The Dewatering Hole

When developments occur that surprise us, it is often because our assumptions about the present, not to mention the future, have turned out wrong. The consequences can be very severe for companies, governments and societies as the current economic crisis demonstrates. If one assumed the U.S. government would always step in to save large financial institutions, then the failure of Lehman Brothers in September 2008 was a big surprise—as were the events that pushed Lehman to the wall in the first place. If one believed the price of oil could not stay above $50 for a year or more—a common belief not long ago—then the price trend of 2005–08 was a shock, as were the wild gyrations that followed. Such beliefs point to a disconnect between how we assume the world works and how it actually works.

No course of action will lead to the gift of perfect clairvoyance about the future. The development of scenarios is a disciplined process, however, that forces us to question the present to understand the different ways the future could unfold and to prepare. Through the creativity, dialogue, investigation and analysis that are part of the scenario process, one can, as Daniel Yergin, IHS CERA chairman, once put it, “peer around the corners of the future and think through and plan for discontinuities before they occur.”

The scenario process helps companies to be early, flexible and adaptive, and to be prepared for abrupt changes in the business environment. It provides a methodology for “thinking the unthinkable”—especially important when the “unthinkable” has a habit of becoming a reality. For instance, several years ago IHS CERA’s “Global Fissures” scenario laid out the dynamics of a deep world recession at a time when recessions were supposedly a thing of the past.

Scenarios provide a way to get beyond the “conventional wisdom” of the moment, to test company doctrine and to put aside prestige and position to ask fundamental questions. A means for tackling real issues and questions that companies face both next year and in 10 years is what the scenario process offers.

But what exactly is the scenario process and how are scenarios developed? First, let’s be clear about what they are not. Scenarios are not simply the fantastic musings of imaginative, feet-on-the-desk free thinkers. Nor are they the exclusive domain of calculations cranked out of a computer. It is not one or the other.

Instead, scenarios, at their best, marry expansive, qualitative thinking about the future with the rigor and feedback of quantitative modeling. Each scenario—a scenario exercise typically creates two to four scenarios—tells a “story,” a logical story, about the future that includes important trends and events, describes the key players and their actions, and explains the dynamics of the system or the set of questions under study.

The aim is not to predict a precise order of events and outcomes, but rather to enable development of robust strategies that will stand up no matter what happens. Scenarios make us explicitly identify and question our assumptions about the future. Inquisitive and disciplined thinking is at the heart of the scenario process—and a key source of insight and value.

The scenario process can address very large questions, such as the future global balance of power, or it can focus on specifics, such as the demand for automobiles in a single country or region of a country. But regardless of the scope of analysis, a vital aspect of the scenario process is that it encourages exploration of linkages among different forces.

For example, how will efforts to develop a global framework to manage greenhouse gas (GHG) emissions affect trade policy, nuclear proliferation or the commercialization of a large-scale electric-vehicle fleet? On the surface, some issues may not seem to influence one another but, in reality, they often do—or will in the future. Geopolitics, markets, technology and the world of business do not evolve in isolation from one another. The scenario process recognizes this reality.

–James Burkhard

Click for Burkhard’s full report, including:

–Scenarios: Expanding Analysis-Testing Assumptions

–Brainstorming the “Big Questions” and Developing Scenario-Building Blocks

–The Next Step: Develop the Scenarios

–The Role of “Shoe Leather”—And Engaging “the Great Women and Men of the World”

–Using the Scenarios

–To Understand the Future, We Need to Question the Present

About the author: James Burkhard is managing director of IHS CERA’s global oil group. He was the project director of “Dawn of a New Age: Global Energy Scenarios for Strategic Decision Making—The Energy Future to 2030,” a comprehensive study by IHS CERA that encompassed the oil, gas and electricity sectors. He is also the co-author of IHS CERA’s World Oil Watch, which analyzes short- to medium-term developments in the oil market. He was on the U.S. National Petroleum Council committee that provided recommendations on U.S. oil and gas policy to the U.S. energy secretary. He can be contacted at 303-736-3000 and jburkhard@cera.com.

You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.