Overcoming Opportunity Blindness and Path Dependence: How To Think Your Way to Multiple Futures

In the age of permanent uncertainty there is a resurgent interest in scenario planning. Executives that have witnessed high profile decline of strong companies know that past success is no guaranteed guide to the future. Kevin McDermott & Peter Kennedy argue that scenario planning can be lifted out of its conventional uses in strategy development and risk management and used instead to avoid “opportunity blindness”.

 

One month before the collapse of the company he’d spent his career building, one which other businesses viewed with awe, Angelo Mozilo, CEO of Countrywide Financial Corporation, met with his investment-banker.  By late 2008 the capital crisis had broken the company’s mortgage-banking business into pieces.  Countrywide was staring at a choice between acquisition or complete disappearance.  In the end it would choose acquisition, a company that could write $400 billion of mortgage business selling itself at a fire-sale price to Bank of America in January, 2009.

“Everyone looks to history to interpret the present and predict the future,” Mozilo told his banker.  “This is unlike anything I thought even three months ago.”

Lots of people know how Mozilo feels.  The conventions of enterprise management, especially as they affect the commercialization of new ideas, are built to reflect what we’ve learned from experience.  And experience is a great teacher with a really big flaw: it’s backward looking.

It’s exactly the backward look that can make us blind to opportunities in nontraditional operating environments.  The absorbing difficulty is that looking forward is no simple task either, especially in an age of perpetual uncertainty.  It’s easy to end up like Angelo Mozillo, betting with too much confidence on a mistaken expectation of the future, based on a trend from the past.

But thinking about the future can be done with rigor, even in uncertain times, and in a way that makes planning for what’s over the horizon a practical, not an intellectual, task.

Breaking with convention

It is well documented that the great growth companies continue to invest in innovation even during downswings in the business cycle.  But the forces for change are much bigger than the business cycle.  In those forces reside nontraditional opportunities that are non-linear, hard to think about and awfully hard to see coming.

The unexpected happens with such frequency that there really ought to be another name for it.  Predictable surprise.  Counterfactual ambush.  Reality usurpation.

In any operating environment the unexpected happens with such frequency that there really ought to be another name for it.  Predictable surprise.  Counterfactual ambush.  Reality usurpation.  Even amid ambiguity managers still need to make choices today, not later when we can all see how things worked out.  To do that assumptions must be made about the way the world is and the way it may plausibly become without locking in to some vision of the future that will grow steadily less probable with the passage of time.

A tool for bringing rigor to thinking about the future is scenario planning, which is lately enjoying resurgent popularity.  Scenario planning is a concept with as many meanings as there are people who practice it.  It is conventionally used mainly for risk management and risk avoidance.  But it can also be a terrific tool for spotting nontraditional possibilities and avoiding opportunity blindness.

Conventional scenario planners get all the smartest people together, develop a deeply considered best guess about the future, and then manage toward it.  The risk in this approach is that the best guess may be a consensus view developed in an echo chamber of like-minded people asking similar kinds of questions from similar perspectives.  That risk is highest when a single assumption about the future emerges as dominant—especially when that assumption is unconscious or unexpressed.

Economic historians sometimes refer to these unexpressed assumptions as “path dependence”, the habit of assuming that the future will be a revised edition of the present and that, therefore, what makes sense now will, with some tweaks, make sense later.  Path dependence is a good illustration of how experience can be a backward-looking teacher.

In scenario planning a good way to thwart the tendency to path dependence is to include multiple possible futures in the scenario-planning design.  Imagining multiple futures deflects planners from the best-guess impulse and obliges them to stress test organizational plans for the likelihood of success or failure in any of them.[1]

A good example of the multiple-futures approach in action is Project Evergreen, a long-running scenario-planning effort of the United States Coast Guard.  From the beginning Evergreen was elevated above the level of a one-time “exercise” or “workshop”.  The team behind it wanted practical consequences from the work that would shape the choices made on budgets, investments, technology and people.  Intriguingly, one of the biggest innovations to come out of Evergreen was conceptual and seemed at first suspiciously intellectual.

The breakthrough emerged from the way thinking about multiple futures freed the planners from an entrenched conception of their mission; to put it another way, freed them from path dependence.

The big idea was initially expressed in conventionally bureaucratic language: “comprehensive information sharing in the maritime domain”.  Before long that was distilled to the more expressive and ultimately more potent “maritime domain awareness” (MDA).

MDA enabled planners to imagine futures in which a siloed approach to the Coast Guard’s mission (which served it well in the past) didn’t work when the organization was simultaneously planning for hurricanes, oil spills, search and rescue, narcotics interdiction, infrastructure breakdowns—and terrorist attacks.  They began to see not only how the Coast Guard’s mission could change but how it could be accomplished with limited resources.  The resiliency of the idea proved invaluable in the aftermath of the 9/11 attacks in the United States, when the Coast Guard was abruptly asked to transform itself into a leading element of America’s homeland security—a perversely nontraditional opportunity.

The MDA innovation has since been adopted by the U.S. Navy and the American intelligence community.

Strategic confidence

The goal of scenario planning can never be perfect knowledge of tomorrow.  The goal is strategic confidence, which is a kind of poise, a knowledge that an organization can respond to dramatic changes in its operating environment that cannot be predicted by extrapolating from the past or by merely applying “what if” to some notional “base case” of the future.

With strategic confidence managers can make choices that privilege some ideas above others, even amid uncertainty.  In markets upset by change, including change produced by disruptive innovation, the range of opportunities opens up.  So does the range of possible competitors for an organization’s turf, whether existing or prospective.  The opportunities, with the risks, can both be managed by taking an expansive approach to scenario planning—expansive, that is, in the sense that it does not work toward a big bet on a single future.

By taking the expansive approach to scenario planning, and acknowledging the limitations of our crystal balls, it is possible to put a stake in the ground with respect to investment in new business.  Too many organizations won’t invest the time, opting instead for what they term “strategic flexibility,” which in practice often falls short of delivering the strategic confidence to act.

Strategic confidence is the conviction that an organization is making choices resilient enough to sustain growth and innovation no matter which tomorrow arrives.  And without succumbing to opportunity blindness.

By Kevin McDermott & Peter Kennedy


[1] Full disclosure: “multiple futures” is the approach developed by FSG that we use in our own client work, including Project Evergreen.

About the authors:

Kevin McDermott founded Collective Intelligence in 1996 to help clients shape new ideas into businesses. CI has since earned a reputation for the range of its capabilities in support of change management, knowledge transfer and continuous innovation for such clients as Booz & Co., Futures Strategy Group, Guaranteach, Korn-Ferry International, McKinsey & Co. and United Way of America. CI’s earliest ambition to reinvent the communications function—described recently in “Notes on Discernment” for InnovationManagement—evolved directly out of McDermott’s earlier career as a reporter covering international business and economics for publications including The New York Times, The Economist, The Atlantic Monthly and The Washington Post.

Peter Kennedy is a founding principal of the Futures Strategy Group (FSG), a consultancy dedicated to helping clients make superior decisions in the face of future uncertainty and change.  For more than 20 years, Kennedy and FSG partners have supported Fortune 500 companies such as IBM, 3M, Deloitte, the Ford Motor Company and the ACE Group in scenario planning, risk analysis, emerging market evaluation, and new product planning.  In the public sector, FSG has applied scenario analysis to new mission development, capital investment decisions, and R&D strategy for organizations such as the US Coast Guard, NASA, and the Panama Canal Authority.

  • Pam Hurley

    The term
    ‘scenario planning’ is used to mean many different things. I follow
    the Intuitive school of scenarios which is the most widely used globally
    and was popularised by Shell International where I learned my scenario trade in
    the 1990s. I confess that I have never come across any scenario work
    where, as these authors suggest ‘Conventional scenario planners
    get all the smartest people together, develop a deeply considered best guess
    about the future, and then manage toward it. That sounds a lot like a forecast
    to me! The whole point of scenario work is to imagine a
    number of different possible futures and then to ask yourself not whether any
    one of them will come to pass but, what if it does? What are the implications of
    each potential future for strategy, the opportunities for innovation, the threats
    from competitors etc.

  • Peter Kennedy

    Thanks for the thoughts, Pam. You’re right inasmuch as planning for any “most likely”
    scenario (whatever the heck that is) amounts to a forecast, which runs directly
    counter to the purpose for doing scenario planning in the first place. Unfortunately, I have seen this too
    often in my 20+ years as a scenario practitioner. Typically, this happens when
    senior executives not directly involved in the process cherry-pick, out of
    context, the results of a scenario process. Sometimes it’s because they don’t
    get what scenario planning is all about; often they confuse it with short-term
    financial modeling or risk management objectives.
    Or it’s because senior executives are spooked by the implications –
    e.g., we’re going after the wrong customer segments or our business model is
    fundamentally flawed – and they opt to bend scenario results to suit their
    short-term business objectives. There are ways to avoid these pitfalls, among the important
    is to insist on substantial senior executive engagement as a condition for
    going forward. (Consultants are
    often loath to push the point because if they do not get the right response,
    they do not get the engagement, and someone else will.) Moreover, a well-developed
    back-end to the process will give all participants and stakeholders the confidence
    that sufficient rigor has been followed to ensure what we call “robust” results
    – that the scenario-derived insights and plans will work and prove successful,
    no matter how the future actually turns out. For more on the different uses and abuse of scenario
    planning, check out this article:http://www.futurestrat.com/outlook-may08.htm

  • Pam Hurley

    I agree Peter that the application or implementation of scenario work often leaves much to be desired. Firstly I think that scenario practitioners need to put a lot more effort into upfront preparation to ensure that the client really understands the purpose of scenario work – more about thinking than planning- and is up for it. If not, walk away. In Shell there is a great deal of prep work inside and outside the organisation and it’s something I insist on in my own practice. Secondly, scenario practitioners need to put a lot more effort into the follow up. Too often the client is presented with a set of scenarios as if that’s job done. Classic approaches to implementation are also flawed. They tend to be linear – ‘option a works well in scenarios 1 and 3 , option b is a problem in scenario 2′ etc. The linear approach is the antithesis of scenario work where we recognise the interactions of all the external drivers. I find it much more powerful – and practical – to address the interconnectedness and interdependence of all the elements at play inside the organisation when applying the scenario thinking.

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