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  • Narratives, Scenarios, and Strategies

    Posted by Grurray on November 22nd, 2014 (All posts by )

    “Essentially, all models are wrong, but some are useful”

    -George E.P. Box

    Models, predictions, and forecasts are always wrong, or, more accurately, they’re never completely right. That’s obvious since the map can never truly be the territory. Some are better than others, but no matter how hard we try and how much information that we gather, we’ll never construct a representation of reality better than the real thing. That being the case, forecasts therefore reveal more about ourselves and our present state of mind than anything about the future.

    The Research Feature in the fall issue of the MIT Sloan Management Review, “Beyond Forecasting: Creating New Strategic Narratives” (link here – requires a one time registration – or purchase Kindle article here for a few dollars), concerns a certain type of forecasting called scenario planning. The authors studied a tech company that was being hit hard during the 2001 economic crash and needed to find new strategies to navigate the rough seas ahead.

    Their research revealed that

    “future projections are intimately tied to interpretations of the past and the present. Strategy making amid volatility thus involves constructing and reconstructing strategic narratives that reimagine the past and present in ways that allow the organization to explore multiple possible futures.”

    These explorations of possible futures, more commonly referred to as scenarios, are stories intended to describe possible futures, identify some significant events, main actors, and motivations, and convey how the world functions.

    The authors note that constructing forecasts based on these methods usually doesn’t work very well because the future is uncertain and often unfolds in a way that is very different from current trajectories. The current paths are comfortable and familiar, so they are difficult to deviate from. Constructing scenarios of the future actually first requires constructing paths that connect the past, present, and future. The narratives are those paths.

    ”In comparing strategy projects within CommCorp, we found that the more work managers do to create novel strategic narratives, the more likely they are to explore alternatives that break with the status quo. In other words, to get to an alternative future, you have to create a story about the past that connects to it.”

    Predicting, prognosticating, and prophesying have been around since time immemorial. The modern version of strategic scenario planning can be attributed to Herman Kahn at the Hudson Institute and his “thinking the unthinkable” about nuclear war by taking into account non-linear, disruptive changes that lead to an uncertain future. The first to bring scenarios into the business world was the pioneering strategy guru Pierre Wack at Shell Oil who coined the term. Wack was a colorful and imaginative individual who took Kahn’s insights and repurposed them to affect the quality of judgment rather than quality of predictions.

    Among the many books, case studies, and articles on the Shell planning department, I just completed The Essence of Scenarios: Learning from the Shell Experience, a history of the scenario group culled from interviews of former members. Pierre Wack helped found it and headed it throughout the 1970s. The book concerns the entire history from then until the present, but it devotes a large part to Wack’s work and legacy.

    In contrast to Kahn’s theories, Wack was less concerned about decoding uncertainty or getting predictions right and more concerned with making future uncertainty more relevant to the present situation.

    “Wack was interested in scenarios as a way to ‘see’ the present situation more clearly, rather than as a basis for knowing about the future. The value of the scenarios is not in better forecasting what ‘the’ future will be, but in encouraging already smart people to learn by ‘seeing’ the present situation afresh, from the perspective offered by plausible, alternative futures , in a process that Wack termed ‘disciplined imagination’.”

    With an emphasis on present adaptation instead of future clarity, their first attempts happened to be nicely prescient. Their November 1971 scenarios covering “Producer Government Take/World Economic Development” and their January 1973 scenarios for “Impending Energy Scarcity” presented different tracks for oil prices including: a low slow growth scenario based on the continuation of past agreements with producer countries, a track that the corporate leadership expected; and a high price growth scenario which factored into concerns that producer countries were reaching limits to how much more capital inflows they could absorb.

    These scenarios involved explorations for prices through the late ’70s into the early ’80s. It’s important to keep in mind that, in keeping with the notion that they weren’t meant to be exact predictions, the high price track scenario still ended up being off by a factor of 20 as oil embargoes and inflation pushed prices higher than anyone could have imagined. Despite the fuzziness of the numbers, however, presenting a possible future far off from what was expected shifted thinking outside the company’s comfort zone.

    There was some initial skepticism from top executives, but the scenario planning helped the company to think differently and conditioned them to adjust in flexible ways that they wouldn’t have considered previously. Consideration of the high price track eventually led to Shell investing in nuclear and coal which helped offset the political turmoil and price shock that would arrive in the mid ’70s.

    “In October 1973, the first oil crisis began to unfold, and the entire organization became aware of the possibilities that scenarios offered. The 1973 scenarios report had provided a new frame of reference – the mindset of the oil producer countries. This new frame was significantly different from the usual analytical frame – the mindset of an oil company. The scenarios had enabled Shell executives to rehearse the future as a thought experiment rather than a crisis exercise. When the crisis actually occurred, Shell was able to collectively re-interpret the turbulent situation and to respond much faster than its competitors.”

    In order to be taken seriously, the Shell scenario team had to relate to top management how the oil producers’ situation related to their own situation.

    “In September 1972, Wack gave what those present remember as a three-hour, enthralling performance that was based on an image of the six scenarios as a river forking into two streams, each of which divided into three tributaries. The insight about hither oil prices and possible energy crisis… were integrated into one of these scenarios.”

    This technique demonstrated the narrative of how the high price scenario was linked to Shell’s operations and how it could have sprung forth from Shell’s past. The key was teasing out the culture, values, and qualities of the past that could make that future plausible.

    Similar re-interpretations of the past are what the MIT researchers found were most successful for their tech company. It wasn’t that they provided better predictions, but it helped provide a unifying vision and get everyone to buy into course changes that didn’t seem to fit before.

    “the crash in the market for its existing products had forced everyone at CommCorp to reevaluate the company’s historical strategic trajectory. This questioning enabled one manager to reinterpret CommCorp’s history, not only as a provider of big-ticket hardware for the backbone of the Internet but also as a provider of communications technologies across the whole network. By seeing the company as all about “communications,” the manager was able to propose a project for improving access at the “last mile” of the network. This reinterpretation made a radical shift in a future vision possible: CommCorp could provide small-ticket, standardized products as well as customized, high-end technologies.

    The narratives and scenarios became a way to define the company as it was today and illustrate a more coherent organizational structure. This is possible because of the rich potential of examining the past.

    “strategy making is not about getting the ‘right’ narrative. It’s about getting a narrative that is good enough for now, so that the organization can move forward and take action in uncertain times. This recognizes that strategy will in some ways always be evolving and “emergent.”

    Everyone loves to try to make predictions, but the real value lies in re-evaluating the past and restructuring past trajectories to provide for a launching point to navigate into the future. This “re-programming” the past is the way to deal with an uncertain future. Instead of forecasting futures that merely extrapolate from the status quo or futilely fighting future models that conflict with conventional mental maps, the use of narratives, scenarios, and strategies provides ways to create stronger and more harmonious models of the present.

     

    16 Responses to “Narratives, Scenarios, and Strategies”

    1. Michael Hiteshew Says:

      the future is uncertain and often unfolds in a way that is very different from current trajectories

      This was one of Hayek’s main arguments for why central planning always fails.

      the real value lies in re-evaluating the past and restructuring past trajectories to provide for a launching point to navigate into the future.

      Now you’re confronted with Hayek’s information problem. We can never have an accurate representation of the present, much less what happened two weeks ago or a year ago or ten years ago. By the time you gather any information at all, however imperfect, it’s already fading into the past, is now changing, and so even that no longer represents the present. On getting an accurate view of what happened in the past, Colonel Hackworth wrote about the different accounts he would get from people who were all at the same battle. Different people witnessed things during one small event.

      All we can see clearly are the large events. All else are swirling and confused eddies of possibility and probability. It may happen, it might have happened.

      “strategy making is not about getting the ‘right’ narrative. It’s about getting a narrative that is good enough for now, so that the organization can move forward and take action in uncertain times. This recognizes that strategy will in some ways always be evolving and “emergent.”

      I agree with that.

    2. David Foster Says:

      One point about forecasting: The more rapidly you are able to act in response to events, the less of it you need. In manufacturing, for example, if changing between product variants requires long set-up times, you are going to need to make large batches and hence will need to try to forecast demand, possibly a long time out, for each variant. But if you can switch from variant to variant rapidly, as with Toyota’a Rapid Die Exchange approach, then forecasting becomes less important.

    3. Grurray Says:

      Good point. Compressing the time period between now and the future is also why manufacturers are so keen on addiritive manufacturing.

      If anyone’s interested, here’s a piece by Wack for the HBR called Shooting the Rapids where he explains some more about their work at Shell. They came up with scenarios in 1975 for the late 70s / early 80s recessions.

      They also had explored the fall of communism in 1981 and the rise of Islamic extremism in 1991. In those cases they took the small inklings that something was up and ran with it. This was straight from Herman Kahn who empasized the impact of small initial changes to the course of the overall system.

      In recent years, however, the scenario group has been unfortunately taken over by corporate politics. They’ve been forced to provide a preferred future scenario rather than explorations, and a few years ago they stated that catastrophic climate change is a certainty.

    4. David Foster Says:

      “In recent years, however, the scenario group has been unfortunately taken over by corporate politics. They’ve been forced to provide a preferred future scenario rather than explorations, and a few years ago they stated that catastrophic climate change is a certainty.”

      I believe this has happened with war gaming exercises…the political insistence that the Blue side must win resulted in assumptions that any contrary results must result from a defect in the game setup, rather than from the nature of reality.

    5. Mike K Says:

      “By seeing the company as all about “communications,” the manager was able to propose a project for improving access at the “last mile” of the network.”

      This is reminiscent of Peter Drucker’s question, “What business are you in ?”

      “They’ve been forced to provide a preferred future scenario rather than explorations, ”

      The US government culture has been taken over by central planners. They resisted Reagan when he wanted to disrupt Detente but he won out. Is there a good source for the theory that he encouraged the Saudis to flood the market for oil and thereby kill off the Soviets export market ? It was probably not a coincidence

      We now have a crony capitalism model which is not going to tolerate future scenario changes well. Hitler did not anticipate the result of his invasion of the Soviet Union. Nobody else did either but he was the one placing the bet on the future that included his country.

    6. Grurray Says:

      “Now you’re confronted with Hayek’s information problem”

      I’ve read a lot of Mises but sorry to say that I haven’t tackled Hayek yet. I have the Road to Serfdom gathering dust in a stack of books. Every time someone mentions it, I immediately resolve to finally get to it, and this is another one of those times.

      It sounds like God’s incompleteness theorem

      http://en.wikipedia.org/wiki/G%C3%B6del%27s_incompleteness_theorems

    7. David Foster Says:

      The question “what business are we really in?” is more subtle than it might sound, and much danger lies in overly-simplified answer. As consultant Michael Hammer wrote:

      Every MBA knows the story about the company that failed because it thought of itself as being in the buggy-whip business when it should have seen itself in the transportation business. In fact this old chesnut entirely misses the point. Strategy is not primarily about markets, either the narrow market for buggy whips or the broader one for transporation. Indeed a company that made and sold whips was highly unlikely to be positioned for manufacturing automobiles. What would have enabled it to succeed in a world of internal combustion engines? The company that sold buggy whips should have asked itself what it did best, at what processes it excelled. Perhaps its real strength lay in its leather fabrication processes, or in its process of filling orders from a network of independent small manufacturers, or in its product development process. Its future was more likely to lie with leather gloves or bags than with metal chassis. What a company does is central to deciding what it is, and where and how it should compete.

      My thoughts:

      In the development of strategy, markets do matter a great deal, of course; however, they must be assessed at a much more specific level than “transportation,” and they must be viewed in the light of actual and potential corporate delivery capabilities. The buggy-whip company should have analyzed who their customers were, and where they were going. Were the customers carriage manufacturers who had a decent chance of succeeding in the automotive world? If so, then perhaps it would have made sense for our buggy-whip company to pursue the automotive market–most likely by providing leather interiors for cars, sold through the medium of companies they were already doing business with. They might then be able to expand into supplying other components, including components having nothing to do with leather. But if the customers were carriage manufacturers who were not pursuing automotive product lines, or unlikely to succeed with them, then a leather car-interior strategy would be less attractive–our company would have no relationship advantage with the new automobile manufacturers over any other potential supplies, since our company hasn’t been selling to the new guys anyhow. In that case, we might do better with gloves, handbags, and luggage–although there might be branding issues (as we now call them) in following such a path. Still other considerations would apply if the company was selling buggy whips through retail stores or via mail order, rather than to the buggy manufacturers.

      Sometimes strategy needs to follow a customer vector–sell new products to the existing customers. And sometimes strategy needs to follow a capabilities vector–build on existing capabilties to provide (existing, new, or modified) products to new customers. Neither model should be assumed be be optimum in advance of analysis, which is what is wrong with the buggy-whip parable: It assumes that because you are selling products that have something to do with “transportation” now, you should continue to do so in the future–which may or may not be the case.

    8. Lexington Green Says:

      Has anyone studied who actually manufactured buggy whips, and what happened to them?

      Ronald Coase studied the actual operation of lighthouses, the classic “public good.” He found there was private provision of lighthouses, though later writers showed the private system broke down over time.

      But we always hear about the poor buggy whip makers, doomed to extinction. But what really happened to the real ones?

    9. David Foster Says:

      LG, an interesting question. Some perfunctory googling turns up thousands of references to the buggy whip analogy…many of them falling in to the fallacious-reasoning trap that Dr Hammer pointed out…but didn’t see any actual data on what happened to the real ones.

    10. David Foster Says:

      Okay, here’s some analysis of what actually happened to companies in the buggy supply chain:

      http://www.nytimes.com/2010/01/10/business/10digi.html?hpw&_r=0

    11. MikeK Says:

      “in its process of filling orders from a network of independent small manufacturers, or in its product development process. ”

      Then tragedy of the 20th century was, to me, Sears Roebuck. I worked for them briefly in the late 50s and early 60s. The USC alumni who sent me to SC on scholarship had many Chicago Sears executives, including Robert E Brooker. He later became president of Montgomery Ward in what I understood was some sort of corporate shakeup.

      The history of the two chains was interlocked, which I did not realize for a long time.

      Wards was first and the Sears was founded to undercut them on price in 1891.

      In 1891 a depression hit. Aaron Ward and George Thorne responded by emphasizing value and quality. Their prices were low but not low enough for the poorest. Into that breach Richard Sears, founder of Sears, Roebuck & Co., walked with the slogan “we always undersell.”

      Then, the management switched again.

      Former Quartermaster General of the Army Robert E. Wood was recruited to increase margins. In obtaining materials for the Panama Canal, Wood had instituted a bottom-up plan of buying. Bottom-up buying entailed working with manufacturers to lower prices while ensuring profits for both parties.

      General Wood began with Wards.

      Even though 1922 marked a return to profitability, Wood sensed that the automobile would eventually render mail order obsolete. He pushed Merseles to get into retailing but Merseles refused. Ironically, car tires and batteries were then two of Ward’s most profitable lines.

      Frustrated by his inability to implement retailing, General Wood began negotiating with Sears. In 1924 Merseles heard of the negotiations and fired Wood. Wood soon joined Sears, which embraced his store program.

      Wood adopted the fixed stores program in 1922 but left Ward for Sears when his innovation was rejected.

      Ward declined during the War and, finally, a proxy fight by Louis Wolfson in 1954 brought the resignation of Avery, the Ward CEO.

      In his search for new management, Barr consulted Ward and Sears alumnus Theodore Houser, who recommended two other former Sears executives, Robert E. Brooker, president of Whirlpool Corporation, and Ed Gudeman, undersecretary of commerce in U.S. President John F. Kennedy’s administration.

      Brooker became president in November 1961 and by 1962 had brought in nearly 200 new executives.

      This was when I met Brooker and Sears people helped me as a college student, finding me a part time job to help with expenses. I had a long family history with Sears and learned a lot by working in retail. I worked in several departments as a management trainee.

      One thing I saw clearly, was the terrible IT system they had in big stores. As I learned more about computers later, working as an engineer and programmer, I could see big trouble ahead for Sears. Wards did no better, especially after Brooker retired in 1970.

      By 1992, they had lost their way but, as is so often the case, they didn’t know it.

      Its unprofitable general catalog operations also were closed in 1993, leaving a smaller — but successful — direct-response business.

      That was the fatal mistake. The Internet was coming and 1994 was the fatal moment. Amazon was founded the next year.

      The company was founded in 1994, spurred by what Bezos called his “regret minimization framework”, which described his efforts to fend off any regrets for not participating sooner in the Internet business boom during that time.[16] In 1994, Bezos left his employment as vice-president of D. E. Shaw & Co., a Wall Street firm, and moved to Seattle. He began to work on a business plan for what would eventually become Amazon.com.

      Bezos did not have background in retailing. Sears had the infrastructure to build a huge internet retailing business just when others were starting out. Imagine if Bezos had gone to Sears but they were not interested in entrepreneurs just then.

      Eastman Kodak was done in by technology that they had actually invented; the digital camera. Sears entered the fatal slide as the business they had invented was taking off online.

    12. MikeK Says:

      “what actually happened to companies in the buggy supply chain:”

      Another example of innovation is Mark Cross which made saddles and riding equipment inn the 19th century. I know about it because the son of the founder was Gerald Murphy who became famous as one of the Paris members of the “Lost Generation.” He and his wife Sara, who so lusted after Sara to the point that he tried to seduce her and, when she turned him down, he painted himself out of a painting about her. They were responsible for making the French Riviera into a summer resort and for the fashion of sunbathing there.

      They spent the 1920s in Paris with Gerald defying his fathers’s wish for him to come home and run the business. Gerald was an artist and knew everybody in Paris in the arts. After 1929, he was forced to come home because things had gotten more expensive in Paris and the business was having trouble in the Depression.

      Not only did he revive the line of fine leather goods but expanded it successfully and it is thriving today.

    13. Grurray Says:

      Avery was forced out from Ward’s because he refused to leave the downtown areas and follow Americans out to suburbs. They never were able to catch up with Sears.

      He was so stubborn during a labor dispute in 1944 that FDR ordered the army take over the business.

    14. MikeK Says:

      “he refused to leave the downtown areas”

      He was also 81, a bit late to be hanging on.

    15. Grurray Says:

      Speaking of buggy whips, the big news last month was HP is making a 3d printer, so we’ll see if there’s a vector leading from 2D paper printers to 3D.

    16. David Foster Says:

      Here’s a machine-tool maker introducing an adapter to turn a CNC milling machine into a 3-D printer:

      http://www.sme.org/MEMagazine/Article.aspx?id=82094&taxid=1459