Shell Oil: Scenario Planning

One could argue that targeting a critical vulnerability before it materializes ”a major determinant of Lowe s success ”might require clairvoyance and that imparting such a capability is extremely difficult. But Shell Oil s experiences suggest that scenario planning can be employed as a useful technique to identify not only your own critical vulnerabilities but also those of your rivals, before they are aware that they have them.

Scenario planning starts by deriving a set of strategic uncertainties, things that are both highly uncertain and highly significant. The values taken on by those uncertainties determine a set of potential outcomes and the conditions that generate them. Since they are uncertain, and since you cannot know how they will evolve or what their values are, you assume both extreme values for them and evaluate how the different combinations of these extreme values define different scenarios. Once you have defined your scenarios, you assume in sequence that each one will be the one true future, and you explore what the world would look like if this were indeed your future prediction. Then you plan, practice, and prepare for each scenario, just as you would if the condition were indeed going to develop.

Shell Oil pioneered the corporate use of scenario planning in the late 1960s to examine drastic, unexpected changes in the international oil market that could not be predicted through simple extrapolation of historical trends. When oil prices had been stable at less than $4 per barrel, Shell, unlike its many counterparts, was most interested in the seemingly improbable events that could restrict supply to the Western world and cause prices to soar to $40 per barrel. It was less interested in optimizing the allocation of crude supplies among refineries and pricing for distilled products based on $1- to $2-per-barrel fluctuations in the price of crude.

Shell s scenario-planning efforts addressed such contingencies as crises in the Middle East that could disrupt the flow of oil to the West and the emergence of regimes hostile to Western interests in the oil-producing nations most important to Shell. Shell was therefore able to identify its own critical vulnerability in 1972 and proactively prepare for what would have otherwise been a catastrophic event ”the loss of oil supplies from Iran, Libya, and Algeria.

When these supplies were actually interrupted in the years between 1979 and 1981, the flow of oil ”and profitability ” continued without serious interruption. As a result of its extensive scenario-planning efforts, Shell had right- sized its fleet of oil tankers relative to the reduced flow of crude from the Middle East. And it had built a flexible and effective oil-trading operation that replaced the lost supplies with long- term forward contracts under which it prepurchased large quantities of oil at locked in prices. ^[5]

Leadership Lessons

Instead of trying to reason from history and data to predict what will happen in a perfect world, scenario analysis uses intuition, experience, and introspection to delimit the range of things that might happen in a rapidly changing and disordered reality. This range of outcomes can, in turn , be analyzed and understood to identify critical vulnerabilities.

Shell used scenario analysis to identify its own critical vulnerability, but it could very easily have used scenario analysis to identify competitors critical vulnerabilities or key customer needs that were not being served . Moreover, Shell moved quickly to act on its scenario-planning efforts, even though the scenarios identified were neither immediate nor certain, and subsequently successfully protected its own critical vulnerability.

^[5] Wack, Pierre, Scenarios: Uncharted Waters Ahead, Harvard Business Review , September/October 1985, 72.