Scenario-based decision-making in crisis situations

HOW SCENARIOS HELP TO REDUCE UNCERTAINTIES, REMAIN CAPABLE OF ACTION AND IDENTIFY NEW OPPORTUNITIES

1. Introduction and current session

After the oil crisis in the 1970s and 80s, the management of the strengthened oil company Royal Dutch/Shell asked itself what makes companies successful in the long term. In order to ensure comparability, companies of similar size (at that time with annual sales of 100 billion US dollars) and a history of at least 100 years were to be examined. Surprisingly, there was only a very small number of comparable companies. The de Geus study concludes that the average life expectancy of large companies (Fortune 500 or comparable) is only 40 to 50 years.¹ One third of all Fortune 500 companies listed in 1970 alone were taken over, merged or split up in 1983. The average life expectancy of a company is currently under 18 years; we can assume that 75% of all Fortune 500 companies will no longer exist in this form in 2027. ²

In order to explain this phenomenon, the research of organizational evolution is used. Companies are subject to constant changes and upheavals in their development. These are characterized by “[…] long periods of small, incremental change, which are interrupted by brief periods of discontinuous, radical change”.³ These periods lead to “creative destruction”, as Schumpeter would call it.⁴ Especially in the past decade with ever shorter product life cycles, increasing innovation speed, technological change and competition, as well as the development of economic areas and powers, this could be observed increasingly in different industries on a global scale.

The outbreak of Sars-CoV-2/COVID-19 and the resulting political measures lead to an unprecedented break in social coexistence and the global economy. In these turbulent times, there is enormous uncertainty about the survival of many companies, the development of the various industries and for each of us. The current pandemic has the potential to change the global economy significantly in the longer term and even the short-term effects are unclear to many of us. Nevertheless, companies must find answers to many questions and remain capable to define measures.

Source: Own Presentation

Changes and upheavals (discontinuities) in the immediate market environment as well as socio-economic, technological, ecological and political developments do not usually occur immediately, but often announce themselves early on. Ansoff called these “weak signals”⁵ In times of great change, those companies that manage to pursue a superior strategy become stronger. To achieve this, foresight is necessary. Ultimately, a combination of creativity and the will to make decisions is necessary to identify change and opportunities, to combine the latter cleverly and to implement them.⁶ The task of strategic management is therefore to recognise and interpret these signals and to derive suitable measures. Calabrese and Costa define strategy development as “a process of inference, resembling multiple hypotheses formation and the selection of one or more alternatives from an infinite range of options”.⁷ The continuous identification of weak signals, drivers and change in general falls under the term “Strategic Foresight”. The aim here is to ensure a long-term and future-oriented perspective in the company.

2. Development of the strategic vision

The field of strategic foresight was decisively shaped by Ansoff. Starting from the concept of weak signals Ansoff developed the concept of “Strategic Issue Management”. He describes issue management as “[…] a systematic procedure for early identification and fast response to important trends and events both inside and outside an enterprise”.⁸ He defines the concept of the issue itself as “[…] a forthcoming development, either inside or outside of the organization, which is likely to have an important impact on the ability to the enterprise to meet its objectives”.⁹

Weak signals are trend information that can be very important for a company. The main problem is the interpretation of this information, as it often allows for alternative developments. A trend is a significant, constant and unidirectional development of one or more variables over a certain period of time. Micic distinguishes between a mathematical and a socio-economic understanding of trends, whereby one is a mathematical-statistical time series and the other a “[…] cumulative events and developments consisting of a large number of substantive phenomena and movements”.¹⁰ In the context of strategic foresight, a socio-economic understanding of trends is generally assumed. Trend research is concerned with the recognition and interpretation of social, economic, technological and cultural developments. The aim is to identify, analyze and interpret relevant changes as early as possible using quantitative and qualitative research methods. The focus is not on forecasting developments and especially trends, but on identifying opportunities and assessing substantial changes.

In the literature, the following five generations of strategic early warning systems are distinguished:¹¹

• The first generation of strategic foresight (early 70s of the last century) uses indicator systems that are extrapolated or projected into the future. Their functional principle is based on the fact that threshold values are predefined for certain key figures. If these thresholds are exceeded or fallen short of, an early warning is triggered.
• The second generation of strategic foresight (late 70s of the last century) is also known as operational early detection. It uses indicators to identify and analyze potential opportunities and risks. These indicators can be linked to both operational and strategic targets.
• The strategic foresight of the third generation (80s of the last century) is based on the concept of weak signal analysis developed by Ansoff. These can be identified at an early stage with the help of a strategic radar, which enables appropriate countermeasures to be initiated.
• The strategic foresight of the fourth generation (1990s of the last century) takes up the approaches of the second and third generation and calls for a holistically networked approach, which makes the interactions between influencing and target variables clear. This approach corresponds to the current understanding of the term Strategic Foresight. The instruments of the fourth generation are Future Labs, scenario techniques, pictures of the future or roadmaps.
• The fifth generation of strategic foresight (from 2000 to date) is also known as strategic futuring. This is about the development of the future or the design of alternative “futures”. The models, procedures and techniques of the first to fourth generation are used, but also instruments such as wild cards, business wargaming or holodecks are employed.

3. Scenario planning and STORMS

How can a company prepare for an uncertain future, especially in times of crisis? Successful action in uncertain times requires not only determination but also flexibility and foresight.

An understanding of change, of systemic short- to long-term effects and changes must be developed. Based on this understanding, it is necessary to foresee their consequences – both for the market and for one’s own company – and to make promising decisions with this understanding. The own possibilities for action must be recognized and weighed up in order to be able to react quickly and adequately at the right moment.

In a changing environment, companies that are able to identify and successfully seize new opportunities thrive. The scenario technique has been emphasized for about 40 years for its ability to support decision making in complex and uncertain environments.¹² The scenario technique is attributed to positive effects on the quality of decisions by overcoming various decision-relevant biases, such as confirmation and overestimation.

In the corporate context, scenarios are usually internally consistent descriptions of possible future states, i.e. models of the relevant environment. These scenarios can have different probabilities, but they always describe consistent states, that could occur. Different key factors are at work, which drives the environment in different directions. Usually, four to eight scenarios are used, whereby these should cover the majority of the probability space. In addition, there are extreme cases and special events that can change the environment, sometimes abruptly. DThese are called wildcards or, under certain conditions, black swans.¹³ What they have in common is that they lie outside the normal expectation range and are therefore assessed in advance with a very low probability, but if they do occur they have extreme effects. These include events such as Fukushima, 9/11, and also Sars-CoV-2/COVID-19.

Common to many scenarios and wildcards is that they lead to a fundamental change in the way many industries do business. In the recent past, the changing environment has favored new methods, openness and new forms of cooperation. Major change always goes hand in hand with rare opportunities for companies to gain new competitive positions with leaps ahead that are difficult to catch up with. Those companies that do not change run the risk of becoming irrelevant. But those that prepare, can react quickly and change consistently are strengthened. As Winston Churchill said: “Never waste a good crisis”.

Transferred to the current situation triggered by Sars-CoV-2/COVID-19, companies must find answers to questions such as

• How long will the lockdown last?
• What impact does this have on my customers, industry and society?
• How does my value proposition and business model relate to these changes?
• Which business areas are affected and to what extent?
• How can we adapt to the new circumstances?
• What assets do we have that we might use differently?
• What opportunities are there in the short and long term?
• How can we derive long-term benefits from the crisis?

The application of the scenario technique at Shell in the 1970s is very well documented. In the course of the analysis, Shell considered a sharp rise in oil prices and prepared the company for it. When a sharp rise in oil prices as a result of the Israeli-Arab conflict actually occurred, Shell was better prepared than its competitors and was able to significantly improve its competitive position.¹⁴

In science, there is a large number of studies, publications and streams on different scenario techniques. It is only in the recent past that the importance of team-based approaches has been decisively addressed, instead of, as before, starting from individual decision-makers.¹⁵

The following is an explanation of the scenario-based approach STORMS, based on the scenario-based strategizing approach of Lehr et al. for fast but well-founded decision-making in times of uncertainty.¹⁶ This approach is based on the goal of achieving a high quality of decision making at a reasonable cost. The quality of the decision depends largely on the information involved (qualitative, quantitative, explicit and implicit), the depth and correctness of the analysis, and the flexibility of the implementation.

The focus of the STORMS approach presented here is on the pragmatic applicability for companies, i.e. on the understanding of the significance of different, even short-term changed environmental situations, as well as the weighing of possible courses of action, their consistency and the quick implementation in the organization. It does not play a decisive role whether it is an emerging, constant change or a strongly changing environment, e.g. as a result of a wildcard, which requires an entrepreneurial response.

The acronym STORMS stands for:

• Scenarios that model the environment and make complex relationships understandable
• Tactics to involve all relevant organizational units
• Operations, so that a consistent and continuous decision-making chain is ensured throughout the organization
• Response, to provide a timely and coherent response to successive developments
• Manual to guide the organization and ensure consistency and effectiveness
• Strategy to guide the organization through a period of change without losing sight of the long-term perspective, avoiding risks and seizing opportunities.

4. STORMS approach

The procedure of the STORMS approach can be divided into three phases:

1. Phase 1 – Scenario development. The aim is to identify the critical factors for your own organization and to model and understand their influence
2. Phase 2 – Derivation of the scope of action and decision making. The aim is to determine the scope of action of your own organisation, to understand which decisions need to be taken to achieve the best possible result
3. Phase 3 – Implementation. Transfer of decisions into executable actions for operational units of the organization and monitoring of the environment to ensure agility and adaptability

When developing the approach, another goal was to give decision-makers in the company the opportunity to work with pre-developed analyses and scenarios, as well as creativity and intuition. Furthermore, to get rid of the time lack and knowledge break between the strategy process and the implementation stage of the decisions portfolio. This results in the following requirements for implementation:

1. Top management must be involved from the very beginning in order to support decisions and actually make them
2. Collaborative work is necessary to create a common understanding among decision makers
3. Cross-functional and cross-departmental work is essential in order to be able to grasp the scope of action
4. Operational authorities in the company must be involved from the very beginning to ensure results that are close to implementation
5. In phase 2 and 3, parallel work is necessary to enable fast implementation and continuous synchronization.

Source: Own Presentation

4.1 Phase 1: Scenario development

The initial step covers the scanning and collecting of existing information about the current environment (exogenous factors) and the own organisation (endogenous factors), as well as their possible developments. This is followed by an analysis of the current situation in order to subsequently identify critical factors and especially uncertainties for the company. For the analysis step, an influence-uncertainty analysis is suitable, whereby the uncertainty dimension should be related to the own company. The factors that have a great influence on the own company, but are also uncertain in further development, are the critical uncertainties.

Different development paths are subsequently worked out for these critical uncertainties. In the corona crisis, for example, the duration of the lockdown is a critical factor for many companies. It can end after a short phase, but it can also be partially maintained for months or even bring social and economic life to a shutdown for several months.

Based on the various developments of the critical uncertainties, the first raw scenarios emerge. For example, a raw scenario could be that long-term quarantine measures are taken, which come to a relatively abrupt end in Q4/2020, as a vaccine becomes widely available. Due to the previous, prolonged economic shutdown, the rapidly shrinking purchasing volume of end customers has a knock-on effect and corporate investments are also only slowly increasing again.

4.2 Phase 2: Derivation of the scope of action

In the second phase, the aim is to make informed decisions despite on a high level of uncertainty.

To this end, the effects of the previously developed raw scenarios are analysed step by step. First, the impact of each scenario on the industry and its immediate environment is analyzed. Based on this, the effects on the own organisation or the different business unites are derived. The result is a impact analysis of the relevant scenarios on the own organization and each business unit.

On the basis of this deep understanding, alternative options for action are developed. In order to support the operationalisation, it is useful to select the fields of action in the analysis according to the business untis and / or functions. The optimal decisions for all previously developed scenarios are identified and then consolidated in a decision matrix (see figure 3):

Source: Own Presentation

This decision matrix shows the entire scope of action of the organization. In order to arrive at comprehensible and consistent decisions, all options for action are evaluated across all scenarios. These evaluations should include opinions from both internal and external experts. If possible, a quantification with a high level of error tolerance can at least show indicative effects for important company key figures. As a result of the evaluation, each action option can be presented in a decision portfolio that combines the dimensions of target effectiveness and robustness (see figure 4).

Source: Own Presentation

Four different categories for the options for action emerge:

1. No Regret Moves (Option 1 in the figure4): Actions that lead to good results with great impact in all scenarios. In any case, these can be implemented immediately, as no negative effects are to be expected in any scenario. In the current crisis, the digitization or virtualization of workplaces is in many cases an option that can be pursued or accelerated. It can be assumed that it will be necessary in any case for the future and it can make a significant contribution to maintaining productivity.
2. Key Decisions (Option 2): Actions in this field lead to very positive results in some scenarios, but there is a risk of failure in some scenarios. Actions in this category are critical and require decision-makers to weigh up the risk, i.e. the risk of failure, against possible positive returns. The prior scenario analysis provides an information basis that supports the decision-makers in reflecting possible negative and positive effects of the decision. In the current situation, many decisions of the procurement strategy, especially production sites and supply chains fall into this category. Thus, effective single sourcing and offshoring can also lead to competitive advantages in the future, but in scenarios with long-lasting lock-downs and obstructions in the movement of goods can endanger supply chains and production issues. It is important to question the current strategy while critically assessing the possible scenarios and, if necessary, to introduce alternative measures.
3. On Hold (Option 3): Decisions that may have positive effects and are in many cases robust across different options, but are not critical to success at this stage. Decisions on these actions can be deferred in favor of the previous two categories. Changes to the corporate design, may possibly be a sensible initiative independently of the further development of the Corona crisis, but in many cases it will not make a significant difference in the current situation and can therefore be postponed.
4. Irrelevant (Option 4): Actions in this field are neither robust nor expected to produce high positive results. Decisions on these actions are irrelevant, at least for the time being.

In the final decision making process, side effects and interactions of the different actions must be taken into account. At this point, a consistency analysis can further support the development of a longer-term, stable strategy.

4.3 Phase 3: Implementation

In the third phase, the transfer of decisions to the operational areas of the company takes place. The goal of this phase is a seamless transition from the creation of scenarios to the generation of options for action (phases 1 and 2) and implementation in the company. This is the only way to ensure that there are clear responsibilities and no time break between the different phases.

For this purpose, several parallel workstreams are formed (see also figure 5), which usually cover the areas of customers, supply chains, competition, workforce, finance, production and infrastructure. Each of these workstreams is led by a project team that is cross-functional and reports directly to top management.

These workstreams are implemented in agile structures and with methods such as daily meetups, backlogs, kanban boards and sprints. This approach allows the teams to quickly grasp and evaluate the current market and company situation and to prepare decisions, as well as to push forward and monitor the implementation in the various company divisions.

Source: Own Presentation

5. Value contributions of the approach

The STORMS approach supports rapid decision making and implementation in times of high uncertainty. It is a variant of the scenario-based approaches, or more precisely an extended variant of the strategy development approach presented by Lehr.
This systematic approach can contribute to company survival and success in the short term as well as in the medium to long term. In the short term, the approach provides support,

• reduce uncertainty and gain clarity in a short time;
• to achieve a common understanding of a situation among management and the leadership team
• make quick but well-founded decisions based on a comprehensive understanding of the situation and its possible development paths and influences on your own organisation
• to ensure the organisation’s ability to act and to dissolve rigidities;
• to protect the existing business as best as possible even in crises such as the Corona crisis, while temporary and long-term opportunities can be identified and seized;
• increase agility and responsiveness through fast and deep problem penetration
  In addition, the approach contributes to the company’s success in the medium to long term (see figure 6).

Source: Own Presentation

6. Summary

This article aims to introduce the use of a scenario-based approach for rapid decision making under high uncertainty. The approach, which we call STORMS, is largely based on the large number of existing studies on scenario techniques, in particular on the scenario-based strategizing approach presented by Lehr et al.¹⁷

We have modified this approach for application in crisis situations and added a third phase of implementation. The COVID-19 crisis is used to highlight fundamental problems and issues for companies in this or similar situations.

In order to maximize the benefit for crisis situations, the STORMS approach focuses on quickly coming to clear decisions from a situation of diffuse uncertainty. In order to achieve this, the approach is designed in such a way that, if necessary, based on existing environment scenarios, their effects on the industry in which a company operates (exogenous) as well as on the organization (endogenous) are systematically derived. Decisive intermediate results of the approach are 1) the identification of the entire scope of action and 2) a decision portfolio that allows to categorize options for action into No Regret Moves, Key Decisions, On Hold and Irrelevant. This assessment allows the management of the company to make informed decisions and, if necessary, to trace back what the possible consequences would be in case of a wrong decision. As a result of the implementation 3) the agility and responsiveness of the company is increased, as the scope of action is already known and options for action are thought through, so that they can be used in case of a changed situation.