Scenario Building

Abstract

This note introduces and describes scenario-building, the strategic-thinking approach developed by Pierre Wack and associates at Royal/Dutch Shell in the 1970s and helped catapult the company from seventh to second in its industry. The note defines the concept, outlines who should use it and how it links to strategic planning, and illustrates it with models and verbal examples. The note is appropriate for use in courses on business economics, strategic thinking, business policy, and leadership.

Excerpt

UVA-G-0260

SCENARIO BUILDING

One skill that can help you develop your visioning capabilities is scenario building. This approach came into its own during the l970s as an alternative to strategic planning. A critical problem with strategic planning that led to the development of scenario building was outlined by Pierre Wack, former strategic planner for Royal Dutch Shell:

Forecasts are not always wrong; more often than not, they can be reasonably accurate. And that is what makes them so dangerous. They are usually constructed on the assumption that tomorrow's world will be much like today's. They often work because the world does not always change. But sooner or later forecasts will fail when they are needed most: in anticipating major shifts in the business environment that make whole strategies obsolete.

In contrast to strategic plans which historically have been built on-line, and range forecasts associated with probabilities, scenarios present several starkly contrasting futures, none of which is “right” or more likely than the next, and each of which is plausible. Scenarios encourage executives to break out of their traditional mindsets and think of economic and business possibilities beyond what they presently envision. The theory behind scenario planning is that, if executives are aware of and at least modestly prepared for several possible outcomes, they will be better prepared to adjust if the world takes an unusual turn.

Unlike the common “best-case-worst-case” planning, scenario building does not include attaching probabilities to the various possibilities identified. To scenario builders, that would mean nonsensically attaching probabilities to “unknowledge” and would also suggest a statistical approach when the challenge is to deal with the single reality that emerges.

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Keywords: business environment, economic environment, planning, long-range scenarios, strategy formulation