By: Kevin McDermott / Peter Kennedy
In the age of permanent uncertainty there is a resurgent interest in scenario planning. Executives that have witnessed high profile decline of strong companies know that past success is no guaranteed guide to the future. Kevin McDermott & Peter Kennedy argue that scenario planning can be lifted out of its conventional uses in strategy development and risk management and used instead to avoid “opportunity blindness”.
One month before the collapse of the company he’d spent his career building, one which other businesses viewed with awe, Angelo Mozilo, CEO of Countrywide Financial Corporation, met with his investment-banker. By late 2008 the capital crisis had broken the company’s mortgage-banking business into pieces. Countrywide was staring at a choice between acquisition or complete disappearance. In the end it would choose acquisition, a company that could write $400 billion of mortgage business selling itself at a fire-sale price to Bank of America in January, 2009.
“Everyone looks to history to interpret the present and predict the future,” Mozilo told his banker. “This is unlike anything I thought even three months ago.”
Lots of people know how Mozilo feels. The conventions of enterprise management, especially as they affect the commercialization of new ideas, are built to reflect what we’ve learned from experience. And experience is a great teacher with a really big flaw: it’s backward looking.
It’s exactly the backward look that can make us blind to opportunities in nontraditional operating environments. The absorbing difficulty is that looking forward is no simple task either, especially in an age of perpetual uncertainty. It’s easy to end up like Angelo Mozillo, betting with too much confidence on a mistaken expectation of the future, based on a trend from the past.
But thinking about the future can be done with rigor, even in uncertain times, and in a way that makes planning for what’s over the horizon a practical, not an intellectual, task.
Breaking with convention
It is well documented that the great growth companies continue to invest in innovation even during downswings in the business cycle. But the forces for change are much bigger than the business cycle. In those forces reside nontraditional opportunities that are non-linear, hard to think about and awfully hard to see coming.
The unexpected happens with such frequency that there really ought to be another name for it. Predictable surprise. Counterfactual ambush. Reality usurpation.
In any operating environment the unexpected happens with such frequency that there really ought to be another name for it. Predictable surprise. Counterfactual ambush. Reality usurpation. Even amid ambiguity managers still need to make choices today, not later when we can all see how things worked out. To do that assumptions must be made about the way the world is and the way it may plausibly become without locking in to some vision of the future that will grow steadily less probable with the passage of time.
A tool for bringing rigor to thinking about the future is scenario planning, which is lately enjoying resurgent popularity. Scenario planning is a concept with as many meanings as there are people who practice it. It is conventionally used mainly for risk management and risk avoidance. But it can also be a terrific tool for spotting nontraditional possibilities and avoiding opportunity blindness.
Conventional scenario planners get all the smartest people together, develop a deeply considered best guess about the future, and then manage toward it. The risk in this approach is that the best guess may be a consensus view developed in an echo chamber of like-minded people asking similar kinds of questions from similar perspectives. That risk is highest when a single assumption about the future emerges as dominant—especially when that assumption is unconscious or unexpressed.
Economic historians sometimes refer to these unexpressed assumptions as “path dependence”, the habit of assuming that the future will be a revised edition of the present and that, therefore, what makes sense now will, with some tweaks, make sense later. Path dependence is a good illustration of how experience can be a backward-looking teacher.
In scenario planning a good way to thwart the tendency to path dependence is to include multiple possible futures in the scenario-planning design. Imagining multiple futures deflects planners from the best-guess impulse and obliges them to stress test organizational plans for the likelihood of success or failure in any of them.
A good example of the multiple-futures approach in action is Project Evergreen, a long-running scenario-planning effort of the United States Coast Guard. From the beginning Evergreen was elevated above the level of a one-time “exercise” or “workshop”. The team behind it wanted practical consequences from the work that would shape the choices made on budgets, investments, technology and people. Intriguingly, one of the biggest innovations to come out of Evergreen was conceptual and seemed at first suspiciously intellectual.
The breakthrough emerged from the way thinking about multiple futures freed the planners from an entrenched conception of their mission; to put it another way, freed them from path dependence.
The big idea was initially expressed in conventionally bureaucratic language: “comprehensive information sharing in the maritime domain”. Before long that was distilled to the more expressive and ultimately more potent “maritime domain awareness” (MDA).
MDA enabled planners to imagine futures in which a siloed approach to the Coast Guard’s mission (which served it well in the past) didn’t work when the organization was simultaneously planning for hurricanes, oil spills, search and rescue, narcotics interdiction, infrastructure breakdowns—and terrorist attacks. They began to see not only how the Coast Guard’s mission could change but how it could be accomplished with limited resources. The resiliency of the idea proved invaluable in the aftermath of the 9/11 attacks in the United States, when the Coast Guard was abruptly asked to transform itself into a leading element of America’s homeland security—a perversely nontraditional opportunity.
The MDA innovation has since been adopted by the U.S. Navy and the American intelligence community.
The goal of scenario planning can never be perfect knowledge of tomorrow. The goal is strategic confidence, which is a kind of poise, a knowledge that an organization can respond to dramatic changes in its operating environment that cannot be predicted by extrapolating from the past or by merely applying “what if” to some notional “base case” of the future.
With strategic confidence managers can make choices that privilege some ideas above others, even amid uncertainty. In markets upset by change, including change produced by disruptive innovation, the range of opportunities opens up. So does the range of possible competitors for an organization’s turf, whether existing or prospective. The opportunities, with the risks, can both be managed by taking an expansive approach to scenario planning—expansive, that is, in the sense that it does not work toward a big bet on a single future.
By taking the expansive approach to scenario planning, and acknowledging the limitations of our crystal balls, it is possible to put a stake in the ground with respect to investment in new business. Too many organizations won’t invest the time, opting instead for what they term “strategic flexibility,” which in practice often falls short of delivering the strategic confidence to act.
Strategic confidence is the conviction that an organization is making choices resilient enough to sustain growth and innovation no matter which tomorrow arrives. And without succumbing to opportunity blindness.
By Kevin McDermott & Peter Kennedy
 Full disclosure: “multiple futures” is the approach developed by FSG that we use in our own client work, including Project Evergreen.
About the authors:
Kevin McDermott founded Collective Intelligence in 1996 to help clients shape new ideas into businesses. CI has since earned a reputation for the range of its capabilities in support of change management, knowledge transfer and continuous innovation for such clients as Booz & Co., Futures Strategy Group, Guaranteach, Korn-Ferry International, McKinsey & Co. and United Way of America. CI’s earliest ambition to reinvent the communications function—described recently in “Notes on Discernment” for InnovationManagement—evolved directly out of McDermott’s earlier career as a reporter covering international business and economics for publications including The New York Times, The Economist, The Atlantic Monthly and The Washington Post.
Peter Kennedy is a founding principal of the Futures Strategy Group (FSG), a consultancy dedicated to helping clients make superior decisions in the face of future uncertainty and change. For more than 20 years, Kennedy and FSG partners have supported Fortune 500 companies such as IBM, 3M, Deloitte, the Ford Motor Company and the ACE Group in scenario planning, risk analysis, emerging market evaluation, and new product planning. In the public sector, FSG has applied scenario analysis to new mission development, capital investment decisions, and R&D strategy for organizations such as the US Coast Guard, NASA, and the Panama Canal Authority.