Speaker 1: In this third and final video about strategy under uncertainty, we'll introduce another tool that helps managers make strategic planning decisions under uncertainty. Here we're going to focus on scenario planning. And the type of uncertainty that scenario planning is mostly useful are the types of uncertainty we might see, for example, in a Pestel analysis, where there are future environmental trends by environmental, not necessarily natural environment, but macro environment within the business environment that the firm is facing. And here we'll want to identify what those key trends are, or those key uncertainties, and then think about their implications for our strategy and where we might want to position ourselves in the future. Now the scenario planning process looks like this. First we want to first define the focal issue or problem we're facing. So what decision are we trying to make? Then we want to explore the key forces that will shape this issue. And again, this is where we might, for example, look at a Pestel analysis. And we want to look at what are the critical uncertainties in the environment. And we want to brainstorm and list them, identifying which uncertainties will impact this decision. The third step then involves creating scenarios. The first thing we need to do is identify, of those uncertainties, the two most critical. And so thinking through the ones that have the greatest impact on this decision, we will identify the two greatest uncertainties and create a two-by-two matrix. In that two-by-two matrix, we will then develop stories about each one of the quadrants. These stories should be logically coherent and consistent views of what would the future look like in this quadrant. And in the next slide, you'll see what I mean by quadrants. But essentially we're defining the future expectation of what the world will look like. What does the competitive environment look like? What does the industry look like? What do consumers want? How are consumers behaving? How are firms in the industry behaving? What does the government interaction look like in terms of government regulations? Possibly looking at the suppliers and the five forces in each one of these scenarios. We then also want to ask the question, if this is the future environment, what it looks like for each one of these scenarios, how did we get to this state? In other words, what are the likely things that have happened within the industry and outside of the industry that create this scenario? And then ideally in the scenario planning process, you then will create a title for this scenario to help visualize for the strategic decision makers what this scenario looks like. After you've created these scenarios, you then have to think about what are the implications of these scenarios for our strategy, for the issue we're facing, for the strategic decision we have to make. We want to think about our strengths for each one of the scenarios and where are our weaknesses and where are there gaps in capabilities or resources that we must obtain. And we want to think about which strategies might we pursue or which decisions might we make that may pay off in multiple scenarios given the uncertainty. And then finally, what does all this do for our current decision process as we start to think about making a decision today, planning for an uncertain future? We want to think about identifying key indicators and warning signals which will tell us which one of the scenarios are we heading towards. It signifies which scenario we're moving towards and then tells us which strategy might we have to move to to be successful. This allows us to think forward and reason our way backward to potential futures and potential different actions we can take now or may have to take in the future as we gain more information about where the environment is headed. An outcome of this process is this two-by-two matrix that really helps us, one, define the key uncertainties in a very specific way, but then two, define the scenarios. You can see here we have the two uncertainties represent the two axes here. We want to label what the high and low endpoints might look like. For example, if the key uncertainty is economic growth, the low economic growth might be an economic recession and the high uncertainty, high level, might be economic boom. If it's, say, government regulation, the low might be very relaxed or loose government regulation, whereas the high form of that uncertainty might be very tight government regulation that constrains competitive behavior. Again, then for each quadrant and scenario, as we discussed in the last slide, we will have a title and a narrative, a story. You can think about developing a very detailed story of what the world looks like and what the industry looks like under each scenario, again, focusing on key industry players, behaviors, suppliers, government, et cetera. What the implications of each scenario is for the firm, and then ultimately identifying a list of early warning signals, and then strategic decision makers will then track these warning signals relatively frequently to help focus on where the market tends to be moving based on recent changes. This will then help us decide which strategy or strategies we need to pursue. Scenario planning really helps us think about how we can be more flexible and then how we can use the information, the strategically relevant information in the environment to then adapt as the environment changes, and we can be ready to deal with future information coming out and then helping us prepare for future scenarios that the business environment will take.