1. Introduction
As the business environment gets turbulent with uncertainty, organizational decision making process is becoming very complex. Decision making is a vital part of a manager's daily activity especially in the strategic planning and management. In simple terms, strategy is about making decisions on the direction and scope of an organization over the long term (Johnson et al, 2010). This paper analyzes the usage of scenario thinking approach in strategic decision-making process in comparison with orthodox approach to strategic planning. There are a number of approaches used by managers to help in making strategic decisions. Scenario thinking approach and orthodox strategic planning approach are some of the tools that are used in strategic decision-making process. Scenario thinking approach is a method of divergent thinking with a belief that future is uncertain and unpredictable, whereas orthodox approach is convergent thinking with the belief the future can be predicted based on the past and current trends. This paper will compare the two approaches from the strategic planning perspectives of'Managing Human Decision Traps', 'Managing Uncertainty and Unpredictability' and 'Managing of Innovation'.
2. Background
Orthodox or Traditional Strategy Planning Method ;
The orthodox or traditional strategic planning process tries to predict a one dimensional future with the assumption that environment will be static. It primarily involves forecasting by the analysis of trends and carrying the current trends into the future. This approach is vision or goal based process of answering “Where are we today?”, “Where do we want to go?” and “How do we get there?” by pre-determining the ideal desired future and planning a single robust strategy to reach that goal. The strategy formulation is heavily oriented towards quantitative analysis and based on assumption that all environmental variables can be measured and analyzed to ensure desired future can be controlled and met. The decision making process used in this approach is linear and logical in nature.
Key Characteristics ;
- It is a predict and control approach focussing on the past.
- It is a forecasting methodology. It assumes future is predictable and relies on quantitative analysis of past data as a means to forecast future conditions.
- It assumes business continuity, hence the future strategies of an organization are influenced by the experiences of past successful strategies.
- It focuses on setting goals and objectives to take the organization into the desired future.
Scenario Thinking Method :
Scenario Thinking or Scenario Planing method was originally used in the military applications. After the World War II, US Air Force came up with scenarios of what its opponents might do and tried to formulate alternative strategies for various possible scenarios. Herman Kahn, who worked for the US military and Rand Corporation used this technique in the field of business for the first time in the 1950s (Verity, 2003). Kahn used the term “scenarios” to describe the future in narration. Scenarios are not forecasts, they are stories of how the future of the business environment might unfold (Van Heijden, 2002). Scenario Thinking method got really popular in the 1970s when Royal Dutch/Shell had successfully used this method to traverse the 1973 oil crisis while others companies were blindsided when tOPEC nations caused the sudden shift in the external environment.
Scenario thinking, is a group strategic decision making tool used to make flexible longterm plans in a dynamic environmental context. This approach does not focus on accurately predicting the future, but is a process that creates a number of possible and plausible futures (Schoemaker, 1995). Scenario thinking involves a systems thinking, that emphasizes the relationships among many factors combined, rather than trying to analyze the factors in isolation. Thus, this approach allows the inclusion of change drivers that are in a way difficult to formalize, for example, a sudden shift in social values or a qualitative change in political environment. Scenarios takes complex elements and narrate them into a coherent, comprehensive, and plausible stories. These hypothesis will form a basis for strategic decision makings.
Key Characteristics ;
- Scenario Thinking is foresight methodology. It assumes that the future is unpredictable and circumstances that surround the organization can change at any time.
- This approach focuses on the future. It consists of creating multiple plausible future scenarios based on qualitative foresights rather than trying to predict a single outcome from the trend analysis of past.
- This approach is about thinking creatively and allowing unconventional views to generate new insights.
- It includes business discontinuity and ambiguity.
- Scenarios are open-ended, adaptable and flexible to use.
3. Managing Human Decision Traps
Orthodox strategic planning uses rational decision making methods. According to Bazerman and Moore (2009), the six step rational Decision-making method is the process in which a manager follows the steps of 1). Defining the problem, 2). Identify all criteria, 3). Accurately weigh the criteria, 4). Generate alternatives 5). Asses alternatives against criterion and 6). Select optimal alternative in a rational manner. This is based upon the premise that individuals think, compare and evaluate alternatives rationally. However the field of behavioral economics has shown us that human beings do not make rational decisions all the time. Our decisions are primed by our values, beliefs and perceptions, i.e our mental models. They are part of our thinking processes hard wired into us as human beings. These beliefs and perceptions are often mistaken for facts and we make decisions based on our mental problems with unwanted consequences. Our cognitive biases and heuristics allow us to take mental shortcuts, so they make living and thinking a lot easier for us. But because we are using them unconsciously, they can
become decision traps.
Strategic Inertia :
According to Gary Klein (1998), human beings approach 95% of their decision making in a recognition primed way. Humans are exposed to these decision traps making the organization face the problem of “Strategic Inertia”. When businesses are facing constant changes , instead of pursuing a change in strategies, the managers cognitive biases will prevent them from changing the strategy and will instead make them stick to the business-as-usual strategy. This situation is called “Strategic Inertia” (Van Heijden, 2002). Strategies and decision making based on the past successes and routines creates “Confirmation bias” and “Overconfidence bias”. Confirmation biases makes managers to seek confirmatory information for what they think is true and fail to search for disconfirmatory evidence (Bazerman & Moore, 2009). Overconfidence bias is defined as when individuals tend to be overconfident of their judgements when faced with moderate to extremely difficult questions (Bazerman & Moore, 2009). In the orthodox strategy
planning, even though external environment is monitored, the threat can be discounted due to confirmation biases or over confidence. Even when a threat is perceived severe, “escalation of commitment” biases will make the managers to stay with the business-as-usual strategy. “Escalation of commitment” occurs when managers tend to make subsequent decisions that continue their initial commitment beyond the level of rationality (Bazerman & Moore, 2009). These decision traps puts the managers in an obsolete world view causing strategic inertia which gradually leads to organization losing touch with business environment (Van Heijen, 2002). Scenario thinking process is divergent thinking. It challenges the mental models and helps managers to come up with ideas by incorporating diverse perspectives. Managers are forced to breakout of their world views, exposing blind spots that would have been otherwise overlooked in their typical decision making process. Many of these decision traps are due to lack of “System Thinking”. Scenario thinking is a type of System thinking process that allows us to think deeper and further to understand a context from multiple perspectives, thus reducing our cognitive biases. Managers improve their mental model as they are forced to think beyond the walls of their conventional knowledge. They help individual perception as it provides a framework for individuals to understand and evaluate different trends as they are unfolding. Because scenario thinking requires a deep understanding of the effects of environmental forces, managers need to think beyond their beliefs and mind-set and be more creative and imaginative. In changing mental models, scenario thinking process will provide a more complete view of the world and reveal the assumptions made by an individual (Chermack T.J , 2004).
Bounded Rationality;
Scenario thinking also reduces the problem of “Bounded Rationality” which is one of the main sources of decision failures (Chermack T.J , 2004). Bounded Rationality is defined as limitations on information processing abilities of human minds (Bazerman and Moore, 2009). Bounded rationality inhibits rational decision making because human minds cannot generate all feasible alternative solutions, cannot process and assess all the information that can predict the consequences of choosing an alternative. Scenarios are effective in reducing bounded rationality as they communicate a huge amount of informations in a storied narrative form. This information is highly memorable and conversational, that would be acted upon by individuals. Any information that is memorable will have high significance to be acted upon when compared to information that remains unconscious (Chermack T.J , 2004).
Group-Think ;
Group-Think is the tendency of people to concur with the others as they are hesitant to express different points of view. A person will often make decisions based on what the majority of the people around them think. Group-think suppresses the ideas that are critical by tendency to concur with the position and the view of the group (Van Heijden, 2002). The construction of multiple scenarios during scenario thinking process creates a forum to debate different opinions, contrasting views and synthesis of conflicting viewpoints. This creates a process for synthesizing different viewpoints into a strategic focus. It provides a team learning environment where members can increase their creative skills and tend to understand and modify their way of thinking and also get to know the way other members usually think. Scenario Thinking approach encourages to have discussions with others and creates individual accountability, thus reducing the problem of group-think.
… continued in Part 2