The ability of the business to plan, and its requirement for environmental information, will be influenced by how predictable its environment is. In Business Strategy the factors affecting this are given very precise meanings. The intensity of environmental issues varies from sector to sector and company to company. What is turbulence then?
Turbulence: How changeable the environment is and how easy it is to predict. Lynch (Corporate Strategy) presents turbulence as Turbulence= Changeability x Predictability
Is the environment likely to change? There are two aspects to changeability.
Complexity: The variety of influences and conditions. These include regulatory, social and political
factors, technological change and internationalization.
Novelty: The degree to which the environment presents new situations to be dealt with.
Is it possible to forecast trends in the environment or at least make sensible predictions of discontinuous change? Again there are two aspects:
Rate of change: In relation to the firm’s ability to respond (slow to fast) to this (in other words, does the environment change at a slower pace than the organization’s ability to respond to it?)
‘Visibility of the future’: Is there reliable information to make forecasts for decision making?
The degree of turbulence will affect the amount of resources devoted to environmental assessment. For example, investment banks employ substantial research departments and each day begins with dissemination of relevant environmental information to traders and managers. Airlines also have research departments which ‘red flag’ issues on a regular basis and also provide reports and forecasts as inputs into their strategic
The development of pictures of potential futures for the purposes of managerial learning and the development of strategic responses are the key areas of Scenario planning.
Scenario planning is useful where a long-term view of strategy is needed and where there are a few key factors influencing the success of the strategy, e.g. in the oil industry there may be a need to form a view of the business environment up to 25 years ahead, and issues such as crude oil availability, price and economic conditions are critical. For example, Shell was the only major oil company to have prepared its management for dealing with the shock of the 1970s oil crisis through scenario planning and was able to respond faster than its competitors. Precision is not possible, but it is important to develop a view of the future against which to evaluate and evolve strategies.
Scenario building attempts to create possible future situations using the key factors. The aim is to produce a limited number of scenarios so that strategies can be examined against them in terms of ‘what if …?’ and ‘what is the effect of …?’ (basically a form of sensitivity analysis).
A car manufacturer could assess the impact of a ‘Green Scenario’ or a ‘High Value Sterling Scenario’ on its business. Financial models of the firm are often used in conjunction with this approach to assess impact on profit. Although these provide a useful approach, it is important not to become too committed to one scenario; after all, they are only forecasts which might not in the event be valid.
Steps Scenario planning:
The development of pictures of potential futures for the purposes of managerial learning and the development of strategic responses.
Identify key forces, using techniques such as PEST analysis /PESTEL analysis
Understand the historic trend in respect of the key forces
Build future scenarios, e.g. optimistic, pessimistic and most likely.
The scenarios generated are then ‘plots’ to be played out making managers consider future possibilities and encouraging them to think about strategy more flexibly