Improving Strategy Development With Scenario Planning

Executives are most pleased with the outcomes of strategy formulation when they work at companies that use a collaborative approach, according to a recent McKinsey & Company survey. And, while they say following best practices yields better results, they use those practices inconsistently. A closer look at the survey results shows how the effective use of scenario planning can help executives enjoy greater satisfaction from their strategic development process. The June, 2007 survey of 2,700 executives involved in formulating, monitoring, or implementing strategy revealed that those who take on the challenge of fostering collaboration between executives at all levels are more positive about the outcomes. However, corporate-level managers tend to perceive their companies’ strategy development processes as collaborative, while their colleagues at the business unit level more often see the strategies as forced on them by the corporate center.

Scenario planning – a tool that enables organizations to create strategies by considering multiple plausible future environments in which the organization may be forced to operate – not only encourages collaboration, but requires it. Throughout the scenario process, from the early development of forward-looking scenarios, Strategy development to the ultimate crafting of strategic options, input from business managers throughout the organization is critical. Corporate and business-unit level managers alike are encouraged to compare their observations and insights about external business conditions, and to apply their expertise to the development of resilient strategies that can withstand future uncertainty. Without this collaboration, strategic development becomes hostage to prevailing conventional wisdoms and obsolete industry views.

Take, for instance, the experience of a specialty chemical company. Instead of forcing a strategy on the organization that was devised solely by corporate-level management, the company involved a broad multidisciplinary team in a scenario planning effort, including executives from marketing, manufacturing, regulatory, and even legal. The benefits of this approach were twofold: it ensured that the scenarios the company created were creative and challenging, and it resulted in a robust, multifaceted set of core and contingent strategies that reflected the input of this diverse team. Another interesting finding from the survey that points to the benefits of scenario planning involved respondents’ attitudes toward best practices. Managers who work at companies that frequently apply best practices – such as assessing industry trends, threats, and competitor reactions – cite better strategy outcomes. However, most respondents believe that their companies do not adhere to strategy-development best practices.

For instance, while eight executives out of ten say it is relevant to identify the top business, social, and environmental trends that would affect a business unit’s strategy, only half report that their companies frequently do so. Furthermore, considerable deficiencies are revealed when executives were asked about the specific actions their companies take when applying best practices. While 65 percent say it is relevant to take the reactions of competitors into account, and 47 percent say their companies frequently do so, less than a third say their companies often discuss and analyze the prospects of other players entering their markets. And, only 10 percent say they frequently conduct gaming exercises to examine the impact of such market entries.

Scenario planning, by contrast, is all about confronting external trends over which companies have little or no control. Scenario planning forces companies to consider future business trends, environmental conditions, and the behavior of rivals when formulating strategy. To do otherwise results in strategic plans that reflect an inaccurate, inwardly focused view of external business threats and opportunities. To illustrate, a financial services company that employs scenario planning as the core of its strategy development process regularly uses the method to critically analyze the impact of external trends on its business. In addition, the scenarios also become a context for gaming the moves competitors might make when confronted by the same trends. In this fashion, the company’s strategy can include its own responses to likely competitor activity.

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