Royal Dutch/Shell

The planning system that was established required all operating units to make cash flow predictions, which were then pulled together and analyzed by the Group Planning team to give an overall company projection. It was quickly apparent, however, that the planning system did not provide results reliable enough for action. Indeed, the numbers generated by the operating units changed dramatically from one projection to another. The company was at a loss as to how it could actually improve this situation. It became clear that Shell was in something of a crisis, unable to make decisions because it could not accurately forecast its financial position.

The Group Planning team, which had been created to analyze the returns of the operating units, was headed by Pierre Wack. Wack had some previous experience in planning and was aware of the technique of scenario planning. The ability to ‘think the unthinkable’, as Herman Kahn advocated in his 1967 book The Year 2000, seemed, in Wack’s mind at least, to be just what Shell was searching for. He recognized that what Shell was trying to forecast was essentially unpredictable and thus suggested scenario planning as a possible technique.

Testing the Value

To test out the possible value of this technique, Wack led his Group Planning team in a study of what the year 2000 would mean for the oil industry. Following the advice set down by Kahn in his book, the team began to consider what they knew to be predictable. They started with the price of the oil itself. In order to determine what was predictable and what was uncertain, the group used supply and demand as a basis for deconstructing the oil price.

The group noted that the global demand for oil had grown consistently by 6% to 8% per annum since 1945 [1] and, as a result, initially identified demand for oil as a predictable truth. Then, the group turned its attention to supply. Wack liaised with the engineers about possible problems with supply, but was told that they could seriously foresee no technical problems would affect the availability of oil. While some people may have been satisfied with this situation, Wack wanted to explore other factors that could possibly impact upon supply.

Anticipating Problems

In order to elicit possible problems, the Group Planning team decided to conduct a stakeholder analysis. The group worked through their lists of stakeholders and became intrigued by the role of host governments, i.e. the governments of the oil-producing countries that allowed the oil companies to operate there. It was felt the best way to explore possible situations arising from the involvement of the host governments would be to role-play the various characters involved. The group members took on the role of a major host government and analyzed a range of available policy options. It became clear to the group that there could, quite plausibly, be some situations in which the host governments would not be acquiescent to the desires of the oil companies.

The Group Planning team realized that many of the oil-producing countries were not as reliant upon the funds generated by allowing oil companies access to oil supplies as had been previously suspected. Moreover, the team realized that this fact could actually be utilized to Shell’s benefit. Indeed ‘by only modestly throttling supply in a market of inelastic demand, the loss of volume would be more than compensated for by the income resulting from the sharp price increase.’ [2]

This meant that it actually made more sense for the host governments to reduce the supply of oil, as it would give them increased income while conserving their reserves. In order to realize and agree to such a strategy the host governments would need to unite and use their combined bargaining powers. As Wack and his team were exploring this scenario, it just so happened that the host governments were getting together in a newly formed group known as the Organization of Petroleum Exporting Countries (OPEC).

The realization of the scenario Wack and his team had been exploring convinced the team that they had found an extremely useful technique. However, when Wack initially presented the group’s findings to senior management, his efforts were not particularly well received. Despite this apparent dismissal, the Group Planning team continued to discuss the scenario, exploring it further and attempting to construct possible responses.

In 1973 the scenario became a reality. The Yom Kippur War between the Arabs and Israelis created a political embargo that limited the supply of oil. This saw the price of oil rise five-fold. Many of the oil companies were simply not prepared for a crisis of this magnitude and their fortunes suffered as a consequence. The Group Planning team at Shell had, however, made enough preparations to allow the company to act on the crisis well in advance of its competitors. This stroke of good fortune saw Shell rise to become the second most profitable oil company, up from only seventh the previous year.

Conclusion

Once it became clear that the economic value of the Group Planning team’s work had equated to billions of dollars [3], the senior management team that had largely dismissed Wack’s warnings a few months before suddenly became very interested. It was apparent to everyone at Shell, and many other businesses around the world, that scenario planning was a technique that could be used to plan for possible futures. In this respect, scenarios offered what the traditional forecasting methods never could. Scenario planning has been a permanent business tool at Shell ever since.