How to think about the future - scenario forecasting - includes related article

American Demographics, Feb, 1998 by Dan Fost, Brad Edmonston

A growing number of businesses use scenario forecasting to look into the future. But forecasting experts say that asking the right questions about the future may be more valuable than finding answers.

If you could see the future, what would it be? Great economic prosperity, another depression, or something in between? What will cause the next radical transformation of society?

An increasing number of business people are using a technique called "scenario forecasting" to think about these questions. They often begin the process with the expectation that they will learn how to look into the future. They soon learn that answering questions about the future isn't nearly as useful as learning how to ask them.

Scenario forecasting helped Royal Dutch/Shell react quickly to several major shocks to the petroleum industry, such as the OPEC boycott of 1973, the plunge in oil prices in the early 1980s, and even the collapse of the Soviet Union. Shell executives didn't predict those changes. They reacted faster and better than their rivals when the changes happened, because scenario planning exercises had prepared them to respond well to change.

"It's not about predictions" says Peter Schwartz, president of the Global Business Network in Emeryville, California, the leading practitioner of scenario planning. "Scenarios are about trying to avoid getting the future wrong in fundamental ways" More companies of all sizes are using the scenario method to seize control of their business's strategic direction. But this method is not something that can be done by a consultant in a single three-day brainstorming session. Rather, Schwartz says, "It's a different way of thinking"

Companies develop scenarios to identify major changes that could happen in the world that could affect their operations. They then map out ways they would react if those changes occurred. The hypothetical exercise leaves them better-prepared for quick action when a real crisis comes along.

CRITICAL UNCERTAINTIES

The scenario forecaster needs to think of several different "critical uncertainties"--events or factors that are both uncertain and extremely important, according to author John Petersen, president of the Arlington Institute in Arlington, Virginia. "You can't plan for all of them," Petersen says. "You want to look across the horizon at two or three scenarios and say, `What are the common elements that exist across all those worlds? What are the common opportunities? What are the common hazards?' Then you can start to build a capability and an outlook, and do some contingency planning"

Schwartz, whose book The Art of the Long View is the bible for scenario planning, says the field grew from human beings' innate desire to see into the future. Under the old model, forecasters drew a straight line and predicted that everything will stem from the way things now stand--that if General Motors is the largest corporation, it will always remain the largest corporation. "Every forecasting attempt that is not mystical or astrological but somewhat scientific looks at the past," Schwartz says. "When things change slowly, that's easy"

Schwartz touches on one of the biggest reasons why so many business forecasters are trying scenario methods. These days, few things in business change slowly.

In the early 1980s, California used a standard demographic projection method, based on birth and death rates, to predict a decline in the number of children statewide. Forecasts made in 1980 showed that "the California population had fairly stabilized" Schwartz says. Schools closed around the state.

Eighteen years later, a new classroom opens somewhere in California almost every day. Planners in the state's education department did not foresee the huge wave of immigration from Asia and Latin America that began in the mid-1980s. They did not consider that the immigrants included many young women from countries with high fertility rates, or that babyboom women would delay childbearing until later in life. If school planners had used scenarios, Schwartz says, they could have considered the change on the horizon. "They might have come up with another scenario" he says. "You prepare your mind's eye to recognize the signals of change in an orderly fashion"

Schwartz salts his conversation with scenario-inspired success stories. He was a cofounder of Smith and Hawken, the mailorder firm that sells upscale gardening equipment. The company started with the idea of selling high-quality, high-priced, garden tools. The founders then mapped out three scenarios for the business: a world of high economic growth, a world-wide depression, and a major social transformation marked by more holistic thinking.

In each scenario, the founders saw potential for increased interest in gardening, and for a need for well-made, long-lasting tools. Indeed, the future they thought most likely was the one with the least economic opportunity. "We were preparing for a world with a very poor economy," Schwartz says. "We got a world of high wealth, and Smith and Hawken changed its strategy. We were orienting ourselves to hippies growing vegetables in a depression. Instead, Reagan took office, and we altered our strategy to a premium market. Scenarios enabled us to recognize and act on the change."