CASE STUDY

Integrating Scenarios into

Strategic Planning
at Royal Dutch/Shell
By Paul J. H. Schoemaker and
Cornelius A.J.M. van der Heijden

Shell developed a number of new methodologies to make

scenario planning more meaningful to line managers.
It also took steps to integrate the learning that takes place
at the SBU level into the Group Planning System.

S
cenarios have been an important tool for enhancing First, Shell conducts scenario building and competitive
strategic management at Royal Dutch/Shell since the position analysis as parallel activities—both guided by a
early 1970s. But in the early 1980s management con­ strategic vision, or elements of one, already in place. Then
ceded that Shell was not getting the full benefit of its con­ information and insights gained from these analyses are used
siderable investment in the scenario process. Part of the to amplify the original strategic vision. After several rounds
problem was that scenario development was an episodic of this learning process, Shell managers are ready to write a
activity—an excursion from the routine planning process. set of strategic options worthy of detailed study. Only after
Furthermore, scenario planning was not thoroughly integrat­ developing the scenarios, the competitive analyses, and the
ed into Shell's Group Planning System, the annual cycle of strategic vision are the managers fully prepared to assess the
strategic and business planning (see Exhibit 1). Shell consequences of acting on these options.
responded to the challenge by developing a number of new
methodologies to make scenario planning more meaningful
to line managers. It also took steps to integrate the scenario Paul J. H. Schoemaker collected insights on Royal/Dutch
team learning that takes place at the SBU level into the Shell's planning group in London during a two-year sabbati-
Group Planning System. The new approach features: cal from the Graduate School of Business at the University of
Chicago. He now heads Decision Strategies International, a
● Focused scenarios. Chicago-based consulting firm and is a seniorfellow at
● Competitive positioning. Wharton's SEI Centerfor Advanced Studies in Management.
● Strategic vision. Cornelius A.J.M.van der Heijden was Shell's head of scenario
● Options management. planning and internal consultancy and is currently Professor
Integrating these four elements in an iterative process of Business Administration at the University of Strathclyde,
helps managers make practical use of what they've learned Glasgow.
from experimenting with scenarios.
May/June 1992 41
 are investigated for the first time—such as the fall of the
The Components of the Framework Soviet Empire or the passage of the U.S. Clean Air Act—the
risks and opportunities have not usually been well articulat­
ed. Scenarios can contribute a great deal to the organization­
How are these components developed in an individual al learning process by offering various overviews on these
Shell operating company or sector? As a starting point, complex issues, and by examining their implications.
assume that a strategic vision exists for the unit, but it has Step 3: Organize the scenario around a logical con-
not yet been refined or focused, nor is it shared by the whole cept. Issues, such as restructured growth or environmental-
management team. ism, define a scenario and insure that its elements are
consistent. These issues also communicate a basic message,
Multiple Scenarios such as, growth involves change, or worldwide public opin­
Scenarios are tools for improving the decision-making ion is turning "green." This is not just another constraint to
process against a background of possible future environ­ reckon with, but rather the onset of an entirely new business
ments. They should not be treated as predictions capable of environment. However, even at this early stage, quick and
influencing the future, but neither are they science fiction dirty quantification can help determine whether a scenario is
stories prepared merely to titillate the imagination. Shell plausible and internally consistent. The team works to deep­
scenarios are focused on: en and expand the analysis. One way is to consider the
● Issues and information that greatly concern Shell's events from the point of view of various key actors. Another
decision makers. way is to refine the quantification. And finally, the commu­
● Elements in the environment that are determinable and nications process takes center stage, since scenarios are use­
somewhat predictable. ful only if they are well understood by all the stakeholders.
● Trendbreakers—elements that will affect a system in Step 4: Focusing the Scenario. By establishing defined
unpredictable ways, but with understandable dynamics. boundaries for the scenarios—in terms of time frames, geo­
● Potential surprises of major significance. graphic regions, industries, business sectors, or major pro­
The scenarios benefit the organization by stimulating jects—the team brings them into sharper focus. Decision
managers to think together in systematic and disciplined makers need to see their concerns reflected in the scenarios,
ways. As a result, the team members become more insight­ but conceptualized in ways that further new understanding.
ful observers of the business environment, capable of recog­ As another way of bounding the future, Shell teams some­
nizing change rather than overlooking or denying it. For times investigate antithetical scenarios. To be useful, scenar­
complex global issues, multidisciplinary teams are needed to ios that differ sharply from conventional views of the future
build integrated scenarios. must be made believable, at least to some degree.
Step 1: Selecting the Issues. There are a number of ele­ Some traps to avoid. Shell teams are trained not to just
ments that each Shell global scenario process has in com­ write best case/worse case or high/low scenarios. By avoid­
mon. And yet, the process is more art than science—there is ing the oversimplified thinking that such scenarios engender,
no simple formula for generating good, useful scenarios. Shell managers learn more about the real challenges that
In most cases, however, the first step is to select the criti­ complex futures pose. Likewise the scenario-building teams
cal issues that need to be examined. Some issues appear in avoid assigning probabilities to scenarios. Indeed, the ques­
most Shell scenarios—economic growth, product demand, tion of probability is not really appropriate, since Shell's sce­
and energy prices. Others will be added or subtracted as the narios are not considered business forecasts but rather
decision agenda and the external environment change. A previews of possible business environments that warrant
major initial challenge for the scenario authors is to antici­ thinking about in advance.
pate what issues and understandings will be of greatest value
several years down the road when the scenarios are in use. Competitive Positioning
Involving the whole management team at this early stage Competitive positioning is at first a process of under­
increases the likelihood of eventual success, for it takes the standing all aspects of a business unit's competitive situa­
as yet unstructured concerns and anxieties of the team as a tion. The second step is to devise ways of improving that
starting point. position. Unlike scenarios, which begin with a global per­
Step 2: Analyze the Areas of Concern. A detailed anal­ spective, the focus of competitive positioning is on the
ysis of the areas of concern should pinpoint the driving microenvironment. Appropriate segmentation of the busi­
forces, predetermined elements, critical uncertainties, possi­ ness is a critical first step. This is a perennial issue for Shell,
ble discontinuities, and linkages with other areas of the busi­ because a number of its units have grown incrementally to
ness environment. At Shell the areas of concern usually exploit potential synergies between existing businesses and
include energy, economics, social change, the environment, new activities. As a result, Shell is a highly interconnected
politics, and technology. When emerging areas of concern company with an organizational structure and an accounting
42 Planning Review
 system that do not always reflect the activities of segments organizational capability, and product excellence create
of its operations. Shell has an intricate internal structure, a competitive advantage that make the strivings of would-be
high degree of local autonomy, and numerous linkages rivals much more difficult. Shell identifies explicitly what
between business units. These include both business transac­ barriers affect major competitors in each business segment.
tions and shared technology. It searches specifically for new business opportunities in
Shell employs a business segmentation module to identi­ areas where its distinctive competencies can be applied to
fy strategically independent units within the organization. create value for its customers, and thereby acheive a sustain­
This segmentation might be justified on the basis of the geo­ able competitive advantage over potential rivals.
graphical area of operation, features of the customer groups Product/market differentiation is a critical and complex
served, types of products or services, or the technology used activity. One reason for the complexity is that Shell's offer­
to produce products. Shell's guideline for segmenting busi­ ings have many components— service, trust, financing, and
ness activities into independent areas of operations is: Does guarantees, to name just a few. In addition to these factors,
it boost the profit potential and does it improve the competi­ the differentiation process also examines structural ele­
tive focus? ments, such as technologies, cost structures, organizational
In the oil business, there are plenty of competitors for the design, culture, and distribution systems. By defining ways
profit that can be derived from a barrel of crude. these differences can be exploited to create customer value,
Competitors include suppliers, customers, other producers, Shell identifies profitable niches where it can systematically
and producers of substitute products or services. Even outperform its competitors.
potential market entrants, like shale oil producers, or even The aim of the competitive positioning process is to learn
energy-saving products (nega-barrels), can be a force to systematically as much as possible about the competitive
reckon with under some circumstances. Various barriers, issues between each Shell business and its rivals. The pro­
such as patents and licenses, protect companies from the cess looks at both soft analysis, such as a competitor's objec­
forces of competition. Other factors—such as economies of tives, capabilities, and personalities, as well as hard data on
scale, sunk costs, technological know how, customer loyalty, costs, market share, growth rates, and innovations.

May/June 1992 43
 Like a beacon atop a lighthouse, the strategic vision illu­
minates the future from a particular vantage point. With this
sharply defined perspective, managers can quantify the
resources they need for a leadership position in the market
with the most profit potential. However, detailed financial
analyses are not the primary purpose of the strategic vision
process. In Shell's experience, over emphasis on financials
at this stage tends to draw attention away from innovative
strategic thinking. Shell managers recognize that strategic
options represent significant value, like financial options
traded at option exchanges. They represent invisible compa­
ny assests.
Shell's intention during strategic vision development is to
reveal the potential of capabilities embedded in the organi­
zation which can be strategically organized to produce sus­
tainable competitive advantage in selected businesses. The
process requires a search deep in the organization, and
depends for success on open communications and creativity
motivators. Once articulated, explained, and adopted, this
strategic vision then becomes both the guiding perspective
and the driving force for several levels of the organization.
Such consensus greatly simplifies decision making, often a
complex process at Shell.
Options Management
Once Shell managers have developed a strategic focus for
a business, they begin the formal process of defining major
Strategic Vision strategic options and their consequences. Option creation—
After the competitive-positioning and scenario-building the fourth methodology—converts everything the planning
processes have deepened Shell managers' understanding of team learned from developing the scenarios, competitive
their business' micro and macro environment, the next step positioning, and the strategic vision into a unified system that
is to refine the strategic vision. At Shell, the term strategic powerfully influences Shell's decision making.
vision means insight, not clairvoyance. Performed systemat­ Stage 1: Option Generation. A review of current busi­
ically, the process helps each operating company or sector ness assumptions often uncovers some new options. For
develop an understanding of what it wants to be in the future, example, an option may may have been previously dis­
what it can be, and how to reach this goal. Making the vision missed because of internal hurdles and cumbersome deci­
real requires conviction, creative foresight, and a practical sion procedures. Or, an option might have been tainted
sense of what is feasible. because it was associated with a previous business failure.
After defining the vision, Shell managers reassess the By conducting post mortems on ill-fated projects, biases
strategic focus of the scenarios and competitive analysis. against good strategic options may be uncovered and atti­
This process sounds complex, but it actually simplifies tudes changed. Other options emerge from investigating
issues for the business unit decision makers. After agreeing new technologies through joint ventures or experimental
on how a business unit should evolve—that is, what it wants projects.
to be and how to get there— Shell managers can focus their Stage 2: Estimating the Consequences. What are the
attention on the most relevant events, trends, and competi­ financial, competitive, and strategic consequences of choos­
tive behaviors. At Shell it typically takes several iterations of ing a promising option? To find out, Shell employs estima­
the process outlined in Exhibit 2 before a sound strategic tion techniques ranging from the intuitive (best guesses) to
focus becomes apparent and accepted. Throughout this pro­ the mathematical (simulation models based on complex
cess, managers strive for an ever greater understanding of probability distributions). To display the consequences of a
where industries are headed, how technologies are develop­ number of options, Shell managers use decision trees to
ing, and how society is changing. As a result, Shell man­ show the relationship of sequential decisions and key uncer­
agers gain deeper insights into how to identify profit tainties. This is especially useful for displaying the choices
potential, and what moves must be made now to establish a in exploration and drilling operations. Monte Carlo simula­
favorable position in the future market. tion is another valuable tool for studying the uncertainty and
44 Planning Review
 risk of an option. For example, this technique can be able to management at all times. They should not be judged
employed to look at profit or market share models based on until they are fully analyzed in terms of their financial, com­
various scenarios. petitive, and strategic potential.
Stage 3: Selecting Options. When choosing among
Implementation
options, it's critical to select the right decision mechanisms.
Shell managers use various quantitative techniques: In the early 1980s Shell's Group Planning consultancy
• Decision analysis offers a rigorous means of making developed an operational program to apply its new concep­
systematic trade-offs among competing objectives in an tual framework. This program used an action-research
uncertain situation. approach to implementing the program at both the Operating
• Options theory makes it possible for managers to assess Company and Sector levels. Initially, the Group Planning
the value of avoiding commitments or delaying decisions representatives, acting as internal consultants, had the job of
that are expensive to change. facilitating the process. But lately the local business plan­
Stage 4: Option Management. At Shell, strategic ners have been encouraged to take on that role.
options are seen as major company assets requiring careful In the first phase of implementation, which takes about
management. two weeks, planning facilitators interview the local manage­
• Game theory can clarify how opponents would be like­ ment team about the current strategic vision and the under­
ly to react to Shell's adoption of a strategic option. For lying business assumptions. After some discussion, a
example, Shell has used game theory to review options strategic evaluation of the business situation is made using
involving competition for market share through pricing, Shell's conceptual planning framework (see Exhibit 3). This
negotiations with governments, or restructuring of mature evaluation usually suggests that a more detailed work pro­
industries. gram is needed. This will constitute phase two. Primarily
Ultimately, regardless of what technique is employed, the conducted by the operational group, this second phase can
decision to select an option is a matter of judgment. By last from three to six months.
approaching these decisions as a team, and putting a high Lately, Shell has encouraged Operating Company plan­
value on consensus, Shell benefits from the expertise and ners to assume more of the responsibilities formerly
experience of all of the members of the group reviewing the assigned to the Group Planning representatives. However,
options. since most Shell line managers assigned to the job of planner
Traps to avoid. The option management process can go had little if any experience using the technologies the pro­
awry if the group's hidden agenda is to consider just one pre­ cess requires, an extensive training program had to be estab­
ferred option and several "straw-man" options. It is also cru­ lished. Fortunately, operating managers are rotated through
cial that the process remain apolitical. The various strategic the planning job frequently, and as a result, knowledge of the
options should be carefully documented and readily avail­ Continued on next page.
May/June 1992 45
 S H E L L , from page 45.

process and its techniques have moved swiftly throughout

the organization.
Shell emphasis, throughout the process, is on team learn­
ing. With line executives in charge of both planning and
implementation, learning and acting become inextricably
linked. When it's time for a performance review of the plan­
ning effort, the team is highly motivated to understand the
reasons for failure or success. This puts a premium on open
communication and discourages defensive behavior. One of
the larger aims of the planning process is a broad communi­
cation of corporate direction, so that every unit knows
where it fits in the total picture. This is encouraged, in part,
by concentrating every group's attention on the needs of the
current and new customers, or end users of products or ser­
vices. As more and more of these groups succeed, Shell is
increasingly focusing on its managers' need to be recog­
nized and rewarded for all the innovation and risk taking the
new planning process requires. □

46 Planning Review