Thinking long-term

Citation

Millett, S.M. (2011), "Thinking long-term", Strategy & Leadership, Vol. 39 No. 4. https://doi.org/10.1108/sl.2011.26139daa.002

Thinking long-term

Article Type: Thinking long-term From: Strategy & Leadership, Volume 39, Issue 4

Shell scenarios for energy 2050 – an update

About 40 years ago, Royal/Dutch Shell introduced scenarios to corporate strategy and planning. Shell today continues to offer new approaches to the methodology it pioneered and to build upon the lessons it has learned from using its scenarios to prepare for possible futures that are distinctly different from the present. As adopted and developed by futurists, planners, and scenario practitioners around the world, the scenario methodology has evolved many variations, but Shell remains a primary innovator that should be watched closely by others.

In 2008, just before the world realized it was falling into the Great Recession, Shell released two new scenarios for global energy to the year 2050. True to the heritage of Shell’s first scenario developer, Pierre Wack, and his initial team, these scenarios provide stories about plausible end states in the future rather than point projections of key energy statistics. Wack, who died in 1997, had successfully argued that statistical and financial forecasts could be very misleading, even provoking dysfunctional behavior by managers. Instead, he favored scenario narratives that would help managers visualize evolving business conditions and force them to think how they would manage if those conditions began to occur. Neither Wack’s scenarios nor the 2008 Shell scenarios, however, specify any particular sequence of events, as did the first scenarios for the US Department of Defense developed by Herman Kahn in the 1950s and 1960s. To this day, the military continues to use scenarios to designate different paths to an expected result rather than as a description of alternative end points in the future, as Wack proposed for corporate applications.

Shell’s methodology is atypical

Shell continues to generate just two principal scenarios as extremes of a spectrum of plausible futures. The “real” future is assumed to lie somewhere between the two extremes. If managers plan for both extremes, then they would have their “bases covered.”

In contrast, the more common practice among consulting firms that specialize in scenario development is to work with client teams to generate at least four scenarios based upon a structure of the most important and most uncertain industry environmental drivers. Recently, a few consulting firms have begun experimenting with a single-scenario methodology.

Shell called its two global energy scenarios “Scramble” and “Blueprints.” Both are grounded in the assumption that the most important drivers of global energy beyond market supply and demand will be global climate change and carbon management. The first scenario describes a world in 2015 and beyond characterized as a “flight into coal.” This future will only aggravate further our carbon management challenges. By 2040 nuclear energy will supplement coal-burning power plants, although nuclear will not replace coal entirely until at least 2050. In Scramble, government policies will move slowly and global cooperation will be difficult to achieve. In Blueprint, on the other hand, there will be more systematic government policies based on cooperation. Technologies will be developed for alternative fuels and for carbon capture and storage (CCS). By 2040 at least 20 percent of all coal-burning plants with have CCS capabilities, and by 2050 at least 50 percent of new vehicles will be electric or hydrogen-run (see www.shell.com/home/content/aboutshell/our_strategy/shell_global_scenarios/).

Shell’s 2008 scenarios imagined conditions in 2015, 2020, 2030, 2040, and 2050. As each scenario builds upon the previous ones, they are progressive if not sequential, at least by decades. This is an important innovation in the scenario method, because it combines the dynamic element favored by Herman Kahn with the static descriptions of Pierre Wack. This synthesis of the dynamic and static qualities of scenarios seems to be a strong trend among modern developers.

Managers must be cautioned to keep separate in their minds the evolution of multiple trends in external business environments and their own strategic plans to achieve desired objectives within those environments. The first approach is futuring and the second is visioning, which includes planning. Shell is very careful to present its scenarios as alternative outcomes of known macro-trends involving many players, as opposed to Shell’s own desired outcomes. Shell clearly prefers the Blueprints scenario and will do what it can to enable it. On its assessment of the likelihood of achieving this goal, however, I find Shell too modest. As one of the principal international energy companies, Shell can do much to influence the paths of either Scramble or Blueprints. It has the vast resources and capabilities, unlike so many other companies, to make its planning scenarios the futuring scenarios for the rest of the world.

Revising scenarios over time

Even when scenarios are static descriptions of business environments by a target year in the future, they must be revised over time according to changing circumstances. No set of scenarios is ever finished – they mature with time. Shell makes this point well by releasing “Signals & Signposts” in February 2011 as an update to the 2015 scenarios. It is an excellent example of continuous business environment monitoring. Shell’s 2008 scenarios did not anticipate record prices for crude oil, the Great Recession, or the BP oil spill in the Gulf of Mexico. The new report takes these recent events into consideration. The scenario team, however, re-affirmed that events have not fundamentally changed the drivers of the scenarios, especially trends for global population growth, urban sprawl, strong economic growth in developing countries, increasing demand for energy, and general “policy drift” among governments. Shell asserts that the global demand for energy could triple from 2000 to 2050. In this set of conditions, global climate change and carbon management will dominate all other issues.

The new report alludes to scenarios that have not been made public by Shell. As many companies do, Shell generates some scenarios for public consumption – as a form of thought leadership and public relations – and others for internal purposes. For example, the developers also prepared a proprietary “Recession & Recovery” scenario that influenced Shell’s business decisions in 2009 and 2010. The public “Signals & Signposts” report also mentions a number of micro-scenarios within the larger Scramble and Blueprints scenarios.[1] Apparently Shell is continuing a practice from the 1980s known as “cascading scenarios,” much like the Russian nested dolls within a doll. This allows for the development of micro-scenarios ranging from the most general to specific business cases.

Shell more or less avoided some controversial issues in their publicly released scenarios: how the price of oil impacts global economic growth and whether the world has or has not hit the peak of global oil reserves. The implicit message of the scenarios is that oil prices are driven by external factors and not by oil company actions. While “Signals & Signpost” gives due credit to the new field of behavioral economics in explaining the dynamics of world demand and markets, it does not fully recognize how strongly behavioral economics impacts Shell’s own corporate culture and actions of market speculators.

Wack asserted 40 years ago that no forecasting method can reliably predict the future. The Shell scenarios prove his point: even the richness of scenarios cannot anticipate disruptive events, or “black swans” of financial panics, market speculations, oil spills, political upheavals in Arab countries, and earthquakes. Scenarios, however, can be very useful in providing broad context for understanding the plausible impacts of events when they occur. Scenarios are equally useful for identifying really important trends and monitoring them, so that managers may learn to recognize changes when they happen and respond quickly to them. With scenarios being used and improved over four decades, one of Wack’s major goals is being realized at Shell: managers must think imaginatively about the long-term future and creatively use that thinking to prepare for both the ordinary business and the times of turmoil. This is a lesson that all managers everywhere need to take to heart.

Stephen M. MillettPresident of Futuring Associates LLC, located in Columbus, Ohio (smillett@futuringassociates.com). Previously he was the resident futurist at Battelle, the world’s largest, independent research and development organization. He is a Contributing Editor of Strategy & Leadership.

Notes

1. www.scribd.com/doc/49606029/ Shell-Oil-Signals-Signposts-2050- Economic-Projections-Report February 11, 2011.