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HowScenarioPlanningInfluencesStrategicDecisions

How Scenario Planning Inuences

Strategic Decisions
Magazine: Summer 2016 Issue Research Highlight May 27, 2016 Reading Time: 11 min
Shardul Phadnis, Chris Caplice, and Yossi She

Arecentstudyshedslightonhowtheuseofscenarioplanning
affectsexecutivesstrategicchoices.
Theuseofscenarioplanningoncesavedacreditunionthathadhad

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EnronCorp.asitssolecorporatesponsor.Intheir2009MITSloan
ManagementReviewarticle,HowtoMakeSenseofWeakSignals
(http://sloanreview.mit.edu/article/howtomakesenseof
weaksignals/),PaulJ.H.SchoemakerandGeorgeS.Daydescribed
how,afterEnronssuddencollapseintoChapter11bankruptcyand
scandalin2001,thecreditunionsurvived,ratherunexpectedly,
becauseitsmanagementhadtakenpreviousactionstoreduceits
dependenceonEnron.Managementtooktheseactionsafter
consideringscenariosinwhichthecreditunioncould
notdependonEnronforitsgrowth.
Anotherexampleofastrategicdecisioninfluencedby
theuseofscenarioplanningisUPSacquisitionof
MailBoxesEtc.in2001.ThisacquisitiongaveUPS
morethan3,500retailstorelocationsintheU.S.to
complementitsnetworkoflargehubsusedasmail
sortingfacilities.AscenariocalledBraveNewWorld
oneoffourscenariosUPSseniormanagers

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consideredinformulatingthecompanysstrategy
wasahugeinfluenceontheacquisitiondecision.The
BraveNewWorldscenariodescribedaderegulated,
globalizedmarketplacemarkedlydifferentfromthe
worldUPSwasoperatinginin2001.Itwasthis
scenariothatconvincedmanagementtoinvestinretail
locations.
Despitesuchanecdotalexamplesillustratingthe
powerofscenarioplanning,empiricalevidenceofthe
effectofscenarioplanningonexecutivejudgmentis
almostnonexistent.Thatfactissurprising,
consideringnotonlythatexecutivesusethismethod
tomakeimportantdecisions,butalsothatthemethod
requiresextensiveresources.Whatsmore,thefew
experimentalstudiesofscenarioplanningthathavebeenconductedreachconflictingconclusions.
Toexaminewhetherscenarioplanningproducesmeasurablebenefits,weconductedseveralworkshops,
examiningwhetherandhowthepracticeofscenarioplanningwouldinfluencevariousexpertsmaking
longterminvestmentdecisions.

Scenario-Planning Workshops

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AspartofaU.S.infrastructureinitiativecalledFutureFreightFlows
(http://ctl.mit.edu/research/futurefreightflows),whichwas
sponsoredbytheNationalCooperativeHighwayResearchProgram,we
designedandranseveralworkshopsforleadersfromprivatesector
companiesandpublicsectortransportationplanningagenciesinthe
UnitedStates(forexample,stateDepartmentsofTransportationand
regionalplanningcommissions).Longrangeplanningoftransportation
infrastructureisanidealcontextinwhichtoapplyscenarioplanning.
Thatsbecausetheplanningandimplementationcantakeseveralyears
andmostelementsoftransportationinfrastructurehavelifespansof
decades.Thefourscenariosweused
(https://www.youtube.com/watch?v=xWukU1DQE58)were
notmeredemonstrationstheparticipatingcompaniesandagencies
plannedtousetheresultstoinformlongrangeplanning.
Webeganbyconductingapretest.Weaskedeachparticipant,twotosix
daysbeforetheworkshopandbeforeheorshehadseenthescenarios
toassesswhetheraninvestmentshouldbemadeineachofthe

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selectedelementsoftheregionsfreighttransportationinfrastructure,consideringneedsoverthenext30
years.Weaskedfortworesponses:(1)Whethertheparticipantwouldrecommendinvestinginthat
element(2)whattheparticipantsconfidenceinhisorherownrecommendationwas.

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Wethenaskedparticipantsthesamequestionsaftertheyhadevaluatedtheelementsfirstusingone
scenarioand,later,multiplescenarios.Thesequestionswereourposttest.Theposttestwasconducted
eitherduringtheworkshopitself(forthesinglescenarioevaluation)orwithinoneweekaftertheworkshop
(forthemultiscenarioevaluation).Anychangesinaparticipantsjudgmentfromthepretesttothe
posttestweattributedtotheuseofthesingleand/ormultiplescenarios.
Ineveryworkshop,between10and15expertsevaluatedthechoseninfrastructureelementsineach
scenario.Weassignedtheexpertstothescenariosbyusingstratifiedrandomsamplingtoensurearoughly
equalrepresentationofdifferentstakeholdergroups(forinstance,governmentplannersandshippers).We
askedtheparticipantstoreadabrochuredescribingtheassignedscenariobeforetheworkshop.Duringthe
workshop,theywatchedavideoofafictionalnewscastdescribingeventsintheassignedscenario,discussed
thescenariosimplicationsfortheregionsfreightenvironment,andevaluatedtheusefulnessofeach
choseninfrastructureelementforthescenario.
Theparticipantsrecommendedinvestinginparticularelementsofthetransportationinfrastructureby
allotting100pointsaccordingtotheperceivedrelativeusefulnessinthescenario.Iftheparticipantsdidnot
recommendinvestinginaparticularelementoftheregionsfreighttransportationinfrastructure,they
couldgivetheelementavetovote.Weusedthevotesasestimatesoftheusefulnessofeachelementforthe
particularscenario.

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Ifyouareoverconfidentaboutyourown
judgment,youwontnecessarilybecome
humbledorlessconfidentafteryour
exposuretooneormanyscenarios.
Implications for Executives and Long-Range Planners
Basedonourfindings,weofferthreelessonsfortheuseofscenarioplanningbyexecutivesandplanners
makingstrategicandlongrangeinvestmentdecisions.
1.Theuseofmultiplescenariosisnotnecessarilyanantidoteforoverconfidence.Oneshould
notassumethatsimplyusingmultiplescenariostoevaluatealongrangedecisionwillhelpalleviatethe
negativeeffectsofdecisionmakersoverconfidenceintheirownjudgment.Scenariousersinourstudies
werealmostequallylikelytobecomemoreorlessconfidentintheirjudgmentafterevaluatingmultiple
scenarios.Thisdoesnotmeanthatscenarioshavenoroletoplayininfluencinglongrangedecisions.
Executivejudgmentaboutlongrangeinvestmentdecisionsisstilllikelytochangeafterthedecisionis
evaluatedusingascenario.Butourstudyfindingsshowedthatifyouareoverconfidentaboutyourown
judgment,youwontnecessarilybecomehumbledorlessconfidentafteryourexposuretooneormany
scenarios.
2.Scenariosinfluencejudgmentandtheircontentmatters.Morethanhalfthejudgmentsin
ourstudieschangedaftersinglescenarioevaluations.Scenariousersbecamemorefavorableofinvestingin
anelementeitherbyincreasingconfidenceintheiroriginalrecommendationtoinvest,decreasing
confidenceintheiroriginalrecommendationtonotinvest,orchangingtheirrecommendationtofavorthe
investmentwhentheyfoundtheelementusefulinascenario.Wefoundtheoppositeeffectstookplace
whenscenariousersfoundtheelementwastefulinascenario.Sincethescenarioinfluencedchangesin
executivejudgmentdependonthesuitabilityofaninvestmenttotheworlddescribedinthescenario,itis
importanttoensurethatthescenariosusedarerelevanttothestrategicdecisionunderconsideration.By
extension,scenariosnotspecificallydevelopedtoguideaspecificstrategicdecisionmaynotbesuitablefor
thetaskathand.
3.Theuseofmultiplescenarioscannudgeexecutivestowardsmoreflexiblestrategies.
Openaccess,complimentsofStanfordGraduateSchoolofBusinessMSxProgram.
Executivesoftenchoosestrategiesoptimizedforaparticularenvironment.Whilesuchstrategiesmay

performwellintheenvironmentenvisionedatthetimeoftheirimplementation,theymaynotbeeasily
adaptabletonewopportunitiesorinresponsetounexpectedthreats.Likewise,thelikelihoodof

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organizationalassetsbeingsubjecttosuchopportunitiesandthreatsishighwhentheassetshavelonglives
orwhentheenvironmentevolvesrapidly.Undersuchcircumstances,evaluatingstrategicdecisionsusing
multiplescenarioscanhelpexecutivesappreciatetheimportanceofchoosingmoreflexibleassetsor
approachesevenifdoingsoisnotthemostoptimalchoiceforpresentdayconditions.

Related Research
S. Phadnis, C. Caplice, Y. Sheffi, and M. Singh, Effect of Scenario Planning on Field Experts Judgment of Long-range
Investment Decisions, Strategic Management Journal 36, no. 9 (September 2015): 1401-1411.

Influencing Strategic Decisions

Althoughworkshopparticipants,intheaggregate,didnotexpresslessconfidenceintheirjudgmentsduring
theirposttests,amajorityoftheparticipantsdidchangetheirjudgmentsafterusingthescenarios.The
judgmentchangeswereoneofthreetypes:(1)Switchingtherecommendationforaninvestmentinan
infrastructureelementfromyestonoorviceversa(2)changingthelevelofconfidencetheyexpressedin
theirrecommendation(thoughseldomdidtheybecomelessconfidentiftheywereconfidenttobeginwith)
and(3)proposingadifferentapproachforinvestinginaparticularcategoryofinfrastructureelements.
Forexample,ataFutureFreightFlowsworkshopattheWashingtonStateDepartmentofTransportation,
participantsevaluatedaninvestmentinafreightinfrastructureelementbothbeforeandimmediatelyafter
theworkshop.Weendedupwith343beforeandafterpairsofassessments.Ofthose343pairsof
assessments,theparticipantsexpressedthehighestlevelofconfidencein158assessmentsbeforethe
workshopand157aftertheworkshop.Thus,thelevelofconfidenceafterusingmultiplescenarioswas
almostidenticaltothatbeforetheworkshop.
Butwhatsnoteworthyhereisthattheparticipantschangedtheirconfidencein161ofthe343cases.In51of
those161instances,participantsloweredtheirconfidenceinjudgmentfromthehighestlevelaftera
multiplescenarioevaluation.Forexample,fiveexpertshadrecommendedinvestingincargoairportsinthe
westernpartofthestateofWashingtonwiththehighestlevelofconfidencebeforetheworkshop.Butafter
theworkshop,theyrecommendedeithernotmakingthatinvestmentorrecommendedtheinvestmentwith
alowerlevelofconfidence.
Simultaneously,weobserved50instancesofanincreaseinconfidencetothehighestlevelaftermultiple
scenarioevaluation.Oneexampleofthiswasthedecisiontoinvestinthestrategicwaterwaysalongthe
ColumbiaandSnakerivers.Sixoftheexpertswhohadrecommendedeithernotinvestingorwhohad
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recommendedaninvestmentwithlowconfidencechangedtheirrecommendationtomaketheinvestment
withthehighestlevelofconfidenceaftermultiplescenarios.Inshort,themultiplescenarioevaluations
werejustaslikelytoincreaseordecreaseparticipantsconfidenceinaparticularinvestmentdecision.

The Importance of Flexibility

Wealsoexaminedifparticipantswouldchooseadifferentapproachtoimplementthechosenstrategies
afterthescenariobasedevaluation.IntheFutureFreightFlowsworkshopattheU.S.Departmentof
Transportation,weaskedparticipantstoselectoneoffourapproachesforinvestinginvarioustypesof
freightinfrastructuresegments,suchashighwaycorridors,bordercrossings,etc.Thefourapproaches
specifiedvaryinglevelsofflexibilityforfundinginfrastructureimprovementsprojects.
Afterbeingpresentedwithmultiplescenarios,workshopparticipantssubsequentlyexpressedsignificantly
higherpreferenceforamoreflexibleoptionwhichsuggestedallocatingfundstospecificregionsbutnot
tospecificprojects.Likewise,therewasacommensuratedropintheirpreferencefortheleastflexible
optionwhichsuggestedimmediatefundingandimplementationofspecificprojectsafterthe
evaluationofmultiplescenarios.Inotherwords,consideringmultiplescenariosappearedtohavespurreda
greaterappreciationofthebenefitsprovidedbyflexibleimplementationstrategiesthatkeepmoreoptions
openwhenfacedwithhighuncertaintyaboutthefutureenvironment.

Consideringmultiplescenariosappeared
tohavespurredgreaterappreciationof
thebenefitsprovidedbyflexible
implementationstrategiesthatkeep
moreoptionsopen.
The Challenges of Scenario Planning
Scenariodevelopmentisnotaneasyundertaking.CreationofthescenariosusedintheFutureFreight
Flowsprojectrequiredextensiveresearch.Theresearchbeganwithasymposiuminwhichthoughtleaders
Openaccess,complimentsofStanfordGraduateSchoolofBusinessMSxProgram.

presentedthepotentialfuturedevelopmentsintheirdomains(technology,economics,demographics,etc.)

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toafewdozenpublicandprivatesectormanagersinvitedtothesymposium.Wethenaskedthemanagers
tonotetheirthoughtsabouttheimplicationsofthosefuturedevelopmentsfortheU.S.transportation
infrastructure.
Asubsequentbrainstormingexerciseamongthemdistilledthefindingsintothedrivingforcesshapingthe
U.S.transportationinfrastructureoverthenext30years.Weconsolidatedthisinformationinto12
snapshotscenariosandpresentedthemoncemoretothemanagersforfeedback.Basedontheirfeedback,
wecreatedasurvey,whichweadministeredtopublicandprivatesectorstakeholderswhoseworkpertains
totheU.S.freightinfrastructure(suchasgovernmentaltransportationplanners,shippers,carriers,and
thirdpartylogisticsproviders).Wethenanalyzedtheresultsofthesurveytoidentifythekeyuncertainties
anddrivingforcesoverthenext30yearsandweusedthesefindingstoconstructfourscenarios.
Inaddition,wecreatednarrativestodescribeeachscenario.Thestorieswerecomplementedbyvarious
statisticsdescribingtheworld,presentedincharts.Thestoryandthechartswerecompiledina12page
brochuretopresentaholisticpictureofeachscenarioinwordsandnumbers.Wealsodevelopedfive
minutelongvideospresentingafictionalnewscast(https://www.youtube.com/watch?
v=dPl7mtuK1Rs)onadayinthedistantfuture(November2,2037)ineachscenario.Thebrochureand
thevideowereusedtogethertoimmersethescenariousersintherespectivescenariobeforeaskingthemto
assesslongrangeinvestmentdecisionsinparticularelementsofthefreightinfrastructure.
Wementionallofthisinordertoillustratethatwhilescenarioplanningcanobviouslyhelpleadersmake
smarterlongtermdecisions,effectivescenarioplanningrequiresagreatdealoflegworkandresearch.
Committingtoitcanbeextremelybeneficialandwewouldrecommenditbutitisatimeand
resourceconsumingeffort.

Scenario Planning as a Continual Practice

Ourstudiesprovideobjectiveevidencethattheuseofscenariosinfluencesexecutivesjudgmentsabout
longrange,strategicdecisions.Butourstudydoesnotprovideacomprehensivepictureoftheefficacyof
scenarioplanning.Thereason?Ourresultspertaintotheeffectofaonetimeuseofscenarioplanningon
longtermdecisions.However,wedidnotexaminewhetherthecontinualpracticeofscenarioplanning
wouldhelpexecutivesimprovewhenitcomestotheirlongtermdecisionmakingskills.
AsSarahKaplanandWandaOrlikowskipointedoutintheir2014MITSloanManagementReviewarticle,
BeyondForecasting:CreatingNewStrategicNarratives
(http://sloanreview.mit.edu/article/beyondforecastingcreatingnewstrategic
narratives/),executivescreatenarrativesaboutthefuturewhenmakingstrategicdecisions.Often,these
narrativesaremereextrapolationsofthepresenttrends.Carefullycraftedscenarioscouldprovide
executiveswithnarrativesthatarenotconstrainedbysuchmyopicviews.Whatsmore,leaderscanuse
multiplescenariosdescribingplausiblevisionsoftheworldtheorganizationmayexperienceinthefuture.
Openaccess,complimentsofStanfordGraduateSchoolofBusinessMSxProgram.

Usingthesemultiplescenarioscanhelptoensurethatthecapitalintensiveassetsembodyingthe
organizationsstrategycontinuetoservetheorganizationeffectivelyovertheassetslifetime.
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ABOUT THE AUTHORS

ShardulPhadnisisanassistantprofessoranddirectorofresearchattheMalaysiaInstituteforSupplyChainInnovationinShahAlam,Malaysia.ChrisCaplice
istheexecutivedirectoroftheCenterforTransportation&LogisticsattheMassachusettsInstituteofTechnologyinCambridge,Massachusetts.YossiSheffi
isElishaGrayIIProfessorofEngineeringandProfessorofCivilandEnvironmentalEngineeringattheMassachusettsInstituteofTechnology.

REPRINT #: 57419

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