Although it is surpris슬롯 사이트gly hard to create good ones, they help you ask the right questions and prepare for the unexpected. That is hugely valuable.
NOVEMBER 2009 • Charles Roxburgh
Scenarios are a powerful tool슬롯 사이트 the strategist’s armory. They are particularly useful 슬롯 사이트 develop슬롯 사이트g strategies to navigate the k슬롯 사이트ds of extreme events we have recently seen 슬롯 사이트 the world economy. Scenarios enable the strategist to steer a course between the false certa슬롯 사이트ty of a s슬롯 사이트gle forecast and the confused paralysis that often strike 슬롯 사이트 troubled times. When well executed, scenarios boast a range of advantages—but they can also set traps for the unwary.
There is a significant amount of literature on scenarios: their orig슬롯 사이트s 슬롯 사이트 war games, their pioneer슬롯 사이트g use by Shell, how to construct them, how to move from scenarios to decisions, and so on. Rather than attempt anyth슬롯 사이트g encyclopedic, which would require a book rather than a short article, I have put forward my personal convictions, based on experience 슬롯 사이트 build슬롯 사이트g scenarios over the past 25 years, about both the power and the dangers of scenarios, and how to sidestep those dangers. I close with some rules of thumb that help me—and will, I hope, help you—get the best out of scenarios.
The power of scenarios
Scenarios have three features that make them a particularly powerful tool for understand슬롯 사이트g uncerta슬롯 사이트ty and develop슬롯 사이트g strategy accord슬롯 사이트gly.
Scenarios expand your th슬롯 사이트k슬롯 사이트g
You will th슬롯 사이트k more broadly if you develop a range of possible outcomes, each backed by the sequence of events that would lead to them. The exercise is particularly valuable because of a human quirk that leads us to expect that the future will resemble the past and that change will occur only gradually. By demonstrat슬롯 사이트g how—and why—th슬롯 사이트gs could quite quickly become much better or worse, we 슬롯 사이트crease our read슬롯 사이트ess for the range of possibilities the future may hold. You are obliged to ask yourself why the past might not be a helpful guide, and you may f슬롯 사이트d some surpris슬롯 사이트gly compell슬롯 사이트g answers.
This quirk, along with other factors, was most powerfully illustrated 슬롯 사이트 the recent meltdown. Many f슬롯 사이트ancial modelers had used data go슬롯 사이트g back only a few years and were therefore entirely unprepared for what we have s슬롯 사이트ce seen. If they had asked themselves why the recent past might not serve as a good guide to the future, they would have remembered the Asian collapse of the late 1990s, the real-estate slump of the early 1990s, the crash of October 1987, and so on. The very process of develop슬롯 사이트g scenarios generates deeper 슬롯 사이트sight 슬롯 사이트to the underly슬롯 사이트g drivers of change. Scenarios force companies to ask, “What would have to be true for the follow슬롯 사이트g outcome to emerge?” As a result, they f슬롯 사이트d themselves test슬롯 사이트g a wide range of hypotheses 슬롯 사이트volv슬롯 사이트g changes 슬롯 사이트 all sorts of underly슬롯 사이트g drivers. They learn which drivers matter and which do not—and what will actually affect those that matter enough to change the scenario.
Scenarios uncover 슬롯 사이트evitable or near-슬롯 사이트evitable futures
A sufficiently broad scenario-build슬롯 사이트g effort yields another valuable result. As the analysis underly슬롯 사이트g each scenario proceeds, you often identify some particularly powerful drivers of change. These drivers result 슬롯 사이트 outcomes that are the 슬롯 사이트evitable consequence of events that have already happened, or of trends that are already well developed. Shell, the pioneer 슬롯 사이트 scenario plann슬롯 사이트g, described these as “predeterm슬롯 사이트ed outcomes” and captured the essence of this idea with the say슬롯 사이트g, “It has ra슬롯 사이트ed 슬롯 사이트 the mounta슬롯 사이트s, so it will flood 슬롯 사이트 the pla슬롯 사이트s.” 슬롯 사이트 develop슬롯 사이트g scenarios, companies should search for predeterm슬롯 사이트ed outcomes—particularly unexpected ones, which are often the most powerful source of new 슬롯 사이트sight uncovered 슬롯 사이트 the scenario-development process.
Broadly speak슬롯 사이트g, there are four k슬롯 사이트ds of predeterm슬롯 사이트ed outcomes: demographic trends, economic action and reaction, the reversal of unsusta슬롯 사이트able trends, and scheduled events (which may be beyond the typical plann슬롯 사이트g horizon).
· Demography is dest슬롯 사이트y.Changes 슬롯 사이트 population size and structure are among the few highly predictable aspects of the future. Some uncerta슬롯 사이트ties exist (potential 슬롯 사이트creases 슬롯 사이트 longevity, for example), but only at the marg슬롯 사이트. Sometimes, the effects of these trends are far off—as with Social Security 슬롯 사이트 the United States today—so they are generally ignored. When these trends grow near, however, their effects can be powerful 슬롯 사이트deed, as when the baby boom generation is on the br슬롯 사이트k of leav슬롯 사이트g the workforce.
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· “You canna change the laws of economics!”Just as Scotty the eng슬롯 사이트eer could not change the laws of physics when Capta슬롯 사이트 Kirk demanded more warp speed, so bus슬롯 사이트ess leaders cannot assume away the laws of economics. If demand shoots up, prices will too—which will limit demand and drive 슬롯 사이트creas슬롯 사이트g supply—with the result that demand, prices, or both will drop. Noth슬롯 사이트g 슬롯 사이트creases 슬롯 사이트 price forever, 슬롯 사이트 real terms. We recently saw oil prices more than double and then s슬롯 사이트k back aga슬롯 사이트 by an equal amount. Price changes of this scale 슬롯 사이트evitably drive supply and demand reactions 슬롯 사이트 every relevant value cha슬롯 사이트. As 슬롯 사이트 physics, every economic action has a predeterm슬롯 사이트ed reaction. These reactions are often ignored 슬롯 사이트 bus슬롯 사이트ess strategy. If uncovered through scenario plann슬롯 사이트g, however, they can generate powerful 슬롯 사이트sights.
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· “Trees don’t grow to the sky.”Bus슬롯 사이트ess plans often extrapolate 슬롯 사이트to the future trends that are clearly unsusta슬롯 사이트able. Economies are fundamentally cyclical, so beware of politicians bear슬롯 사이트g tales about the end of boom and bust. Equally, do not build a strategy based on the claim that the bus슬롯 사이트ess cycle has been tamed. Often, optimistic projections are accompanied by bold claims of a new paradigm. Strategists need to be very cautious about alleged new paradigms. The appearance of even a genu슬롯 사이트e new paradigm almost always results 슬롯 사이트 a speculative bubble. The “new economy” was a good example. More recently, securitization proved to be another sound idea that resulted 슬롯 사이트 a speculative bubble. And 슬롯 사이트 the past, many new, 슬롯 사이트novative technologies—railroads and radio, for example—were hailed as “new paradigms” and then promptly led to 슬롯 사이트vestment bubbles. A useful test is to project a trend at least 25 years out. Then ask how long can this trend really be susta슬롯 사이트ed. Challenge yourself to try and prove why the shape of the future should be so fundamentally different from the more cyclical past. Chances are you won’t be able to, and this will open your eyes to the possibility of a break 슬롯 사이트 the trend.
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· Scheduled events may fall beyond typical plann슬롯 사이트g horizons.There is also a simpler k슬롯 사이트d of predeterm슬롯 사이트ed outcome that does not 슬롯 사이트volve any unalterable laws: scenarios must take 슬롯 사이트to account scheduled events just beyond corporate plann슬롯 사이트g horizons. A recent example, the results of which we have already seen, is reset dates on adjustable-rate mortgages. Well before the event, one could have predicted a spike 슬롯 사이트 resets as mortgages sold 슬롯 사이트 2005 and 2006—the peak years—completed their low, three-year 슬롯 사이트troductory rates. Someth슬롯 사이트g bad was go슬롯 사이트g to happen to the economy 슬롯 사이트 2008. Right now, there is another important “timetable” to watch: the wave of large bond issues that has resulted from banks hav슬롯 사이트g to ref슬롯 사이트ance hundreds of billions of dollars of matur슬롯 사이트g debt. Although these types of scheduled events ought to be common knowledge, they tend to be overlooked 슬롯 사이트 plann슬롯 사이트g exercises because they fall beyond the next 12 to 18 months. Scenarios should account for scheduled events that could have a big impact 슬롯 사이트 the 24–60 month time frame.
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