How many scenarios?

In this episode of The Strategy Maverick: Whatever we predict, we'll probably be wrong. Evidence below.

How many scenarios should we consider?

Popular answers:

• One. Only one will come true. That answer comes from a forecasting, data-driven mindset.
• Two. Something will happen or it won’t.
• Three. Best case, worst case, most-likely case. Customarily equated to fast growth, slow growth, most-likely growth.
• Infinity. The Heisenberg Uncertainty Principle says we change things when we measure them.
• Infinity ÷ 2. A forecaster and Werner Heisenberg split the difference.

We can always conjure up enough scenarios to hit our scenario quota. Here’s a freebie: Tomorrow, the U.S. Congress will outlaw political donations above ten dollars.

The important question

Of course, the important question is not how many scenarios we should address. The important question is to find and face the important scenarios.

I run a simple process when a management team thinks even infinity ÷ 2 scenarios is just too many. With it, you can generate a dozen or two scenarios in an hour or two.

1. Ask each person to nominate a scenario. “Archrival surprises us with game-changing new product.” “Asteroid hits Earth.” “Federal Reserve raises interest rates 0.25%.” Encourage people to think generally (e.g., supply-chain disruption) rather than narrowly (e.g., bridge out in Iowa).
2. Vote on each scenario’s impact, positive or negative, on a 1-5 scale. 5 is high impact.
3. Vote on each scenario’s likelihood. 5 is highly likely.
4. Vote on how unprepared the business is for each scenario. 5 is highly unprepared.

When you’re done, focus on the scenarios that score high on all three dimensions, like the archrival’s surprising game-changer. Such scenarios are big deals, likely to happen, and you’re unprepared. Focus less on the asteroid; it’s a big deal but unlikely this fiscal year. Focus even less on the 0.25% rate hike. It’s an adjustment, not a threat.

Discuss any scenario where there’s wide divergence in votes. Sure, someone might be overreacting… but someone might know something you don’t know.

Once you identify key scenarios, ask yourself questions like these:

• Will our actions affect whether a scenario comes to pass? In a business war game that my colleagues and I facilitated, managers discovered that an innocuous move could unnerve competitors and provoke a price war. They scrapped the innocuous move.
• What could happen? NASA data show that small asteroids “impacted” Earth’s atmosphere 556 times between 1994 and 2013. Almost all disintegrated. But one, over Chelyabinsk Oblast, was consequential. Traveling at 42,960 mph, it exploded with the force of the Hiroshima atomic bomb and caused many injuries. See “The Flaw of Averages” by Dr. Sam Savage. Don’t look up.
• What if? Top management wanted a product team to stretch; the product team wanted to be judged against feasible goals. They asked my colleagues and me to solve the problem by simulating many scenarios. It turned out that the product team could hit the stretch goal if it deployed its most aggressive strategy… and if all its competitors sat and watched calmly as their market shares dropped. How likely is that?

Evidence

Even after the dazzling, disturbing discourse above, you might still underestimate how many scenarios exist and overestimate how confident you should feel about your predictions. You’re not alone. I’m right there with you, and so are thousands more with whom I’ve worked.

We’ve got evidence.

Over two thousand people have designed strategies for my Top Pricer Tournament?. (You can too. It’s fun, confidential, cool, and free for individuals. Contact me.) Entrants make pricing decisions in three generic industries, cleverly called Ailing, Fast Growth, and Mature. Businesses in each industry start from identical positions. Each entrant’s strategies compete against all combinations of other entrants’ strategies. The only lever entrants can pull is price. Sounds simple, yes? The Tournament currently simulates over 2.2 million scenarios per strategy and over 14 billion in total.

Tournament entrants must decide, among other things, whether to cut, hold, or raise their prices in Q1. As they decide, they might predict what the other entrants will do.

The graph below shows the percentage of entrants who chose to cut, hold, or raise their prices in the Ailing, Fast Growth, and Mature industries. Cutting price in the Fast Growth industry is the most common choice (43%)… not surprising, since conventional wisdom says you should go for market share in fast-growing industries. Decisions in the Mature industry were much less aggressive, with only 10% cutting prices in Q1, also in line with conventional wisdom. The Ailing industry is arguably the most difficult and least conventional, and we see that all three options are well represented.

Source: The ACS Top Pricer Tournament?.

Notice that none of the initial price moves — cut, hold, raise — gets half or more of the choices. That means this: No matter what Tournament entrants predict their competitors will do, they will probably be wrong. That’s why we need scenarios.

I’ve seen the same probably-predict-wrong problem in crisis simulations involving government and first responders.

For me, there are two key insights.

One: Don’t be too sure. We learn more with humility than with confidence.

Two: The more we look, the more we see.

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I’m?Mark Chussil, Founder of?Advanced Competitive Strategies, Inc. Thank you for reading my newsletter. Tell your friends. Thanks for comments, too. The more I listen, the more I learn.

For many posts, links, and videos, see?The ACS Strategy and War-Gaming Bibliography.

#competing #strategy #strategicthinking #simulation