When the present day, significant advancements in various fields

When observed closely, it is evident enough that uncertainty is
something that people fear a lot. Whether it be buying insurance to secure
themselves from the unseen or try to make contingency plans for the worst case
scenario. Future is something that we are unable to predict, we might get close
or even predict it right using our logic or analyses but getting in perfectly
right every time is next to impossible. In the context of businesses too, the
future and the upcoming events are uncertain and unpredictable. Managers have
to plan in advance for the future circumstances that they might encounter if
they desire the survival and longevity of their business.

In the present day, significant advancements in various fields
especially technological has enabled managers to use various tools and
techniques at their disposal to strategically analyse and take decisions using
the data and information they might have or acquire. Here, a manager has a very
complex task as there are numerous factors which are meant to be considered
when taking account of the organisation’s future. Adapting to change in the
contextual environment is one of the key challenges for managers as they try to
ensure the organisational goals are met and business is running smoothly (Miller,
K. Waller, H,2003)  

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This complex external environment plays a very significant role in the
strategic decision making. This external environment has different levels i.e.
external macro environment and external micro environment. The Macro
environment houses number of factors over which the organisation has no
influence but changes in those factors may have a huge impact on the
organisation’s business activities and strategies as they influence the micro
environment (industry/competitive environment) in which the organisation
conducts its business activities.

In the past, organisations used to make forecasts, a lot of forecasts
actually which were often not met by the organisation as forecasting only
proposes a single path towards the future. It seems it might have been able to
just serve its purpose back then but today’s globalised economies are too
complexly unconnected and interdependent that operating in such market
conditions would require more than just forecasted sales and figures.

Environmental analysis plays a significant role in developing a
sustainable competitive edge. One of the ways to analyse the external
environment is through

 

PESTEL Analysis

PESTEL has been a widely known and used method to analyse the different
factors and environments that have some sort of impact over the business of the
organisation namely Political, Economic, Socio-cultural, Technological,
Ecological and Legal.  PESTEL allows the
managers to identify the environment in which the company operates and also
provides information and data that enables him/her to make predictions about
the situations that they might encounter in the future.

Although PESTEL analysis provides important foundational knowledge in,
conceptual terms, for analyses of the macro environment, it has some limitations
in terms of measurement and evaluation (Yüksel, 2012).

PESTEL does not adopt a quantitative approach to measurement which does
not allow the factors constituting the external environment of the company to
be objectively and rationally analysed (Yüksel, 2012). Also, the analysed
factors are independently evaluated which implies that the factors and
sub-factors in PESTEL analyses may differ in their relative importance.

 

Figure 1: PESTEL Analysis

 

The early forecasts failed as firms failed to meet their predictions
because they operate in a very complex, volatile, uncertain and ambiguous which
makes it very difficult to predict the future. The studies in the late nineties
show that the appropriate tools chosen to analyse the external environment
depends on uncertainty. More complex and uncertain environments require more
sophisticated tools.

                

 

Figure 2: Different tools and techniques

 

Scenario Planning

Scenario Planning revolves around the ideology that the environment is a
very complex and uncertain system can can in the best way be understood from
the multiple and considerable futures. Wack argued that as “the future is no
longer stable it has become a moving target. No single ‘right’ projection can
be deduced from past behaviour. Therefore, we need to accept uncertainty, try
to understand it, and make it part of our reasoning” (Wack, 1985).

Scenarios are not predictions, extrapolations, good or bad futures, or
science fiction. Instead, they are purposeful stories about how the contextual
environment could unfold in time (van der Heijden et al. 2002)

The manager can develop insights into the uncertain future nature of the
environment by surfacing multiple perspectives about changes and complexity in
the environment and a number of possible outcomes are looked upon with an
intention to identify predetermined elements of the future.

 

Scenario planning is designed to be an organisationally based
social-reasoning process based on dialogue and conversation to share
participants’ perceptions of the environment and, engaging in a process of
sense-making through theory building and storytelling (van der Heijden et al.
2002)

There are different steps to Scenario Planning which are discussed
briefly.

 

Step1-
Identifying areas of Concern

The initial stage of scenario planning starts with identification of the
concerns or areas of interest which although not necessary, may be identified
using PASTEL.

 

Step2-Brainstorming
for key uncertainties and trends.

Environmental variables are examined in depth to explore considerable
scenarios. It is needed to identify the uncertainties and factors that have the
highest impact on the business.

 

Step3- Clustering
key uncertainties.

The ideas generated from the previous step are grouped according to
their interrelatedness.

 

Step4-
Prioritising uncertainties.

Each group of interrelated uncertainty is positioned on an
Impact/Predictability matrix.

Figure 3: Impact/predictability matrix

 

 

Step5- Developing
Scenarios

The critical uncertainties identified previously are explored in depth
in order to identify the considerable polar extremes of possible future
outcomes.

 

Step6-
Articulating scenarios

storyline for each of the scenarios is developed after deep exploration.

 

Step7-Identifying
Structural Insights and Potential Discontinuities

By identifying the drivers of change before change itself manifests in
the environment, managers are able to develop strategic responses and actions.
Gaining such an understanding is potentially a major source of competitive
advantage.

 

Step8- System
Behaviour

System model approach to better understand each scenario. system
modelling is achieved by the use of influence diagrams connecting variables
over time and revealing their causal links and relationships and their feedback
loops which are diagrams connecting three or more variables in a causal
relationship.

 

The scenario methodology, by prioritising key environmental uncertainties
for impact and predictability, provides a structured approach to environmental
analysis that is both subjective and organisation specific. The scenario
methodology inherently and explicitly recognises multiple pathways-to the
future. In contrast, the simple methodology underpinning PEST and
its-derivatives implies that the future is given or determined and can be
considered-as a projection of events from the recent past into the future
(Burt, Wright, Bradfield, Cairns & van der Heijden, 2006).

Although scenarios can free our thinking, they can
still be affected by biases. When we are making prediction, we tend to look for
confirming evidence and discount disconfirming evidence, and this bias can
creep into scenario development. Also overconfidence and being too sure about
something may prove fatal.

 

 

 

Conclusion

The
taxonomic classifications of PEST and its derivatives are of limited help to an
organisation in exploring and understanding its environment, because they are
too generic, fail in delivering understanding of the interrelationships and
interdependences among variables, and do not produce a clear understanding of
the (potential)external drivers of change. (Burt, Wright, Bradfield, Cairns
& van der Heijden, 2006)

The
scenario methodology offers a way of exploring and understanding the inherent
ambiguity and complexity associated with the uncertain contextual environment.
It enables managers to proactively embrace the future. Ambiguity, complexity,
and uncertainty can be acknowledged, harnessed, and exploited by organisations
as part of their approach to organisational learning.

 

 

Bibliography:

 

Burt, G., Wright,
G., Bradfield, R., Cairns, G. and Van der Heijden, K. (2006) “The role of
scenario planning in exploring the environment in view of the limitations of
PEST and its derivatives” International Studies of Management and Organisation,
Vol.36, No.3, pp.50-76

 

Miller, K. and
Waller, H. (2003) “Scenario Planning, Real Options and Integrated Risk
Planning”, Long Range Planning, Vol. 36, pp.93-107

 

Schoemaker, P.
(1995) “Scenario Planning: A Tool for Strategic Thinking” Sloan Management
Review, Vol. 36, No. 2, pp. 25

 

van der Heijden,
K., R. Bradfield, G. Burt, G. Cairns, and G. Wright. 2002. The

Sixth Sense:
Accelerating Organizational Learning with Scenarios. Chichester, UK: Wiley.

 

Yüksel, I.
(2012). Developing a Multi-Criteria Decision Making Model for PESTEL Analysis.
International Journal Of Business And Management, 7(24). http://dx.doi.org/10.5539/ijbm.v7n24p52

 

Wack, P. 1985.
“Scenarios: Uncharted Waters Ahead.” Harvard Business Review 63 (5)
(September–October): 73–90.