Page 84 - Performance Leadership

Chapter 5 Operational and Analytical Alignment • 73

laws, ecological practices, subsidies, compliance, or accepted business
practices. Many assumptions are based on technology restrictions:
What is possible today is being extrapolated into the future. Internal
assumptions may be based on the company’s typical business processes,
for instance, from order to cash, or decision-making processes around,
for instance, financing projects. The next step after listing these busi-
ness assumptions is imagining the opposite. What happens if what we
hold as true, doesn’t work anymore? How would the business model
change if there is no market growth, or if the cost of labor is going up
(or down, for that matter)? Or what happens if an important techno-
logical restriction is lifted because of new research?
Scenario analysis is also a behavioral tool for structuring one’s percep-
tions about alternative future environments in which one’s decisions
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might be played out. A set of stories may be built around a few major
“plots” about how the world may turn out to be. Others have taken a more
quantitative approach, by applying probabilities on scenarios and calcu-
lating expected returns. Scenarios don’t help predict the future, but they
do help organizations to be ready, no matter which of the scenarios
becomes a reality. The often-recited and most well-known example of the
enormous business impact of scenario analysis comes from Shell. When
the 1970s oil crisis hit, Shell had the scenario ready. As a lot of the think-
ing had been done, it was easier for Shell to drastically change strategy
while still being in control. Shell came out as a strong market leader.
Even if reality is different than any of the plotted scenarios, there is
a huge advantage of having gone through a scenario analysis exercise.
Thinking in terms of flexible outcomes and alternative strategies
unfreezes the mind. People experienced in thinking in terms of sce-
narios will be less likely to stick to an established strategy even if real-
ity is moving in a different direction. Scenario analysis contributes to
alignment between the first and second loop of management, from a
top-down direction. Continuously considering different courses of
action asks for an agile strategy implementation process. Strategies are
not cast in stone and are implemented to last a number of years.
Scenario analysis helps managing external perception versus self-
perception. A large part of scenario building has to do with external fac-
tors, what happens in our political, economic, social, and technological
environment. Change in our environment may lead to changes in how