Contents
Forecasts have one drawback: they are least reliable precisely when they matter most. They extrapolate what has been and fail at breaking points. At Shell, the Frenchman Pierre Wack shaped a different way of planning. He did not want to predict the future. He wanted to prepare the minds of decision-makers for several futures – the essence of Scenario Thinking.
From a calculation model to a conversation about futures
Situation
In 1959, Shell set up a central planning department, Group Planning. Starting in 1965, the company worked with a computer-based planning system, the Unified Planning Machinery. At its core, it extrapolated the present. In the early 1970s, Shell abandoned it: the forecasts were becoming less reliable, and the system tended to stifle debate rather than stimulate it. In parallel, Jimmy Davidson and Ted Newland had begun long-term studies in London in the mid-1960s. In 1967, Henk Alkema and Pierre Wack joined them. Their model was the scenario method of Herman Kahn, who had previously worked at the RAND Corporation and had founded the Hudson Institute in 1961.
Link to the principle
Scenario thinking begins with an admission: there is no one right number about the future. Instead of calculating uncertainty away, you make it visible and give it structure.
An uncomfortable insight
Situation
The studies led to an insight that hardly anyone wanted to hear at the time. The oil states on the Persian Gulf would become the most important suppliers. That meant the market could shift from a buyers’ market to a sellers’ market. Then political decisions by the producing countries would determine the price, and no longer just reserves and drilling technology. Newland and Wack worked out scenarios in which scarcity and sharply rising prices occur. Alongside them, they set scenarios in which everything carries on as before. This second group visibly rested on improbable assumptions.
Link to the principle
Good scenarios look for what is already in the making, even if no one yet sees the consequences. Wack and Newland also worked out the “business as usual” case properly. Precisely this showed how many lucky coincidences would be needed for nothing to change.
Changing minds, not numbers
Situation
The top management found the crisis scenarios hard to accept. Wack drew a lesson from this, which he described in 1985 in two articles in the Harvard Business Review. Scenarios take effect only when they change the inner picture held by decision-makers, which he called their “microcosm.” He advised against building variants along a single axis: high, medium and low. Readers then take the medium one as the likely one and plan with a forecast after all. Shell decided to use scenarios at headquarters and in the business units and to test strategies against them.
Link to the principle
A scenario is not a report but a practice ground. It has served its purpose when people perceive different signals afterward than before.
October 1973
Situation
After the Yom Kippur War in October 1973, the Arab producing countries cut production, OPEC raised prices, and the price of a barrel of crude oil rose roughly fourfold within a few months. The Western economies were plunged into a severe crisis. At Shell, Jan Choufoer, the refinery coordinator, had earlier proposed an expensive conversion: additional cracking units that convert heavy fuel oil into lighter products. Heavy fuel oil can be replaced by coal or gas; gasoline hardly at all. When prices rose, this investment paid off.
Link to the principle
Shell had not predicted the timing of the crisis. But the company had already thought through the kind of crisis it would be. That is why it recognized the new situation faster and had responses ready while others were still waiting for a return to normal.
What the story does not prove
Situation
The Shell story is one of the best-known case studies in strategy teaching. It is often said that the scenarios helped the company rise from being the weaker oil major to the leading one. Such claims go back mainly to the accounts of those involved. How much the scenarios contributed to the result cannot be measured precisely.
Link to the principle
Scenario thinking does not guarantee success. It shortens the time between the onset of a development and your own response. It becomes effective only when it is tied to real decisions: investments, contingency plans and early warning signs.
Key takeaways
Key lessons
- Don’t ask what will happen, but what could happen and how much of it is already in the making.
- Work out the “business as usual” case honestly, too. It often turns out to be improbable.
- Don’t build variants of high, medium and low. Build different stories.
- A scenario takes effect only when it changes how your decision-makers see things.
- Link every scenario to a decision you make today.
Summary
Pierre Wack and his colleagues at Shell did not predict the 1973 oil crisis. But they thought through a world in which the producing countries set the price and made the company’s leadership familiar with it. When the crisis came, it was less alien to Shell than to others. That is the core of scenario thinking: not being proved right but being prepared.
Sources
- Pierre Wack: Scenarios: Uncharted Waters Ahead. In: Harvard Business Review, September/October 1985.
- Pierre Wack: Scenarios: Shooting the Rapids. In: Harvard Business Review, November/December 1985.
