Scenario Analysis

Scenario analysis attempts to capture the nonlin-earity, complexity, and unpredictability of turbulent environments by incorporating techniques for eliciting and aggregating group judgments, specifically through Delphi techniques and cross-impact matrices. The Delphi technique involves asking an anonymous panel of experts to estimate individually the probability that certain events will occur in the future. The panel members have several opportunities to revise their initial estimates. They look at the anonymous responses from other experts on the panel to gauge how much their individual estimates deviate from other estimates. While Delphi forecasting can be described as constrained guesswork, its probability estimates are statistically sound because panelists selected are experts in their respective fields. Cross-impact analysis (CIA) is a complex technique sometimes performed by hand, as in the procedure pioneered by General Electric (GE), and increasingly by computer. Its output is a matrix showing the favorable or unfavorable interaction of likely developments generated earlier by the Delphi panel.

The origin of scenario analysis is claimed by theorists from many countries. Nicholas C. Georgantzas and William Acar attest that scenarios were introduced to planning literature by Herman Kahn who worked on military scenarios for the U.S. government in the 1950s. In the 1960s H. Ozbekhan of the Wharton School (of the University of Pennsylvania) used scenarios in an urban planning project for Paris, France. Pierre Wack asserts that it was a group of strategic planners at Royal Dutch Shell who came up with the idea of using scenario analysis for strategic planning in the 1970s.

Ansoff and other strategy theorists state that the 1970s witnessed the transformation of product markets into a global perspective. Changes in the external sociopolitical environment became pivotal in strategy making. Environmental challenges, many of them novel, also became progressively numerous. Combined with the geographical expansion of markets, they increased the complexity of managerial work. They rendered the managerial capability developed during the 1960s inadequate. Today, environmental challenges are developing progressively faster. Their novelty, complexity, and speed have increased the likelihood of strategic surprises.

[Page 1413]Often regarded as the father of scenario analysis, Herman Kahn's method underlies the type of “systems analysis” represented in On Thermonuclear War, although it became more explicit as a methodology in Kahn's later futurological research, embodied in his book with Anthony Wiener published in 1967, The Year 2000.

For Kahn, scenarios were hypothetical sequences of events constructed for the purpose of focusing attention on causal processes and decision-points. They are designed to answer two kinds of questions: (1) How might some hypothetical situation come about, step by step? and (2) What alternatives exist, for each actor, at each step, for preventing, diverting, or facilitating the process? Kahn used scenarios to understand the alternative worlds represented by the year 2000. His method involved the sequence of steps described below.

The analyst first identifies what he/she takes to be the set of basic long-term trends. These trends are then extrapolated into the future, taking account of any theoretical or empirical knowledge that might impinge on such extrapolations. The result is called the surprise-free scenario. The surprise-free scenario becomes the base from which variations on the scenario or alternative futures are derived by varying key parameters in the surprise-free scenario. Kahn made no claim that scenarios were predictive. Instead, he was adamant that no one scenario is more probable than the other. The Kahnian approach was taken in 2002 by the Hudson Institute to investigate the possible impact on business of consumer fears post-9/11.

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