Scenario planning

Content

An increasingly complex world

The period between the late 1950s and the mid-to-late 1960s in western economies was unique but quite deceptive. Following decades of international political conflict, depression and war it provided an environment of full employment and economic growth prospects never before experienced anywhere. The capacity of the physical environment to provide long-term support for all economic activities was not considered a great issue. Though Rachel Carson published Silent Spring in 1962, its message took a while to penetrate. Everything seemed to be plentiful, and the atmosphere unchangeable or capable of absorbing anything without harm.

This was the world into which Hans Hoegh-Guldberg arrived in early 1959 as a very green Danish economist – green as in inexperienced rather than (yet) ecologically orientated. In July of that year he was fortunate to gain employment with leading Sydney-based management consultants W D Scott & Co, whose chief economist was Phil Shrapnel. Phil was the first of the economist gurus who now proliferate in the Australian media. Short-term forecasting was the name of the game. Hans cut his analytic teeth on making accurate forecasts of the Australian economy and key sectors such as the automotive and construction industries. Colleagues including Ken Walker and Paul Brenac shared the experience. The experience honed his applied statistical skills and reaffirmed his faith in always trying to back what he was doing with solid up-to-date economic theory.

The cosy western world of steady growth without too many influences from elsewhere was soon shattered, intensified by the counterculture and anti-war movements that gathered strength in the second half of the 1960s. Adding another dimension to these socioeconomic aspects was The Limits to Growth, the 1972 book commissioned by the Club of Rome that modelled the consequences of a rapidly growing world population and finite resource supplies. A plethora of non-government organisations (NGOs) grew strong across a wide spectrum of interests.

And surrounding all that activity in the west was a hungry and increasingly vocal world of developing countries – adding to the turmoil and complexity that remains with us in today’s global society.

top

Enter scenario planning

Shell is representative of many other corporations that have adopted scenario planning as a strategic planning instrument. It was among the first to recognize the emergence of a more turbulent world, in which economic and financial decisions were increasingly encroached upon by social, environmental, technological and political considerations, as well as economic and financial self-interest. Scenario planning was not unknown when Shell took it up in the late 1960s; it was first developed in the US during the early cold war period to test a number of ‘unthinkable’ futures about military strategy, including nuclear war.

Shell’s objectives were naturally more business-orientated. In what appears to be their very first series of alternative scenarios in 1970, the company hit upon the idea of an Arab oil embargo resulting in escalating oil prices. This enabled the firm to plan quickly towards that future when it actually happened in 1973, including its inevitable consequence of reducing demand for crude oil. The result was to put Shell in a strong competitive position while other oil majors kept adding their customary 7-8% pa to storage and refining capacity right through the 1970s.

Shell remains committed to scenario planning. They even publish their scenarios. The latest series (to 2050) depicts two different futures focusing on a world in which fossil fuels are becoming increasingly scarce and the need to reduce carbon dioxide emissions is become increasingly urgent.

top

What is scenario planning?

Basically, it is the construction of alternative futures, initially expressed in storylines which are then used to generate quantitative estimates of those key economic, demographic, environmental, and other variables considered relevant for the particular application. None of these futures is likely to eventuate exactly as described, and that doesn’t really matter. The art is to construct two, three or four stories that cover the range of plausible alternatives. These futures must be distinct and credible. There is no point in devising a future which nobody believes could possibly happen, or one which is so disastrous that nothing much can be done to forestall it, nor is there any point in devising two futures so similar that they basically need the same policy measures to either prevent or encourage, depending on their merits or disadvantages.

So we look for futures that are sufficiently different to cover the range of plausible possibilities viewed from today’s perspective. Even this is difficult, as it means suspending our own beliefs in where the world is heading, and thinking of how unexpected events in the future can profoundly change what may happen – taking us to a “fork in the future road map” where we may go either left or right, for example 9/11. Terrorism was a recognized threat in the 1990s but how did 9/11 revise people’s and politicians’ ideas of the future, and how much should scenario planners go with this rather than the 1990s or any other perspective? Assuming that terrorism is a relevant driver of some scenarios, the logical answer may be to construct alternative futures where terrorism intensifies in one and subsides (because of a renewed set of enlightened policies?) in another.

top

Who can do scenarios?

Partly because of its origin in big multinational corporations (and its genesis within the post-war US defence establishment), there is a perception that it needs huge teams and resources to develop plausible scenarios which – most important of all – are accepted by the relevant stakeholders. If the decision-makers don’t get to “own” them through their acceptance, the exercise is futile.

Plausibility and adoption by stakeholders are essential conditions, but in our experience size is not. There are ways in which even a small business or consulting firm can produce acceptable scenario planning exercises. The business needs to involve its employees and other stakeholders, the consulting firm its clients, and local communities and other groups relevant for the scenario topic.

top

Our first scenarios

Hans first became interested in scenario planning in 1997 while conducting a subscription service together with his wife Isobel (a former high-school teacher of Indonesian language and culture in Sydney) for businesses with Indonesian interests. Fortuitously, a long-standing friend in Great Britain, Professor David Stout, was developing a similar interest through his association with the British government agency Foresight. So ideas were emailed across the world which proved to be of benefit to both.

The last major issue of Economic Strategies Indonesia’s Indonesia Outlook service (1998) was named Four Scenarios to 2008. These scenarios were developed in isolation (apart from input from Isobel and feedback from David) and ranged from a relatively benign future (in which B J Habibie survived to complete a five-year presidency, rather than just one year!) to a future where the country split into six parts. In between were two scenarios, one called “Islam prevails” (but depicting a very different regime from, say, Iran), the other “The people prevail – eventually” (after coup attempts by the formerly ruling Soeharto family inspired by numerous conspiracy theories floating about at the time).

None of these futures happened. The best-case scenario was actually closest, with economic recovery and growth from the early 2000s which was mirrored by reality after the election of President Yudhoyono in 2004. But the continued political presence in today’s Indonesia of some Soeharto-era generals, and the rise of militant Islam groups after 9/11 and their involvement in repeated terrorism events in Bali and Jakarta, show that there are elements of other 1998 scenarios in the current situation. The risk of a general split-up of the country currently seems more remote with Timor-Leste being the only new country seceding from Indonesia. Soon after the scenarios were published in 1998, however, serious religious riots broke out in Ambon, capital of Maluku province which remains very different from the main Indonesian islands centred on Java.

The point of scenario planning is not to get it absolutely right, but to outline a range of possible outcomes, all of which could eventuate with equal probability. A background to the Indonesian scenarios followed by the scenario stories themselves can be read here.

A supermarket survey from the Indonesia Outlook service shows how the Indonesian middle class before the 1997-98 financial collapse converged towards western standards and prices – a special illustration of purchasing power parity (PPP), which helps compare living standards in developing and developed countries. The question of whether to use PPP or market exchange rates in the analysis of long-term economic growth has proved important in our analysis of global scenario projections.

Following the Indonesia Outlook venture, Pacific in Peril for Greenpeace was the first report in which Economic Strategies participated to incorporate scenarios. The scenario stories were written by David Stout, who was a co-author of the report. The approach was well received and demonstrated the use of scenarios in ecological-economic projects.

top



Great Barrier Reef

It was clear from our previous experience that while a huge organisation is not required to write plausible scenarios, it is advantageous to build on something already widely accepted and to embellish it with local insights. The opportunity to do so came when Hans and Ove Hoegh-Guldberg were invited to do the larger study of the Great Barrier Reef for WWF/QTIC mentioned in the environment page.

To strengthen the scenarios we took a number of steps:

  • First, we adopted the four basic scenarios used in the Third Assessment Report of the Intergovernmental Panel for Climate Change (IPCC, the world's leading body on that subject), written and published in 2000. The four scenarios were constructed along two axes: global versus regional, and economic versus environmental. So the "A1" scenario was global/economic, "A2" regional/economic, "B1" global/environmental and "B2" regional/environmental. They depicted the development of four very different worlds as the 21st century proceeded.
  • Some of these scenarios were modified to take account of criticism that had been directed at some aspects, and our own slight misgivings about some assumptions. We also embellished the scenarios with additional storylines both worldwide (to increase our own sense of "ownership" of the IPCC scenarios) and, more importantly, to bridge the gap between the worldwide IPCC stories and the local Queensland scene.
  • Hans conducted three scenario-planning workshops (Port Douglas, Townsville, and Brisbane) for local input. This proved very important for the total exercise, providing essential inspiration for the final scenarios.
  • Ove provided specific scenarios for coral reef development and fish populations in the various sections of the Great Barrier Reef for each main scenario, and Hans built in tourism and fisheries and made quantitative regional GDP projections to fit each scenario 20 years in the future.

Florida Keys
We were pleased when this approach was endorsed by NOAA, the US National Oceanic and Atmosphere Administration. As described in the environment page, Hans conducted a scoping project of the Florida Keys in preparation of a two-year study in 2005. This study received funding for the fiscal years 2007-08 and 2008-09, and the draft report is due at the end of September 2009.

Like the Great Barrier Reef study, this one aims to develop alternative, equally plausible scenarios as a basis for long-term future planning. These scenarios again originate in worldwide stories and projections of greenhouse gas emissions, developed from the four main scenarios used in the Intergovernmental Panel on Climate Change Third Assessment Report (2001), depicting alternative worlds along two axes, one between 'economic' and 'environmental', and one between 'global' and 'regional'.

As in the Great Barrier Reef study, the scenarios range from global storylines to the local scene. A central element in the Florida Keys scenario development was a series of scenario-planning workshops in the Florida Keys, between Key Largo in the north and Key West in the south, in June 2008. The idea of scenario-planning workshops which Hans developed in the Great Barrier Reef study was greatly expanded and revised for the Florida Keys.

The five workshops attracted 60 senior members of the Florida Keys community ranging from 10 members of the Sanctuary Advisory Council and many other members of decision-making groups including past, present and future commissioners of the local Monroe County, as well as leading NGO representatives and opinion leaders from the general public. Acknowledgment is due to the presidents of Key Largo, Islamorada and Lower Keys Chambers of Commerce, the director of the Sanctuary Friends Foundation of the Florida Keys, and the Florida Keys Eco-Discovery Center in Key West for helping to ensure the success of the workshops. All proceedings were put on paper by two highly competent court reporters and provided an indispensable verbatim record.

The project coincides with a significant quantity of environmental and scientific research in the Florida Keys which will greatly benefit the socioeconomic study. As this is written, it is entering its final and crucial phase.

Two matters have become clear which is of major importance to the current project, one from the developing evidence about climate change, and one as a result of the Great Barrier Reef study.

  1. Global climate change has become an increasingly urgent matter of concern since the original scenarios were designed in the late 1990s for the Third IPCC Assessment Report in 2001. This was acknowledged in the Fourth Assessment Report (2007), but the urgency has increased further since then, manifested in such matters as the need to reduce greenhouse gas emissions by 80% by 2050, rather than 50% which seemed to be the main assumption only two or three years ago, and the need now seen to target the increase in global warming to no more than two degrees Celsius (rather than three).

    There is rapidly mounting evidence of positive feedback effects in the climate models triggering large new events such as ice sheets and tundras melting at an accelerating rate in polar areas. Sea level rise is expected to greatly exceed the IPCC estimates. Ocean acidification as a result of increased absorption of carbon dioxide has emerged as another serious risk factor, reducing the calcification rate of organisms from hard corals to crustaceans and krill in the Southern Ocean.

  2. The pioneering effort in the Great Barrier Reef study of using local scenario-planning workshops to identify issues of local concern led to a significantly larger effort in the Florida Keys, as described above. These workshops were also organized to focus more directly on what would be the key future issues for the Keys themselves.

top

The Coral Triangle

The Coral Triangle is the most species-rich and possibly the most threatened coral reef area in the world. It covers the waters off eastern Indonesia, Sabah (the easternmost Malaysian state), the Philippines, Timor-Leste, Papua New Guinea, and the Solomon Islands. Most of the area is covered by four of the world's 25 biodiversity hotspots, chosen because their unusually wide biodiversity is under severe threat.

Ove Hoegh-Guldberg was invited to be speak at the May 2009 World Ocean Conference in Manado, the capital of the Indonesian province of North Sulawesi. WWF Australia backed by its international organization agreed, in February 2009, to fund a study of the prospects for the Coral Triangle, to be developed in time for the conference. Hans was invited to become the second lead author (with Ove as project leader and chief scientist), in charge of the economic assessment and scenario development. About 18 other experts provided material for the report.

Despite its size and complexity, the project was ready for publication by late April, after peer review. A major part of Hans's work, apart from the socioeconomic analysis and research into particular coral reef areas within the Triangle, has been to review in even greater detail the deterioration in climate change prospects that has occurred since the current emissions scenarios were devised, in particular since 2007. He was also able to develop the main scenarios from global (preceding similar work for the ongoing Florida Keys project) to local level.

This website will be updated and furnished with appropriate links when the findings on the Coral Triangle are documented at the Manado conference.

top

Do we need global issues to do scenario planning?

The answer is no. The last page on local studies contains examples that scenario planning is potentially useful at local government level. It has also been proposed for the Music Council of Australia where Hans is a board member. In short, there is no real limit where the technique may not contribute, either upwards or downwards in the organisational hierarchy.

In summary, it frees the mind to think realistically about future strengths, weaknesses, opportunities and threats.

Last revised: 23 May 2010

top

Economic Strategies logo
Advertisements

2 Comments on “Scenario planning”

  1. Wilson Fyffe Says:

    Hi Hans,

    I like your website. We have some background in common. I joined Coopers & Lybrand in Sydney as a corporate planning consultant in 1988, shortly after they acquired the W.D.Scott unit. I was then posted to Indonesia for 10 years. I started my own consulting unit in Singapore after the 1998 crisis in Jakarta.

    I have joined Dr. Michael Jackson’s Shaping Tomorrow network. I have met him personally in Singapore and like his style. If you are interested, please consider joining the group. Also, I would like to network with you on Scenario Planning projects around APAC.

    Kind regards
    Wilson Fyffe
    President Director
    Amplios Consultants Pte Ltd
    http://www.amplios.net
    HP +65 983 60607


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s