Using Scenarios to Develop Strategy
Ir. P.A. de Ruijter
March 1999, Amsterdam
The company
In January 1998, a large multinational with a strong brand name sold, what was for them a small manufacturer of test and measurement equipment to a venture capital firm. The business unit, here called T&M, originally started as supplier to the other business units in the multinational company, but over the years also developed a significant customer base outside the multinational company and outside its original area of business.
When the T&M business unit was part of the large multinational company, it was one business unit in a division of many unrelated businesses in the professional arena. Since there were no synergies between the business units in the division, the business units were managed through a financial holding company of the division. The holding company managed the business units by imposing performance measurement criteria on the companies. The two main performance criteria were financial; Return of Investment (ROI) larger than 20% and Profit Margin larger than 10%. Apart from these and other non-financial performance criteria, the holding company posed very little interference on the business. This made managing the business units relatively easy from a holding perspective, but also left little room for long term planning and investment in new technologies, especially if the business units were experiencing difficulties in achieving revenue targets from existing product lines.
The T&M business had experienced some difficult years from the beginning of the ‘90s, which was partly due to their industry being cyclical in terms of investments in new equipment. Further, the industry as a whole was going through a major technology shift from analogue technologies to digital technologies. Due to the downturn in revenues the company had reduced its workforce over the years to comply with financial targets from the holding company and only had limited development resources to develop new (digital) products. This made choices on which products to develop difficult and had led to a conflict between the development department and the sales department. The sales department felt that the company didn’t develop what they where able sell, and the development department felt that the sales department didn’t sell what was in the product catalogue, but rather used the catalogue 'as a platform for discussing with customers on which products to develop.’
The strategy process
After being divested, the management team of T&M felt it should rethink its strategy. This need was not felt to satisfy the new parent company, but because they wanted to get a better insight into the effects of digitisation on their industry and to get more focus into areas of technology, development and marketing. The management team wanted to build on the knowledge and creativity of their organisation, rather than bringing industry experts to ‘tell’ where to focus. There were many ideas around in the company on where to focus, so the management team also felt that it was important to create a neutral platform for discussing strategy, a platform which somehow was liberated from the earlier entrenched disagreements between the different departments in the company. The management team asked Jan Grøndrup-Vivanco and me to facilitate a 'scenarios -to- strategy process'.
In March 1998 the strategy project started with a kick-off meeting with the extended management team. In this meeting the objectives of the project were defined and we decided which steps to take and who to involve. The objective of the scenarios -to- strategy project was to create consensus in the company for a 5-years strategy in the areas of technology, product development and marketing. The first step in the project was to interview the management team and a cross section of people (appx. 16 people) inside the company about external developments and the key uncertainties which the company faced. Experiences from earlier scenarios-to-strategy projects had shown that the collective knowledge of a company will give sufficient insight to strategic issues and options a given company is faced with, but that the processes to have a constructive conversation to reach consensus are often lacking. For T&M the crucial uncertainties appeared to be the speed of substitution from analogue to digital concepts in the markets of their clients, currency fluctuations and social economic development.
In a 24-hour scenario workshop with the interviewees these insights were integrated into three plausible, relevant, yet challenging stories or scenarios, about how the future business environment might unfold. Each scenario represented opportunities and challenges for T&M and we did not aim to have a good, bad and a ‘business as usual’ scenario, neither did we try to predict the future or discuss the likelihood of the scenarios. The scenarios served as a tool to articulate the different implicit assumptions that were already guiding the policies in the company.
The following three scenarios were developed:
Tin Lizzy: Stability in a growing economy (scenario 1)
London, 2003: Just a hand full of players and technical standards dominated the world when TV was analogue. After a turbulent period a new set of standards and players emerged again to dominate the now digital world. These new standards and economies of scale give a positive impulse to the economy which can be compared with the mass-produced standard Ford Model-T (also called Tin Lizzy); more for less.
Happy, go lucky: Room for change (scenario 2)
Palo Alto, 2003: This scenario describes a world where there is money enough for new ideas and better technologies. The entrepreneurship and flexibility of Silicon Valley has spread all over the world.
World of Chaos: Turbulence in technology and politics (scenario 3)
Paris, 2003: This scenario describes rapid changing technologies and standards, in a world dominated by economic and political turmoil.
With the three scenarios the group simulated possible reactions of competitors and clients in these three worlds. The scenarios gave the needed neutral platform, which enabled the company to have a debate of what the implications would be of each scenario for the company. For two reasons this was a very important step in the strategy development process. First, the discussion was not about was the company should do or not do, it was about exploring the world outside the company and understand how this could impact the company. Second, by looking at scenarios and their implications a new common language was created in the group, which didn’t had its roots in old departmental perceptions and misunderstandings. This new common language facilitated the dialogue, because the issues in the discussions were not so much about who was right or wrong, but about ‘what if…’
Armed with these scenarios the workshop participants were interviewed again. This time we were specifically looking for options about what T&M could do in response to the scenarios. These interviews focus on possible actions for sales and marketing, research & development, human resources and the organisation structure.
The second workshop was a 24-hour strategy workshop with the aim of moving from having developed options, to deciding on strategy. During the options interviews we found that the developments of the business environment were very different for the specific market segments T&M was in. So we decided to structure the workshop likewise. In the workshop we formed three groups, along the lines of the segments and each group identified the future key success factors in the evening session. The morning session focussed on generating options (using the interview report as background material) and the afternoon was used to discuss the timing and selection of the options. The workshop ended with a solid list of strategic action items and general conclusions about changing the organisational structure in order to be able to exercise the intended actions.
The outcome of the strategy workshop was a decision and consensus to look at T&M customers as three separate businesses, which in terms of product development, sales and marketing have very different characteristics. The management had the courage to split the company into three lines of business. The development and production departments would function as resources centres for the three lines of business. By splitting T&M into lines of business a greater transparency would be achieved. Each line of business would need to justify investments in terms of cost and revenue potential, something which was new for T&M.
Seeing T&M as three distinct lines of business gave the workshop participants the clarity to change the development priorities during the workshop in an atmosphere of consensus. What the scenarios also made T&M realise is that, as they no longer forms part of a large multinational, they should seek to develop alliances in all aspects of their value chain, like links with universities, test and measurement equipment suppliers with complementary products and distribution channels. T&M realised that they would never realise the economy of scales in their US distribution by setting up their own channels. As a consequence of this insight, T&M will now distribute through a company with complementary products in the US, and have access to market their products in Europe.
Conclusion
In retrospect the timing of this scenario -to- strategy project was excellent. T&M was bought by a new owner with money to invest in the growth of the company, but with no brandname to add to the company and with no sales network to offer. Next to that, some radical new technologies came to the market which would make the old self-definition completely obsolete. For T&M it was clear something had to change. At the same time the relatively new CEO of T&M was willing and eager to make T&M an innovative and growing company again. This willingness to change and "can do"-attitude resonated through the whole company. The employees where very open to debate, and enjoyed being listened to. We were eager to listen to them, since all the business innovations came from them. We just enabled the power and knowledge that was already within the company. We only needed to facilitate the communication and to structure the divers insights. The change came from T&M.
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When we look back at the company after the scenario-to-strategy project, we can see that it changed from a small, backward looking, divested company in analogue Test & Measurement equipment into three promising, mid-sized, experienced start-up companies in digital multimedia equipment. The first signals in the market indicate that the new strategy could be very successful, not only for the company itself, but also for its new shareholder.
