What are the roles of scenario planning in project management?

Abstract

There are key differences between visions and scenarios. A vision is generally the desired view of the future, while scenarios represent a range of possible views of the future. As a discipline, scenario planning is often described as one approach to strategic planning. This paper examines what roles, if any, scenario planning has in effective project management. It begins with a brief discussion of leadership, vision, and strategy. All are fundamental to effective project management. A traditional approach to strategy development is the SWOT (strengths, weaknesses, opportunities, and threats) analysis. The results of the SWOT are typically used to map the path to a desired future state. However, a vision is analogous to a point estimate—it represents only one view of the possible futures. In contrast, scenario planning recognizes that there are several possible futures and that it is prudent to anticipate each of these from a “what if” perspective. This paper discusses the mechanics of scenario planning and identifies areas where it could be useful from a project management perspective.

Introduction

First, start with a simple model. Assume the place where we are currently standing is Point A. The place where we want to go is Point B. Our task is to determine the best way to get from Point A to Point B.

A simple view of strategy is to first develop a vision of the future. Point B represents that future vision. Our task as leaders is to develop an overall plan to get from Point A to Point B. And then we implement that plan. Our strategy encompasses the description of Point B, a rationale for why Point B is desirable, and the high-level plan to get there. Operational or tactical plans address the more detailed tasks necessary to achieve the strategy. Thus, the general flow is: (project) leaders ➔ vision ➔ strategic decisions ➔ implementation.

An alternative view is to develop multiple versions of Point B, since the future is uncertain. These multiple views of the future are scenarios. This paper examines this alternate flow of strategy: (project) leaders ➔ scenarios ➔ strategic decisions ➔ implementation.

The paper begins with discussions on leadership and vision. Strategy is discussed twice. The first discussion is a description of traditional strategic planning, including definitions and approaches. The second discussion examines scenario planning, including the perspectives of leading practitioners. After scenario planning is discussed in general, the paper examines how it applies to project management. In this context, it refers to project management, program management, and portfolio management.

The beginning model description of Point A (where we are), Point B (where we want to be), and the path to get from A to B is a rather simple change model. In project management terminology, Point A is the pre-project state. Point B is the post-project state. The path connecting the two is the project plan. Leadership is a key factor in the successful implementation of any change.

Leadership

There are many definitions of leadership. This paper uses the following definition: Leadership is the process through which people are influenced in some way to accomplish goals, generally group goals. There are many theories of leadership. Most of these theories can be categorized by asking two simple questions. The first question is, do you believe leadership is a function of traits and characteristics, or a function of behavior? The leadership definition presented accommodates “yes” answers to both of these options. Effective leaders exhibit traits such as resilience, energy, self-confidence, decisiveness, and personal integrity and honesty. Effective leaders also exhibit behaviors such as effective communications skills and interpersonal skills (that is, the ability to effectively interact with other people). These skills, and traits to some extent, can be improved through training.

The second question is, do you believe leadership is always applied the same way (universal) or varies according to the context of the situation (situational)? As before, the leadership definition used earlier accommodates “yes” answers to both of these options. In general, leaders vary their actions based on the context of the situation. But there are some traits and behaviors that should remain constant across all situations, such as integrity and honesty.

There are large and growing numbers of books that discuss and describe leadership. Many of these represent leadership experiences from the perspective of one person—the author. And many of these best-selling leadership authors are well-known business, sports, or political figures. One disadvantage of these leader-turned-author narratives is that they represent only one view of leadership.

However, there are some leadership books that draw on the experiences of tens of thousands of leaders. For example, Kouzes and Posner (2007) described five practices of exemplary leaders distilled from their extensive research and database that began in the mid-1980s. These five practices were (1) model the way, (2) inspire a shared vision among constituents, (3) challenge the status quo processes, (4) enable others to act also, and (5) encourage the heart.

It is difficult to rank these five practices in the abstract. Any particular leadership situation may suggest that one is the most important at that time in that context. This paper examines the role of the second practice (inspiring a shared vision), particularly in setting the future vision(s) as part of the strategic process. A useful place to begin is with definitions.

Vision

As discussed previously, Kouzes and Posner (2007) included vision in their five exemplary practices. They defined vision as “an ideal and unique image of the future for the common good” (p. 105). Similarly, Bennis and Nanus (1985) used the definition “a mental image of a possible and desirable future state of the organization” (p. 89). Separately, Nanus (1992) used the phrase “a realistic, credible, attractive future for your organization” (p. 8) when discussing vision. Finally, Kotter (1996) described vision as “a picture of the future with some implicit or explicit commentary on why people should strive to create that future” (p. 68).

Although there is significant overlap among these four definitions, there are three unique aspects. First, there is a time orientation. All describe a point in the future, similar to Point B from the simple model discussed in the Introduction. Second, they include a description of what the future (Point B) looks like. Generally, this is a mental picture of the desired objective. Third, they emphasize why the future view is desirable. As Kotter (1996) noted, this can be implicit or explicit.

Collectively, the three aspects of a vision are time orientation, objective to be achieved, and rationale for why the objective should be achieved. In project management terminology, these could be the project schedule, the project scope, and the business case for the project.

Kotter (1996) also discussed six characteristics of effective visions. These characteristics included feasible and communicable. Later in this paper, the term plausible will be used in describing effective scenarios. In this context, feasible and plausible are the same. The ability to effectively communicate the vision cannot be overstated. If the vision remains with the leader, it is unlikely the group will successfully accomplish the vision. Kouzes and Posner (2007) emphasized the necessity for a vision shared among all constituents. The formulation and subsequent communication of the vision are critical to successfully getting from Point A to Point B. This is similar to a definition of strategy.

Strategy

Porter (1996) described strategy as “defining and communicating the company’s unique position, making trade-offs, and forging fit among activities” (p. 77). This is perhaps one of the most common views of strategy. Mintzberg (1994) pointed out that strategy can have two orientations: forward and backward. In the forward orientation, strategy is “a plan, or something equivalent – a direction, a guide or course of action into the future, a path to get from here to there” (p. 23). From a backward perspective, strategy is “a pattern, that is, a consistency in behavior over time” (p. 23). Simply, these are referred to as plan and pattern.

Later, Mintzberg, Ahlstrand, and Lampel (1988) extended the strategy definitions to include three additional “P’s.” Position is “the locating of particular products in particular markets” (pp. 12–13). This is similar to Porter’s (1996) definition. Perspective is “an organization’s fundamental way of doing things” (Mintzberg, et al., p. 13). Finally, ploy is “a specific ‘maneuver’ intended to outwit an opponent or competitor” (p. 14). All project managers who have negotiated with difficult stakeholders may recognize this last definition.

There are various approaches to developing an organizational strategy. One is to start with a blank piece of paper. In most cases, this is extremely difficult. A second, more common approach is to analyze the current organization using a strengths, weaknesses, opportunities, and threats (SWOT) analysis. The analysis looks at strengths and weaknesses internal to the organization. In contrast, the analysis of opportunities and threats looks external to the organization. Van der Heijden (1996) described how the SWOT yields organizational insights that are then structured into strategic issues to be addressed.

Project risk management is one of the nine knowledge areas described in A Guide to the Project Management Body of Knowledge (PMBOK^® Guide) – Fourth Edition (Project Management Institute [PMI], 2008). The identify risk process, one of the six project risk management processes, included SWOT analysis as one of its tools and techniques.

A third approach to developing an organizational strategy is to prepare scenarios.

Scenarios

Some references define scenario in the singular. For example, de Geus (1997) described a scenario as “an imaginative story about the future – a sketch of the ‘lot of life’ as it could develop from the present moment” (p. 44). Others define a scenario in terms of both the future and the general course of action required to achieve it (Lindgren & Bandhold, 2003). They used the phrase “a full description of a future state and the path to that future” when describing a scenario (p. 167). Perhaps it is a nuance of words to discuss a scenario (singular) as opposed to scenarios (plural). Scenario planning almost always involves the use of multiple scenarios.

Most authors defined scenarios in the plural. Some example definitions are

• Van der Heijden (1996)—“consistent and challenging descriptions of possible futures” (p. 5),
• Fahey and Russell (1998) — “projections of a potential future” (p. 7),
• Schwartz (1991) — “stories about the way the world might turn out tomorrow” (p. 3), and
• Ralston and Wilson (2006) — “stories of possible futures” (p. 15).

There are common elements among these definitions. First, scenarios are described as stories or narrative descriptions. While these may range in length, scenarios generally cannot be adequately described in only one or two sentences. The term scenario is based on the plot or storyline from the acting profession. These are seldom succinct narratives. Second, scenarios are descriptions of possible futures. There is no mention of a desired future, although there may well be a preference among the possible scenarios in terms of desirability of occurrence. Third, there is an implicit recognition of the future uncertainty through the use of phrases like “a projection of the future” as opposed to “the projection of the future.”

Scenarios vs. Vision

These three common elements of scenarios definitions—narrative descriptions, the absence of identifying a preferred or desirable end state, and the implicit recognition of uncertainty—distinguish them from the typical definition of a vision. As discussed earlier, visions are characterized as a desirable future outcome. The only overlap appears to be that all definitions point to some point in the future.

Lindgren and Bandhold (2003) elaborated further on the differences between scenarios and visions. For example, they used terms like “possible, plausible futures,” “uncertainty based,” and “illustrate risk” to describe scenarios versus “desired future,” “value based,” and “hide risk” for visions (p. 24). They also noted that the scenarios are used relatively little as opposed to visions. Based on the risk focus only, project management professionals may benefit more from scenarios.

Lindgren and Bandhold (2003) also described the role of forecasts as a point between scenarios and visions. In the context of this discussion, they characterized forecasts as “probable futures” (instead of possible or desired) and noted that forecasts are used frequently. The PMBOK^® Guide – Fourth Edition (PMI, 2008) listed forecasting as a tool and technique for both the control costs process and the report performance process.

Again, all of these terms involve a point in the future. Looking into the future involves uncertainties. But van der Heijden (1996) noted that by its nature, planning assumes that at least something is predictable. These predictable elements are not 100% certain. Nonetheless, they are classified as “predetermineds” and are included in each scenario considered. The opposite of predetermineds is “uncertainties.” The predetermineds are included as common elements in each scenario, and the uncertainties are used to display the differences among scenarios. Van der Heijden (1996) observed that the problem is “to separate what is predictable from what is fundamentally uncertain” (p.16).

To further describe the relationships among predetermineds, uncertainties, and time to the future, van der Heijden (1996) used three time periods. In the near-term, predetermineds are high, uncertainties are low, and forecasts are used. Scenarios are used in the mid-term. At some point in the mid-term, there are more uncertainties than predetermineds. In the far-term, uncertainties are high and predetermineds are low. Ringland (1998) illustrated the danger in a single-point forecast in the far-term where the range of uncertainties becomes extremely wide. Van der Heijden suggested that hope is the methodology at this point (as opposed to forecasting or scenarios).

The definitions of near-term, mid-term, and far-term will vary across situations. Most projects will operate in the near-term and mid-term timeframes. Again, the exact time periods (as measured in months or years) will vary among industries and other project variables. Nonetheless, this suggests that scenarios may be a useful methodology in addition to forecasts. However, it is difficult to imagine a project where hope is a viable methodology.

Scenario Planning

At this point, one can imagine that utilizing scenarios in planning may require more effort than just publishing a vision statement and an operational plan to achieve it. There should be clear objectives about the purpose of using scenario planning. Authors like Schwartz and Ogilvy (1998) and Ralston and Wilson (2006) discussed two possible reasons. The primary reason is to facilitate decision making. However, scenario planning can also be used as a learning tool. Schwartz and Ogilvy noted its usefulness for “investigating general areas of risk and opportunity” (p. 59). Ralston and Wilson discussed how scenarios “reduce our vulnerability to surprises” by requiring us to envision possible futures and their implications. Fahey and Randall (1998) used the term scenario learning to mean “the development of scenarios and their integration into decision making”. Indeed, they noted that the dual purposes of scenario learning are expanding “decision makers’ understanding of possible futures and enhancing decision making” (p. 3). Both of these are desirable from a project management perspective.

Methodology

If scenario planning has value for project management, a logical next step is to discuss the methodology. Unfortunately, as Godet (2006) noted, there is no single way to create scenarios. Schwartz (1991) described an eight-step process:

1. Identify the key decision(s) to be made.
2. List the key factors that will influence the success or failure of the key decision(s).
3. List the forces behind the key factors identified in step 2.
4. Rank the key factors and driving forces based on both their importance to successful decisions and their uncertainty.
5. Identify the scenario logic—the key variable drivers that distinguish the uncertainties.
6. Flesh out the descriptions of key scenarios.
7. Determine the implications of each scenario.
8. Identify the leading indicators that will suggest (as time progresses) which scenario is evolving.

Some authors (e.g., Ringland, 1998; Godet, 2006) repeated Schwartz’s (1991) eight-step approach. Ralston and Wilson (2006) developed a more detailed, 18-step process. This process began with establishing the need to use scenarios and gaining executive agreement. It ended with communicating the results of the scenario planning to the organization. The bulk of the 18 steps can be mapped back to the eight-step process described by Schwartz. Either process can be used. They lead to essentially the same result.

Fahey and Randall (1998) discussed an interesting approach to constructing scenarios. In particular, they identify two basic methods: future forward and future backward. In the future forward method, “Projects sets of plausible futures based on analysis of present forces and their likely evolution”. In contrast, the future backward method is to “Select several significant futures and try to discover the paths that lead to them” (p. 19). This seems analogous to the forward pass/backward pass analysis of schedule networks. This terminology may be more familiar to project management professionals.

Number of Scenarios

One key question is: How many scenarios should be developed? There is no explicit agreement on the exact number except that there should be more than one. Also, there is a practical limit on the total number of scenarios that can be effectively used. This is based on the time required to adequately develop a large number of scenarios and the increased difficulty in making decisions among a larger number of feasible options. The consensus among practitioners is between two and four scenarios.

Ringland (1998) discussed the experiences of using two, three, and four scenarios at Royal Dutch/Shell. Two scenarios resulted in two very distinct, credible story lines. These were not necessarily one desirable and one undesirable. Three scenarios resulted in the belief that one was the forecast or preferred option. Four scenarios resulted in divergent thinking about the future.

de Geus (1997) favored two scenarios over three. He stated that the use of three scenarios can lead to the selection of “the one in the middle” as a compromise between the extremes represented by the other two (p. 48). In contrast, two scenarios force decision makers to choose between two plausible futures.

Other Attributes of Successful Scenario Planning Efforts

Lindgren and Bandhold (2003) offered seven criteria for good scenarios:

1. Facilitates decision making by providing key insights,
2. Plausible (i.e., are realistic and possible),
3. More or less equally probable,
4. Internally consistent from a logic (cause and effect) perspective,
5. Recognizably different (versus variations of the same theme),
6. Memorable, and
7. Challenging (regarding the organization’s views about the future).

Ringland (1998) provided additional lessons learned from a previous scenario planning project. These included: (1) ensuring the scenarios are relevant to the business (similar to Lindgren and Bandhold’s [2003] first criterion), and (2) choosing scenario names that promote “understanding at an intuitive level” (p. 108). Van der Heijden (1996) and Heydinger and Zentner (1983) also listed several criteria similar to those proposed by Lindgren and Bandhold. None of these attributes seem to pose a problem from a project management perspective.

Another key variable is the length of the timeframe covered by the scenarios. In part, this depends on the industry. Heydinger and Zentner (1983) noted that the time horizon for the petroleum industry is 10 years— “the time required to explore, locate, and extract fossil fuels” (p. 58). They stated that the time horizon for planning in colleges and universities may be closer to 15 years. de Geus (1997) described scenario planning efforts at Royal Dutch/Shell that had a 30-year time horizon.

Whether the scenario time horizons are closer to the 15 or the 30 years length is a moot point for most projects. If the planning horizon is really in this range, scenario planning appears to have a limited (at best) role in project management. Even the five-year minimum scenario time horizon discussed by Lindgren and Bandhold (2003) is not beneficial for most projects. Fortunately, the other attributes of scenario planning suggest there is some applicability.

Additional Observations

For the scenarios to be effectively used, they must be communicated. As mentioned earlier, the last step in Ralston and Wilson’s (2006) 18-step process was to communicate the results of the scenario planning effort within the organization. Lindgren and Bandhold (2003) discussed effective scenario communications, starting with “a highly descriptive and memorable title” (p. 68). The need for effective communication of scenarios and decisions is no surprise. A hallmark of effective leadership is effective communication. This is equally true for effective project management.

Scenario planning is an inherently common human activity. Lindgren and Bandhold (2003) observed that individuals constantly write scenarios by “interpreting signals in the environment and reframing them into meaningful images of and trajectories into the future” (p. 1). This seems to describe the “what if” thinking performed by project management professionals on a routine basis. The PMBOK^® Guide - Fourth Edition (PMI, 2008) discussed risk reassessment as one of the tools and techniques in the monitor and control risks process.

Schwartz (1991) described how scenarios tend to be classified into three groups: “more of the same, but better; worse (decay and depression); and different but better (fundamental change)” (p. 20). Many projects follow the first path. For much of the project’s life, the projections are on budget, on schedule. Unfortunately, troubled projects inevitably fall into the second category (worse). Re-baselining may help. Once a project plan is baselined (or re-baselined), it is unlikely that the project would fall into the different but better category. An exception is a change in business requirements that causes the project to be reconsidered.

The Roles of Scenario Planning in Project Management

On the surface, the minimum time horizon for scenario planning (five years) rules out its use in most project management applications. It is doubtful that various scenarios would be used to identify alternative views of the future. Further, the role of scenarios for primary decision making about the future seems unnecessary once the project (or program or portfolio) plan is baselined and approved.

However, some of the principles of scenario planning have significant benefit. The primary role appears to be in risk management. The concept of scanning for indicators of fundamental changes in the overall environment that signal a variance from the planned future is central to effective project management. In addition, the predetermineds from a scenario planning perspective can facilitate “no regrets” decisions by the project management.

The Role in Which Project Management?

The title of this paper is intentionally vague regarding project management. The PMBOK^® Guide – Fourth Edition (PMI, 2008) discussed the three PM’s: project management, program management, and portfolio management. The principles of scenario planning can be used across all three. By their nature, projects will use the more tactical aspects of scenario planning. Programs and portfolios will be more strategic. It’s possible that portfolio management could use scenario planning as a basic methodology.

Other Considerations and Conclusions

Scenario planning methodology plays a role in the PMI strategic planning process. Vargas (2008) described how the PMI board “uses scenario thinking to interpret macro environmental trends and adjust strategy as global conditions warrant” (p. 2). This is analogous to monitoring project management indicators to determine if they suggest a fundamental change in the project management environment.

Conclusions

It is premature to include scenario planning in the PMBOK^® Guide (PMI, 2008) as a project management process, although there is rationale for its use as a tool and technique in some existing processes. However, the principles of scenario planning can be extremely useful in increasing the effectiveness of project management. These principles include recognizing that there may be alternative futures to the desired vision, monitoring environmental variables to detect if a fundamental change is underway that could affect the successful project outcome, and using the terminology to help manage stakeholder expectations. From one perspective, scenario planning principles are inherent in risk management processes. However, more work is needed to refine a scenario planning methodology directly applicable in a project management setting.