INDUSTRY SCENARIOS AND COMPETITIVE STRATEGY UNDER

UNCERTAINTY

Introduction • How does a firm choose a competitive strategy when it

faces major uncertainties about the future• The sources of uncertainty are numerous and originate

both within the industry band in the industrys broader environment

• Uncertainty has recently incred+ased dramatically due to flucuating oil and other raw material prices, swing in financial and currency markets, deregulation, financial and economic crises, electronic revolution, globalization etc.

• Strategies are frequently based on the assumotion that the history will repeat itself, or on managers own implicit forecasts about the most probable future of an industry

Scenarios as a planning tool• A scenario is an internally

consistent view of what bthe future might turn out to be

• Macroeconomic and macropolitical are macroscenarios

• These are too wide to be sufficient for effective companys strategy, and dont provide answers to technological change behavior of competitors, factors driving industry etc

Industry scenario

• Scenarios allow a firm to move away from dangerous single-point forecast of the future, in the instarnces when the future cannot be predicted

• In competitive strategy the appropriate unit for analysis of mscenarios is the industry, those are called industry scenarios. By focusing on the industry macroscenarios also make sense

• An industry scenario is not a forecast but one possible future sructure

Constructing industry scenarios

Identifying industry scenarios• To identify uncertainties each element oif industry

structure must be examined and placed into one of three categories:

1. Constant elements2. Predetermined elements and3. Uncertain elementsThe firts two are parts of every scenario, while the third

distingiushes scenariosBy considering only apperarent trends important

discontinuities may be overlookedThe most difficult changes to predict are those originated

outside the industry

Independent VS. Dependent scenarios

• Converting the list of uncertain structureal elements into scenarios begins by dividing them into independent and dependent uncertainties

- Independent uncertainties are those elements of structure whose uncertainty is independent of other elements of structure

- Dependent uncertainties are those elements of structure that will be largely or completely determined by independent uncertainties

Cont.• Independent uncerta9inties are the scenario variables on which

scenarios are based.• Only independent uncertainties are an appropriate basis for

constructing scenario because they are the true sources of uncertainty

• Separating uncertain elements of industry structure into those that are scenario variables and those that are independent requires determination and identification of causal factors

• The uncertainty around the causal factors of each scenario variables leads to scenarios.

• Assumption about scenario variables will determine the outcome of dependent uncertainties.

• Then predetermined and constant elements are added to the picture to complete the profile

Determinants of future industry structure

Identifying a set of scenarios• An industry scenario is based on a set of assumptions about

each of the scenario variables derived from the causal factors

• Constructing a set of industry scenarios is rather simple once the scenario variables had been determined if there was only one scenario variables

• However the number of relevant scenario variables is greater and thus the number of possible combinations generated multiplies

• There are two ways to limit the proliferation of scenarios:1. Reducing the number of scenario variables2. Reducing th number of assumptions made about each

Consistency of assumptions

• Internal consistency of scenarios is partly ensured by separating scenario variables from dependent ones.

• Another critical requirement is the consistency of the assumptions made about each scenario variable with each other

• Often scenario variables affect one another and thus some combinations of assumptions about them are not internally consistent

Analyzing scenarios• The nnext step is to analyze the implications of each

scenario. • The analysis of a scenario involves the following:- Determining future industry structure under the

scenario- Developing the implications of the scenario for

industry strucutural attractiveness - Identifying the nimplications of the scenario for the

sources of competitive advantage• An importnant part of analyzing a scenario is

determining when it will become clear that the particular scenario has come to pass

Introducing competitor behavior into scenarios

• If a firm has a dominant position in its industry or if competitor has little potential effect on structure the analysis of each scenario ends at the industry level.

• However it usually isnt the case• Strategic mapping is useful tool for integrating predictions of likely

competitors respsonses under different scenarios• Strategic mapping allows the simultaneous display of all comptitors

expected behavior under a scenario. It also facilitates the analysis of interactions among competitors and their responses to each others moves

• If the behavior of one or more competitors under a scenarion is both uncertain and likely to have an important impact on competition this introduces an additional scenario variable into the scenario.

• All previos scenario have to be split in two or more additional scenarios based on the assumptions of the competitors behavior

The number of scenarios to analyze

• A good starting point to scenario analysis is to analyze polar scenario first. That is those scenarios that are most widely separated. The polar scenarios lead to the most different industry structures and thus will help bounbd the range of strategic options

• The next scenario analyzed should be one where structural outccome is expected to differ signmificantly from the polar scenarios

• The scenario deemed most likely to occur should also be analyzed

• Etc...

Attaching probabilities to scenarios

• Strategic implications of scenarios are partly a function of their likelihood of occuring

• In attaching probabilities usual problems are bias and conventional wisdom

Industry scenarios and competitive strategy

• Having developed and analyyzed a set of industry scenarios,the next task is to use them to formulate the strategy

• A firms optimal strategy would usually be different under each scenario if the firm knew the scenario would occur

• A firm does not know which scenario will occur and therefor choose the best way to cope with uncertainty in selecting strategy given the resources

• Some firms prepare just for one scenario, while others if having fresources may prepare for all possible scenarios

Strategic approaches under scenarios

• There are five basic approaches to dealing with uncertainty when selecting adequate strategy:

1. Bet on the most probable scenario2. Bet on the best scenario3. Hedge- a firm choses a strategy that produces

satisfactory results under all scenarios4. Preserving flexibilty, chosing the strategy that

preserves the flexibility of a company until it becomes more apparent which scenario will actually occur

5. Influence It is often possible and desirable to employ combined and

sequencing strategies

Factors influencing firms approach

1. First-mover advantage2. Initial competitive position3. Cost or resources required4. Risk is a function of following factors:Timing or resource commitmentThe degree of inconsistency of strategies for alternate

scenariosRelative probability of the scenariosThe cost of changing strategies once uncertainty is

resolved5. Competitors expected choices

Scenarios and the planning process

• Every plan is based on industry scenario in one form or the other.

• Although industryscenarios are built on the business unit level, corporate level may be of assistance thgough providing :

Macroscenarios as an inputTechnology forecastingTraining and challengingCorporate risk analysis

Final thought

• The industry scenario is not a sufficient tool for strategy formulation, but is a necessary condition and provides a framework for formulating strategy under conditions of uncertainty