our own analysis. Again, these presumed uncertainties should be examined further. For example, one uncertainty was whether advertisers would remain sensitive to agency account conflicts (when an agency serves competing clients). Yet agency account conflict appears not to be an issue in Spain or for Dentsu in Japan, which suggests that the assumptions underlying this uncertainty needed to be reconsidered. It was important that each person identify only a few key uncertainties, so we could get to the core issues.

Next we addressed the interrelationships among the uncertainties. We asked whether a "yes" answer to say U2 yes to, say, affects the chance of a "yes" answer for U3 or another uncertainty (see Part B, Table 3). If the chance of a "yes goes up, the correlation between U2 and U3 is positive (+); If the chance goes down, the correlation is negative ( ), (-), and otherwise it is zero (0) or indeterminate (?). ( ) ( ) Since mega-agencies can compete better if their clients are less concerned about potential account conflicts, the correlation between U2 and U3 is positive.

Conversely, the less deductible advertising expenses are, the more likely clients may do it inhouse as part or general expenses, resulting in a negative correlation for U4 and U7. However, it is not clear how some of the other elements might be correlated (e.g., U1 and U3)' and sometimes there is no correlation at all (e.g.,between U1 and U7).

This i l Thi simple matrix i a practical way t i is ti l for assessing a scenario's consistency. i t

Construct initial scenario themes

We arrived at three possible scenarios for the advertising industry, focusing on the question of global agency viability. These are also called Learning Learning scenarios. These are scenarios which require further study and shaping before becoming final decision scenarios. scenarios We placed the positive and negative outcomes of the seven uncertainties into different scenarios to obtain the extremes and added a middle-of-the road scenario. Figure 1 profiles each scenario in terms of the weight given to a "yes" answer for each uncertainty.

Each scenario poses a different set of strategic challenges and requisite core capabilities. Exploring them turns the initial learning scenarios into fi l d i i scenarios. i final decision i We give each scenario a title, just like a movie, and then explain the scenarios. The globalization scenario g Requires a strong emphasis on integrative marketing. First the account manager has to learn how First, to sell multiple services at multiple levels within the client organization. Second the agency's team has to learn Second, agency s how to approach the client's problems from a marketing perspective rather than just an advertising one. d ti i

Yet the global marketplace requires integrated marketing solutions that combine advertising with direct mail, channel, and trade management. And such strategies can be devised only if the market itself is thoroughly understood, which requires stronger market research.

The "dinosaur" scenario

The mega-agencies will not like the "dinosaur" world, so a q y g p critical question is how they might respond if this scenario emerged.

The "Polarization is 'Hot'" scenario

It combined two outcomes (a "yes" for U2 and a clear "no" for U3), even though they are presumably positively correlated. Such tension or slight inconsistency should be an impetus for further analysis of the scenarios, perhaps through quantitative modeling.

IPA is vigorously pursuing the global agency concept, putting its faith in the first scenario. It is upgrading the quality of its local management teams, reducing barriers to cross-agency and cross-country collaboration, building financial muscle, and pursuing global clients clients. But as its motto ("Think global, act local ) ( Think local") indicates, IPA is also following the second scenario. IPA is looking for signals that the third might emerge emerge.

Implications for business

IPA must decide for itself, once it constructs scenarios, whether

to gamble the future on one scenario, stay flexible to exploit multiple scenarios, develop exit routes in case things sour, or hedge the risk through strategic pa t e g or diversification. partnering o d e s cat o
Whichever approach you pursue, developing early indicators for each scenario helps you recognize before recognize, competitors, which way the world is headed.

Schoemaker, P J H (1995) S S h k P. J. (1995). Scenario Pl i Planning: A T l i Tool for Strategic Thinking, Sloan Management Review, Winter, pp. 25-40, ISSN: 15329194