0024-6301/84/$3.00 + .OO Pergamon Press Ltd.
Long Range Planning, Vol. 17, No. 5, pp. 45 to 49, 1984 Printed in Great Britain
Scenarios in Europe-Who Them and Why? P. Malaska,
M. Malmivirta,
T. Meristii
The authors of this article describe a study of European companies the aim of which was to review the extent of multiple scenario analysis in company planning. They describe the differences in planning between users and non-users of the system, and analyse the benefits and drawbacks of using the system.
and S.-O.
companies growing companies.
Uses
Hanskn
described below bear witness interest in this field on the
Aims, Methodology the European Study Many of the recent articles contained in LorIg Range Plarw~ir~gand in other management publications have dealt with scenarios as a method of preparing for an uncertain future. The systematic use of scenarios in company planning is, however, a rather new phenomenon and as yet there seems to be no uniform and generally accepted way of drawing up such scenarios or of using them in practice. The methodological development and practical application of the scenario method in long-range planning were earlier connected with such fields as the research done by French sociologists (DATAR, SESAME, Association International futuribles), American military research and world models (reports to the Club of Rome). famous names in the field of futurology such as Ossip K. Flechtheim, Gaston Berger, Bertrand Jouvenel and Herman Kahn developed ideas based on alternative views of the future as long ago as the early 1940s. The erection and use of possible, probable and desired courses of events, i.e. scenarios, became widespread among companies, however, only in the decade of great change, the 1970s. One company which has pioneered the use of scenarios in corporate strategic planning is Shell, which adopted scenario planning as a permanent strategy in 1972/1973.’ Little information about the USC of scenarios by other companies has been published but research by Linneman and Klein in the U.S.A. in 1977 and 1981’ together with our study of European Professor P Malaska and Mrs. Tarja Meristo. Turku School of Economics, Turku 50. Finland, Mr. Martti Malmiwrta, Nesto Oy, Espoo 15. FInland. President. DBA. Sten-Olof Hans&. Farmos Group Ltd. Turku 36, Flnland.
The
aims
45
of the study
to the part of
and Course
of
were:
to review the extent of the USC of Multiple Scenario Analysis (MSA) in planning in different in different branches of types of companies, business and applied to different issues; to describe differences, if any, in planning and views of the future between users and non-users of MSA; to analyse the benefits and pitfalls of using MSA as a supplement to traditional planning and as a support for decision-making, and to share experiences between participants. For the study the thousand largest industrial companies in western Europe were selected and, in addition, the hundred largest transport companies. Questionnaires were used to collect data for the study. The questionnaire was formulated in English, German and French and sent to the 1100 firms in the latter part of 1981. It was in two parts: the upper section contained eight questions about the uncertainty and predictability of the future, about critical factors concerning the company’s success and about methods used for long-range planning; all the companies were asked to answer this section rcgardlcss ofwhcther they used scenario approach or not. In the second section questions wcrc asked about the companies’ USC of scenarios for strategic managcmcnt. There wcrc twelve questions in a11 in the second section of the questionnaire. Acceptable companies,
qucstionnaircs the pcrccntage
were returned of answers
by 166 therefore
16
Long
Range
Planning
Vol.
17
October
being 15. Fifty-nine of the companies replying to the questionnaire said that they used the scenario method (36 per cent). The proportion of scenario users is lower than the figure obtained by Linneman and Klein for U.S. companies in 1981 (51 per cent). On the other hand. it is higher than the corresponding figure for U.S. firms in the 1977 study (23 per cent). The study was not of the statistic sampling kind so that the results might be generalized to apply to all 1100 companies to which the questionnaire was sent. The aim, in which a fair measure ofsuccess was achieved, was to find companies that successfully use scenario approach and to study their views of the usefulness, practicability and development potential of scenarios. The answers are summarized in a separate report and from it can be seen the individual percentages given in answer to each question by users and non-users.3 We have also written an article putting forward background assumptions in more detail than is possible here.4
Differences Non-Users As shown considerably
Table
in
1. Use
Between
of MSA
MSA
MSA
of time
MSA
since
Users/ non-users
Oil companies, vehicle manufacturers, suppliers of electricity and transport companies make wide use of MSA. The forest industries, the light chemicals industry and companics with widely diversified activities represent the other extreme. is a relatively
The majority of users did not adopt scenario approach until after the first oil crisis. This is clearly a sign that the use of MSA and changes in corporate environment arc‘ linked in some way. It is worth
in
USC‘
Percentage
after 1978 1976-I 978 1973-l 975 before 1973
of users
22 41 22 12
noting that there are several companies, in addition to Shell, which have used this method of long-range planning for more than eight years. Obvious differences can be observed of users and non-users to uncertain present-day and future factors, corporate environment. Among make use of MSA the uncertainty environment is considered to have during the past ten years than is non-users of MSA, see Table 3.
Environmental
Petroleum and related industries 8/12 (73%) Transport equipment 7/l 1 (64%) Electricity supply 5/8 (62%) Transportation 1 O/l 8 (56%) Construction and construction materials 4/l 1 (36%) Food manufacturing 4/11 (36%) Machinery and fabricated metal products 319 (33%) Heavy chemicals 2/6 (33%) Iron, steel and ferro alloys 4/l 3 (31%) Electrical machinery, apparatus and supplies 4/l 2 (33%) Forest based companies 2/16 (14%) Highly diversified companies l/l4 (7%) Light chemicals O/6 (0%) Others 5/19 (26%)
MSA as an aid to corporate planning recent phenomenon, see Table 2.
2. Length
varies
by branch
Branch
Table
Table 3. Uncertainty associated environmental factors
Users and
Table 1, the use of from branch to branch.
19X-I
factor
1. Prices and availability of energy 2. Currency fluctuations 3. Inflation 4. Prices and availability of raw materials 5. Legislation and governmental regulations 6. Market growth rates 7. Technological advances in the production of your products or services 8. Political instability in your market countries 9. The role of the new industrialized countries IO. Values and life styles 11. Demographic development
in the attitudes factors, both affecting the companies that of the corporate increased more the case among
with
Percentage reporting uncertainty has increased very much during the past 10 years Non-users Users (%) W)
81 69 47
86 81 61
35
37
23 21
34 29
25
19
19
25
16 13 2
24 25 7
We have therefore drawn the conclusion that the adoption of MSA is associated with the increasing uncertainty and unpredictability of the corporate environment that took place in the 1970s. Ifaccount is taken of the original purpose of MSA, namely the charting of new alternative futures, then this result seems to be quite logical. Table 4 indicates that the size of the company is also a signiticant factor affecting the USC' of MSA. Large companies have both the interest and the resources to adopt various new planning methods.
Scenarios Table
4. Size of company
Turnover
(Sbn)
by turnover
No. of companies to which questionnaire was sent
Over 10 5-l 0 2-5 l-2 0.5-l Under 0.5
1980
No. of users/ No. of replies
31 48 139 201 412 269
7/10 s/17 13/26 11/30 8/46 11/37
(70%) (53%) (50%) (37%) (17%) (30%)
The high proportion of users among companies with a turnover of less than $@5bn is explained by the fact that one branch of industry particularly active in the use of MSA, transport companies, falls into the group of companies with the smallest turnover. It is characteristic of users of MSA longterm experience of strategic Table 5.
Table
5. Experience
of strategic
that they planning,
have see
in Europe-Who
Uses Them
and
Why?
47
Forty-six per cent of MSA-users said that they would increase their USC of the method in the future and only 12 per cent announced that they would make less use than hitherto. At the same time there were a number of non-users who expressed interest in using the method in the near future. When companies were asked their view of the usefulness of strategic planning, the feeling among both groups was quite clearly one of approval. was used to describe strategic ‘Very useful’ planning by 23 per cent of non-users and 32 per cent of users. Clear differences between users and nonusers appeared when they were asked about the weaknesses of strategic planning. In the group of non-users serious failings to strategic planning were more clearly in evidence than among the user group see Table 7. This was especially true of ‘scanning environmental changes’ and ‘dealing with uncertainties and unpredictabilities of the future’.
Table 7. Inadequacies systems
of strategic
planning
planning Percentage
Strategic planning system since after 1978 1975-l 978 1970-l 974 1965-l 969 before 1965
Percentage Non users
Users
Problem areas
12 17 25 19 27
Scanning environmental changes Competitor analysis Creating flexibility and adaptability needed in making strategic changes Dealing with uncertainties and unpredictabilities of the future Managerial participation in planning
18 28 29 10 8
Partially this is explained by the positive correlation between the size of the company and the experience gained in strategic planning. For users of MSA it is necessary, however, to understand the meaning and the significance of strategic planning, as MSA, after all, should be seen as a supportive function of strategic planning. This point of view was emphasized in the answers to the question concerning the difficulties in the use of MSA.
Is It of Value? Table 6 shows that most of the users of MSA regarded it as a useful aid in strategic planning. Table 6. Contribution of scenarios development of strategic plans Contribution to strategic plans Essential Helpful Of little help Not useful Not known as yet
reporting severe inadequacies Non-users Users
of
19 17
3 12
11
10
22
5
6
2
It can be seen from Table 8 that the strategic planning time horizon of companies that do use the scenario method is greater on average than that of companies not using the scenario method.
Differences between branches of industry are not in themselves enough to explain this result since the differences between users and non-users as far as the distance of planning horizon is concerned remain much the same in all cases when companies were made within different branches of industry.
to the Table
Percentage 24 59 10 0 5
of users
8. Strategic
Time horizon under 3 years 3- 5 years 6-10 years 1 l-l 5 years over 15 years
planning
time
horizon
Percentage of Non-users Users 3 51 31 2 9
2 24 47 7 20
4x
How
Long
Range
Planning
Vol.
17
October
Is It Used?
Conclusions
Companies have used scenarios for the widest possible range of different topics. The phenomenon studied may have been some particular environmental factor s&h as energy, inflation, exchange rates, etc. Some companies have made scenarios of the future for some individual business area or even for the alternatives facing the whole company in the future.
(1) The
period of cessation of the prolonged began in the 1970s and development that . its subsequent supercession by the greater uncertainty and unpredictability have been noted and felt by leading European companies.
(4
There does not appear to be any generally accepted system for constructing scenarios. Rather than adopting formal procedures established in advance a more favoured method of constructing scenarios is to recommend certain natural principles (consistency, logicality, etc.) and then leave the rest to the imagination and resourcefulness of the person concerned. Despite the poor reputation enjoyed by mathematical and statistical models at present 59 per cent of the companies replying to the questionnaire considerd them very useful or useful aids in erecting scenarios. On the other hand, the delphi method was unknown, which came rather as a surprise; 51 per cent had never used it in the scenario method.
some of the drawbacks (4) MSA is able to remove of strategic planning and especially to improve control of the uncertainty and impredictability of the corporate environment. It can also help to organize co-operation between different levels of management and participation in creating the company’s future, and thus improve not only planning but the whole strategic management. method of procedure with (5) There is no uniform MSA nor is there likely to be in the future. By reason of its intuitive nature the method used in scenarios always seeks to establish adaptations and possibilities suited to the individual company within the framework of certain basic principles, which can be made effective through experience.
It was quite surprising that as many as 51 per cent of users said that they chose only one scenario when formulating the main strategy. Afterwards the validity of the strategy was tested using other scenarios as variables. Necessary modifications of the strategy were made accordingly. Only one third of users were using scenarios for contingency planning in the real sense of the word (different strategies for different scenarios).
9. Management’s
involvement
Planning
in planning
Corporate strategic planning is being subjected to continuous changes with the aid of which companies are trying to subject the changing environment to methodical study and thereby to better control the attainment of company goals. MSA is just such a new addition to the arsenal of strategic planning weapons and its ~1st~ has spread simultaneously with the 1970’s period of change.
operating in the most turbulent (3) Companies environments and companies with long-term experience of strategic planning have been pioneers in adopting MSA.
Setting up scenarios seems to be largely the responsibility of planning personnel. The contribution made by top executives, on the other hand, is in setting goals and making assumptions about the environment. Similarly, the development of strategies and the choice of final strategy appear to be the task of the company’s top executives in most cases (Table 9).
Table
1984
This study has provided rather a large amount of valuable evidence of the change undergone by strategic management as a response to the changes that took place in the environment in the 1970s. At the same time it has convinced the authors that through the exchange of experiences and their joint evaluation MSA can be developed into a
with
task
Setting goals and criteria for the business activities and spelling out the basic assumptions about the environment Drafting of multiple scenarios Evaluating draft scenarios and selecting one for strategy formulation Formulation and appraisal of strategy Cross-checking strategy against other scenarios Final selection of strategies for operations
MSA
Top executives
Involvement of Planning personnel Business unit managers
xx -
xx xxx
-
X xx -
X xx X
xxx
xxx
xx
Scenarios more systematic management.
and
practical
tool
for
strategic
in Europe--Who
Christopher unthmkable,
Lorenz, How Shell made its managers Financial Times, 5 March (1980).
think
the
Them
and
Why?
49
(2)
Robert E. Linneman and Harold E Klem, The use of multrple scenarios by U.S. industrial companies, Long-RangePianninglZ (1 ). 83-90, February (1979); Linneman and Klein, The use of multiple scenarios by U.S. industrral companres. A longitudinal study 1977-l 981, Temple Universrty (1982).
(3)
P. Malaska, M. Malmwirta. T. Merrsto and S.-O. Hansen, The Multiple Scenario Approach in Strategic Management. the frrst summary report, Turku (1982).
(4)
P. Malaska. Coping with the future, Turku (1982).
References (1)
Uses
Unpredictability
and Uncertainty
of
