What is Scenario?What is Scenario?

-Engage in systematic conjecture

-Human beings are constantly writing scenarios, interpreting signals in the environment and reframing them into meaningful images and trajectories in to the future.

Abbas Malekimaleki@sharif.edu

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Scenario means simply to think about the Scenario means simply to think about the problemproblem

When a sailor is sailing I n Persian Gulf, he must aware of the numerous winds, different in direction and speed. He must also be very alert to not lose the wind and also to another boats.

Amazingly there are very few accident at sea, maybe very few during the recent 50 years.

The reason for this is the brain’s extreme capacity to interpret huge amounts of information intuitively, to calculate the speed and direction of other boats, keep track of one’s own direction and the position of surrounding banks, rocks and buoys and at the same time prepare for alternative actions if an oncoming boat changes direction earlier than expected.

Through experience, sailors improve their ability to interpret external signals.

Their brains become better and better at generating ‘sailing scenarios’.

Just as the football player over time becomes better at football scenario generation.

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Introduction Introduction

For Many years, it was believed obtaining accurate forecasts lay in the development of complex, quantitative models.

With just a little more time, a few more equations and a lot more dollars, these models would be able to provide forecast.

Many users have become disillusioned with forecasting models, attempt to predict the future from fancy mathematical manipulations of historical data.

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Feedback and feed-forwardFeedback and feed-forward

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Scenario planning is the combination of scenario Scenario planning is the combination of scenario analysis for strategic purposes and strategic planning analysis for strategic purposes and strategic planning based on the outcome of the scenario phasebased on the outcome of the scenario phase

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The relations between possible, The relations between possible, probable and desired futureprobable and desired future

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What is not Scenario?What is not Scenario?

Scenario is not a forecast, neither a visionIt does not seek numerical precision. It usually provides a more qualitative and

contextual description of how the present will evolve in to the future.

It is not assured. Scenario analysis usually tries to identify a

set of possible future, each of whose occurrence is plausible

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Definition of ScenarioDefinition of Scenario Vocabulary: Scenario is an outline of a natural or expected course of events. Kahn and Weiner: A hypothetical sequence of events constructed for the purpose of

focusing attention. Porter An internally consistent view of what the future might turn out to be Ringland: That part of strategic planning which relates to the tools and

technologies for managing the uncertainties of the future Schnaars: Identify plausible future environments that the firm might face.

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Forecasting and UncertaintyForecasting and Uncertainty

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Differences between scenarios, Differences between scenarios, forecasts and visionsforecasts and visions

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Scenarios versus ForecastsScenarios versus Forecasts

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Crude Oil Rigs in US, Crude Oil Rigs in US, (Prediction)(Prediction)

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Crude Oil Rigs in US, Crude Oil Rigs in US, (Reality)(Reality)

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Future is not continuation of the past necessarilyFuture is not continuation of the past necessarily

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Scenario in BusinessScenario in Business

22% of “Fortune 1000”, were using scenario analysis in the 1970s

75% of these firms adopted the approach after the oil embargo in 1973

It is essential to keep the number of factors that are considered to a minimum.

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Time HorizonTime Horizon Scenario analysis has been used primarily in

long-term forecasting. Most firms that used scenario analysis employed

5-year horizon. But in Xerox 15-year Shell, 15-year at least. The content of scenario becomes progressively

more vague as the time horizon lengthens. The ideal time horizon of scenario analysis is

specific to the industry, product or market under consideration.

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Historical BackgroundHistorical Background

Herman Kahn: was writing scenarios as far back as the 1950s.

“Thinking the Unthinkable” Shell in 1970s.SRI (Stanford Research Institute): Future of American

Society until 2000.

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SRiSRi

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HistoryHistory

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The Number of Scenarios to GenerateThe Number of Scenarios to Generate

Consensus is that three scenario are best. Although two tend to classified as “good-and-bad”, while more than three become unmanageable in the hands of users.

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Arraying ScenariosArraying Scenarios Scenarios are inevitably arrayed over some back-ground

themes. Four background themes: 1-Favorability to the Sponsor: Selecting an optimistic and then an pessimistic. “Surprise-free” or ‘baseline” scenario 2-Probability of Occurrence One of the scenarios is labeled as “most likely”. Scenarios are possibilities, not probabilities. 3-Single, Dominant Issue Sometimes there is a single dominant factor whose outcome is central to the item being forecast. Like economy, government policy. 4-Themes In most business applications there is more than a single unknown.

There are many issues which compete, combine and interact with one another to characterize the future. Three scenarios as: Economic expansion, Environmental concern, and Technological domination.

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Scenario projects could be used for different Scenario projects could be used for different purposes and with different focusespurposes and with different focuses

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Characteristic of traditional planning compared Characteristic of traditional planning compared with the scenario planning approachwith the scenario planning approach

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Scenario planning is well suited to the task of Scenario planning is well suited to the task of dealing with paradigmatic, non-linear changedealing with paradigmatic, non-linear change

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Methods of Constructing Methods of Constructing ScenariosScenarios1-Highly Qualitative Procedures2-Practical Procedures3-Cross-Impact Analysis

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1-Highly Qualitative Procedures1-Highly Qualitative Procedures

Kahn: -A simplistic intuition or an expression of bias rather than a careful synthesis and balancing of the analysis with more subtle qualitative considerations. -“Surprise-free” scenario Godet: -”Exploratory Prospective Analysis” -Holistic and integrative analysis Durand: -Intuitive analysis

Critic: They rely so heavily on intuitive and subjective analysis that they are difficult to implement.

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2-Practical Procedures2-Practical Procedures

More practical means of generating scenarios in business environment:

-Identifying factors are expected to affect forecasting situation at hand.

-Postulating a set of plausible future values for each of these factors.

-Selecting a few plausible scenarios from a large number of possible combinations of the values of these factors.

Two Approaches on selecting strategies: -Deductive -Inductive

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3-Cross-Impact Analysis3-Cross-Impact Analysis Emerged from early work on the Delphi

Technique It’s Basic philosophy of Cross-Impact is that no

development occurs in isolation. Rather, it is rendered more or likely by the occurrence of other events.

Cross-Impact attempts to capture these ‘cross-impacts’ from the judgmental estimates of experts.

Data from experts are then input into a computer simulation or mathematical program.

Critic: Judgmental estimates are surely not amenable to any mathematical machinations.

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Few Comments on ScenariosFew Comments on Scenarios1. The most important part of scenario analysis is to think

about the problem.2. The most difficult in scenario analysis is how to reduce

a large number of potential future outcomes to a few plausible scenarios. The number of possible scenarios grows quickly as the number of factors increases.

3. Two methods: -Inductive: If the number of factors is small (<5),

examine every possible scenarios from this set. -Deductive: When many factors are considered, rather

than examining every possible combination, set the tone of scenarios. It means to decide whether the scenarios will represent an optimistic and pessimistic views of the future, or characterize some dominant themes.

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Scenarios on Iran’s future to 2006Scenarios on Iran’s future to 2006

Three scenarios are written by BMI (Business Monitor International)

Political ScenarioEconomic ScenarioBusiness Scenario

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Advantages of ScenarioAdvantages of Scenario

Scenario writing is a planning instrument. It is also an effective learning tool. Thinking in scenarios helps us understand the logic of

developments, clarify driving forces, key factors, key players and our potential to exert an influence.

It proceeds more from the gut than from the computer. Although it may incorporate the results of quantitative models.

It shows a slight accuracy comparing with other models of forecasting. Specially when uncertainty is high.

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Scenario as powerful instrument Scenario as powerful instrument

Brain-compatible format: Scenario thinking matches the way the brain function. Narrative format (images and stories) makes them easily memorable.

Opening-up of divergent thinking: By forcing your mind to think about qualitatively different directions, you train your capability to think the unthinkable.

Complexity-reducing format: Complex business or general environments can be reduced to a manageable amount of uncertainty.

Communicative format: Scenarios are easy to communicate and to discuss.

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Weaknesses of ScenarioWeaknesses of ScenarioIf scenarios are powerful, why haven’t they been If scenarios are powerful, why haven’t they been

more widely used?more widely used? Uncertainty in conclusions: It does not give one single

answer about the future. Therefore it does not provide the security that is often required in decision making.

Counterintuitive to managerial simplicity: It does not accord with the managerial simplicity that says that there is one right answer to every question. Scenario planning is a more holistic or systemic approach to planning than traditional methods.

Soft methods and soft answers: Scenario techniques are usually qualitative, the results are often presented in qualitative terms that fir poorly with traditional numbers-oriented cultures.

Time consuming: Workshop-based methods are time consuming in terms of the number of hours and days the participants need to spend to get thorough results.

Secrecy: Most of Scenarios adopted in the companies are arcane and impractical

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BibliographyBibliography

Kahn, Herman & A. J. Weiner, The Year 2000, London: McMillan, 1967.

Makridakis, Spyros et al., The accuracy of extrapolation (time-series) methods, Journal of Forecasting, 1, 111-153, April-June 1982.

Schnaars, Steven P.; “How to Develop and Use Scenarios”; Long Range Planning; Vol. 20, No. 1, pp. 105-114, 1987.

Zenter, Rene D.; “Scenarios in forecasting”; Chemical and Engineering news; October 1975, pp. 22-34.

-Lindgren, Mats, & Hans Bandhold; Scenario Planning; New York;

Palgrave, 2003.