Corporate Executive Board
Don't Oversimplify Your Scenarios
A mathematical formula probably isn't the answer. But as a result of today's environment, strategy heads across industry are now reporting a similar frustration with complexity and uncertainty of overwhelming proportions. Many have turned to scenario planning to make sense of things, but are finding that the traditional approach leaves them and (more importantly) their executives feeling like something is missing.
Combating Complexity with Complexity
The hard work of scenario planning has always been in isolating the most critical factors from a larger set of driving forces. The traditional approach takes two key driving forces to yield what business strategists know as a 2x2 matrix of four possible scenarios. In the past few months however, CEB researchers have found that the reason strategists are increasingly frustrated by today's increased scenario complexity isn't that they're not working hard enough, but that there is a flaw in their underlying approach. The "2x2 matrix" is just too simple a framework for the multi-dimensional uncertainty of the current environment.
CEB has seen two more complex matrices work better: the "2x2x2 matrix" which adds a third dimension of uncertainty and yields eight scenarios, and the four dimensional "2x2 in a 2x2", which yields 16 possible scenarios.
An Example: Multidimensional Frameworks in Practice
To see how these multidimensional matrixes can work, let's use an example from the strategy team at a financial services company. Needing to explore more complexity than a conventional 2x2 matrix would allow, they constructed a 2x2x2 matrix and used the three dimensions of the matrix to discuss:
The pace of recovery in the financial markets The level of governmental intervention in their industry The level of demand for their products
By assigning probabilities to each of the eight scenarios, the team ran a war-game style role-play session and were able to brief their board on which two scenarios were the most likely, which one was less likely but an important wild card, as well as provide background on the five remaining scenarios.
Even though using multidimensional frameworks like this will result in more complex presentations to senior management, CEB has found that they are better than the alternative: presentations that are too simple and not as informative. If executives believe that the set of scenarios under discussion oversimplifies or misses important dynamics—or another words, if they can't see all the critical factors and how they factor in—they won't trust the outcomes or consider the implications, and the whole exercise is invalidated.
But why not just skirt the whole issue and present executives with an unframed list of potential scenarios? The reason is that scenario frameworks are as valuable as the scenarios themselves. They make the cause and effect relationships transparent, visually connecting the scenarios to the underlying forces that shape them, while also linking each scenario to the other. In this current environment of such unprecedented uncertainty, CEB research suggests that the value of the framing for contextualization and sense-making becomes even more important.
Practical Considerations and Advice
If you want to use a multidimensional framework, CEB suggests considering these ideas first:
1. Use probabilities…carefully. Assigning probabilities to the values or points along each axis helps guide the conversation from the broad framework to the few worthy of deeper review; however, beware that probabilities can too quickly focus the discussion.
2. Distinguish the majors and the minors. The three, four, or even five variables in a multidimensional framework need not be treated equally. This idea is built into the nested 2x2, organized as it is around a primary matrix, but can be worked into other multidimensional frames too.
3. Plan on hard work. Seek shortcuts. Multidimensional frameworks are not a substitute for any of the hard work of scenario planning, such as defining the focal issue, separating trends and uncertainties, and crafting compelling stories.
4. Consider your culture. Don't underestimate the powerful organizational antibodies that will seek out and destroy any scenarios effort if it is perceived as less than credible. Involve your senior leadership team in ways to gain their buy-in.
5. Link to action. If your scenarios exercise did not allow you to challenge and perhaps change or add to your strategic assumptions and actions, then it was just another ineffective effort. Design your scenarios activities to tie into specific strategic planning decisions and processes.