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Scenario planning for small businesses
Long Range Planning, Vol. 26, No. 1, pp. 123 to 129, 1993 Printed in Great Britain
0024-6301/93
$6.00 + .OO
0 1993 Pergamon Press Ltd
123
Scenario Planning for Small Businesses M. John Foster
Entrepreneurs are risk takers and innovators but are not always strong supporters of strategic planning, especially in smaller businesses. However, small business entrpreneurs, like everyone else, have to face up to the uncertainty inherent in the future. One key element of strategic planning is to devise ways to handle that uncertainty and a useful technique for this is scenario building. It is often assumed that scenario building is an approach which only large, wealthy organizations can use because of the time, cost and expertise involved. This article describes a simplified approach to scenario building which can be employed with benefit by even the smallest firms.
Small businessmen’ tend to be reluctant planners (see e.g. Ogunmokun, 1990, and Sexton and Van Auken, 1982). People are too busy with running the business; it is too costly an exercise; and it is ‘too technical’ for the average owner of a small business. This article suggests that small businessmen should plan strategically and one of the key elements of planning is grappling with the uncertainty inherent in the future. Scenario building is a good way to deal with that uncertainty, and this is feasible even for the small businessman.
Reducing
the Risks of Failure
One of the unavoidable truths of running any business is that the owners or managers constantly have to make decisions about what to do next. Closing their eyes to the need to make decisions is in essence a form of passive decision making, an acceptance that the business will be allowed to take its chance steering an ‘as you were’ course. If nothing in the environment changes, this may work perfectly well but the assumption of stability around the business is questionable for most enterprises. When the Gulf War was being waged it affected everyone, even if only because the price of petrol or M. John Foster is Principal Lecturer in Business Strategy at the City Polytechnic of Hong Kong. He is currently on leave from Kingston Business School at Kingston University.
diesel for the company car or van had gone up; a change had occurred. Planning should be seen quite simply as whatever reflective activity precedes the making of this barrage of decisions which the business requires. Russell Ackoff (1970)) sums it up very succinctly when he defines planning as ‘anticipatory decision making’. From here it is a small step to suggest that the fundamental reason for investing time, energy and money in pro-active planning is to try to improve the quality of decisions. If planning is taken seriously it helps people to understand their business better. A recent study of small businesses in Australia found that there was a clear link between the success of businesses and their level of planning. Moreover, those who did more planning got more value. (Ogunmokun, 1990). Strategicplanning looks at longer term issues whose impact is likely to be far-reaching and enduring. Taking the longer term view can be seen to be critically important for any business. Those who do not plan may simply crash into an immovable barrier which, had they looked ahead, could have been circumvented or accommodated. For example what should the local delicatessen do when a large new supermarket opens up close by? Perhaps it is no coincidence that a large proportion of small business start-ups fail. In the U.S.A. it is reported (Executive Office of President, 1983) that 25-50% of new small businesses fold within 12 months (depending on the definition of ‘small’) and in the U.K. around 40% fold in the first 2 years (see Burns and Dewhurst, 1986, Chapter 3).
Dealing with Uncertainty If the desirability of strategic planning is accepted, let us now focus on the question of handling uncertainty in that planning. It is not realistic in the 1990s to assume that ‘tomorrow will be the same as today’. There is uncertainty inherent in the future and
124
Long Range Planning Vol. 26
February 1993
dealing with that trncertainty is one of the hardest tasks for management. As part of a recent research project, the author undertook a small survey of planning experts (see Foster & Kitching, 1989) to discover which facets of the strategic planning process they deemed most important. Their ‘top six’ comprised: the need to establish objectives clearly; several attributes which linked the planning process to the general management of the organization; and treatment of uncertainty. There are many approaches to tackling uncertainty, many related to the idea of probability. However, as the planning horizon lengthens, in a strategic setting, the assessment of probabilities is increasingly difficult. The long term assessment of the probability of future events must be highly subjective. To deal with this complex problem we can turn to scenario analysis. Another question which may then arise is whether scenario analysis is too complex, too subtle and consequently too expensive for the small businessman entrepreneur to cope with or afford. This need not be so. Of course scenario analysis as practiced by Shell, or other multinationals, would be expensive for a small business and the complexity of such a study would be too much for our entrepreneur to handle alone. However the approach can offer a way of thinking about future uncertainties which is affordable and manageable by the small businessman. He can continue to be a ‘back of an envelope planner’, provided he has a big enough envelope.
A Simplified
Scenario Process
This section examines tha basic nature of scenario analysis, its potential major variants and its adaptation for the small business. Consider the scenario :
(9
following
three
definitions
of
a
A scenario is an archetypal description of a possible future based on a mutually consistent grouping of determinants (P. W. Beck (1982), Former Planning Director of Shell U.K.)
(ii) A scenario is a qualitative OY quantitative picture of a given organization or group, developed within a framework of a set of specified assumptions (Christine McNulty (1977)) Futures Consultant). (iii) A scenario is a device for ordering one’s perceptions about an environment in which one’s decisions might be played out (attributed to SRI International, see Huss & Honton, 1987). Clearly a scenario is not a narrow forecast but a picture of the wider span which may well have ‘soft’ or qualitative aspects as well as ‘hard’ quantifiable
items in it. There are assumptions, which should be made explicit, inherent in a particular scenario and it is vital that the picture should be internally consistent. Thus we have an arena for the strategists to explore to reduce the cost of ‘mistakes’. As Beck (1982, p. 18) puts it: ‘A scenario is intended to be regarded as a tool to assist understanding-as a backdrop to the decision making process, rather than as a integral part of the decision itself.’ I suggest the following definition: A scenario is a description of a ‘possible future’ based on a set of mutually consistent elements, within a framework of specified assumptions. It will typically encompass both quantitative and qualitative elements. The distinction between the ‘scene’ and the act of decision mentioned above is important and one to which we shall adhere. However, not all writers maintain the distinction. A good way to understand what is happening is to make an analogy with teaching Business or Management. In that setting case-studies are offered to the students. The students are required to read, analyse and make decisions on what they determine to be the key issue(s) of the case. The cases relate to actual past events so that some kind of constructive debriefing is possible, aided by hindsight. One way to think of scenario writing is as writing cases describing the possible future environment inside and outside an organization. The creation of these case futures enables strategic decision makers to assess how they might react to the future-cases with which they are presented. This time, of course, there is no debriefing with hindsight, only the arrival of a time when real decisions are required. If the scenario writers have done a good job and the decision makers took their role-playing seriously, then the decisions will be made after a review of the possible consequences.
Writing
Scenarios
What then are the steps involved in writing scenarios? The basic steps are set out in Figure 1. Step 5 is easy to write down but will be potentially very hard to handle in practice. However, the emphasis as written is perhaps the crucial point to bear in mind at all times. This will then provide the putative future within which to examine possible future actions. The assembly process in step 5 could lead wholly or in part to a computer model but, for a small enterprise, it could be a largely descriptive process annotated with a few key items of hard data along the way. One way of examining the potential interactions of factors, and future forecasts of them, is to resort to cross-impact analysis. At the level of the small scale entrepreneur, this may amount to constructing a simple matrix with the factors on
Scenario Planning for Small Businesses
1. Key Fsctors: Identify Key Relevant Factors
2. Assumptions: 3. Sources
State the Assumptions
125
- Inside the Organization - in the External Environment - Economic - Social - Technological - Political - Competition
to be Implicit in the Scenario, Including its Horizon.
Identify Relevant Sources of Information
for Key Factors.
4. Issues: Identify the Issues/Points of Divergence Arising From Conflicting Forces in the Current Situation. 5. Pictures
of the Future: Assemble, or Fit Together, the Information
and Forecasts Obtained to Generate Internally Consistent Pictures or Development Pathways.
Figure 1. Basic steps in scenario writing both axes, thereby focusing attention on ations which the entrepreneur might then subjectively. For a more complex scenario computer packages are available. (See, e.g., 1980, and Huss and Honton, 1987). The complementary are :
combinevaluate analysis, Higgins,
issues which arise in practice
(a) at what level of generality/aggregation the scenario(s) be pitched? and
should
(b) how many scenarios to build? The two most commonly used levels of scenario are: Global Scenarios and hhstry Scenarios. Global Scenarios usually deal with global economic issues. Typical major variables are: growth, inflation and interest rates, protectionism and energy prices. The sort of Companies which use global scenarios are usually large organizations, such as aerospace companies or the oil majors. The Industry Scenario typically includes factors relating to competitor behaviour and technology trends, e.g. process changes and the arrival of possible substitutes for the industry’s products. These industry scenarios may be developed with a broad conception of an industry or for a narrow market segment. The choice will depend on the firm’s expected areas of participation within the industry. For our small businessman, global scenarios may not be relevant and even industry scenarios may be at too high a level of aggregation. He will probably need to produce ‘local market’ scenarios. The issues here will be similar to the industry scenario but more locally and more narrowly focused. A question often asked is, ‘What factors should be considered?’ The kinds of factors to be considered
will be those mentioned above in conjunction global and industry scenarios.
with
We are still left with the question of how many scenarios to attempt. In theory, the answer should perhaps be ‘a lot’, thereby enabling us best to cope with future uncertainties but in practice this is not feasible even for the large large and wealthy companies. As one planning executive in a national operating company of one of the oil majors explained: ‘Head Office might like us to build three or four but, realistically, if we manage two decent ones they have to be satisfied with that.’ The same will be true for the small businessman. If practical considerations mean our scope is limited to two, we have to decide which two scenarios to attempt. Four possibilities are shown in Figure 2. If only two of these four scenarios can be attempted, it might be advisable to choose 1 and 4. The first because it is where we expect to be, and the fourth because it is the one we have to explore to find out if we can stay in business if the worst happens. Whatever they may declare publicly, the first objective of most businesses is to survive. The ‘dream scenario’ is probably least useful: if that set of events occurs, the worst that can happen is a failure to exploit the opportunities available. This will be irritating but not life-threatening. If more than two scenarios are envisaged the ‘surprise free’ model may be helpful because it provides a ‘base scenario’ from which to move outwards: it may be useful despite its low likelihood of occurrence. It could be argued that this advice attempts to simplify scenario analysis too much. As one planning analyst with Shell Australia said: ‘Talking about separate archetypal scenarios is misleading. The idea is to have two or three scenarios which span the range of possibilities and whose differences
126
Long Range Planning Vol. 26
1.‘Most Likely’
2.‘Surprise
-
Free’-
February 1993
In this scenario trends unfold according to our best estimates. some factors may still change sharply, because events do not evolve in a continuous way. In this scenario existing values and trends are maintained so that we face no ‘Uncharted Waters’. Wack (1985a. 1985b) suggests that this is often a good basis to develop, if only for comparative purposes.
3.‘Optimistid
-
This is the ‘dream’ scenario where everything bull market which speculators love!
4.‘Pessimistic’
-
In this scenario everything goes against us, subject to the usual constraint that all the elements must be internally consistent. Energy costs, interest rates, competition, all go against us.
is good: It is the
Figure 2. Four types of scenarios arise from an analysis of the issues governing the uncertainty. It is therefore very unlikely that you would put all the good things into one scenario (1) or all the bad things in another (4), essentially because neither would be likely to be internally consistent’. In an ideal world with good skills readily available and the time, money and inclination to pursue a comprehensive investigation, that is a reasonable argument. But, for the under-resourced and relatively unskilled scenario user, focusing on one of a fairly small set of archetypal, thematic developments is a way to achieve something. Not every business is as well-resourced as Shell or Exxon. Once the scenarios are built, we can analyse our position and decide on a course of action. The choice is between designing the strategy around the needs of a given scenario and then taking a view on which scenario-strategy pair to follow or, as Porter (1985) suggests, to try to ‘hedge’ our strategy i.e. devise a strategy which is workable across a range of scenarios. Hedging, in that sense, may be unnecessarily cautious. There will be losses and payoffs whatever future occurs. The best option is probably to devise a strategy to optimize within the most likelyfuture but with contingent escape routes built in.
Getting
Started
This section describes three examples of ‘getting started’ at scenario writing. In the first two cases we address the problem of getting started from a very specific point of view: an entrepreneur considering his own local market situation. The third example is more open and looks specifically at the uncertain situation in Hong Kong. The product for each of the first two examples is a single page diagram. If entrepreneurs went no further than these diagrams, they would be learning something new because they are using a new way of thinking. However, we have
only partially attempted steps 1 and 2 of the process outlined in Figure 1. The two diagrams are not comprehensive. They are shown as illustrations of ‘working charts’. The arrows indicate interdependencies among the factors. In the second example there is a mass of interdependencies. Running a restaurant is not such a simple business as one might imagine.
Scenarios for a Housebuilder This example considers the situation of a small to medium sized housebuilder based in the South East of England. Some interdepencies are illustrated by juxtaposition and others are sketched in to show how the mappings become complicated. The involvement of government is highlighted by the use of asterisks.
Scenarios for a Restaurateur This scenario was developed for a firm which runs a group of three up-market French restaurants in properous suburbs of SW London. Figure 4 illustrates the value of scenario analysis in displaying the key factors affecting the business.
Hong Kong After 1997 The final example we consider is a Hong Kong national scenario for 1997 and beyond. The list of factors which should be considered is standard and could be readily deduced from Figure 1. The real interest in this case is to develop a scenario which describes what would happen if China reneged on
Scenario Planning for Small Businesses
1
1
I
I
*
Demand for New Houaea
Economic Outlook Interest (and Motgage) Rates*
I
I
127
*
I
I
I
_ _
I
I
Prices Availability
I
- Buyer’s or Seller’s Market 7
I
I I
I I
Cash Flow Capability/Speed
I
-
I
I I I I I
-
I
Coat of Materlala Availability
I
Foundations to Completion Sensitivity to Price Falls
_ f
Including Imports (e.g. Timber)
of Land (Hence Price) - Government Posture on Greenbelt’
I I I I I I
Competition From Big Builders - How Low Will They Drop Prices to Get Sales 7 -Will They Operate on Breakeven in Hard Times 7
I I I I
Technology
I__
Building
- Timber Frame Issue - Factory va Site Build (of Basic Elements) - Quality/Durability va Price - Brick va Concrete
Standards* Changing Consumer Requirements Buyers Want Better Standards of Roof After 89/90 Gales 7)
Poaaible Disaster
(e.g. Will
Factors: An Economic Depression Labour Win the Election
/ Swingeing Property Transfer Tax+ (* Denote Government
\ Policy to Defend Greenbelt”
Influence)
Figure 3. Scenario factors for the housebuilder its undertakings to ‘leave Hong Kong alone’ when it takes over in 1997. If China did renege, in what areas would it renege and with what effects? Our interest is to decide whether business life would be sustainable. From the perspective of the big business, decisions might be required as to the place of incorporation, stock exchange listing and eventually, withdrawal. For the small businessman, the situation might be much more dramatic, for his business may be wholly in Hong Kong. If a significant number of factors go against him, will he feel driven to leave Hong Kong? Below is a list of important political and economic factors or events. Some apply to any business, others are more important to importers and exporters.
Even if everything in the list came to pass we would still not have created a doomsday scenario. Events in the wider world (e.g. energy price) could be perfectly stable. However, if only one or two items on the list came about a very unappealing picture might unfold. For the small Hong Kong entrepreneur items (3) and (4) might be the trigger which will cause him to go to Canada, Australia or Britain. The imposition of strict import and export controls would make doing business much harder and a sharp rise in profits tax would cut immediately into the entrepreneur’s disposable income. The point is clear: eueyta small number of critical changes in the business environment could lead to a dramatic change.
Long
Figure
4. Scenario
Range
factors
Planning
Vol.
26
February
for the restaurateur
1. Imposition 2. Abolition 3. Imposition
of China’s Central or Provincial of Hong Kong’s Separate of Centrally
Administered
4. Sharp Rise in Both Corporate 5. Syphoning-off
Figure
5. Scenario
1993
Style of Government.
Currency. Import/Export
Controls.
and Personal Taxes (Currently
16.5% and 15%).
of Hong Kong’s Profits Tax into China’s Central Coffers.
6. Imposition
of Strict Censorship.
7. Imposition
of Strict Work Permit and Visa Controls on Foreign
factors
for Hong
Nationals.
Kong
This example shows how, with a little effort, a businessman can build a picture. We begin to assemble key factors in a systematic way. Thousands of Hong Kong citizens who are busily making contingency plans, may be writing their own worst case scenarios and devising strategies to cope with them.
Developing
the Scenarios
In these three examples we took the first two steps in the scenario writing process described in Figure 1. To construct specific scenarios, such as ‘most likely’ or ‘doomsday’ scenarios takes us to step four, the identification of ‘points of divergence’ arising from
Scenario Planning for Small Businesses conflicting forces in the current situation. As an illustration, we can imagine some ‘points of divergence’ which might bring about a doomsday picture for each of the three examples. (a) Housebuilder:
(9
The U.K. economy defies regenerate it and declines,
government (ii) The houses as unsafe,
outlaws
attempts
to
timberframe
(iii) Labour sweeps to power in a General Election and restates support for the ‘greenbelt’ while imposing a heavy property transfer tax. to a more hostile If this happened it would . lead . environment and one would expect to see owners not selling their houses; building costs rising over the timber-frame issue and a longer term loss of confidence because new building land would be very scarce. In that situation the big players, who are able to pay premium prices for the few sites which might be available would succeed at the expense of small companies.
129
Conclusion In this paper we have looked at the value of strategic planning generally and, more specifically, at the usefulness of a scenario analysis to the small businessman entrepreneur. (1) We argued that strategic planning is a desirable style of management for a small business. (2) We looked at scenario analysis, which many small businessmen would regard as a highly specialized activity beyond their scope. We have seen that this need not be the case and that it is possible to start building scenarios. Even if we use a simple model, it will significantly help the entrepreneur in taking strategic decisions.
Acknowledgements-An earlier version of this paper was presented at the ENDEC World Conference in Entrepreneurship and Innovative Change, Singapore, July 1991.
(b) Restaurateur:
6)
High inflation returns, leading to high interest rates and high mortgage rates, reduced discretionary spending power and a reduction in eating out,
(ii) Traditional, rich French sauces become highly unfashionable because of their negative health implications, (iii) Skilled waiting staff become increasingly hard to recruit in S.W. London. If these factors occurred simultaneously then the restaurateur would face a bleak prospect. He would have a smaller market and fewer staff to service the remaining customers. A switch to another business might offer the possibility of survival. (c) Hong Kong: If most of the factors occurred, the Hong Kong economy would be in desperate straits. If the world economy was also hit, perhaps by a new oil crisis, the picture would also suffer. In each of these cases, the events listed are compatible with one another. That they all would happen simultaneously is improbable but it is not impossible. The cardinal scenario rule of internal consistency is not violated, leaving the decision maker with a possible future in which to explore his options.
References R. L.
Ackoff, A Concept of Corporate Planning, Wiley, New York (1970).
P. W. Beck, Corporate planning for an uncertain future. Long Range Planning, 15, 12-21 (1982). P. Burns and J. Dewhurst, Small Business in Europe, Macmillan, London (1986). Executive Office of The President, The State of Small Business, Washington, D.C. (1983). M. J. Foster and J. Kitching, Measuring the effectiveness of strategic planning-The process of calibration. Occasional Paper No. 10, Kingston Business School. Kingston upon Thames (1989). J. C. Higgins, Strategic and Operation Planning Systems. Prentice Hall, London (1980). W. Ft. Huss and E. J. Honton, Scenario planning, what use? Long Range Planning, 20, 21-29 (1987).
styleshould you
C. McNulty, Scenario development for corporate planning, Futures, 9, 128-138 (1977). G. 0. Ogunmokun, A study of the strategic planning practices in Australian small business organisations. Unpublished Doctoral Dissertation, Monash University, Melbourne (1990). M. E. Porter, Competitive Advantage, Free Press, New York (1985). D. L. Sexton and P. M. Van Auken, Prevalence of strategic planning in small business. Journal of Small Business Management, 20 (4). 20-26 (1982). P. Wack, Scenarios: uncharted waters ahead. Harvard Business Review, p. 73-89, September/October (1985a). P. Wack, Scenarios: shooting the rapids, Harvard Business Review, p. 139-I 50, November/December (1985b).
0024-6301/93
$6.00 + .OO
0 1993 Pergamon Press Ltd
123
Scenario Planning for Small Businesses M. John Foster
Entrepreneurs are risk takers and innovators but are not always strong supporters of strategic planning, especially in smaller businesses. However, small business entrpreneurs, like everyone else, have to face up to the uncertainty inherent in the future. One key element of strategic planning is to devise ways to handle that uncertainty and a useful technique for this is scenario building. It is often assumed that scenario building is an approach which only large, wealthy organizations can use because of the time, cost and expertise involved. This article describes a simplified approach to scenario building which can be employed with benefit by even the smallest firms.
Small businessmen’ tend to be reluctant planners (see e.g. Ogunmokun, 1990, and Sexton and Van Auken, 1982). People are too busy with running the business; it is too costly an exercise; and it is ‘too technical’ for the average owner of a small business. This article suggests that small businessmen should plan strategically and one of the key elements of planning is grappling with the uncertainty inherent in the future. Scenario building is a good way to deal with that uncertainty, and this is feasible even for the small businessman.
Reducing
the Risks of Failure
One of the unavoidable truths of running any business is that the owners or managers constantly have to make decisions about what to do next. Closing their eyes to the need to make decisions is in essence a form of passive decision making, an acceptance that the business will be allowed to take its chance steering an ‘as you were’ course. If nothing in the environment changes, this may work perfectly well but the assumption of stability around the business is questionable for most enterprises. When the Gulf War was being waged it affected everyone, even if only because the price of petrol or M. John Foster is Principal Lecturer in Business Strategy at the City Polytechnic of Hong Kong. He is currently on leave from Kingston Business School at Kingston University.
diesel for the company car or van had gone up; a change had occurred. Planning should be seen quite simply as whatever reflective activity precedes the making of this barrage of decisions which the business requires. Russell Ackoff (1970)) sums it up very succinctly when he defines planning as ‘anticipatory decision making’. From here it is a small step to suggest that the fundamental reason for investing time, energy and money in pro-active planning is to try to improve the quality of decisions. If planning is taken seriously it helps people to understand their business better. A recent study of small businesses in Australia found that there was a clear link between the success of businesses and their level of planning. Moreover, those who did more planning got more value. (Ogunmokun, 1990). Strategicplanning looks at longer term issues whose impact is likely to be far-reaching and enduring. Taking the longer term view can be seen to be critically important for any business. Those who do not plan may simply crash into an immovable barrier which, had they looked ahead, could have been circumvented or accommodated. For example what should the local delicatessen do when a large new supermarket opens up close by? Perhaps it is no coincidence that a large proportion of small business start-ups fail. In the U.S.A. it is reported (Executive Office of President, 1983) that 25-50% of new small businesses fold within 12 months (depending on the definition of ‘small’) and in the U.K. around 40% fold in the first 2 years (see Burns and Dewhurst, 1986, Chapter 3).
Dealing with Uncertainty If the desirability of strategic planning is accepted, let us now focus on the question of handling uncertainty in that planning. It is not realistic in the 1990s to assume that ‘tomorrow will be the same as today’. There is uncertainty inherent in the future and
124
Long Range Planning Vol. 26
February 1993
dealing with that trncertainty is one of the hardest tasks for management. As part of a recent research project, the author undertook a small survey of planning experts (see Foster & Kitching, 1989) to discover which facets of the strategic planning process they deemed most important. Their ‘top six’ comprised: the need to establish objectives clearly; several attributes which linked the planning process to the general management of the organization; and treatment of uncertainty. There are many approaches to tackling uncertainty, many related to the idea of probability. However, as the planning horizon lengthens, in a strategic setting, the assessment of probabilities is increasingly difficult. The long term assessment of the probability of future events must be highly subjective. To deal with this complex problem we can turn to scenario analysis. Another question which may then arise is whether scenario analysis is too complex, too subtle and consequently too expensive for the small businessman entrepreneur to cope with or afford. This need not be so. Of course scenario analysis as practiced by Shell, or other multinationals, would be expensive for a small business and the complexity of such a study would be too much for our entrepreneur to handle alone. However the approach can offer a way of thinking about future uncertainties which is affordable and manageable by the small businessman. He can continue to be a ‘back of an envelope planner’, provided he has a big enough envelope.
A Simplified
Scenario Process
This section examines tha basic nature of scenario analysis, its potential major variants and its adaptation for the small business. Consider the scenario :
(9
following
three
definitions
of
a
A scenario is an archetypal description of a possible future based on a mutually consistent grouping of determinants (P. W. Beck (1982), Former Planning Director of Shell U.K.)
(ii) A scenario is a qualitative OY quantitative picture of a given organization or group, developed within a framework of a set of specified assumptions (Christine McNulty (1977)) Futures Consultant). (iii) A scenario is a device for ordering one’s perceptions about an environment in which one’s decisions might be played out (attributed to SRI International, see Huss & Honton, 1987). Clearly a scenario is not a narrow forecast but a picture of the wider span which may well have ‘soft’ or qualitative aspects as well as ‘hard’ quantifiable
items in it. There are assumptions, which should be made explicit, inherent in a particular scenario and it is vital that the picture should be internally consistent. Thus we have an arena for the strategists to explore to reduce the cost of ‘mistakes’. As Beck (1982, p. 18) puts it: ‘A scenario is intended to be regarded as a tool to assist understanding-as a backdrop to the decision making process, rather than as a integral part of the decision itself.’ I suggest the following definition: A scenario is a description of a ‘possible future’ based on a set of mutually consistent elements, within a framework of specified assumptions. It will typically encompass both quantitative and qualitative elements. The distinction between the ‘scene’ and the act of decision mentioned above is important and one to which we shall adhere. However, not all writers maintain the distinction. A good way to understand what is happening is to make an analogy with teaching Business or Management. In that setting case-studies are offered to the students. The students are required to read, analyse and make decisions on what they determine to be the key issue(s) of the case. The cases relate to actual past events so that some kind of constructive debriefing is possible, aided by hindsight. One way to think of scenario writing is as writing cases describing the possible future environment inside and outside an organization. The creation of these case futures enables strategic decision makers to assess how they might react to the future-cases with which they are presented. This time, of course, there is no debriefing with hindsight, only the arrival of a time when real decisions are required. If the scenario writers have done a good job and the decision makers took their role-playing seriously, then the decisions will be made after a review of the possible consequences.
Writing
Scenarios
What then are the steps involved in writing scenarios? The basic steps are set out in Figure 1. Step 5 is easy to write down but will be potentially very hard to handle in practice. However, the emphasis as written is perhaps the crucial point to bear in mind at all times. This will then provide the putative future within which to examine possible future actions. The assembly process in step 5 could lead wholly or in part to a computer model but, for a small enterprise, it could be a largely descriptive process annotated with a few key items of hard data along the way. One way of examining the potential interactions of factors, and future forecasts of them, is to resort to cross-impact analysis. At the level of the small scale entrepreneur, this may amount to constructing a simple matrix with the factors on
Scenario Planning for Small Businesses
1. Key Fsctors: Identify Key Relevant Factors
2. Assumptions: 3. Sources
State the Assumptions
125
- Inside the Organization - in the External Environment - Economic - Social - Technological - Political - Competition
to be Implicit in the Scenario, Including its Horizon.
Identify Relevant Sources of Information
for Key Factors.
4. Issues: Identify the Issues/Points of Divergence Arising From Conflicting Forces in the Current Situation. 5. Pictures
of the Future: Assemble, or Fit Together, the Information
and Forecasts Obtained to Generate Internally Consistent Pictures or Development Pathways.
Figure 1. Basic steps in scenario writing both axes, thereby focusing attention on ations which the entrepreneur might then subjectively. For a more complex scenario computer packages are available. (See, e.g., 1980, and Huss and Honton, 1987). The complementary are :
combinevaluate analysis, Higgins,
issues which arise in practice
(a) at what level of generality/aggregation the scenario(s) be pitched? and
should
(b) how many scenarios to build? The two most commonly used levels of scenario are: Global Scenarios and hhstry Scenarios. Global Scenarios usually deal with global economic issues. Typical major variables are: growth, inflation and interest rates, protectionism and energy prices. The sort of Companies which use global scenarios are usually large organizations, such as aerospace companies or the oil majors. The Industry Scenario typically includes factors relating to competitor behaviour and technology trends, e.g. process changes and the arrival of possible substitutes for the industry’s products. These industry scenarios may be developed with a broad conception of an industry or for a narrow market segment. The choice will depend on the firm’s expected areas of participation within the industry. For our small businessman, global scenarios may not be relevant and even industry scenarios may be at too high a level of aggregation. He will probably need to produce ‘local market’ scenarios. The issues here will be similar to the industry scenario but more locally and more narrowly focused. A question often asked is, ‘What factors should be considered?’ The kinds of factors to be considered
will be those mentioned above in conjunction global and industry scenarios.
with
We are still left with the question of how many scenarios to attempt. In theory, the answer should perhaps be ‘a lot’, thereby enabling us best to cope with future uncertainties but in practice this is not feasible even for the large large and wealthy companies. As one planning executive in a national operating company of one of the oil majors explained: ‘Head Office might like us to build three or four but, realistically, if we manage two decent ones they have to be satisfied with that.’ The same will be true for the small businessman. If practical considerations mean our scope is limited to two, we have to decide which two scenarios to attempt. Four possibilities are shown in Figure 2. If only two of these four scenarios can be attempted, it might be advisable to choose 1 and 4. The first because it is where we expect to be, and the fourth because it is the one we have to explore to find out if we can stay in business if the worst happens. Whatever they may declare publicly, the first objective of most businesses is to survive. The ‘dream scenario’ is probably least useful: if that set of events occurs, the worst that can happen is a failure to exploit the opportunities available. This will be irritating but not life-threatening. If more than two scenarios are envisaged the ‘surprise free’ model may be helpful because it provides a ‘base scenario’ from which to move outwards: it may be useful despite its low likelihood of occurrence. It could be argued that this advice attempts to simplify scenario analysis too much. As one planning analyst with Shell Australia said: ‘Talking about separate archetypal scenarios is misleading. The idea is to have two or three scenarios which span the range of possibilities and whose differences
126
Long Range Planning Vol. 26
1.‘Most Likely’
2.‘Surprise
-
Free’-
February 1993
In this scenario trends unfold according to our best estimates. some factors may still change sharply, because events do not evolve in a continuous way. In this scenario existing values and trends are maintained so that we face no ‘Uncharted Waters’. Wack (1985a. 1985b) suggests that this is often a good basis to develop, if only for comparative purposes.
3.‘Optimistid
-
This is the ‘dream’ scenario where everything bull market which speculators love!
4.‘Pessimistic’
-
In this scenario everything goes against us, subject to the usual constraint that all the elements must be internally consistent. Energy costs, interest rates, competition, all go against us.
is good: It is the
Figure 2. Four types of scenarios arise from an analysis of the issues governing the uncertainty. It is therefore very unlikely that you would put all the good things into one scenario (1) or all the bad things in another (4), essentially because neither would be likely to be internally consistent’. In an ideal world with good skills readily available and the time, money and inclination to pursue a comprehensive investigation, that is a reasonable argument. But, for the under-resourced and relatively unskilled scenario user, focusing on one of a fairly small set of archetypal, thematic developments is a way to achieve something. Not every business is as well-resourced as Shell or Exxon. Once the scenarios are built, we can analyse our position and decide on a course of action. The choice is between designing the strategy around the needs of a given scenario and then taking a view on which scenario-strategy pair to follow or, as Porter (1985) suggests, to try to ‘hedge’ our strategy i.e. devise a strategy which is workable across a range of scenarios. Hedging, in that sense, may be unnecessarily cautious. There will be losses and payoffs whatever future occurs. The best option is probably to devise a strategy to optimize within the most likelyfuture but with contingent escape routes built in.
Getting
Started
This section describes three examples of ‘getting started’ at scenario writing. In the first two cases we address the problem of getting started from a very specific point of view: an entrepreneur considering his own local market situation. The third example is more open and looks specifically at the uncertain situation in Hong Kong. The product for each of the first two examples is a single page diagram. If entrepreneurs went no further than these diagrams, they would be learning something new because they are using a new way of thinking. However, we have
only partially attempted steps 1 and 2 of the process outlined in Figure 1. The two diagrams are not comprehensive. They are shown as illustrations of ‘working charts’. The arrows indicate interdependencies among the factors. In the second example there is a mass of interdependencies. Running a restaurant is not such a simple business as one might imagine.
Scenarios for a Housebuilder This example considers the situation of a small to medium sized housebuilder based in the South East of England. Some interdepencies are illustrated by juxtaposition and others are sketched in to show how the mappings become complicated. The involvement of government is highlighted by the use of asterisks.
Scenarios for a Restaurateur This scenario was developed for a firm which runs a group of three up-market French restaurants in properous suburbs of SW London. Figure 4 illustrates the value of scenario analysis in displaying the key factors affecting the business.
Hong Kong After 1997 The final example we consider is a Hong Kong national scenario for 1997 and beyond. The list of factors which should be considered is standard and could be readily deduced from Figure 1. The real interest in this case is to develop a scenario which describes what would happen if China reneged on
Scenario Planning for Small Businesses
1
1
I
I
*
Demand for New Houaea
Economic Outlook Interest (and Motgage) Rates*
I
I
127
*
I
I
I
_ _
I
I
Prices Availability
I
- Buyer’s or Seller’s Market 7
I
I I
I I
Cash Flow Capability/Speed
I
-
I
I I I I I
-
I
Coat of Materlala Availability
I
Foundations to Completion Sensitivity to Price Falls
_ f
Including Imports (e.g. Timber)
of Land (Hence Price) - Government Posture on Greenbelt’
I I I I I I
Competition From Big Builders - How Low Will They Drop Prices to Get Sales 7 -Will They Operate on Breakeven in Hard Times 7
I I I I
Technology
I__
Building
- Timber Frame Issue - Factory va Site Build (of Basic Elements) - Quality/Durability va Price - Brick va Concrete
Standards* Changing Consumer Requirements Buyers Want Better Standards of Roof After 89/90 Gales 7)
Poaaible Disaster
(e.g. Will
Factors: An Economic Depression Labour Win the Election
/ Swingeing Property Transfer Tax+ (* Denote Government
\ Policy to Defend Greenbelt”
Influence)
Figure 3. Scenario factors for the housebuilder its undertakings to ‘leave Hong Kong alone’ when it takes over in 1997. If China did renege, in what areas would it renege and with what effects? Our interest is to decide whether business life would be sustainable. From the perspective of the big business, decisions might be required as to the place of incorporation, stock exchange listing and eventually, withdrawal. For the small businessman, the situation might be much more dramatic, for his business may be wholly in Hong Kong. If a significant number of factors go against him, will he feel driven to leave Hong Kong? Below is a list of important political and economic factors or events. Some apply to any business, others are more important to importers and exporters.
Even if everything in the list came to pass we would still not have created a doomsday scenario. Events in the wider world (e.g. energy price) could be perfectly stable. However, if only one or two items on the list came about a very unappealing picture might unfold. For the small Hong Kong entrepreneur items (3) and (4) might be the trigger which will cause him to go to Canada, Australia or Britain. The imposition of strict import and export controls would make doing business much harder and a sharp rise in profits tax would cut immediately into the entrepreneur’s disposable income. The point is clear: eueyta small number of critical changes in the business environment could lead to a dramatic change.
Long
Figure
4. Scenario
Range
factors
Planning
Vol.
26
February
for the restaurateur
1. Imposition 2. Abolition 3. Imposition
of China’s Central or Provincial of Hong Kong’s Separate of Centrally
Administered
4. Sharp Rise in Both Corporate 5. Syphoning-off
Figure
5. Scenario
1993
Style of Government.
Currency. Import/Export
Controls.
and Personal Taxes (Currently
16.5% and 15%).
of Hong Kong’s Profits Tax into China’s Central Coffers.
6. Imposition
of Strict Censorship.
7. Imposition
of Strict Work Permit and Visa Controls on Foreign
factors
for Hong
Nationals.
Kong
This example shows how, with a little effort, a businessman can build a picture. We begin to assemble key factors in a systematic way. Thousands of Hong Kong citizens who are busily making contingency plans, may be writing their own worst case scenarios and devising strategies to cope with them.
Developing
the Scenarios
In these three examples we took the first two steps in the scenario writing process described in Figure 1. To construct specific scenarios, such as ‘most likely’ or ‘doomsday’ scenarios takes us to step four, the identification of ‘points of divergence’ arising from
Scenario Planning for Small Businesses conflicting forces in the current situation. As an illustration, we can imagine some ‘points of divergence’ which might bring about a doomsday picture for each of the three examples. (a) Housebuilder:
(9
The U.K. economy defies regenerate it and declines,
government (ii) The houses as unsafe,
outlaws
attempts
to
timberframe
(iii) Labour sweeps to power in a General Election and restates support for the ‘greenbelt’ while imposing a heavy property transfer tax. to a more hostile If this happened it would . lead . environment and one would expect to see owners not selling their houses; building costs rising over the timber-frame issue and a longer term loss of confidence because new building land would be very scarce. In that situation the big players, who are able to pay premium prices for the few sites which might be available would succeed at the expense of small companies.
129
Conclusion In this paper we have looked at the value of strategic planning generally and, more specifically, at the usefulness of a scenario analysis to the small businessman entrepreneur. (1) We argued that strategic planning is a desirable style of management for a small business. (2) We looked at scenario analysis, which many small businessmen would regard as a highly specialized activity beyond their scope. We have seen that this need not be the case and that it is possible to start building scenarios. Even if we use a simple model, it will significantly help the entrepreneur in taking strategic decisions.
Acknowledgements-An earlier version of this paper was presented at the ENDEC World Conference in Entrepreneurship and Innovative Change, Singapore, July 1991.
(b) Restaurateur:
6)
High inflation returns, leading to high interest rates and high mortgage rates, reduced discretionary spending power and a reduction in eating out,
(ii) Traditional, rich French sauces become highly unfashionable because of their negative health implications, (iii) Skilled waiting staff become increasingly hard to recruit in S.W. London. If these factors occurred simultaneously then the restaurateur would face a bleak prospect. He would have a smaller market and fewer staff to service the remaining customers. A switch to another business might offer the possibility of survival. (c) Hong Kong: If most of the factors occurred, the Hong Kong economy would be in desperate straits. If the world economy was also hit, perhaps by a new oil crisis, the picture would also suffer. In each of these cases, the events listed are compatible with one another. That they all would happen simultaneously is improbable but it is not impossible. The cardinal scenario rule of internal consistency is not violated, leaving the decision maker with a possible future in which to explore his options.
References R. L.
Ackoff, A Concept of Corporate Planning, Wiley, New York (1970).
P. W. Beck, Corporate planning for an uncertain future. Long Range Planning, 15, 12-21 (1982). P. Burns and J. Dewhurst, Small Business in Europe, Macmillan, London (1986). Executive Office of The President, The State of Small Business, Washington, D.C. (1983). M. J. Foster and J. Kitching, Measuring the effectiveness of strategic planning-The process of calibration. Occasional Paper No. 10, Kingston Business School. Kingston upon Thames (1989). J. C. Higgins, Strategic and Operation Planning Systems. Prentice Hall, London (1980). W. Ft. Huss and E. J. Honton, Scenario planning, what use? Long Range Planning, 20, 21-29 (1987).
styleshould you
C. McNulty, Scenario development for corporate planning, Futures, 9, 128-138 (1977). G. 0. Ogunmokun, A study of the strategic planning practices in Australian small business organisations. Unpublished Doctoral Dissertation, Monash University, Melbourne (1990). M. E. Porter, Competitive Advantage, Free Press, New York (1985). D. L. Sexton and P. M. Van Auken, Prevalence of strategic planning in small business. Journal of Small Business Management, 20 (4). 20-26 (1982). P. Wack, Scenarios: uncharted waters ahead. Harvard Business Review, p. 73-89, September/October (1985a). P. Wack, Scenarios: shooting the rapids, Harvard Business Review, p. 139-I 50, November/December (1985b).