4. Managing Uncertainty and Unpredictability
Orthodox strategic planning became popular in the 1960s, during the period consisting of primarily domestic competition, slow changes in industries and a predictable environment (McFarland, 2005). Orthodox strategic planning was appropriate in this environment. But today, business organizations operate in a volatile, hyper-competitive markets facing unpredictable events. Globalization has made business world closer and more connected than ever. Unpredictable events like 9/11 terrorist attacks in New york caused systematic meltdown of the global airline industry, 2008 credit crisis which initially started in real estate sector had a negative trickling effects on all other sectors of business, unexpected social shifts like the recent Arab uprisings had significant implications on an otherwise sound business sectors of North African tourism. And even unpredictable political events like, Saudi Arabia decision to ban Danish products in 2006.
Many businesses end up getting blindsided when these unpredictable events takes place. The reasons for getting blindsided is because the orthodox strategy model is inside-out rather than outside-in. This model is based on continuity in their current business environment with lack of curiosity about outer periphery. By establishing a single description of the current state and desired future state, formulating a robust one-dimensional strategy to get to the desired future state, this approach does not take into account unforeseeable events in the external environment and hence will fail to predict any major shifts to the firms external environment. Also, it doesn’t directly point the planning team’s attention towards threats which resides outside of their current industry business model. For example: Toyota's global automobile production was cut drastically when its supply chain was severely affected during the 2011 earthquake and tsunami in Japan. Another example is China's abrupt decision to block Google's internet services in China, which caught Google completely off guard and unprepared.
One thing is certain, that is disruptive events like these can happen anywhere and anytime. and businesses today operate with full of surprises and discontinuity. To anticipate these discontinuity organization need to think with foresight. Even though we cannot predict the future we can explore the futures by using scenario thinking process and anticipate these discontinuous. The philosophy of Scenario thinking is that the future is uncertain and unpredictable. Scenarios will make managers to think from a different mindset and anticipate various disruptive events that will affect the organization but currently is outside of their radar.
Predicting vs Anticipating ;
Scenario thinking starts with exploring the conceptual environment surrounding the periphery of the business sector. These forces are not obvious but can influence and shape the environment within which the sector operates. These could be global level, country level, or sector level which could potentially become specific. Since Scenarios are “alternative futures” that cannot be predicted due to uncertainty, the Scenario thinking approach challenges existing business models and stimulate strategic debate for new ideas which is radically different to the orthodox strategic planning method. Scenarios compel managers to begin the planning process by considering what could be, not what has been. In order to respond to undesired happenings such as the collapse of credit markets or natural disasters, organizations must be flexible and adaptive to change and respond as circumstances dictate. Scenarios suggest a number of possible changes to the status quo, it allows organizations to think through discontinuity and to come up with flexible plans composed of a variety of options. Once these scenarios are identified managers can have a strategic plan for handling those when such event occurs. If a scenario doesn't occur, the plan can be dropped and if a scenario takes place then organization is prepared and can quickly react to it, thus maximizing chance to success. Scenario thinking approach transforms an organization from being one of controlling risks to rather a navigating uncertainties.
Handling of Crisis ;
Orthodox planning makes the decision making process more complex for managers as there are no plans to deal with an unexpected situation that organization might face suddenly. During crisis, managers will have to make decisions faster. When managers are suddenly faced with these unexpected events and are not prepared for it, they end up making decisions based on their heuristics which leads to decision traps as explained earlier in this paper. Being unprepared also causes delays in making the right decisions and thus, may have a negative impact on the organization. Scenario thinking approach enables managers to come up with strategies that takes into account all forms of scenarios and how to manage them best. This puts managers in a position to make a quick and informed decisions when the event unfolds. For example, BP oil spill in the Gulf of Mexico is probably the worst man-made environmental disaster. This disaster not only impacted livelihood of people living in the coastal towns but threatened BP's business and its employees too. Now, BP could or could not have prevented this accident from happening in the first place, however BP could have used Scenario planning approach to strategically plan for worst-case scenarios like this large scale explosion and subsequent oil spill. Having a contingency plan in place would have put BP in a position to act faster and limit the negative impact.
Avoiding Crisis;
By looking at a system as a whole Scenarios provides early warning signs which helps managers and business organizations gain peripheral vision enabling them to pick up changes thats happening outside the business focus but could have significant impact on businesses. Decision makers will be able to recognize the scenario at the early stages should it actually be the one that unfolds. By involving a wide range of people in the scenario planning process, it creates an actionable foresight, allowing mangers the flexibility to make wise and well-reasoned decisions when they see signs for a potential crisis occurring. The organization can move forward by shifting its focus between these options and thus, enabling the organization to adapt its plans to the changing environment. Since scenarios offers flexible and multiple coverage strategies, we don't make decisions immediately, but this approach will prepare the mangers to make decision when situation unfolds thus avoiding a crisis.
5. Managing of Innovation
Orthodox strategy methods are about creating predictability and does not incorporate innovation in strategic planning. This method relies on past data to plan for future. When focussing on the past, the managers are forced to think in terms of what has happened in the past will most likely happen in the future. This creates a barrier for out-of-the box thinking. The problem is that focusing on the past emphasizes what has worked before, instead of new ways of thinking and doing. Large companies have large barriers to innovation because they have traditionally preferred a one solution view of strategy of sustaining growth, planning accordingly and thus, they could be less alert to the emergence of disruptive changes in their environment.
Disruptive Innovations ;
One of the most consistent patterns in business is the failure of leading companies to stay at the top of their industries when markets change due to 'Disruptive Innovations' (Bower & Christensen,1995). According to Christensen et al (1995), a disruptive innovation is an innovation that helps create a new market, and eventually goes on to disrupt an existing market by displacing an earlier technology. For Example, Netflix's DVD rental-by-mail business model was a disruptive innovation that caused the large US brick-and-mortar movie rental company Blockbuster to ultimately declare bankruptcy.
The modern business environment has shifted from industrial age to information age. In the information age era anyone can develop and distribute goods and services within a fraction of a traditional strategy execution time. These disruptive innovations can cause the failure of highly successful companies if their strategy is focussed on sustaining their businesses. Such successful companies can be blindsided by the emergence of disruptive innovations because they are essentially caught in the routine of maintaining the status quo. According to Christensen et al (1995) it is highly uncommon for firms that manage established lines of business effectively, to anticipate and respond well to a disruptive innovations coming from an external agent. Orthodox Strategic planning assumes that industry boundaries are given and hence does not push large organizations to think deeply about the sustainability of their organizations in a time of continuous disruptions, instead they become “performance organization”. These performance organization will focus on growth by sustaining a rate of improvements of their existing products and services rather than focussing on a game changing innovations.
Microsoft, for example, famously missed in 2000 to see the full potential of 'Google' and its internet search business and subsequently spent billions developing their own search technology 'Bing' to compete against 'Google' to get a share of the internet advertising market that they missed. By the time Microsoft released 'Bing', Google had a already gained a huge market share in the internet Search and advertising business and had become a very large company itself. Ironically 'Google' faced a similar problem few years later when they ignored the potential of social networking site 'Facebook'. By the time Google came out with 'Google+', their answer to Facebook, it was too late. The problem of course was that the Microsoft and Google who were once a disruptive innovators themselves , but as they grew to a large organizations, they started focussing on sustainability of their core technology rather than pursuing disruptive innovation. They had developed a mindset that entrenched a certain view of the world, and that view had worked very well in the past but failed to think flexibly about possible future scenarios. Both Microsoft and Google missed to act on the opportunities of the emerging ideas, instead were blindsided and had to react to the disruptive innovations.
In the business environment today, everyone faces threat from disruptive innovations, and the pursuit of innovation is the only viable strategy for building new business models that will secure the future of an organization. So it is critical that business must actively pursue innovation to strategically create disruptive innovations that will upset the industry status and create an environment for a new game. In this type of a turbulent environment Scenario thinking is a critical innovative tool (Leger, 2006)
Scenarios and Innovations;
According to Drucker (2007), the principles for successful innovation are;
- Explore relevant environmental factors to analyze opportunity
- Innovation is conceptual and perceptual
- Innovation must satisfy a specific needs
- Successful Innovation can achieves market leadership or create whole new industry.
Scenario thinking can be used as an innovation tool to support the above principles. Scenarios supports the analysis of opportunities with a range of market assumptions, to explore the competitive environment and develop a strategic position. The scenarios are essential in developing a picture of what was happening in the broader market and business environment that affected the product groups. Scenario thinking will free product planning from existing limitations of previous mindset that the company may be currently operating under. It makes us think about how we should act now instead of reacting later if a future scenario would become reality. Scenarios are creative and intuitive, therefore help organizations to quickly and easily make sense of converging and often conflicting trends so they can focus on identifying opportunities for innovation. Preparing this way helps organization to consider emerging ideas and discovers entirely new patterns that no one else has recognized.
6. Conclusion
Scenario thinking approach in organizational decision-making process is a useful tool in strategic planning. Strategy is about planning for the future and is affected by the environment both inside and outside the business boundaries. Unlike orthodox strategy planning method, scenario thinking incorporates business discontinuity and prepares the organization to visualize and deal with unpredictable set of situations. Thus, it makes the decision-making process more easier and faster when an unpredictable situation unfolds.
Scenario thinking also reduces the problem of Strategic Inertia and the decision failures caused by our mental models. By forcing decision makers to express multiple opinions and to consider alternative views, scenarios helps with falsifying decision making biases. Scenario thinking only has a positive affect on strategy management as it improves individuals thinking, leading to improved insights and ideas and thus make better decisions. Scenarios not only creates early warning signs that might be precursor to the desruptive future but also identifying opportunities for industry changing innovations. Scenarios are all about considering alternative futures and thus provoke out-of-the-box ideas which ultimately can lead to disruptive innovations.
Even though Scenario Thinking approach is considered being too costly and time consuming, in today's turbulent business environment, it is still an effective and efficient tool for organizational decision making process compared to orthodox strategic planning methods.
7. References
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