API Research Paper The Future Scorecard: Combining ... Research Paper The Future Scorecard:...

API Research PaperThe Future Scorecard: Combining externaland internal scenarios to create strategic

foresight

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The Future Scorecard (Management Decision, 2005, Vol 43 No 2) API Research Paper

The Future Scorecard: Combining external and internal scenariosto create strategic foresight

ByBy: Alexander Fink, Bernard Marr*, Andreas Siebe, and

Jens-Peter Kuhle

Abstract:Abstract: Scenarios are traditionally used to describe possible alternative future

developments in the external environment, which then inform current strategy

assessment and future strategy development. However, with a shift in focus away

from the market-based paradigm and towards a resource-based view of strategy,

scenarios can also be used to describe alternative internal development paths for an

organization. These two types of scenarios can then be systematically developed

and combined to form a significant element of a strategic early warning system – the

future scorecard.

Bernard Marr is the Chief Executive and Director of Research at the Advanced Performance Institute.E-mail: [email protected]. Alexander Fink is founder and a member of the executive board of ScMI Scenario ManagementInternational AG, GermanyDr. Andreas Siebe is a founder and member of the executive board of ScMI Scenario ManagementInternational AG, Germany.Jens-Peter Kuhle is manager of the business field Strategic Early Warning Systems at ScMI ScenarioManagement International AG, Germany.

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The Future Scorecard: Combining external and internal scenarios tocreate strategic foresight

Introduction

To survive and grow in an era of continuouschange, organizations must identify upcomingopportunities and threats early enough and addressthem in their strategic planning. Scenario planningbecame popular in the 1970s as a tool to helporganizations in this process by distilling thecountless possibilities of the future state into alimited set of coherent views. This limited set ofscenarios could then influence strategic decision-making. The development of scenario planning wasclosely associated with the emergence of strategiclong-range planning. During that time, models ofstrategy were emphasizing the exploitation ofmarket power with the competitive forces introducedby Michael Porter (1980) and the model of strategicconflict presented by Carl Sharpiro (1989). In thispredominantly externally focused mindset scenarioswere exclusively used to describe alternative futuremarket developments (Miller and Waller, 2003).More recently, internally focused models of strategythat emphasize efficiency were introduced tosupplement the externally focused models. Thismovement resulted in concepts such as theresource-based, competence-based, andevolutionary views of the firm. Strategists wereforced, therefore, to move away from a ‘black-box’view of the firm and match external opportunitieswith organizational capabilities. In this article we willdemonstrate how scenario planning is following this

development and how both external and internalfuture scenarios can be created. This allows firms tomatch external opportunities and threats with thethreats and opportunities of internal developmentsin their strategy planning.

In the remaining part of this paper we willdemonstrate how the two scenario approaches canbe used to build a strategic control instrument – thefuture scorecard –combining strategic planning andearly warning systems to enable strategic foresight.First we will describe the traditional role of scenariosin strategic management, outlining the four-stepprocess for scenario development, and discussinghow scenarios are used in strategic planning; thenwe will discuss the resource-based view, outlininghow it informs scenario thinking and how to developinternal strategy scenarios; in the subsequent partwe discuss how strategic planning can be based oninternal and external scenarios; before we conclude,we describe how a future scorecard can bedeveloped based on the strategic insights from thescenarios.

Scenarios in strategic management

Today’s environment is increasingly unpredictableand often appears to be in a state of flux. It seemsunsafe therefore to rely on just one single view ofthe future. Instead, scenarios help organizations tocope with growing uncertainties by acquiringmultiple views that describe a range of



opportunities. Scenarios are based on two mainprinciples:

Systems Thinking: There seems to be ever-increasing diversity and dynamics in entrepreneurialactivity. At the same time, most managementapproaches are still built upon traditional cause-and-effect thinking in distinctive sub-systems. Thisoften leads to structural problems. In the course oftheir planning, organizations thus need to considerthe development and the behavior of complexsystems by dealing with the interconnectionsbetween the most important key factors of a largerecosystem (Moore, 1996).

Future-open Thinking: It is increasingly difficult tomake precise predictions of future trends anddevelopments. Organizations therefore have tounlearn the idea that a single predictable futureexists. Instead, they have to include alternativeoptions in their calculations of how influencing

factors may develop.

The term ‘scenario’ is used for a variety of differentapproaches – from simple alternative projections(e.g. ‘the high-price-scenario’) to results of complexsimulation-models. Here we use the term scenarioonly for future images that combine future-openthinking with systems thinking. That means that ascenario is one of several future images thatdescribes a future situation based on a significantnumber of consistent developments. The use of thiskind of complexity-processing scenario in corporateor business planning is described as ScenarioManagement (see Figure 1).

Figure 1 also shows some traditional approaches inthis field: System Dynamics is a combination ofSystems and Strategic Thinking – but without themultiple perspectives (A). Most Scenario Planningapproaches, on the other hand, are based onFuture-open Thinking and Strategic Thinking – but



they neglect the complexity in the marketenvironment and scenarios become obsolete verysoon (B). Scenario Technique approaches – mostlyfrom Continental Europe – create very complexscenarios but often fail with their integration intostrategic management (C). The unique feature ofScenario Management is that it combines thesemethods of Systems Thinking, Future-OpenThinking and Strategic Thinking. In the following wewill outline the four steps of developing a scenario.Four steps of scenario developmentMost scenario processes are initiated withinplanning or strategy development processes. Theirgoal is to improve the decision-making process byincluding uncertainties in complex environments.Planners therefore have to define a specific scopethat we call the ‘scenario field’. It describes thesubject of the scenario creation process. The mostfrequently used scenario fields are based on themarket-based view and focus on corporate orbusiness environments in general, industries,markets, technologies, and specific global issues,

e.g. electronic business or payment systems. Todescribe possible future images of a scenario field,planners have to work through the following fourphases (see Figure 2).

1 Detection of key factors (Phase 1). Everyscenario field consists of a large number ofinfluence factors. To avoid unwanted concentration,the scenario field is systematically structured intodifferent spheres. Each sphere is described byspecific influence factors which are summarized inan influence factor catalogue. Using the full numberof identified factors during scenario creation wouldlead to scenarios that are too complex and blurred.Only those factors are selected that are eithercharacteristic for the development of the wholescenario field or have a strong influence on thecenter of the scenario field. These so-called ‘keyfactors’ can be extracted with the help of aninfluence analysis. Based on the assessment of theinterconnections, the systemic behavior of allfactors is visualized to identify subsystems,



dominant factors, and critical feedback loops.

2 Foresight of alternative projections(Phase 2). This is the heart of the scenariodevelopment, where we look into the future. First,the scenario team defines a future horizon – thetime in the future that should be described by thescenarios. After this, the team identifies possibledevelopments for all key factors – so-called ‘futureprojections’. The aim is not to find the one mostlikely projection, but to also find alternative andplausible images that can be used to enable thescenarios to describe the full ‘window ofopportunity.’ Usually three or four projections aredescribed per factor to avoid one-dimensional‘black-and-white’ thinking.

3 Calculation and formulation ofscenarios (Phase 3). Two goals determine the thirdphase: ideally each scenario should represent apossible and internally consistent future situationand the set of scenarios should represent the entire‘window of opportunities’, including all possibleimages of the future. To work out consistent futureimages, the consistency of all pairs of projections isassessed and all possible combinations – so called‘projection bundles’ – are checked. Scenariosoftware can be used to assist this process. To finda suitable set of scenarios, the highly consistentprojection bundles are systematically grouped in acluster analysis. The number of scenarios is pre-determined and the more diversely the members ofthe scenario team think into the future, the morescenarios will be produced. Projections that appearin the majority of projection bundles of a certain

scenario are named ‘scenario elements’. Whilesome projections appear in more than one scenario,others are a distinguishing feature of only onescenario. These characteristic elements are at thecenter of the scenario description, which can takethe form of a report or more innovative formats,such as newspapers, interviews, or even theatreplays.

4 Analysis, mapping and interpretation ofscenarios (Phase 4). In addition to the scenariodescription, each scenario can be analyzed indetail: What are the scenario drivers? How robust isthe scenario? What are the likely outcomes? Whoare the winners and losers in the scenario? Andwhat happens if disruptive factors are included?What are possible sub-scenarios? A second set ofquestions concerning the consequences of thescenario could be asked too: What are theopportunities and risks for us as a result of thescenario? What would we have to do in case thescenario became reality? However, even if allscenarios are described and analyzed in detail,many executives strive for an overview of their‘window of opportunities’. Using multidimensionalscaling the input bundles can be projected intoscenarios which are then visualized in so-called‘scenario maps’. Such a map can be used tointerpret the set of scenarios. Often the currentsituation is marked on the map so that alternativedevelopment paths can be seen as arrows from thecurrent situation to other scenarios.



The scenario development processes

Scenarios are developed in different ways (seeFigure 3). Intuitive approaches are used by ‘gurus’(who sell scenarios as products) and by companiesmainly in the Anglo-American area. Thesescenarios are often well formulated, but they are notreconstructable which leads to problems whencompanies try to integrate their dialogue-basedscenarios into continuous planning processes.Typically, systematic approaches like ScenarioManagement are either used by external expertsand consultants who sell scenario studies; or theyare developed directly within the company – oftensupported by internal or external facilitators ormoderators.

The most common form of scenario developmentare scenario projects. They generally last between acouple of weeks and a couple of months, dependingon the complexity and work intensity. Typically, two

to five workshops take place where a scenario teamof 10-20 participants discusses the most significantsteps of the process. A smaller core team isresponsible for the preparation and documentationof the workshop as well as taking responsibility forsome specific analyses. While this traditionalapproach often takes quite a long time and requiressubstantial resources, others prefer a scenarioconference. Here the scenarios are jointlydeveloped in 2 or 3 days. Scenario conferencesenable participating managers to explore alternativeconcepts in a creative atmosphere and tosystematically develop a vision together with theirpeers. This has the added advantage that all keyinfluencers have contributed to the same discussionand, therefore, their buy-in to the conclusions islikely to be greater.

How scenarios are used in strategic planningStrategy development rarely starts with a blank



piece of paper. Often the aim is not to invent acompletely new strategy, but to examine thesuitability of the existing strategy with the help ofexternal scenarios. The strategy in question can bean existing corporate or business strategy; or it canbe a hypothesis-based strategic option, put forwardby the strategy team.

Strategy valuation processes can discover problemsor inconsistencies in the current strategy as well asnew market opportunities. Both could lead to arevision or abandonment of the current strategicdirection. This is why the traditional scenarioplanning process starts with an analysis of theimpact of external scenarios on the company orbusiness unit in question. Here the rule of thumb isto keep all scenarios in the game for as long aspossible. This often leads to new findings, such asunderestimated threats in a – previouslysuperficially viewed – ‘good’ scenario and to hiddenopportunities in ‘bad case’ scenarios. Based oninsights from the scenarios in terms of opportunitiesand threats, companies can develop new strategies.Strategies can be approached in the following threeways, depending on the specific planning situationand the corporate culture of the company(Makridakis, 1990; Courtney, 2001):

Planning-oriented strategies. This approach isbased on the belief that there is a relatively certainfuture. On that assumption, planners do not have towait and react but can make decisions and takeactions in anticipation of forthcoming changes.

Preventive strategies. Here the emphasis is onreacting to environmental changes. Uncertainty isaccepted, and the aim is to cope with unforeseenchange.

Proactive strategies. Here strategists accept that awide range of changes in the corporate environmentare unpredictable, but nevertheless attempt toanticipate potential events and so are able to reactahead of time to exploit their arrival (if, and when,they do). Furthermore, action can be taken by theorganization to bring about desired change thatwould not have occurred otherwise or would havehappened later (Makridakis, 1990).

The development of strategies can vary betweentwo extremes:

• Focused strategies are based on onesingle reference scenario – in most cases the onewith the highest probability. Within this kind ofstrategy, resources are strongly focused and thestrategic direction is easy to communicate.Companies working with focused strategies have tobe aware of changes in the corporate environment.They need excellent market research and earlywarning processes to make sure that they arealways on track. They also require organizationaladaptability to fast changes in their strategy.

• Future-robust strategies are based onmultiple scenarios, ideally all the identifiedscenarios. These are very flexible strategies whichare open to changes in the environment. But robuststrategies are often very complex and difficult to



communicate.

How the resource-based view of strategicmanagement informs scenario thinkingIn this section we would like to briefly review theimplications of the resource-based view of the firm,introducing strategy scenarios as a tool tounderstand the internal developments in firms.Subsequently, we provide a classification of firmresources and a selection of case examples of howstrategy scenarios were applied to assess theinternal resource developments.As outlined above, scenarios have traditionally beenused to detect and explain the developments andpossible changes in the external environment of thefirm. This approach is rooted in the market-basedapproach of strategic management, which widelyignores the developments of internal capabilities.Kenneth Andrews (1971) has highlighted the dangerof ignoring the internal capabilities when he statesthat opportunities without the necessary capabilitiesare a ‘trip to fairyland’. In recent years a new theoryof strategic management has emerged whichargues that a competitive advantage oforganizations arises not only from identifying newexternal opportunities, but instead from managingthe difficult to replicate resources and capabilities,which in turn form the basis for capabilities. A newway of thinking about strategy was framed into theresource-based view of the firm. This understandsfirms as heterogeneous entities characterized bytheir unique resources which, when combined, formdifferent distinctive and leveragable capabilities.The view that firms compete on their uniqueresource architecture was shaped by scholars

including Birger Wernerfelt (1984), Richard Rumelt(1984), Jay Barney (1991), and supported bytheories of evolutionary economics (Nelson andWinter, 1982), the notion of competence-basedcompetition (Prahalad and Hamel, 1990) and theincreasing importance of knowledge and intangibleassets (Winter, 1987; Itami, 1987; Teece, 1998) infirm performance. However, the aim of this article isnot to review the theoretical foundation of theresource-based view; this has been doneelsewhere.

Transaction cost theories show that organizationsshould focus on the capabilities they are good atand not necessarily use excess capabilities (andresources) to enter a multi-product or diversificationstrategy (Teece, 1980; Montgomery and Wernerfelt,1988). This means that firms need to strategicallymanage their resources and capabilities in order togain a competitive advantage and improve theirperformance.

Development of strategy scenarios

The future-open thinking does not need to be limitedto the external environment. As outlined by Barney(1991), firms obtain sustained competitiveadvantages by implementing strategies that exploittheir internal strengths through responding toenvironmental opportunities, while neutralizingthreats and avoiding internal weaknesses. It is notenough any more to just determine the market,industry, and technology trends and then create astrategy that is suitable for the foreseendevelopments. Internally, organizations have manyoptions of how to react to external opportunities and



threats. As outlined above, strategic options oftendepend on each other and are path-dependent -that is, present choices about options are influencedby past choices (Post, 1997). It is often thesedynamic interactions which create causal ambiguityand gives organizations a difficult to replicateadvantage (Collins and Montgomery, 1995).Within an organization there are often differentperspectives on current problems, unsolvedconflicts, different assumptions about the leverswhere changes can be started, inconsistentcompromises, different prioritizations of reasonablemeasures and resources – and different interests.Not taking those into account in the strategyformulation could turn the strategy implementationinto a ‘suicide mission’ right from the beginning. Theabove challenges can be addressed during thedevelopment of alternative strategy scenarios. Inthis way, management executives bring in theirpersonal ideas and visions of the company’s future

and systematically link them to several strategyscenarios.

The development and interpretation of such strategyscenarios is carried out in the following four steps:

1 Identification of key elements of thestrategy (Step 1). A strategy scenario describes‘how we could conduct our business in the future’.Typical elements of strategy scenarios are the waythe company sees itself: its resources, itscapabilities and competencies, the future portfolioand its behavior in the competitive arena, thedifferent key processes and its resourcemanagement. During a strategic dialogue usually upto 20 key elements are identified.2 Development and description of futureoptions (Step 2). The aim of this step is to describeeach key element’s ‘windows of opportunities’.Consequently the following questions are the center



of attention: What could our portfolio structure looklike in the future? How do we cope with our currentcapabilities? How are our resources interacting tocreate a competitive advantage? How significantcould alliances and partnerships be in the future?Members of the scenario team rapidly encounterthese questions as they are closely related to theirdaily business.3 Combining of future options withstrategy scenarios (Step 3). Linking the futureoptions for each key factor to strategy scenarios isdone in parallel with the creation of externalscenarios: This includes a consistency check for allfuture options and leads to a suitable number ofpossible strategies that describe a range of‘windows of opportunity’ for the company orbusiness unit in general. Yet it is important that themembers of the scenario team now develop theirown image of every strategy scenario.4 Development of a strategy roadmap(Step 4). The basis for all strategy scenarios, thechange needed and the necessary resourcesrequired, are analyzed and the various ‘windows ofopportunity’, which are described by each of thesestrategy scenarios, is visualized in a ‘strategyroadmap’ (see Figure 4).

In order to discuss the organizational strategy interms of resource architecture and resultingcapabilities we need a taxonomy of organizationalresources. Many scholars and managers havehighlighted the fact that it is the more intangible andknowledge-based resources that provide firms witha potentially sustained competitive advantage as

they are valuable, rare, and not easy to imitate or tosubstitute (Barney, 1991).Over the past decade or so various taxonomieshave been introduced to categorize the keyresources in firms. In particular, the emergence ofconcepts such as intangible assets and intellectualcapital has added further depths to the definition oforganizational resources (Marr, 2005). The Swedishinsurance and financial services company Skandiawas among the first to categorize their intellectualcapital (Edvinsson, 1997). Skandia split intellectualcapital into ‘human capital’ (e.g. knowledge andskills of employees) and ‘structural capital’ (forexample, the patents, processes and practices thatremain when employees have left the firm). Otherclassifications also add ‘relationship capital’ (e.g.vital relationships with customers, suppliers andother significant stakeholders) as an additionalcategory (Roos and Roos, 1997). Today, thedifferentiation between human capital, structuralcapital, and relationship capital seems to be anaccepted classification of the resourced-based viewof intellectual capital . In order to include physicalassets and to add further granularity to structuralresources, we use the following taxonomy ofresources (Marr and Schiuma, 2001; Marr et al,2003).

Organizational resources are the sum ofstakeholder resources (including employees asstakeholders) and structural resources. Thisdistinction reflects the two main components of anenterprise: (1) its actors and (2) its constituent parts.Figure 5 illustrates the taxonomy of resources withits sub-classifications. Stakeholder resources are



divided into stakeholder relationships and humanresources. The former identifies relationships withexternal actors of a company while the latterrepresents internal actors. Structural resources aresplit into physical and virtual infrastructure, whichrefers to their tangible and intangible naturerespectively. Finally, virtual infrastructure is furthersub-divided into culture, routines and practices, andintellectual property. These categories and theirsub-sets are illustrated conceptually within thisdiagram.• Stakeholder relationships include all formsof relationships of the company with its stakeholders. These relationships could be licensingagreements, partnering agreements, financialrelations, contracts and arrangements aboutdistribution channels, as well as informalrelationships. The stakeholder relationships alsoinclude customer relationships and brand image,

representing a fundamental link between acompany and one of its key stakeholders.• Human Resources embrace allcomponents of employees including competences,commitment, motivation and loyalty. Some of thekey components are know-how, technical expertise,and problem solving capability, creativity, education,attitude, and entrepreneurial spirit.• Physical infrastructure comprises allinfrastructure assets, such as buildings and theirstructural layout and location, machinery andequipment, as well as information andcommunication technology like computers, serversand physical networks.• Culture embraces corporate culture andmanagement philosophies. Some importantcomponents are organizational values. Culture is offundamental importance for organizationaleffectiveness and efficiency since it provides a



framework, sometimes implied, through which tointerpret events.• Practices & Routines include internalpractices, virtual networks and routines, i.e. tacitrules and procedures. Some key components areprocess manuals providing codified procedures andrules, tacit rules of behavior as well as managementstyle. Practices and routines determine howprocesses are being handled and how workprocesses flows through the organization.• Intellectual property is the sum of patents,copyrights, trademarks, brands, registered designs,and trade secrets whose ownership is granted tothe company by law.However, for the development of effective strategiesorganizations not only require an insight into thenature of their resources but also an understandingof the dynamic interaction of individual resourcesand how they complement one another. It is oftenthis dynamic combination of resources that is thekey to success and competitive advantage (Marr etal, 2004). For example, a company may haveexcellent programming skills that enable it to buildsoftware, but they might be worth little unlessaccompanied by a strong distribution network,loyalty and commitment from its employees, and apowerful brand name. This type of combination ofresources is often the recipe for success incompanies such as, for example, Microsoft orCISCO Systems. The following section we willprovide examples of strategy scenarios based onthe above outlined taxonomy of firm resources.Examples of strategy scenariosStrategy scenarios are not only developed for thewhole company or one business unit. Very often,

strategy scenarios focus on specific resources andtheir interrelated strategic issues. Below we outlinesome case examples of how organizations havedeveloped strategy scenarios for some of their keyresources (see also Figure 6).• Stakeholder relations: In an increasinglyunstable environment, municipalities and regionshave to act more and more strategically. TheGerman city of Bueren decided to examine theperspectives of the city and its surroundings withthe help of a multiple-stakeholder scenario planningproject. Participants in the review were, in additionto representatives from the council andadministration, 30 inhabitants from different groupsand associations. The aim was to developproposals for a sustained and prosperousdevelopment and future interaction between thevarious stakeholder groups.• Human Resources: The EuropeanAeronautics Defense and Space Company (EADS)was created in a merger between the GermanDaimlerChrysler Aerospace AG, the FrenchAerospatiale Matra and CASA of Spain. EADSrealized the critical role of their knowledge workersand wanted to reorganize its corporate learning. Tosupport this process, strategy scenarios werecreated to identify different business models of howto create a Corporate Business Academy and howto evaluate them in the context of the specific EADSbusiness culture.• Physical infrastructure: INPRO is anaffiliated company of the automotive manufacturersDaimlerChrysler, Volkswagen and suppliers BASF,IWKA and ThyssenKrupp Automotive. Theinnovative work of INPRO consists of applying latest



research to applications in the production practice.Within a scenario-project, possible visions for thefuture of product development, productionpreparation and production processes in the carindustry (Digital Factory) were explored. The currentphysical infrastructure was an important factor inthis project. The scenarios evaluated the industrydevelopment as well as new forms of co-operationbetween suppliers and customers. The integrateduse of information services played an importantpart, which in turn changed the role of the physicalinfrastructure.• Culture: A municipal data processingcompany (KDO) offers a variety of services to theirclients – the local governments. Doing this, KDOacts in an uncertain environment, defined by terms

such as 24-hour Town Hall and Local AuthorityDistrict Online. Culture is an important aspect in twoways – firstly, the culture of the local regioninfluences the work that is carried out, andsecondly, a good organizational culture of KDO isseen as an important factor of attracting new talentas KDO is restrained by relatively low governmentpay scales. Scenarios were used to understandfuture development possibilities in the environmentof the KDO, trying to examine possible technicaland social changes that will impact the work ofKDO. In addition, internal scenarios were created toinvestigate possible impacts of organizationalculture on the services KDO can offer to meet thechallenges and risks resulting from the externalscenarios.



• Routines & practices: A leadingtelecommunication provider used scenario analysisnot only to understand technology trends in this fastmoving sector, but also to develop internal strategyscenarios to understand the impact of newtechnology trends on its business model. Inparticular, taking into account processes androutines as a closely integrated process chain isseen as one of their key competitive advantages. Inanother case example, a manufacturing companyused scenario management to identify and combinerelevant resources and technologies in order todesign consistent process chains.• Intellectual property: The pressure onmaritime industry in Europe has significantlyincreased during the last years. Harsh competition

and battles to survive characterize the actions ofmost companies. Only few succeed in concentratingon the necessary strategic questions. This is whythe European Union supported the foundation of theEuropean Virtual Maritime Institute, EVIMAR A/S.This amalgamation of 17 industry partners from themaritime and economic research meets the growingchallenges of the maritime industry. In thefoundation process, strategy scenarios weredeveloped to comprehend possible interactionsbetween the diverse partners. Particular emphasiswas put on the analysis of the strategic policyregarding their intellectual property. It was critical tounderstand possible conflicts in the usage anddevelopment of new research or patents in order toaddress them in the design of EVIMAR.



In today’s complex business environments it isnecessary to look at both, the internal and externaldevelopments in order to inform strategydevelopment. The process of ‘scenario-basedstrategic planning’, integrating internal and externalscenarios, is visualized in Figure 7.

The first step is the ‘strategic analysis’. Here, thepresent situation is described with the help ofsuitable methods and tools. Well-known instrumentsof strategic planning like portfolios, success factors,strategy maps, value chain analysis or businesssegmentation can be used.

The second step is the description of possible futuredevelopments of the external environment. The thirdstep in the development of strategy scenarios. Thecentral step is ‘strategy finding’ where companiesreach a critical point in the process. All experiencesand recognizable information are aggregated up tothis point. Based on the existing informationcompanies have to decide on their strategy - ideallybased on one strategy scenario suitable for allexternal scenarios.

The process of ‘strategy formulation’ starts once thestrategic direction has been defined. Recurringparts of corporate and business strategies arevisions and mission statements, strategic or corecapabilities and strategic positions. Strategicconsequences, programs and measures build thebridge between the present situation and theobjectives described as vision, mission, capabilitiesand positions – and therefore the starting point ofthe ‘strategy implementation’. The final step is the

continuous measurement of the strategyimplementation process which in turn acts as afeedback loop into the analysis.

Strategy finding based on a scenario-matrix

By developing strategy scenarios and externalscenarios the risk level and uncertainty areexamined in two different directions. The externalscenarios reveal possible side conditions likeindustry, market or global developments. Strategyscenarios, on the other hand, clarify the firm’s ownoptions. The suitability of strategy scenarios withinthe individual external scenarios is then valued andput into a ‘scenario matrix’ (see Figure 8). Thismatrix can answer two questions:

How robust is the strategy scenario? The rows in ascenario-matrix show how robust a complex bundleof options expressed as a strategy scenario isagainst the uncertain environmental development.Which strategy scenarios are suitable for a specificexternal development? The scenario matrix canalso be read the other way round where thecolumns show which strategy scenarios are suitablefor a specific situation.

Often the different resources interact so strongly,that strategy scenarios have to describe the wholebundle of corporate or business options. This is whySiemens Business Services used strategyscenarios to describe their future developmentpossibilities and strategic positioning in Germany.First of all, external scenarios were developedindicating the alternative possibilities for SBS in theGerman market. Afterwards alternative internal



strategy scenarios were developed using ascenario-conference. These strategy scenarioswere then used to match them with the externalscenarios. This led to the creation of a future-robustmission statement for Siemens Business ServicesGermany.

A second example is Heidelberger DruckmaschinenAG (Heidelberg), the market leader for print andpublishing industry solutions. Heidelberg hasbecome a global player that constantly has to reactto fast-changing industry trends. Recent examplesinclude the progress in digitizing data and themerger of diverse industries into a cross-mediamarket. To secure its leading position and to fosterits development towards a solutions provider,Heidelberg has to detect changes in the graphicalindustry as well as the embedded communication

economy at an early stage. Furthermore thecompany has to evaluate its strategic options in thechanging external conditions. To support thisprocess Heidelberg developed both marketenvironment and strategy scenarios to comparethem with each other in a strategic workshop of theHeidelberg board.

The need for strategic early warning

Within the last few years, many companies wereable to significantly improve their strategyimplementation process using instruments such asthe Balanced Score¬card (Kaplan and Norton,1996) and the Performance Prism (Neely et al.,2002). Nevertheless, organizations were repeatedlysurprised by dynamic changes in the environmentand it soon became clear that old strategies had



been maintained for too long. Only with hindsight, itwas evident that those ‘sudden’ events werepreceded by so called ‘weak signals’, which couldhave been detected in its early stages. Therecording and evaluation of such information is thesubject of strategic early warning. Thereby, thetraditional perception is changed in threedimensions (see Figure 9, left):Integration of external information about theenvironment. Especially in the area of strategicplanning, the majority of early warning informationcan be gained from the corporate environment(Schoemaker, 2002).

Integration of qualitative information. Moststrategically relevant developments are difficult toquantify, so that qualitative factors, trends anddevelopments have to be drawn into consideration.Integration of future-open information. The fixationon a once-determined strategy within the scope ofstrategy implementation processes and theunderlying external assumptions are leading to a

substantial narrowing of the horizon. Thus, it isimportant for the company to extend their focusbeyond the current strategy.

Several of those tendencies can be found in currentmanagement approaches. The Performance Prismintegrates external environment information,qualitative risk-management focuses on impreciselymeasurable danger zones and scenarios enablehandling uncertainty. With strategic early warning allthree approaches are combined in two coreactivities: In mid-term focused trend-management,possible future developments are identified andanalyzed. In long-term focused scenario-monitoring,the scenarios are assessed by currentdevelopments and identified trends.

The combination of strategic planning andstrategic early warning

If companies succeed in detecting ‘weak signals’ ingood time and purposely using them, then theirscope to take opportunities and avoid risks is



enlarged. This strategic early warning is closelyinterconnected with the process of strategicplanning and controlling (see Figure 10):

Strategic contingency controlling. The success of aonce developed strategy depends not only on thecompanies’ actions and performance to implementthe strategy. Companies must also ensure that theirstrategy is in line with the current developments oftheir markets, industry and global environment.That’s why external indicators are integrated in mostperformance measurement systems – but usuallyas one-dimensional premises which are built upon astrategy-conformant market perspective. Newtrends usually do not arise from these kind ofindicators though. To recognize ‘weak signals’ intime, managers have to widen their horizon to thoseareas which are not part of their current strategy –

and often beyond their current mental models.Issue management. Many relevant future trends lieoutside of the previous strategic viewpoints. Oftenthey derive from initiatives apart from the traditionalplanning process, e.g. in business development, inproduct and innovation management or inseparated foresight activities. As a result of theseactivities, new issues, strategic consequences andpossible actions are identified. It is far fromacceptable to wait for the discussion of these issuesand the resulting decision-making until the nextplanning cycle. That is why companies need anadditional perspective of ‘early-warning-indicatedplanning’ or decision-making.We define the combination of strategic planning andearly warning as ‘strategic foresight’. Scenarios canplay a significant and new role in combining thewell-structured planning process with the often less-



organized and in some planners’ minds more‘chaotic’ early-warning processes:

1 Scenarios can be the nucleus for new earlywarning processes. While the implementation ofearly warning processes often needs a longertimeframe, scenarios deliver first results in relativelyshort time. That is why a scenario project – whichoften delivers a framework for environmentalscanning and significant scenario indicators – canbe an excellent starting point for an early warningprocess.

2 Scenarios define the scope for monitoringprocesses. When companies decide on focusedstrategies, the scenarios which are not considereddefine a specific scope for monitoring. Theseimportant sources of ‘weak signals’ can only bestructured by scenarios.

3 Scenarios are needed to identify ‘weaksignals’. Early warning processes are much morethan long-term market research. They focus on‘weak signals’, which appear first in less plausiblealternatives to the current mental models. Scenariosare an important tool for clearing the way for thesenew ideas into the strategic thinking.

4 Early warning processes initiate newscenario processes. Often topics which suggest acloser examination in form of scenarios are theresult of early warning process.

5 Scenarios and early warning systems usethe same kind of information. On the one hand,well-structured knowledge about futuredevelopments can be used to reduce the time ofscenario processes as well as their quality. On the



other hand, well-written scenarios can return intoearly warning systems as new information.

The future scorecard as an instrument ofstrategic foresight

In traditional performance measurementapproaches, companies continuously observe theirperformance and ask: ‘How is the implementation ofour current strategy going?’ (see Figure 11). Today,many companies include external strategy premisesinto their performance measurement-systems andask: ‘How are the premises of our current strategydeveloping?’ But even this strategic approach fails ifdynamics are too strong and new trends and issuesarise independently from the current strategy.

A future scorecard could help companies to avoidthese risks by monitoring• not only the premises of the currentstrategy but also the critical market indicators (CMI)based on external scenarios which are not takeninto consideration within the current strategy;• not only the internal performance indicatorsbut also the change indicators from alternativestrategy scenarios which are not part of the currentstrategy.

The combination of strategy premises, criticalmarket indicators and strategy indicators leads to aFuture Scorecard which we believe is an importantaddition to existing performance measurementapproaches.



Requirements for the implementation of a futurescorecard

The implementation of a future scorecard is stronglyinterconnected with a scenario-based planningapproach which is described in Figure 12. Here acompany develops external scenarios (boxes ‘1’)and analyzes their impact on the strategy (boxes‘2’). To integrate organizational uncertainties, theydevelop their strategy based on internal strategyscenarios and their combination with the externalones (boxes ‘3’). The continuation of the scenariosprocesses includes the identification and monitoringof scenario indicators (boxes ‘4’).

Once a strategic guideline is defined, theimplementation of this strategy is measured indifferent ways. This process traditionally focuses oncurrent, internal and financial indicators.Performance measurement-approaches like theBalanced Scorecard or the Performance Prism havesignificantly enlarged the perspectives andintegrated non-financial and external indicators.However, most performance measurementprocesses focus only on the currently followedstrategy.Based on the future scorecard approach companieshave three different ways to address futuredevelopments:

Change your operation: Companies can changetheir operations without changing the strategy:• They could change their operational andtactical behavior to strengthen the performance andto influence the strategy indicators directly;

• They could react to changes in theenvironment shown by external indicators.

Change your strategy: Companies could changetheir strategy without changing the way they see thefuture of the environment or their own possibilities;• They could change the way they assessthe external scenarios, e.g. by changing thepossibilities or the risk management premises;• They could change the assessment of theinternal strategy scenarios, e.g. because of changesin their own resources or unexpected competence-developments.• They could develop new contingency plansfor alternative side conditions or possibilities whichmight become relevant in the future.This kind of change leads to additional changes onthe operational level.

Change your view on the future: Companies couldchange the way they see the future of theenvironment or their own possibilities:• They could rework their external scenariosdue to significant changes in the environment• They could rework their strategy scenariosdue to significant changes in the way theorganization can cope with the environment;• They could rework their combination basedon new developments.This kind of change leads to new strategicdiscussions and – very often – to changes in thestrategy, too.The development of a Future Scorecard needs tobe based on a creative learning culture and onexperiences in the fields of future thinking and



strategic management (Van der Heijden, 2002).One core element is open dialogues about theperspectives and strategies of the company (Zohar,1997). The Future Scorecard overcomes traditionallimits in thinking, leads the decision makers to newquestions and increases the tolerance of differentpoints of view. Scenarios are the right basis toinitiate and carry out such strategic dialogues. Atthe same time they enable the decision makers whoare ‘trapped in operative daily business’ to freethemselves and systematically broaden theirperspectives.

Conclusion

Scenarios have traditionally been used to developdifferent and internally consistent pictures of thefuture external environment. With the emergence ofthe resource-based view of strategy, moreemphasis was placed on organizational resourcesand how they can be used to address thechallenges posed by external change. In this article

we have outlined how organizations can developinternal strategy scenarios to complement externalscenarios in order to provide strategic foresight. In aworld of endless opportunities, path-dependentorganizational development, as well as stronginterconnectivity of the resource base, such strategyscenarios are valuable tools that allow organizationsto address the complex strategic issues in a future-open way. Combining both external and internalstrategy scenarios enables organizations to create afuture scorecard – a continuous measurement toolto complement other performance measurementapproaches in order to deliver the openness andflexibility needed for sustainable performance intoday’s increasingly turbulent business climate.

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Endnotes, References & Further Reading

Marr, Bernard (2010), “The Intelligent Company: Five Steps to Successwith Evidence-Based Management”, Wiley, Oxford.

Marr, Bernard (2009), Managing and Delivering Performance,Butterworth-Heinemann, Oxford.

Marr, Bernard (2006), “Strategic Performance Management”, Butterworth-Heinemann, Oxford

The API Resource Library:

Our Resource Library offers a wide selection of relevant downloads andlinks to books, articles and case studies. These have been selected asuseful information sources for further reading and to illustrate global bestpractice and leading thinking.

Other Management White Papers available:

What is a modern Balanced Scorecard

How to design Key Performance Indicators

How to design a Strategy Map

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