Lean scenario planning, a case study in automotive retail

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Master Thesis Business Studies

Lean scenario planning, a case study in automotive retail

Car dealers are facing a turbulent time in The Netherlands. Sales are declining for some years now, technology is evolving, regulations and consumer behaviour are changing. A lean scenario planning will be developed for SMEs and tested for car dealers. It will be a toolkit

for SMEs that lack the time and mindset to invest in traditional scenario planning, but nonetheless need to be prepared for the future and disruptive changes.

Wim Jan Koolhof

University of Amsterdam Amsterdam Business School

Student: Wim Jan Koolhof Studentnumber: 6174353

First supervisor: Dr. E. Peelen

Second assessor: Dr. M.L. van der Veen Universiteit van Amsterdam

Amsterdam Business School Faculty Economics & Business July 25, 2014

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Preface

Writing this master thesis has been one of the biggest challenges in my study career and maybe more than that. The biggest challenge lied in the fact I like to think about things not relevant for the specific situation. In that way you read and write a lot, all very interesting, but not very constructive. Because of this it took me a little bit longer to finish the thesis. Fortunately my supervisor, Dr. Ed Peelen, helped me finding the right directions and structure in writing this thesis, I’m very grateful for that. He showed the directions to Soft Systems Methodology, system constellations and made me enthusiast about the subject of scenario planning. His advice to just write about a specific topic may have been the best one! I gained very useful knowledge in this process and definitely will use it in future situations. I also would like to thank Dr. M.L. van der Veen for being the second assessor.

Furthermore I would like to thank my parents Wim and Marij for their continuous support and trust in a positive outcome, my brother Laurens for very critical remarks and my friends Kaj and Tom for their support and trust.

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Abstract

Scenario planning has been a hot topic since the 1950’s and is still gaining popularity with researchers. There are differences in methods used for scenario planning, but all of them result in scenarios based on a repetitive process of learning. Most of the time scenario planning is implemented by multinational companies that dedicate specific resources to the planning process. Scenario planning based on classic methods is very time consuming.

Until now, time and resources were not a restriction for scenario planning. The research in this paper investigates if it’s possible to create a lean scenario planning method which puts less pressure on resources, so the method comes within arm length of small and medium sized enterprises. The research objective of this study is: ‘’Develop and test a ‘lean’ scenario planning approach, which can be performed in a short time frame.’’ This research tries to answer the research objective through a number of different approaches. First a scenario planning method is built in which ‘lean’ elements were included. A workshop provided variables such as trends and uncertainties. Through different methods the variables are turned into strategic options and scenarios. The scenarios were checked by participants and adapted towards useful scenarios that could reflect a future state. Mental models are an important part of this research. Managers of small and medium sized enterprises can be stuck in a business-as-usual mental model, they do not think about the future. Scenario planning may change this model to a more open-minded one. In order to measure the change a pre and post questionnaire were used in order to discover a possible change of the mental model of managers.

Both the results of the workshop in combination with the lean scenario planning method and the questionnaires indicate that it is possible to make the process of scenario planning leaner. Methodology made by Wim Jurg is used in order to measure the usefulness of the workshop and final scenarios. Through specific questions relevance, validity precision, reliability and usefulness were tested. The final scenarios were described as useful, the post questionnaires indicated that the mental model of managers and employees had changed. The aim of scenario planning in one day was rejected as it is not possible to repeat the scenario planning process in a single day in order to sharpen and enrich the scenarios. Splitting the process of lean scenario planning in two parts would make a positive difference.

Key words: lean scenario planning, strategy, soft systems methodology, soft problems, mental model, usefulness, system constellations

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1 Introduction

For a very long time strategy has been under the attention of researchers. One of the leading researchers on strategy is Michael Porter. He described the conditions for success: ,,Strategy is about alignment of internal and external factors.’’ (Porter, 1991). Success compared to a competitor is a result of having distinctive capabilities, which can be developed through internal and external analysis. This allows for current conditions to be monitored and make adaptions to adjust for these factors and become more successful. But what about the long term, when you don’t know how internal and external factors will change? A solution for this question may lie in the theory of scenario planning. Scenario planning starts with analysing the company and its environment, or as it is described by Van der Heijden, the business idea and its environment (Van der Heijden, 2005). But scenario goes further. Scenario planning is an organic way of thinking about the future and brings a lot of extra benefits, for example improving synergies in your company, improving organizational learning, and preventing different kinds of biases. Some examples of those biases are overconfidence, narrow framing, tendency to look for confirming frames and errors of the third kind (Schoemaker, 1997). Therefore scenario planning will be the theoretical fundament of this thesis. Malaska found that scenario planning was used mostly by large multinationals, because they had resources to work with new methods (Malaska et al., 1984). Today most of the multinational companies are using scenario planning, but little is known about scenario planning through a lean method, a method that asks for less resources and time and that will be within arm length of small and medium sized companies.

The industry which will be studied is the car retail industry. Car retailers have experienced difficult market dynamics over the past years with declining sales, declining customer loyalty and ever changing regulation. They operate in a volatile world and prioritize the current performance with little focus on the future. The performance of a car dealer can be measured by a single measure, the so called dealer margin. According to BOVAG, the average dealer margin for 2013 was 1,1 %. 1 Developments like a declining dealer margin, changing

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7 consumer behaviour2, government regulations3 and technological developments4 influence the performance of car dealers. But how will these developments continue to impact the future?

We will develop a ‘lean’ scenario planning method which can be implemented in a very limited period of time with limited deployment of staff and managers. We will test if these managers of small and medium sized companies learn from scenario planning.

Mental Model

The theory of mental models goes back to 1943, when Kenneth Craik wrote an article about the mind. He stated the following: ‘‘the mind constructs “small-scale models” of reality that it uses to anticipate events. Mental models can be constructed from perception, imagination, or the comprehension of discourse.’’ (Johnson-Laird & Byrne, 2000). Jay Wright Forrester had another definition for mental models: "The image of the world around us, which we carry in our head, is just a model. Nobody in his head imagines all the world, government or country. He has only selected concepts, and relationships between them, and uses those to represent the real system." (Wikipedia, 2014) In other words, the decision making process of managers are based on already existing concepts and relations. In this way of thinking lies a threat, also called the ‘business-as-usual’ threat. Decisions are based on past experiences and not on possible events in the future. This threat is also highlighted by Van der Heijden, he states the following: ,,Scenarios are tools to research one’s understanding of the world. In line with the critical realism paradigm the objective is to challenge one’s own “mental model of the future,” sometimes called the “business as usual” future.The process draws on a group’s intuition to identify the main factors driving the system, in particular those that are significantly uncertain.’’ (Van der Heijden, 2000, p. 33.)

So scenario planning allows you to not only think about the future in a structured way, it also challenges managers to change their mental model. If a mental model can be changed, a manager may be able to increase the quality of his or her decisions and think about the future in a structured way (Van der Heijden, 2000). Therefore the possible change of mental models also will be investigated in this thesis.

2 http://www.marketingonline.nl/nieuws/bericht/veranderingen-in-consumentengedrag-leiden-tot-verschuivingen-in-autoverkoop Website visited on January 28, 2014

3 http://www.compendiumvoordeleefomgeving.nl/indicatoren/nl0131-Emissie-per-voertuigkilometer.html?i=23-69 Website visited on January 28, 2014

4_{http://www.technologyreview.com/featuredstory/520431/driverless-cars-are-further-away-than-you-think/} Website visited on January 28, 2014

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8 Research objective

As is stated above, it is more difficult for small and medium sized enterprises to implement the strategic process of scenario planning. As the classic method of scenario planning is time consuming, the aim of this thesis is:

Develop and test a ‘lean’ scenario planning approach, which can be performed in a short time frame.’’

In this master thesis a lean scenario planning method will be build which is useful for this specific situation. Through testing the reliability, validity, generalizability and consequent the usability (or usefulness) of the research, the usefulness of the method will be tested, this will be done through a pre- and post-questionnaire, and feedback on the developed scenarios. Information will be collected through a case study, which includes a literature review, desk research, and a workshop with managers, employees and external stakeholders. Ultimately the created method of this research may be used to help SME’s with scenario planning.

In order to reach this aim, the following questions will be studied:

1. What is the history of scenario planning?

2. What are the current characteristics of scenario planning, based on most common literature?

3. How do you develop a lean scenario planning method?

4. How can you use scenario planning as a learning tool in an organization?

5. Will scenario planning result in changes of a mental model of car dealer managers and employees?

6. Which scenarios can be developed for a car dealer?

This master thesis will include the following chapters. Chapter two consists of a literature review, comparisons of leading theory and an overview of relevant characteristics. In chapter three the research methodology will be described, which includes the philosophy, approach, design, a new method and the test for usefulness. In chapter four the lean scenario planning method will be applied to the case study company. This chapter will conclude with the result of both the case study and the test for usefulness. In chapter five the result and conclusion will be discussed.

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2 Towards a lean scenario planning model

In this chapter the history, current state and leading theory will be described through an overview with comparisons, differences and risks and hurdles.

2.1 General overview Scenario Planning

Scenario planning was first used in the 1950s by the department of defence. (Coates, 2000) Herman Kahn was responsible for a new way of military thinking. He invented the escalation ladder which is showed in figure 1. (Rummel, 1979)

Figure 1, Kahn’s Crisis Dynamics

Herman Kahn’s aim was to think about the unthinkable. (Chermack et al., 2001) In order to find the unthinkable, he used elements of game theory. Game theory was invented by Oscar Morgenstern and John von Neumann. McMillan stated about game theory: ,, Game theory is the study of rational behaviour in situations involving interdependence’’ (McMillan, 1996, p.6). Interdependence means that all kind of actions have an effect on the players in the game (Mcmillan, 1996, p.6). The fact that scenario planning originally is based on game theory is not surprising, scenario planning is a result of the analysis of internal and external changes, basically changes of game players. Leading writers stated the following about scenario planning:

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Author What is Scenario Planning?

K. Van der Heijden, (2005) ‘’ Scenario planning is an approach to strategy focused on the process, which differs from traditional approaches, often characterized as rationalistic, involving the search for the ‘optimal’ or ‘evolutionary’ strategy.’’

C.A. Varum & C. Melo (2010, p. 356)

‘’ Scenario planning has increasingly been recommended as a tool towards the improvement of decision-making, useful in dealing with uncertainty, even in the smallest firms.’’

P. Schoemaker, (1995) ‘’Scenarios are based on the assumption that the business world is unpredictable, but certain events are predetermined. No scenario can provide an accurate description of the future. Their role is to help managers recognize, consider and reflect on the uncertainties they are likely to face. By identifying trends and uncertainties, a manager can construct scenarios to overcome the usual errors in decision-making: overconfidence and tunnel vision.’’

F. Roubelat, (2000) ‘’ Scenario planning is a networking process that challenges strategic paradigms and forces firms to rethink their internal and external boundaries.’’

A. Martelli (2001) ‘’A management technology used by managers ‘to articulate their mental models about the future and thereby make better decisions.’’

P. Wack (1985) “ Scenarios help managers structure uncertainty when they are based on sound analysis of reality, and they change the decision makers; assumption about how the world works and compel them to reorganize their mental model of reality’’

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11 According to the citations above, the most important characteristics of scenario planning are:

 Search for optimal strategy  Change mental models

 Identify and deal with trends, predetermined elements and uncertainties  Avoid managers’ biases

 Find and describe interrelations

Varum & Melo made an overview of the development of scenario planning from 1950 onwards. Scenario planning emerged in two countries, the USA and France. In the USA Pierre Wack used scenario planning as a tool for creating multiple for Dutch Royal Shell. Schwartz and Van der Heijden further developed the techniques. In France scenario planning was developed by Godet, based on the La Prospective school. The La Prospective school can be translated as strategic scenario building (Varum & Melo, 2010). Godet stated: ‘’It is a way of thinking based on action and non-predetermination using specific scenarios’’. Furthermore he stated that this is necessary because ‘’models based on past data and relationship can’t be used anymore to predict the future‘’ (Godet, 1986, p.135). La Prospective is based on seven key ideas:

 To clarify present actions in the light of the future  To explore multiple and uncertain futures

 To adopt a global and systematic approach

 To take into account qualitative factors and the strategies of actors  To remember always that information and forecast are not neutral  To opt for plurality and complementarity of approaches

 To question preconceived ideas on forecasts and forecasters. (Godet, 1986, p.135-136)

According to Godet there is no single scenario planning method, but he said there is a consensus in the steps which have to be taken in scenario planning. In appendix A the method of La Prospective can be found.

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12 Furthermore Godet states that the objectives of a scenario method are:

1. To detect the priority issues for study (key variables), by identifying the relationships between the variables of the specific system under study through systemic analysis; 2. To determine, especially in relation to key variables, the main actors and their

strategies, and the means at their disposal for bringing their projects to a successful conclusion.

3. To describe, in the form of scenarios, the development of the system under study, by taking into account the most probable evolutionary path of the key variables and by using sets of assumptions about the behaviour of the various actors. (Godet, 1986)

The next paragraph will elaborate on the subjects of characteristics and methods for scenario planning. There is chosen for the leading works of Van der Heijden, Schoemaker and Wack because of their operational experience and current relevance of the research.

2.2 Scenario planning characteristics and methods

2.2.1 Kees van der Heijden

Description:

Van der Heijden stated the following characteristics about scenario planning:

 “Organisational survival/ self-development are the essential and prime driving forces of strategy.

 Strategizing is creating a new and unique policy framework for future action, based on deepening understanding of the fit between ourselves and our environment in which we need to survive and develop.

 The business idea is a strategic perspective on ourselves and an organisation

 The scenarios are the strategic perspectives on the environment of this business idea. (Van der Heijden, 2005, P113)”

The core of a business idea is which characteristics of a company deliver unique capabilities and give a company competitive advantages. The other element is the environment which is formed by all of the external forces. Different theories are made in order to define the external

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13 environment. The most common theories are the PESTEL analysis (Van der Heijden, 2005, P 183) and the five forces model. (Porter, 1991)

PESTEL Porter five forces

 Social developments  Technological developments  Economic developments  Ecological developments  Political developments  Legal developments

 Threat of new entrants

 Rivalry among existing competitors  Threat of substitute products or

services

 Bargaining power of suppliers  Bargaining power of suppliers Figure 3: PESTEL and Porter 5 forces

The theories of PESTEL and the Porter Five Forces can be used to address internal and external forces.

Van der Heijden uses two perspectives on scenario planning, action research and social interaction. Van der Heijden stated: ,,This perspective (action research) on the scenario methodology highlights the aim of uncovering predetermined elements in the outside world, allowing better anticipation of what could happen, and better understanding of what is fundamentally unpredictable. Improving our understanding of this context of our decision making is clearly useful. (Van der Heijden, 2000, p. 34.) The perspective is based on finding the unknown, but according to Van der Heijden, scenario planning has also another perspective, namely social interaction or the processual view. How can a group of managers be helped with acting on unexpected events? (Van der Heijden, 2000) It is important to break through the business-as-usual mental model. The business-as-usual way of thinking is mostly based on deductive thinking, a mental model formed through past and current events. As long as a group of managers remain in their old mental model, indications of big changes will not be noticed. Or as is stated by Van der Heijden: ,,Without this the group will display tunnel vision, and will lack skills of adaptation to a new environment.’ (Van der Heijden, 2000, p. 34.)

Most important for scenario planning is to find the causal relations between the different trends. It is the role of a scenario planner and a management team to find these connections. Furthermore one always has to realize that scenario planning will not give you a guarantee for the future, it might happen or it might not. But as long as your business idea maintains to be strong when different scenarios occur, you are in a relatively safe place.

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14 Vulnerabilities regarding scenario planning:

According to Burt en Van der Heijden (2003) scenario planning for small and medium sized enterprises has three hurdles:

Organization culture: Client state of mind: Fear of engaging / fear of the future:

 Dominant

management style

 Understanding the thinking horizon

 Level and quality of strategic thinking  Requisite variety  Short-termism  Preference for incremental change  Anxiety  The outsider

Figure 4: Hurdles. Source: Burt et al., 2003, p. 1016

Burt & Van der Heijden state the following about a solution for these hurdles: ,,To improve the effectiveness of scenario and futures work fruitful collaboration between scenario planners and the client manager(s) is key. Our experience has shown the importance of building the initial trust relationship required to create this collaboration.’’ (Burt et al., 2003) Building a trust relationship is very important in order to start with effective and efficient scenario planning.

Business as usual mental model

As is mentioned in the introduction, theory about mental models and scenario planning will be studied further. You can assume small companies have less time to think about the future because of higher workload, also called a continuous state of firefighting. Kraus, Reiche and Reschke state the following about this problem: ‘’ SMEs often do not have the means to ensure the successful continuous application of strategic planning. In contrast to larger companies, SMEs normally maintain a lower level of resources, have more limited access to human, financial and customer capital, and lack a well-developed administration.’’ (Kraus, Reiche & Reschke, 2007) Furthermore Snuif and Zwart found evidence that SME’s have less attention for strategy. (Snuif & Zwart, cited in Gibcus & Kemp, 2003) A theoretical framework designed for small firms would be beneficial when developing a strategy, but Gikinski found out there is no all-encompassing theoretical framework to use. (Gikinski, cited in Gibcus & Kemp, 2003) The lack of interest for strategy at SME’s is confirmed by Hanlon and Scott, they state: ,, Small

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and medium-sized enterprises (SMEs), it is usually argued, are too busy dealing with operational problems and events on a day-to-day basis and devote no time to strategic management’’ (Hanlon and Scott, cited in Gibcus & Kemp, 2003)

Scenario planning is a part of strategic management and it is therefore interesting to learn more about strategic interests of SME’s. In order to find answers, the business-as-usual mental model will be used as the status quo. Important in the business-as-usual mental model is the critical realism paradigm. This means that we think we know the future based on our knowledge about the present and past. This is also called logical deduction. Because of fear for the future or just because managers think they are lucky, they tend to think in a business-as-usual way, there is no room for new ideas. In order to solve this hurdle, you have to look for structures or causal relationships. Some examples of those connections are:

 Related behaviour, or covariance, among variables  Spatial or temporal closeness

 Similarity in form or pattern. (Van der Heijden, 2000)

The solution to move away from group-think and the business-as-usual mental model is to keep the anticipatory and processual perspective in mind and maintain active management.

Lack of objectives / wrong expectations

Another threat for effective scenario planning is the lack of clear objectives and / or expectations. (Van der Heijden, 2004) In order to reduce these risks it is necessary to work with a categorization of purposes, in figure 5 you can find some examples of those purposes:

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16 Figure 5: Navigating through the business environment (Van der Heijden, 2004, p.147)

Strategizing is about making plans on the basis of predict and control. But according to Van der Heijden that is not enough:,, We have to go out there, explore and begin the process of building new understanding. We need to engage in a process of learning. Institutions need to engage in a process of organisational learning (OL).’’ (Van der Heijden, 2004 p. 148) According to De Geus organizational learning is in the end the most important (superior skills) competitive advantage for a company. (De Geus, 1988) In order to learn something in an organization, there has to be a solid basis that is offered through leadership. As is stated by van der Heijden: ,,The leader removes some of the uncertainty and shields the group from the buzzing confusion in the outside world.’’ (Van der Heijden, 2004, p. 148)

In short, knowing by gaining control is strategy, knowing by participation is based on operational learning. (Van der Heijden, 2004) Fear forces companies into the direction of gaining control, in case of thinking about the future not the right direction. As is mentioned earlier, it can be compared with the business-as-usual model, there is no room for thinking about the future. The only way to solve this problem is to change the thinking process, new solutions have to be found. By eliminating groupthink and fragmentation, a lot of ideas will float to the surface. (Van der Heijden, 2004, p. 152)

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17 Some other examples are:

 Adopting scenario-based strategic conversation as the new rule of the game, in which alternative views find space to be heard.

 Reducing fear and advocacy and making space for listening, for example by separating the strategic conversation from the decision making process.

 Defining the aim of the strategic conversation as the creation of a “portfolio of possible strategic initiatives”.

 Encouraging experimentation triggered by these initiatives, but controlled by effective feedback.

 Doing all this while some slack in resources is still available. (Van der Heijden, 2004, p. 154)

In conclusion, the following points have to be integrated in the new scenario planning method in order to prevent that hurdles will affect the effectiveness of the lean scenario planning:

Organization culture:

 Attention for client state of mind

 Attention for fear of engaging / fear of the future  Free from business-as-usual mental model  Manage Lack of objectives / wrong expectations  Reduce group-think, support idea generation

 Mention importance of organisational learning / change mental model  Gaining trust of managers

Scenario planning method overview:

The following figure shows an overview of the structure in which Van der Heijden builds scenarios:

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18 Figure 6: Van der Heijden Scenario Planning method

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2.2.2 Pierre Wack

Description:

Pierre Wack introduced scenario planning at Royal Dutch Shell during the 1970’s. According to Wack the purpose of scenario planning is:

,, Scenarios deal with two worlds: the world of facts and the world of perceptions. They explore for facts but they aim at perceptions inside the heads of decision makers. Their purpose is to gather and transform information of strategic significance into fresh perceptions. This transformation process is not trivial – more often than not it does not happen. When it works, it is a creative experience that generates a heartfelt ‘’Aha!’’ from your managers and leads to strategic insights beyond the mind’s previous reach.’’ (Wack, 1985)

That ‘’Aha’’ moment is the moment you are looking for as a scenario planner, also called a change of the mental model.

The start of the scenario planning lies in predetermined and uncertain elements:

Exploration and expansion of predetermined elements:

 Events already in the pipeline whose consequences have yet to unfold  Interdependencies within the system

 Breaks in trends

 The ‘’impossible’’ (Wack, 1985)

The next step lies in the minds of managers, they have to understand the predetermined elements and unfold them in their mind in order to accept the scenarios. (Wack, 1985)

This process is called rooting. Scenarios have two purposes:  Protective: Anticipating and understanding risk

 Entrepreneurial: Discovering strategic options of which you were previously unaware (Wack ,1985, p. 146)

The next step is to make alternative and internally consistent pathways for the future, preferably not two or three, but more. Most important in the scenarios is showing the driving forces in the system, their relationships and the critical uncertainties. (Wack, 1985, p. 146) Furthermore it

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20 is important to combine scenario planning with a strategic vision and option planning. This will eventually lead to option generation.

Vulnerabilities regarding lean scenario planning:

According to Wack the key problem with scenario planning is that the interface of scenarios and decision makers is ignored or neglected. (Wack, 1985) In other words, scenarios are made by people who do not make final decisions. Top managers rely on their intuition (or their good judgement) and therefore prefer forecasts instead of scenario planning. Forecasts don’t give a reliable insight into the future, they are based on previous experiences, and there is a risk of missing key turning points. Top managers are stuck in their business-as-usual mental model. When the process of scenario planning is implemented in a good way, it is possible to break through the one-eyed view and managers are pushed out of their comfort zone. The scenario planning process can work as a breeder effect and can give a lot of energy back. (Wack, 1985, p.150)

Step 1: Exploration and expansion of predetermined elements

Step 2: Understand and unfold predetermined elements, also called ‘’rooting’’. Step 3: Create a few alternative and internally consistent pathways into the future,

describing different worlds  Key is it has to illuminate the major forces driving the system, their relationships and the critical uncertainties. Step 4: Reflect, scenarios have to be protective and entrepreneurial, focus on

uncertainties. Step 5: Test Value:

1. What do the scenarios leave out? 2. Do they lead to action?

Step 6: Did you meet the main goal: Decision scenarios allow managers to break out a one-eyed view; the ability to re-perceive reality.

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2.2.3 Paul Schoemaker

Description:

According to Paul Schoemaker, the method of scenario planning consists of four steps: 1. Scenarios will be used to examine the external environment, specifically those trends

and key uncertainties that affect all players.

2. Industry analysis and strategic segmentation will help define the battlefield in terms of competitors, barriers, and profit potential.

3. Core capabilities analysis provides the basis for developing a strategic vision for the future

4. Strategic options help make the vision into reality. (Schoemaker, 1997)

When to use scenarios:

 Uncertainty is high relative to managers ‘ability to predict or adjust.  Too many costly surprises have occurred in the past.

 The company does not perceive or generate new opportunities.

 The quality of strategic thinking is low (i.e., too routinized or bureaucratic.  The industry has experienced significant change or is about to.

 The company wants a common language and framework, without stifling diversity.  There are strong differences of opinion, with multiple opinions having merit.  Your competitors are using scenario planning. (Schoemaker, 1995)

The approach of Schoemaker is based on the Resource-based view. This means companies are successful if resources are scarce, durable, defensible or hard to imitate. These kind of resources lead to sustainable competitive advantage and a higher profit. These resources have to be in line with future key success factors. (Schoemaker, 1997) Furthermore mental models play an important role. Schoemaker states: ‘’Managers who can expand their imaginations to see a wider range of possible futures will be in a much better position to take advantage of the unexpected opportunities that will surely come along’’ (Schoemaker, 1997) In this statement lies a relation to the literature of Wack and Van der Heijden where good scenario planning may change the mental model of managers in a way they start to be more imaginative. This will lead to new insights about the future and a less business-as-usual mind-set.

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Vulnerabilities regarding lean scenario planning:

According to Schoemaker, when thinking about the future, it is useful to think about three classes of knowledge:

1. Things we know we know 2. Things we know we don’t know 3. Things we don’t know we don’t know

All three classes are affected by different biases; overconfidence, narrow framing and the tendency to look for confirming evidence. The biggest risk is caused by errors of the third kind. (Schoemaker, 1997) Since scenario planning is a study of our collective ignorance, errors can be reduced. It is easier to find the weak signals and tunnel vision is reduced. According the opinions of Schoemaker and Wack, the most important things of scenario planning are finding more innovative options and have the courage and vision to act on them. (Schoemaker, 1997)

Below is an overview of the necessary steps which have to be taken when following the method of Schoemaker. Furthermore a figure with building blocks is added.

Step 1: Define the scope

Step 2: Identify major stakeholders Step 3: Identify basic trends Step 4: Identify key uncertainties

Step 5: Construct initial scenario themes Step 6: Check for consistency and plausibility Step 7: Develop learning scenarios

Step 8: Identify research needs

Step 9: Develop quantitative / formal models Step 10: Create decision scenarios

In order to check if the chosen scenarios are good ones, three assessments can be done: 1. Relevance; scenarios should connect directly with mental maps of managers. 2. Internally consistent and be perceived as that

3. They should be archetypal; that means they should describe generically different futures rather than variations on one theme.

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23 After checking the scenarios, two other analyses may be done, a competitive analysis and an industry analysis.

In Appendix B you can find more in-depth information about the scenario planning method of Schoemaker.

2.3 Overview

Three leading writers have been discussed, in this paragraph comparisons and difference will be studied further. The paragraph consists of three sub-paragraphs; a comparison, differences / risks and hurdles.

Figure 7: Comparison characteristics leading writers

Kees van der Heijden Pierre Wack Paul Schoemaker

1: Setting the agenda 2: Construct Business Idea

(SWOT)+ Environment (PESTEL + 5 forces)

3: Define uncertainties and

trends; Risks, structural

uncertainties and unknowable’s

4: construct scenario and

internal agenda

5: Scenario structuring:

inductive, deductive and incremental scenario structure

6: Develop story lines

7: Scenario research: Surprise

free, challenge or phantom

1: Exploration and expansion of

predetermined elements

2: Understand and unfold

predetermined elements, also called ‘’rooting’’.

3: Create a few alternative and

internally consistent pathways into the future, describing different worlds

4: Reflect, scenarios have to be

protective and entrepreneurial, focus on uncertainties.

5: Test Value: What do the

scenarios leave out? Do they lead to action?

6: Did you meet the main goal:

Decision scenarios allow managers to break out a one-eyed view; the ability to re-perceive reality.

1: Define the scope

2: Identify major stakeholders 3: Identify basic trends 4: Identify key uncertainties 5: Construct initial scenario

themes

6: Check for consistency and

plausibility

7: Develop learning scenarios 8: Identify research needs 9: Develop quantitative / formal

models

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2.3.1 Comparison scenario methods

Tapinos made an overview of the general consensus about scenario planning between authors:

 Through a variety of methods ranging from interviews with multiple key stakeholders to group brainstorming, the most important uncertainties and predetermined factors (certainties) of the future are identified. Tapinos observed that there is no consensus on whether perceived uncertainties from both the general and industrial environment should be included in this stage.

 The uncertainties identified are clustered or reduced to manageable number (circa 10)  The impact of scenarios is examined

 Strategic options are generated based on the scenarios developed. A number of authors have suggested the use of SWOT matrix and this was later expanded by who suggested the examination of the impact of each scenario on the industrial and internal environment to generate ‘SWOT of the future’. (Tapinos, 2013, p. 18)

Based on the writings of Van der Heijden, Wack and Schoemaker, the following corresponding key characteristics can be indicated:

 Through scenario planning fresh perceptions are sought. A good scenario planning project has to lead to organisational learning.

 Scenario planning has a strong aim to change the mental model of managers. A manager can be stuck in the business-as-usual mode, through scenario planning the mind can be opened.

 One of the most important things in scenario planning is finding the relations between the different drivers. Through scenario planning managers and a facilitator have to find relations between the business idea, trends, uncertainties, unknowable’s, activity schemes and driving forces. These characteristics may be summarized in the term rooting, finding the real problem.

 Define the scope / agenda,

This thesis aims to find a lean method and only the most important characteristics should be used:

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25  Try to change mental model, find the ‘’Aha’’ moment

 break through the one-eyed view of managers

 Identify patterns and clusters in key trends, driving forces and scenarios  Gaining trust of managers / build relationship

2.3.2 Differences and risks

The aim of scenario planning is more or less the same for every author: finding relations. They differ in the way they want to find those relations, for example in the order of activities. Van der Heijden has a focus on business idea, environment and uncertainties. Wack writes about rooting predetermined elements and Schoemaker writes about stakeholders, trends and uncertainties. The main difference is how it is expressed in their conclusions, these are the following:

Van der Heijden: Develop story lines and do scenario research

Wack: break out a one-eyed view; the ability to re-perceive reality

Schoemaker: Develop quantitative / formal models and create decision scenarios

Regarding the subject of this thesis, lean scenario planning and managers with an assumed limited interest in and time for strategic thinking, the following part will focus on the different writers’ approaches when forming scenarios together with SME managers.

To start with Van der Heijden, he puts a strong emphasis on the first part of developing scenarios, forming the business idea and study the environment. Thinking about the environment leads to a big uncertainty, a lack of understanding of the complex environment in which a company operates. Based on this uncertainty three forms are mentioned; Risk, structural uncertainty and unknowable’s. These uncertainties form the fundament of scenario planning. In this fundament lies a risk when working with SME managers, since they have limited interest in the future. SME managers may be aware of the risks, but their thoughts about structural uncertainty and unknowable’s may be very limited. In conclusion, the scenario method of Van der Heijden is based on four subjects, the business idea, the environment, uncertainties and finding the relation between these variables. One can start making scenarios when the first three subjects are clear, otherwise the found relations will lead to wrong conclusions.

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26 The method of Wack is a little bit more useful for SME managers, since he starts with the exploration and expansions of the predetermined elements. Or as is stated by Wack: ,, The foundation of decision scenarios lies in exploration and expansion of the predetermined elements: events already in the pipeline whose consequences have yet to unfold, interdependencies within the system (surprises often arise from interconnectedness), breaks in trends, or the "impossible." Decision scenarios rule out impossible developments; they deny much more than they affirm.’’ (Wack, 1985b, p. 140) In the method of Wack finding the predetermined elements is far more important, and in most cases more easily found by SME managers since they do know what is happening on the short term and already have some thoughts about already occurring change. But also uncertainties play a role in the method of Wack, het states: ,, Experience shows that decision scenarios focus on critical uncertainties that are often very different from those that seemed obvious to managers at the beginning of the process.’’ (Wack, 1985b, p. 146) A difference with Van der Heijden is the fact critical uncertainties are changing during the process. Regarding the lean scenario planning method this is not a big risk, since changing the mental model is also part of the aim of lean scenario planning, this change in uncertainties is very useful.

The method of Schoemaker differs from Wack since there is an emphasis on defining the trends and uncertainties as a starting point. This way of starting can be compared with Van der Heijden, but it is again not useful for business-as-usual minded managers. Do they have thoughts about trends and uncertainties? The method of Schoemaker has a big advantage, the goal of his scenario planning method is forming learning scenarios and finding blind spots with the help of learning scenarios. Through changing a managers’ mental model, a company is adapting to the future and therefore learning. So no, the method of Schoemaker is not very useful when you want to start with lean scenario planning, and yes, the goal of scenario planning with the use of Schoemakers’ method is very useful.

That said it can be concluded that none of the three scenario planning experts have attention for lean scenario planning, in fact, they strongly discourage to make the planning process a fast one since the process has to repeat itself over and over again.

2.3.3 Hurdles

When thinking about a lean scenario planning method, it is also interesting to know more about possible hurdles. Since the process of scenario planning is lean, there is little room for errors. Therefore the mentioned hurdles will become a part of the suggested lean scenario planning

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27 method in order to work more efficiently. In the following overview the most relevant hurdles are mentioned.

Example of the most common hurdles:

 Organization culture, Client state of mind, Fear of engaging / fear of the future: Solution, building the initial trust relationship

 Business-as-usual mental model

 Lack of objectives / wrong expectations  Reduce group-think, support idea generation

 The interface of scenarios and decision makers is ignored or neglected.

 Managers tend to remain in their old mental model, they use forecast to think about the future. Since forecasts are based on the past and present, future key changes can’t be seen.

 Different biases; overconfidence, narrow framing and the tendency to look for confirming evidence. The biggest risk is caused by errors of the third kind.

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3 Research methodology

In this chapter the chosen methodology will be discussed. This study has two goals. The first aim is to learn more about lean scenario planning. Is it possible to make effective scenarios in an afternoon or do you need more time to gain trust of managers and walk through the necessary steps of scenario planning in order to finish with a good result? The other aim is less tangible, learn more about possible changes of the mental model of managers after a strategic scenario planning session. Theory already showed that managers can remain in their business-as-usual mental model, this mental model does not fit with the desired attitude regarding successful scenario planning.

3.1 Research philosophy

According to Saunders, Lewis and Thornhill, a research philosophy relates to the development of knowledge and the nature of that knowledge. Regardless the subject and the impact of your research, you are developing new knowledge. Furthermore they state that the philosophy you adopt contains important assumptions about the way in which you view the world. (Saunders et al., 2009, p.107) But most important in choosing for a specific philosophy is your own view on the relationship between knowledge and the process in which knowledge is further developed. (Saunders et al., 2009, p.108) Again the main research objective in order to elaborate on the question of finding the best fitting research philosophy.

Develop and test a ‘lean’ scenario planning approach, which can be performed in a short time frame.’’

When thinking about ontology, a choice between objectivism and subjectivism can be made. Sounders et al. state the following about objectivism and subjectivism: ‘’ Objectivism portrays the position that social entities exist in reality external to social actors concerned with their existence. Subjectivism holds that social phenomena are created from the perceptions and consequent actions of those social actors concerned with their existence.’’ (Saunders et al., 2009, p.110) In other words, in objectivism the outside world is structured and always the same, in subjectivism the world is always changing as a result of interaction. Furthermore Saunders has stated the following:’’ It is your role as the researcher to seek to understand the subjective reality of the customers (in this case managers) in order to be able to make sense of and

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understand their motives, actions, and intentions in a way that is meaningful.’’ (Saunders et al., 2009, p.111) Related to the difference between objectivism and subjectivism is the epistemology. According to Saunders et al. epistemology concerns what constitutes acceptable knowledge in a field of study. A comparison is made between a resource researcher and a feelings researcher. This is in line with the objectivism versus subjectivism discussion. Saunders states that for a resource researcher, reality is represented by objects that are considered to be real, in other words, data collected a less open for bias and therefore objective. (Saunders et al., 2009, p.112) A feelings researcher focuses more on feelings and attitudes. A feelings researcher adopts the interpretivist philosophy. The third philosophy is Realism. Realism can be described as that what the senses show us as reality is the truth; that objects have an existence independent of the human mind. The opposite of realism is idealism. In idealism only the mind and its contents exist. (Saunders et al., 2009, p.114) Realism can be divided in two types, direct realism and critical realism. Direct realism is as we see the world, direct through your senses. Critical realists say we see representations of reality, some sort of illusion. Next comes the philosophy of interpretivism. Saunders et al. stated about interpretivism: It advocates that it is necessary for the researcher to understand differences between humans in our role as social actors. Saunders et al., 2009, p.116) Furthermore he states that a researcher has to adopt an empathetic stance. As a researcher you have to think as your subjects in order to understand them. Furthermore Saunders states that business situations are a function of a particular set of circumstances and individuals coming together at a specific time. Therefore the interpretivist perspective can be useful when studying business and management situations. (Saunders et al., 2009, p.116)

In order to designate the most relevant philosophy, the philosophy which shows most comparisons with this study is the interpretivism philosophy. Saunders states the following: ,, The challenge here (when adopting an empathetic stance) is to enter the social world of our research subjects and understand their world from their point of view. ‘’ (Saunders et al., 2009, p.116). An important part of this research is measuring a possible change of the mental model of a manager. It is necessary to think like a manager in order to ask the right questions. The lean method which will be developed, will aim at understanding their point of view through different techniques The process of finding trends and uncertainties, transformations, root definitions, a confrontation scheme, strategic options, and first and final scenarios, is aimed at a structured and fast method to find those answers. Other motivations for choosing the interpretivism philosophy are the following:

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30  Value bound, researcher is related to company used in case study.

 In depth investigation through panel interview

 Qualitative research, questionnaires (Saunders et al., 2009, p.119)

3.2 Research approach

Research approaches are used to find a useful design for a research. The approaches can be divided in two categories, the deductive and inductive approach:

 The deductive approach; you develop a theory and hypotheses and design a research strategy to test the hypotheses.

 The inductive approach; Collect data and develop theory as a result of your data analysis. (Saunders et al., 2009, p.124)

In other words, deduction is testing a theory, induction is building theory. Since the research will try to build a new theory for lean scenario planning based on existing theory, on can say this research has a combination of a deductive and inductive approach. According to Easterby-Smith et al. (2008) it is important to choose an approach because:

 ‘’It enables you to take a more informed decision about your research design.

 It will help you think about those (the overall configuration of your research) research strategies and choices that will work for you and, crucially, those that will not.

 Knowledge of the different research traditions enables you to adapt your research design to cater for constraints.’’ (Saunders et al., 2009, p.126)

According to Saunders a combination of both approaches is possible, the characteristics of the inductive and deductive approach meet the approach of this research:

 Deductive because existing theory will be used, or move from theory to data.  Inductive because of qualitative nature of research

 Inductive, because more flexible structure to permit changes of research emphasis as the research progresses (Saunders et al., 2009, p.127)

3.3 Research design

3.3.1 Purpose and strategy

According to Saunders a research can have different purposes. He makes a distinction between exploratory, descriptive and explanatory research. (Saunders et al. 2009, p.139) This research

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31 has an exploratory purpose. Robson stated the following about exploratory research: ‘’ An exploratory study is a valuable means of finding out what is happening, to seek new insights, to ask questions and to assess phenomena in a new light. ‘’(Robson, 2002, p.59) There are three ways of conducting exploratory research: A search of the literature, interview experts in the subject and conducting focus group interviews. An important characteristic of scenario planning is organizational learning, this can be done through conducting focus group interviews with the goal to discover new insights. The importance of organisational learning is highlighted by De Geus. He states that faster organizational learning than your competitor may lead to the only possible competitive advantage. (De Geus, 1988) When performing a focus group interview, the new insights of managers may be discussed, with organizational learning as a result. In other words, mental models, or insights, and organizational learning are strongly related to each other and have influence on the future, it is necessary to build a research design in which these subjects get extra attention.

Next step is defining the research strategy. This research is based on the case study design. Robson defines a case study as ‘a strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon within its real life context using multiple sources of evidence.’ (Robson, 2002, p. 178) Furthermore Yin states the importance of context, adding that, within a case study, the boundaries between the phenomenon being studied and the context within which it is being studied are not clearly evident. (Saunders et al., 2009, p. 146) When conducting the research it will become possible to answer questions like why, what and how. Furthermore triangulation is relevant for this research, multiple sources like interviews, questionnaires and desk research are used. This research is a single case study. Single case studies are not preferred, but when building a new method this fact is less relevant. The new method may be tested through new case studies. Single case studies have a risk of lower validity and generalizability, in paragraph 3.3.2 there will be am elaboration on those subjects. Important when doing a scenario planning session with managers is gaining trust. ’’ (Burt et al., 2003) Since the researcher already is familiar with some managers working for the company used in this case study, the already existing relation will help during the process of making a scenario planning.

3.3.2 Reliability, validity, generalizability and usability of workshop

The credibility of research depends on three factors; reliability, validity and generalizability. Reliability means the collection of techniques and analysis procedures have to lead to

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32 consistent findings. According to Easterby-Smith, the following three questions have to be asked in order to judge the reliability:

1. Will the measures yield the same results on other occasions? 2. Will similar observations be reached by other observers?

3. Is there transparency in how sense was made from the raw data? (Easterby-Smith et al, 2008, p. 109)

Furthermore they state: ‘’Validity is generally conceptualized as whether the subject that was intended to be measured was actually measured’’ (Easterby-Smith et al, 2008) Most important threats to reliability are subject or participant error, subject or participant bias, observer error and observer bias. (Saunders, 2009, p. 156)

According to Saunders, validity is concerned with whether the findings are really about what they appear to be about. Is the relationship between two variables a causal relationship? (Saunders et al., 2009, p. 157) The most important threats to validity are history, testing, instrumentation, mortality, maturation and ambiguity about causal directions. Generalizability is also called external validity. Generalizability means if the results of your research are also applicable in other research settings. Especially in single case studies, a low generalizability is a threat. Since this research is based on one case, careful attention will be paid to the new scenario planning method which will be used in this research.

Usability is a result of reliability, validity and generalizability of the research. When these factors can be answered positively, you can assume the results of the research are useful. Wim Jurg made a method to test these factors in order to define the usefulness. In the next paragraph you can find an elaboration on this subject.

3.3.3 Testing usefulness with method of system constellation

The development of useful scenarios is highly dependent on a change in the mental models of managers. When developed scenarios are considered useful, this can mean the mental model of a manager has changed. In order to define usefulness of scenarios and the research in its entirety, a combination of factors will be used. The factor generalizability comes from leading literature, the factors reliability, validity, relevance and precision come from a research called: The Perceived Usefulness of Branding Constellations. (Jurg, 2010)

Wim Jurg is the creator of branding constellations. According to Jurg ‘’A branding constellation is a non-verbal elicitation technique that uses a non-verbal systems metaphor to identify branding problems’’. (Jurg, 2006) In short, first a preliminary research question is

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33 formed about a brand. Next step is to form up to six key brand elements. The aim of a branding constellation is to find new or change key brand elements. These elements are then linked to people, in the literature called stand-ins. In the next phase, a brander moves the stand-ins around into positions which feel good for the brander. Jurg stated about this: ‘’ The initial constellation is a spatial metaphor of the brander’s mind-set on the problem’’ (Jurg, 2005) The argumentation behind using a systems constellations for finding answers to questions is the following. According to Gibson ‘’identifying marketing problems is difficult since most are soft or messy: they are hardly definable mismatches between what is and what could be.’’(Gibson, cited in Jurg, 2006, p.2) ‘’Checkland & Scholes report systems metaphors are appropriate for problems of this kind.’’ (Checkland &Scholes, cited in Jurg, 2006, p.2) According to Zaltman ‘’Metaphors help marketing decision makers to understand the - big - part of their preconscious experience that is not processed semantically through conscious consideration (Zaltman, cited in Jurg, 2006, p.2) In other words, by using metaphors, soft and messy marketing problems can be solved through verbal and non-verbal elicitation techniques. Although it would be very interesting to think about some sort of scenario planning constellation with business ideas, competencies, the external environment, risk, unknowable’s and uncertainties as key scenario element, this research will only focus on a lean scenario planning method. It is already clear that a complete constellation process would costs too much time, money and staff deployment to consider it as ‘lean’. But a part of the theory behind system / branding constellations is very relevant. Similar to scenario planning, it is looking for answers on soft and messy problems. Scenario planning also copes with soft and messy problems, you are looking for answers to anticipate on future event, but you don’t know the answers and have no precise goal in mind. In order to test if the results of the system constellation are trustworthy, Wim Jurg created a method to test the usefulness.

The classification model of usefulness can be used for studies on problem identification problems. (Jurg, 2010, p.11) Parts of this model will be used to test the usefulness.

How do you measure the change in mental model of a manager? Do you ask him, did your mental model change? He would say yes or no but you can’t check that. Jurg stated the following about perceived usefulness:,, Perceived usefulness is the degree to which the respondents perceive problem identification techniques as improving their initial perception of the problem.’’ (Jurg, 2010, p. 74) This statement is also applied to the subject of this thesis; SME Managers have a problem (initial perception of the problem), they don’t think enough about future events. Therefore scenario planning is used (problem identification technique) to improve strategic thinking. Jurg wrote about brand constellations, but the way of testing

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34 relevance, validity, reliability and precision is generic. A selection of questions related to a change of the mental model is made and adapted to make in useful for this thesis. In the following part you can find an overview of questions which will be used, these question are adapted to the subject of scenario planning. Furthermore for every question is mentioned if it will be used in the pre, the post or both questionnaires. The results of the questionnaire can be found in appendix H.

Figure 8: Definitions of perceived usefulness dimensions. (Jurg, 2010, p.78.)

Overview questions Relevance Appendix C Overview questions Validity Appendix D Overview questions Reliability Appendix E Overview questions Precision Appendix F Overview questions Usefulness Appendix G

Test Relevance

Question Item Component Pre / Post

Describe the answer or solution to your research problem that this branding constellation provided.

Primary branding problem insight

Insight

Alternative question scenario planning:

Pre: How will the Dutch automotive industry

(retail, producers, consumer behaviour, technology, politics, demographics and

- pre - post

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35 environment) look like in 20 years? Answer as

broad as possible, just your thoughts. – Relevance

Post: How will the Dutch automotive industry

(retail, producers, consumer behaviour, technology, politics, demographics and environment) look like in 20 years? Answer as broad as possible, just your thoughts. Did your opinion change as a result of the scenario planning workshop and in what way did it change? – Relevance

Did the interview result in particular insights into your branding problem? If so, which?

Primary branding system insight

Insight.

Alternative question scenario planning: Did the scenario planning workshop result in particular insights into the problems of a changing automotive industry? If so, which? - Relevance

- post

Additional question regarding relevance Alternative question scenario planning: What kind of strategic activities do you currently take to form a vision about and strategic planning for the future?

- Relevance

- pre

What is the answer to the brander’s problem question based on the branding constellation?

Insight.

Alternative question scenario planning: Do you already have a thought about one or more specific scenario which will occur the next 20 years? - Relevance

- pre - post

Did the branding constellation result in any further, unreported, insights? If so, which?

Post-constellation Insight question

Insight

Alternative question scenario planning: Did the scenario planning workshop result in any further, unreported insights? If so, which? - Relevance

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36 Did the branding constellation increase your

understanding of the relationships between the represented branding elements? If so, what relationships in particular? Branding system relationships question System

Alternative question scenario planning: Did the scenario planning workshop increase the understanding of the relationships between the trend, uncertainties and unknowable’s? If so, what relationships in particular? –

Relevance

- post

In your view, did the constellation help the brander to better understand the branding problem? Why (not)?

Problem insight

Insight

Alternative question scenario planning: In your view, did the scenario planning workshop help you to better understand the strategic problems? Why (not)?

- Relevance

- post

To what degree do you believe that branding constellations can help branders to better understand the actual reality of their brand?

Secondary problem insight

Insight

Alternative question scenario planning: To what degree do you believe that scenario planning can help managers to better

understand the actual reality of the automotive (retail) industry? - Relevance

- pre - post

To what degree do you believe that branding constellations can help branders to develop a better vision of their brand?

Secondary option insight

Insight

Alternative question scenario planning: To what degree do you believe that scenario planning can help managers to develop a better vision on the future of the automotive (retail) industry? – Relevance

- pre

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Test validity

Question Item Component Pre / Post

Can you give an example of a key insight obtained from a participant reaction that cannot be explained from any information provided by you?

Key-element intuitive truth

Truth

Alternative question scenario planning: Can you give an example of a key insight obtained from a group members’ reaction that cannot be explained in another way?

- Validity

- post

In your view, did the branding constellation provide a valid representation of reality? If so, why? If not, why not?

Constellation intuitive truth

Truth

Alternative question scenario planning:

In your view, did the scenario planning workshop provide a valid representation of the future? If so, why? If not, why not?

- Validity

- pre - post

Were any brand elements lacking in the constellation? If so, which?

Completeness Completeness

Alternative question scenario planning: Were there specific trends or uncertainties lacking in the first stage of the scenario planning workshop? – Validity

- post

Table 2: Test validity

Test reliability

Question Item Component Pre / Post

In your view, did the branding constellation provide consistent information? If not, can you give an example of inconsistency?

Coherence

Lean scenario planning, a case study in automotive retail

Master Thesis Business Studies