The Art of the Long View - Scenario Planning & Analysis

The Art of the Long View, Peter Schwartz

I first learned about scenario planning in business school - almost 20 years ago now. It's been interesting and encouraging to see a renewed interest in it in ESG circles, probably mainly due to scenario analysis being recommended by the TCFD as a useful tool for climate-related risk management.

However, it seems many ESG professionals are unaware of the long history that this strategic planning tool has, and the fact that there is extensive literature on the topic.

One of the standard texts on scenario planning is "The Art of the Long View - Planning for the Future in an Uncertain World", by Peter Schwartz. I reread this book recently and feel it offers a lot of valuable insights for sustainable finance enthusiasts, not only as it relates to climate change.

Below I've included what I feel are the main takeaways from this book. Please note this is not meant as a summary - as always, to get the most out of this I recommend you read the entire book; it is very rich in examples and is an enjoyable read.

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In a scenario process, managers invent and then consider, in depth, several varied stories of equally plausible futures. The stories are carefully researched, full of relevant detail, oriented toward real-life decisions, and designed (one hopes) to bring forward surprises and unexpected leaps of understanding. Together, the scenarios comprise a tool for ordering one’s perceptions. The point is not to “pick one preferred future,” and hope for it to come to pass (or, even, work to create it – though there are some situations where acting to create a better future is a useful function of scenarios). Nor is the point to find the most probable future and adapt to it or “bet the company” on it. Rather, the point is to make strategic decisions that will be sound for all plausible futures. No matter what future takes place, you are much more likely to be ready for it – and influential in it – if you have thought seriously about scenarios.

The point is not to “pick one preferred future,” and hope for it to come to pass

In this context the precise definition of “scenario” is: a tool for ordering one’s perceptions about alternative future environments in which one’s decisions might be played out. Alternatively: a set of organized ways for us to dream effectively about our own future. Concretely, they resemble a set of stories, either written out or often spoken. However, these stories are built around carefully constructed “plots” that make the significant elements of the world scene stand out boldly. This approach is more a disciplined way of thinking that a formal methodology.

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To operate in an uncertain world, people needed to be able to reperceive – to question their assumptions about the way the world works, so that they could see the world more clearly. The purpose of scenarios is to help yourself change your view of reality – to match it up more closely with reality as it is, and reality as it is going to be. The end result, however, is not an accurate picture of tomorrow, but better decisions about the future. … Pierre Wack was not interested in predicting the future. His goal was the liberation of people’s insights.

The real value comes from the interaction with those who must decide and act.

The purpose of scenarios is to help yourself change your view of reality – to match it up more closely with reality as it is, and reality as it is going to be.

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The true work took place in the last step, rehearsing the implications. How would such a business fare in each of the three worlds? That is also the most interesting part of the scenario process, the part that yields the most surprises. … Often, this step reveals interconnections that were not apparent before. … Scenario thinking is an art, not a science.

You know that the scenario is effective when someone, pondering an issue that has been taboo or unthinkable before says, “Yes, I can see how that might happen. And what I might do as a result.”

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“Scenarios deal with two worlds,” wrote Pierre Wack. “The world of facts and the world of perceptions. They explore for facts but they aim at perceptions inside the heads of decision-makers. Their purpose is to gather and transform information of strategic significance into fresh perceptions. This transformation process is not trivial – more often than not it does not happen. When it works, it is a creative experience that generates a heartfelt ‘Aha!’ from your managers and leads to strategic insights beyond the mind’s previous reach.”

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It is a common belief that serious information should appear in tables, graphs, numbers, or at least scholarly language. But important questions about the future are usually too complex or imprecise for the conventional languages of business and science. Instead, we use the language of stories and myths. Stories have a psychological impact that graphs and equations lack. Stories are about meaning: they help explain why things could happen in a certain way. They give order and meaning to events – a crucial aspect of understanding future possibilities.

It is a common belief that serious information should appear in tables, graphs, numbers, or at least scholarly language. But important questions about the future are usually too complex or imprecise for the conventional languages of business and science.

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The French poet and philosopher Paul Valéry wanted to learn how to think clearly about the future, and took the matter of examining his own mind-set very seriously. His method, which I recommend as a potentially fruitful exercise, was to awaken every morning before dawn and to write down the first things that came into his mind. Like Freud, who was to pioneer the similar psychotherapeutic technique of “free association,” Valery recognized that these spontaneous, often nonsensical-seeming ramblings offered clues to his habitual mind-sets.

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You may wonder how I keep track of all the material I gather. I have no elaborate filing system; no data base, for instance, and no millions of articles in folders with tags recording their location. I used to maintain such a system and found that I never used it. I hardly ever went back to the files. Instead, I concentrate on educating myself; on passing information through my mind so it affects my outlook: on tuning my attention as if it were an instrument. Sometimes, admittedly, I let articles and reports pile up in stacks; then I sift through the stacks to find what I need. And sometimes I must go back and re-create all the research I did several years before. But that, in itself, is valuable, because in the fields I care about, the facts have changed since I last went to look for them. Don’t worry about your files, worry about your perceptions.

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The last man we talked to was Kishida Junnosuke – chairman of the editorial board of Asahi Shinbun, the biggest Japanese newspaper. … “Our second word for optimism is Rakkanteki,” Mr. Kishida continued. “It means having enough challenges to give life meaning. In that sense I am very optimistic about Japan’s future.” In Japan, I came to realize, people accepted their problems as challenges to be met. Through meeting them, people would grow and improve. I thought of the infrastructure problem in the United States, which most governments have ignored, hoping it would go away. Yet our highways and roads are literally disintegrating, and it will take hundreds of billions of dollars to repair the damage. We don’t see that as a challenge to be overcome, as we did the space race, but as an ugly unsolvable problem to be denied.

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Make the time to read outside your immediate specialty – if necessary, taking time from more “active tasks”. Stick bookmarks in promising places, then graze the marked passages later. Allow yourself to become enthralled once in a while. … What I look for in my book reading is surprises – perceptions that are new to me, and then become of my own perception.

Whenever I look for driving forces I first run through a familiar litany of categories:

-?????????Society

-?????????Technology

-?????????Economics

-?????????Politics

-?????????Environment

In nearly every situation, I find forces from each of these arenas which make a difference in the story.

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Make the time to read outside your immediate specialty – if necessary, taking time from more “active tasks”. Stick bookmarks in promising places, then graze the marked passages later.

In every plan, critical uncertainties exist. Scenario-planners seek them out to prepare for them, an approach that hearkens back to old military scenarios. … Critical uncertainties are intimately related to predetermined elements. You find them by questioning your assumptions about predetermined elements: what might cause the price of oil to rise again?

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Challenge and Response

In the summer of 1987, I looked at the future of global finances for the London Stock Exchange… At the time, conventional economic thinking admitted only two scenarios. Either the economic system would crash into a prolonged depression, or we would “magically” defeat the problems created by these huge international financial imbalances permanently and break forth into stable prosperity. These scenarios in their na?ve extremes did not seem to make sense. I visited Ariyoshi Okimura … “I don’t think the imbalances are going to go away,” he said casually. “And I don’t think they are going to destroy the system. I think we will have ‘managed imbalances.’ The question will not be how to eliminate them, but how to live with them.” Okimura was correct. The economy has been … resilient. As new problems come up, investors and countries learn to adapt. We may see events that bring us to the brink, but the system itself won’t fail. Instead it will evolve further with each new challenge and response.

Environmentalism offers another test. For many years, the most widely perceived relationship between economics and the environment was a zero-sum winners and losers logic. You could either have growth or environmental safety, but not both. If you wanted a cleaner environment, you had to waste money on paperwork, catalytic converters, and coal plant scrubbers. If you were pro-growth, it meant you opposed environmentalism. People were locked into polarized positions by the logic of the debate.

Today, the logic of “sustainable development” suggests that both economic growth and environmental quality are possible – if people tackle the challenge of satisfying both criteria. That means developing new technologies which cut waste and save energy. When we designed scenarios for PG&E, for example, we deliberately set them up as challenge and response plots. We said that they had consistently seen their world as winners and losers, in which they were limited by politics and the supply of energy. That meant fighting to build power plants and transmission lines. In a challenge and response mind-set, they look at each difficulty as an opportunity to learn. As a result, their perceptions are now influenced by community feelings and their sense that the public will work with them to solve problems.

Today, the logic of “sustainable development” suggests that both economic growth and environmental quality are possible – if people tackle the challenge of satisfying both criteria. That means developing new technologies which cut waste and save energy.

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The role of scenarios is to arrange the factors so they illuminate the decision, instead of obscuring it. To do this, you start by questioning your belief in the inevitability of more of the same.

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There is an almost irresistible temptation to choose one scenario over the other: to say, in effect, “This is the future which we believe will take place. The other futures are interesting. But they’re irrelevant. We’re going to follow this scenario.”… Unfortunately, reality does not follow even the best-thought-out scenario. The point of scenario planning is to help us suspend our disbelief in all the futures: to allow us to think that any of them might take place. Then we can prepare for what we don’t ?think is going to happen. …

That’s why scenario planners avoid single predictions. …

Similarly, many people don’t want to see only the up side. … I was surprised at first to find out how difficult it is to convince people of optimistic scenarios. But up sides also pose enormous challenges: growth, innovation, and change. … People call optimistic scenarios “unrealistic,”?and since it’s a crime in business to be unrealistic, the scenario is often discarded.

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One powerful name for a scenario is “the Official Future.” It stands for the set of implicit assumptions behind most institutional policies: that things will work out okay tomorrow once the proper people get into power and can put their policies into effect. … Most Official Futures often turn out to be mere propaganda; but everybody in an organization subscribes to them almost unconsciously. … Then we often present it as one of a group of scenarios, so that people can see it for exactly how likely or unlikely it is. They usually discover that, in laboring under the Official Future, they have been working toward an impossible or undesirable goal.

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How do you judge whether a scenario was effective? The test is not whether you got the future right. That is fairly easy if you consider multiple scenarios. The real test is whether anyone changed his behavior because he saw the future differently. And, did he change his behavior in the right direction? Did he do the right thing? … An effective scenario almost always changes behavior. … Scenarios can open up your mind to policies you might not otherwise consider.

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Much writing about business creates the illusion of the CEO as a “general”, who commands his … loyal troops. Those troops, in turn, are supposed to transform themselves in whatever direction the CEO points. In real life, CEOs of large organizations are well aware that groups of people don’t work that way. Getting a group to develop the capacity to change requires a high degree of shared worldview, and a mutual commitment to change.

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Appendix: Steps to Developing Scenarios

1.??????Identify focal issue or decision

2.??????Identify key forces in the local environment

3.??????List driving forces in the macro-environment – what are the forces behind the forces identified in step 2?

4.??????Rank by importance and uncertainty

5.??????Selecting scenario logics

6.??????Fleshing out scenarios

7.??????Implications

8.??????Selection of leading indicators and signposts

Additional considerations:

1.??????Beware of ending up with three scenarios… People not familiar with scenarios or their use will be tempted to identify one of the three as the “middle” or “most likely” scenario and then will treat it as a single-point forecast.

2.??????Avoid assigning probabilities to different scenarios, because of the temptation to consider seriously only the scenario with the highest probability.

The role of scenarios is to arrange the factors so they illuminate the decision, instead of obscuring it. To do this, you start by questioning your belief in the inevitability of more of the same.