Using scenarios to focus R&D

Gill Ringland

Gill Ringland, a Fellow of St Andrew's Management Institute (SAMI), focuses on using future studies and scenarios to improve decision making in the present (gill.ringland@btinternet.com). She rst worked with scenarios while Group Executive, Strategy, for ICL, now part of the Fujitsu Group. She is the author of three recent books Scenarios in Business, Scenario Planning: Managing for the Future, and Scenarios in Public Policy.

Traditional methodologies for selecting R&D projects

Most managers with responsibility for a number of research & development projects routinely employ a number of portfolio management tools explicitly designed for ranking R&D projects and managing R&D programs. For instance Philip A Roussel's ``Third Generation R&D'', published by Harvard Business School Press, describes a portfolio method for prioritizing projects. Three axes measure the relative potential cost/benet/competitive position of R&D projects: J Competitive position and technological maturity. J Size of reward and probability of success. J Annual budget and years to completion. Managers then plot portfolio of possible projects on these three axes, providing a framework for discussion and decision with corporate planners and marketing. Stanford Research Institute (SRI) uses a similar method for labeling a portfolio of R&D projects to facilitate discussion of priorities. They normally choose the axes: J Timescale of market impact. J Cost of project. The costs, timetables and budgets in an R&D project are usually well understood, if not precisely predictable for instance the time from the lab to development, or the rate of development of technological capability can usually be estimated. But the market factors the competitive position, the size of reward, probability of success and the market impact are harder to anticipate. In judging these factors, R&D managers, corporate planners and marketers will normally base their judgment on the trends to date.

DOI 10.1108/10878570310455042

VOL. 31 NO. 1 2003, pp. 45-55, MCB UP Limited, ISSN 1087-8572

STRATEGY & LEADERSHIP

PAGE 45

But many new products emerge into a changing world, with: J New competitors. J Changed user wants and needs. J Changed price structures. J Changed regulatory environment. These factors are determined by changing industry structures, by new global competitors, and most particularly by changes in user perceptions, lifestyles and desires. To preview these possible future environments, a number of rms have successfully used scenario planning to improve R&D decision making. Scenario developers have helped managers explore a range of possible futures encompassing uncertainties, such as the rate of adoption of technology. The R&D manager can then compare the sensitivity of the R&D projects' success criteria to the detailed assumptions about the future. As a case in point, microwave ovens were available at least 20 years before they became popular for their efciency at heating up pre-cooked frozen meals at high speed. The changes in society that made them popular after two decades were the number of working women who needed meals that could travel from freezer to microwave to dinner table in minutes. So, if the inventors of the microwave oven had developed alternative views of the future, one in which most women worked away from the home and another in which most women were at home cooking gourmet meals with gas and electric ovens, they would have realized that the sales of microwave ovens would be dependent on lifestyle changes increasing the number of working women.

Forecasts, scenarios and foresight

Three important terms are widely used in the process of thinking about and assessing the future: (1) Forecast: a conjectural estimate, based on present indications, of the course of events or condition in the future[1]. (2) Scenarios: a set of logically consistent but distinctly different views of what the future might be[2]. (3) Foresight: a process for developing research policies with a long-term perspective using networks of knowledgeable agents who possess improved anticipatory intelligence[3]. So, a forecast combines current trends and renders them into a single value or range of values for a variable. Forecasts of timescale, cost, etc are widely used for technology developments, because there is a well-trodden path from the lab to the

was the extent `` One range of possibilitiesrigid or evolving,to which communities were

represented by two extremes: `community open' or `community closed'.

''

PAGE 46

STRATEGY & LEADERSHIP

VOL. 31 NO. 1 2003

customer. Forecasts are usually based on expert opinion, often collected by the iterative Delphi process. Forecasts are an important component of scenarios for the future. Given the forecasts of the available technology, scenarios can then explore the possible future societies and how they may react to these products. So in the case of the microwave oven, scenarios of alternative futures could have been developed, and the potential markets for microwave ovens explored in each. Affecting the market would be growth in wealth, business activity, and social changes (such as single person or single parent households), increasing education of women, the nature of leisure activities, and the move away from rural areas to cities. It is sometimes possible to identify specic events that would give early indicators of a scenario playing out. Scenarios provide a simple but powerful way of capturing and exploring multiple images of the future. The analytical process of using a combination of scenarios and forecasts to ensure that an organization focuses its R&D on the most effective areas is what we call ``Foresight''. This typically combines desk-based investigations and literature searches, forecasting, use of a wide range of inputs for building of scenarios, and the use of business intelligence or market intelligence to monitor early indicators. This article focuses on the scenarios part of this process, while recognizing that without good forecasts and an ongoing decision process, the scenario stage will be of limited value. The role of scenarios is to provide the tool for understanding the major areas of uncertainty. Glen Hiemstra[4] identies key areas of uncertainty over the next 50 years as: J The impact of: j The digital revolution, biotechnology and nanotechnology. j Shrinking populations in the developed world. j The preponderance of the aged in the developed world. J The nature of: j Work its duration, location, content. j The home - returning perhaps to its pre-industrial revolution role. j Education, learning and information gathering. J The balance between: j National governments and NGO's in handling major problems. j The private sector and government in handling infrastructure issues, with the funding and timescale implications.

Scenarios used to formulate an R&D portfolio in information, communications, and technology

The ``Business in the Third Millennium'' (BIT3M) program was a consortium to study the effect of ICT on business. It was run by Watts Wacker of think tank FirstMatter (www.rstmatter.com) and was active from 1996 to 1999. The delegates of the member companies of the consortium used scenarios to dene and prioritize research projects to be initiated by the consortium. Both the company I worked for then, ICL (now Fujitsu Services), as well as Fujitsu Business Consulting of Japan, were partners.

VOL. 31 NO. 1 2003

STRATEGY & LEADERSHIP

PAGE 47

The hypothesis behind BIT3M was that the combination of Information, Communication, and Technology (ICT) would have a major impact on the way business evolves or changes discontinuously in the next few decades. While the supply chain and the customer interface have already been substantially changed by ICT, we hypothesized that an even more radical shift could be happening that the balance of power between the company and its customer was beginning to change. Since it was possible even probable that this effect might appear differently in Asia, the USA and Europe, the consortium sought members based in all three geographies to ensure sensitivity to the potential cultural differences. The BIT3M program started with the construction of scenarios to describe possible ways that digital information could inuence and change society. When we started we described society as being composed of three entities: business, the consumer, and government. We soon added another entity community. Traditionally, communities are local, as in a village community or a university community. However a major change facilitated by information, communications and technology was the creation of communities of interest that communicate electronically. These communities were showing signs of forming very effective lobbying groups, and also banding together for purchasing, or for sharing information on parenting, products, and diseases and their treatment (Exhibit 1). In parallel with the rise of virtual communities we noticed that the boundary between people's behavior as a citizen and behavior as a consumer was blurring. People expected governments to provide services as the private sector does, and they changed their consumption choices in line with political opinions. Boycotts of goods were evolving into selective investment in ethical trusts. The individual operating variously as consumer, citizen, leader, manager, and increasingly enabled by the information, communication and technology infrastructure had increased power in the post-ICT world. These individuals gain added leverage by joining communities that have political or market clout. For instance, an ad hoc buying club for Lexus cars negotiated major discounts from a dealer. Greenpeace[5], using email effectively, organized across country boundaries to humble Shell Oil Company over the disposal of an oilrig in the North Sea. In many ways, there are signs that the balance of power in the new world is

Exhibit 1 Role of the individual

PAGE 48

STRATEGY & LEADERSHIP

VOL. 31 NO. 1 2003

shifting towards the individual and ad hoc communities, and away from business and governments. In contrast, one of the projects set up by the consortium identied the decreasing capability of national governments to control business, community or individual activities within their geography. For instance, legalized gambling has now moved back into many countries after the realization that revenues were leaking offshore. In spite of the best efforts of the Chinese, Saudi and Iranian governments, individuals there access information electronically. Governments face problems in ensuring a stable tax base as individuals become mobile and choose their domicile. These and similar observations led us to institute a watch for signs and signals that this trend was strengthening or waning. We also observed the increasing role of NGOs in the business environment. For instance, NGOs were the main drivers in dening the International Kyoto Treaty environmental agreement standards.

Four scenarios for 2010

By 1998, we wanted to explore the potential effects of these factors on business. So we built some scenarios at a workshop of the consortium delegates during three days of interactive work. The scenarios also utilized information from literature searches, expert interviews and discussions.

Four scenarios for 2010

Two key drivers of the scenarios were: J The nature of communities, whether geographic or virtual. The major question was the extent to which communities were rigid or evolving, represented by two extremes: ``community open'' or ``community closed''. We observed that the sense of community is strongly linked to individual and lifestyle choices. J The capability of business to adapt to a new environment with a potentially changed power structure. We expected that the ability of government to adapt would usually lag that of business. We assumed that the adaptability of both the social infrastructure education, health, law and order and technical infrastructure were linked to business agility. The two extremes in this range of possibilities were ``business traditional'' and ``business agile and adaptive''. These two drivers produce four scenarios describing the business environment in 2010 (Exhibit 2). In Liberation Works, a sense of local community develops to provide a rich and wellbalanced social environment, while business practices remain those of the 1990s. This is a ``Greenpeace'' world that reconciles global and ecological concerns with business and individual interests. Government funds the majority of technology infrastructure.

in the other range of `` The two extremes ``business traditional''scenario possibilities were and ``business agile and adaptive''. ''

VOL. 31 NO. 1 2003

STRATEGY & LEADERSHIP

PAGE 49

Exhibit 2 Scenarios for 2010

In Gung Ho, there is also a sense of community, but since the business and social infrastructures have adapted to the newly powerful individual, many of these communities will be dependent on common interests rather than geography. Business has found ways of meeting their customers' new demands. Lags in the adaptability of government mean that business has taken over some of the regulatory roles of government, and has taken a lead in implementing the technology infrastructure. MegaCorp is a world in which large companies have established new rules. Virtual communities of individuals, geographic communities, and governments, are less powerful because of the rules imposed by the MegaCorp organizations. This is a divided world, with gated communities and social unrest. This is the nearest scenario to the future envisioned by Aldous Huxley in Brave New World. In it, the private sector implements Infrastructure. Finally, in Organization Rules there is a strong sense of community, but it acts to reduce business agility, a result perhaps of the hierarchic constraints of society. The technology infrastructure is supported by state investment and may also be operated by the state.

Research portfolio
In developing the portfolio of research projects from the scenarios, we brainstormed the different topics that would be relevant in each scenario. Then we looked to nd common themes and topics to explore the underlying drivers of the scenarios. So for instance, in all four scenarios, since the basic science was already evident, we assumed that the technological rate of advance would continue in the laboratory for the next decade. After then, the differing assumptions about the scope of government

process, by `` The scenariomight preventdelineating the social issues that technology adoption,

helped participants build more robust R&D programs and set up early warning indicators to monitor the pace and the directions of evolution.

''

PAGE 50

STRATEGY & LEADERSHIP

VOL. 31 NO. 1 2003

start to make an impact on technology availability. For instance the extent of local loop broadband or third generation wireless technology will depend on: J Who will pay for the upfront investment in networks and will this be different in the USA, Europe and Asia? J Are there any new disruptive technologies and where would they emerge? J Who will lead the adoption of new technology and how much will they be willing to pay? Under the heading of community and the related lifestyle issues, we saw that the there would be major differences in each scenario. For instance, local communities would be strong under Liberation Works, and virtual communities of special interest groups would be important players in Gung Ho. This meant that we needed to investigate the sources and nature of the differences, seeking answers to questions such as: J How does the relationship between the individual and society change in each scenario? J How will this alter customer's expectations of business? J What are the forces driving business in the third millennium? Research topics, which emerged on lifestyles and communities, included: J How do communities evolve in each of the scenarios? J What are the role models people and organizations for each scenario? J What is the evolution path of each scenario as seen in terms of individual/ community decisions such as election results? J What causes each scenario to ourish or become unstable? J How and why are the boundaries between work and leisure different in each scenario? J In what ways are the individual and community uses of visual and verbal media different in each scenario, and what effect does this have? J What are the types of community and how are they changing? For instance, would Gung Ho support more or fewer virtual communities and NGO's than MegaCorp? The Business Agility axis prompted research topics related to the way in which digital information accelerated or held up change in organizations. J What is the role of information, communication and technology in making organizations more agile in Gung Ho and MegaCorp? Which scenario is more sustainable for businesses inuenced by MegaCorp but not aspiring to be a dominant international player? J Which scenario creates most value and which least? J How do the culture and business processes differ in each scenario? For instance, we could see that businesses in a Gung Ho world would need processes that were exible and reviewed regularly J What are the new value chains in each scenario, if any? The governance environment will also be different for each scenario: the research topics are: How will governments evolve to meet the new environment? In what ways

VOL. 31 NO. 1 2003

STRATEGY & LEADERSHIP

PAGE 51

will regulation encourage or discourage the new world? How will governments fund themselves? So, in MegaCorp, regulation would be strongly inuenced by a few market leaders, and their investment would be aligned to increasing the penetration of the virtual world, at least in cities where connection costs are lower. Governments nd it difcult to control and predict tax revenues in this world, due to the power and international nature of dominant international organizations. In contrast, Organization Rules is a world in which governance is by nation states and there is little momentum for change.

Early indicators
Early indicators are specic events that are relatively easy to watch for and which can give an indication of which way the world is evolving. So for instance the rise of a political party or politician can indicate that changes are likely and the direction that they will take. One example of this is Shell's decision on investment in North Sea gas elds. The bidding was intense and prices high: Shell asked the question, Would Russia's extensive gas elds start to contribute to international supply? They identied this key indicator: if a politician named Mikhail Gorbachev moved into national prominence it was likely that Russia would open up. They saw his career start to develop, and so did not take part in the bidding war for North Sea reserves. Shell later bought gas from Russia at an advantageous price.

Early indicators
In BIT3M, we saw some early indicators being satised for both MegaCorp and Gung Ho, for instance: J The rise of defacto standards in telecoms, media and computing industries replacing slower traditional mechanisms of agreements between national bodies J The rise of virtual communities for hobbies, health and family information sharing, and for trading online J The success of some brick and mortar retailers in creating electronic trading arms (for instance food retailers in the UK and restaurants in the USA), as well as the survival of some dotcom start-ups. J Regulation moving away from national governments towards NGO's, for instance in the computer industry and for Internet and Web standards. As a result we proposed that some industries at least would evolve along the MegaCorp or Gung Ho. So we focused our research project portfolio into digital information in the retailing, ICT and media industries.

Prioritizing research projects

The participants in the consortium workshop then categorized the list of 30 possible research projects into three groups: J Expensive those costing the entire budget for at least one year. J Medium we could afford 3-5 of these. J Quick/cheap less than 10% of the budget.

PAGE 52

STRATEGY & LEADERSHIP

VOL. 31 NO. 1 2003

Once we had a dened and costed set of research projects we categorized them into high, medium and low impact projects, and which scenario they were relevant to (Exhibit 3). Some projects were central to an understanding of all the scenarios; others were of interest only under one or two. We focused on projects relevant to MegaCorp and Gung Ho. The projects that the participants felt had the most impact on Business in the Third Millennium related to: J The role of ICT in making organizations more or less agile. J The changes in the value chain. J Who would pay for network implementation? J Disruptive technologies. J The nature of virtual communities and their interaction with business. J Mobility of individuals across national boundaries. J What were the early indicators for MegaCorp vs. Gung Ho? Three of the projects, those on network implementation, disruptive technologies and early indicators were in the quick/cheap category. We scheduled the study of network implementation and early indicators, but left the research project on disruptive technologies until later. We could only afford to do one of the other three projects, on value chains, the connection between information, communication and technology and agility, or virtual communities and business. We chose to study the interaction of virtual communities and business, across both scenarios, since we could see other groups working on value chains and to a lesser extent on information, communication and technology and business agility. We found a think tank that was willing to share results with us on the effect of mobility of individuals across national boundaries, and the effect of this on the tax base of governments.

Lessons for practitioners

We used scenarios to dene a portfolio of research projects twice in the BIT3M Program. In both cases, the portfolio of projects that emerged was signicantly different from our initial instincts.

Exhibit 3 Prioritizing research projects

VOL. 31 NO. 1 2003

STRATEGY & LEADERSHIP

PAGE 53

By going back to the underlying forces and asking questions about the discontinuities that may emerge, the scope of the portfolio widened and many new potential research questions were raised. Our list of research topics was dauntingly long before we applied the prioritization process about 30 separate topics costing about seven times our budget. By looking at the early indicators, we could narrow down the number of scenarios to consider from four to two, and the projects from 30 to 20. We then decided to focus on the projects that were important in both of the scenarios, and to delay others until some of the early indicators leading to either MegaCorp or Gung Ho had been observed. We had expected that the internal issues for business such as value chains and ICT and agility would have emerged as top priority topics. Instead we found that the questions of the inter-relation of business with its customers emerged from the process as most signicant.

Conclusions
The BIT3M case study used scenarios to: J Widen the range of discussion about the research program. Many of the participants were from technology companies. Introducing scenarios helped them to think about the adoption of technology, market issues and the effect of ICT on society

Conclusions
J Engage sponsors and stakeholders in exploring the context of the proposed research topics in the program, as a prelude to decision-making and funding. The process, with interviews before the workshop and three days of interaction within a disciplined process at the workshop, underpinned the efforts of the participants to sell the research program back into their organizations. J Link technological issues into societal issues. This required an examination of a wider set of backgrounds than was traditional for planning R&D. The role of Watts Wacker, a consumer futurist skilled at exploring societal issues, was crucial. J Build a more robust research program by understanding the social issues that might prevent technology adoption and set up early warning indicators to monitor the pace and the directions of evolution. The participants shared the monitoring of early indicators among their business intelligence groups. Key questions related to investment in network infrastructure and sources of regulation. J Prioritize research topics for investment, through use of the early warning systems, which showed indicators for MegaCorp and Gung Ho. By focusing on MegaCorp and Gung Ho we were able to focus on the role of business, and to dene a portfolio of research projects spanning these two scenarios.

Implications for corporate planners

Lessons corporate planners can learn from the case study are: J Business agility is a key requirement in the present business climate. Many of the factors originally identied by BIT3M are central to today's business climate.

PAGE 54

STRATEGY & LEADERSHIP

VOL. 31 NO. 1 2003

J The range of factors that need to be considered in plans is now much wider than only a few years ago. Markets have changed from product push to consumer desire driven, a result of changes in lifestyles and increased consumer information. These factors are more difcult to forecast than technological issues. J In considering the shape of society and new forces, scenarios can capture some of the dimensions of uncertainty, allow for the creation of robust strategies and understanding of early warning indicators of new phenomena. However, a word of caution. Scenario development projects do not always produce transformational insights and innovative thinking. In scenario work as in forecasting, it is difcult for planners to shake off the blinders of their current worldview. Veteran scenario developer Barbara Heinzen[6] enumerates many ways in which scenarios may fail to tackle the seminal issues for an organization, and the reasons why they ounder. Causes of failure include: planners taking too narrow a view of the topic, not getting the attention of decision makers, or accepting a culture that cannot confront the question of change. As an example of this last pitfall, she recalls asking the question while building scenarios for Asia in 1996, ``Could we have a nancial crisis?'' and getting the answer, ``That is not possible''. Nevertheless scenarios surely t among the toolkit of every manager responsible for planning. They provide a process, mechanism and framework for anticipating change, watching for early warning signs, and creating more robust plans.

Notes
1. Oxford Compact Dictionary (1991), Clarendon Press, ISBN 0-19-861258-3. 2. Porter, M. (1985), Competitive Advantage, Free Press, New York, NY, ISBN 0-68484-146-0. 3. Irvine, J. and Martin, B.R. (1984), Research Foresight, Continuum International Publishing, ISBN 0-861-87496-X. 4. Ringland, G. (2002), Scenarios in Business, Wiley, ISBN 0-470-84382-9. 5. Davis-Floyd, R. (1997), ``Storying corporate futures: the Shell scenarios'', International Journal of Futures Studies, Vol. 1. 6. Ringland, G. et al (1999), ``Shocks and paradigm busters'', Long Range Planning, October.

VOL. 31 NO. 1 2003

STRATEGY & LEADERSHIP

PAGE 55