Unlike traditional risk management tools, which are usually based around tangible and quantifiable issues, scenario thinking encourages executives to step into the unknown and imagine a range of possible futures. - Doug Randall and Chris Ertel
Managing risk is central to many corporate strategies. Reputations that take decades to build can be ruined in a matter of hours through incidents such as environmental accidents. “The definition of risk management for organizations has broadened, expanding beyond the tangible and quantifiable issues to the less tangible and more qualitative forms of risk. The bounded definition blinds executives to considerable opportunities that come when risk is well anticipated and it causes them to miss potentially major disruptions.”
In order to enhance their position, executives need to integrate their “risk management” and “risk taking” sides – both within themselves and within their organizations. Implementing risk management into their strategy will require them to adapt a new attitude and to take a strategic view of risk which incorporates managing uncertainty. Risk arises when an organization’s operating system is vulnerable due to the absence of effective controls and countermeasures (i.e.; a lack of risk management)
A predictable surprise is defined as “an event or set of events that take an individual or group by surprise, despite prior awareness of all the information necessary to anticipate their consequences.” This is equated to “I might have known this would happen.” Evidence shows that “people tend to believe in retrospect that an event was far more predictable that reality dictates.”
But why do businesses and authorities not act upon what they know to prevent predictable surprises? Bazerman and Watkins have identified five cognitive biases for this question. “First, we tend to have illusions that lead us to conclude that a problem does not exist or is not severe enough to merit action. Second, we interpret events in an egocentric manner- we allocate blame and credit in ways that are self-serving. Third, we discount the future because it is easier to put off daunting measures today to prevent “far-off” disaster. Fourth, we cling on to the status quo. And fifth we only start fixing problems when we have personally suffered harm or can see that danger is heading our way.” In his book, Inevitable Surprises, Peter Schwartz argues that scenario planning will give businesses a competitive edge.
Scenario planning is an approach to risk management which companies should adopt. This strategy allows leaders to explore and exploit the unknown while allowing them to act in the face of uncertainty. Scenario Planning allows for a more balanced view of both the risks and opportunities in the environment. Scenario thinking begins with a fact finding phase where assumptions about the future are made. The “unofficial future” analysis is a foundation for exploring what is known and unknown about the future within an organization. However, most executives disagree with the “official future” when it is presented to them. It is only in hindsight that they realize that they were not fully accounting for the risks and opportunities their companies face. The process of developing multiple scenarios helps increase the possibility that executives will not be surprised, because it prepares them for multiple unique futures. Traditional risk management is based on probabilities, actuary tables, and other known and measurable quantities. But scenarios are intended to provoke the imagination and provide a more comprehensive view of risk, so that the results can be embedded in critical strategic decisions.
The BP oil spill is the best argument for why scenarios must be considered before tragic events...