June 2015

The power of scenario planning

  • By James Deverell, Director, CSIRO Futures

Smart thinking about possible futures can allow the industry to be prepared for uncertainty

We live in a world that is increasingly interconnected and rapidly changing. New business models and disruptive technologies are creating new opportunities and threatening established businesses at a faster rate than ever. This is being driven in part by the globalisation of science and technology, as well as investment in research and development around the world.

Emerging technologies are rapidly reshaping operations in many industries. In mining, automation and remote operations are improving productivity and worker safety, and advanced sensor networks are creating vast amounts of data that can be used to monitor operations and improve production efficiency by looking at both local operations and end-to-end systems optimisation.

Looking further into the future, a number of technologies have the potential to disrupt entire sectors. For example, additive manufacturing could disrupt physical supply chains by enabling on-site production of replacement parts and equipment. In the mining sector, advances in metal recycling could one day enable new business models and change industry fundamentals by replacing assets with access. More prosaically, the development of materials such as graphene could create substitutes to base metals in downstream applications.

Alongside these emerging and disruptive technologies, socio-economic conditions are also changing rapidly. Demand for resources has grown faster in the last 20 years than at any point in history, fuelled largely by rapid economic growth and urbanisation in Asia. By 2025, Asia will account for over half of the world’s economic output. At the same time, environmental and social impacts are drawing increased scrutiny in both developed and developing countries. Today, 95 per cent of the world’s largest 250 companies conduct sustainability reporting on a regular basis, compared with 35 per cent in 1999.

To ensure continued growth and prosperity, the mining sector will need to anticipate and respond quickly to these emerging technologies and socio-economic shifts. This will require strong innovation leadership and capacity – this is the ‘innovation imperative’. A failure to innovate and build innovation competency is an increasingly existential strategic risk. It will also require understanding where to innovate to take advantage of new opportunities and mitigate future challenges.

Scenario planning

Scenario planning is a powerful tool that can provide insights into the potential impact of these shifts and guide innovation planning, at both a sector level and for individual companies. Scenarios are evidence-based narratives of the world at a future point in time. Unlike forecasting, scenario planning is not intended to give a definitive prediction of the future, but rather to communicate a wide range of possible outcomes and the consequences of each.

The technique has its roots in the resources sector, with Shell being one of the early pioneers. According to their own corporate reports, it helped them to ‘see future prospects more clearly, make richer judgements and be more sensitive to uncertainties.’ Their scenario planning process is often credited with helping them successfully navigate the oil price shocks of the 1970s.

Below, we briefly look at three ways that scenarios can be used to guide decision making in the resources sector. Firstly, they can be used as an input into creating national and sector-level R&D roadmaps and planning. Secondly, they can be used to inform corporate innovation strategies and identify future opportunities to build competitive advantage. And thirdly, they can be used to continuously validate the assumptions behind investment decisions in individual research projects.

Sector technology roadmaps

At a national and sector level, scenarios provide a framework for thinking about trade-offs in the allocation of finite innovation inputs and capacity (labour, capital, government expenditure, etc) across a range of possible futures. By identifying common features across scenarios, sector-wide technology roadmaps can be formulated that optimise resource allocation under the widest range of scenarios.

Scenarios are a useful tool for communicating complex ideas and building a platform for change across a diverse set of stakeholders by putting outcomes in the appropriate context for individuals. Scenario planning is useful not only to understand possible futures and react to them, but also to guide proactive actions that will influence ideal outcomes.

For example, CSIRO recently built upon our strategic foresight work to explore the implications of long-term global trends in the mining sector. We used these trends as the basis for a scenario planning exercise for the mining sector in Chile. Working closely with the Chilean government, industry and researchers, CSIRO identified four plausible future scenarios for the mining sector in Chile:

  • In a ‘Mining Powerhouse’ scenario, demand for copper remains strong well into the future, driven by continued growth in Asia. Mining companies successfully harness science and technology innovations to drive production efficiency and increase output to meet this strong demand.
  • In a ‘Strong Services’ scenario, global mining activity slowly shifts towards developing countries and mining-related economic growth in developed countries becomes increasingly dependent on the upstream knowledge economy: the mining equipment, technology and services (METS) sector that serves overseas demand.
  • In a ‘Sustainability Leader’ scenario, sustainable mining practices become increasingly important to social license to operate. This creates challenges for existing miners but also opens up opportunities for new types of services that support environmental and social sustainability.
  • Scenarios can also be used to identify major risks associated with negative futures so that strategies can be developed to mitigate them. In a ‘Collapse of Copper’ scenario, demand for copper plummets, due to a combination of weak demand created by substitutes and lack of competitiveness from a failure to improve production efficiency.

These four scenarios were developed through consultations with over 50 senior leaders across the Chilean government, mining industry and research groups. They were used as the basis for both a sector-level R&D roadmap and to communicate complex possible futures in a simple manner to build a platform for change across a number of different stakeholders. This is enabling the industry, government and researchers to work together to prioritise R&D projects and identify crossover opportunities into other sectors of the economy.

This methodology is equally applicable to the Australian resources sector. Economic conditions and the mix of resource outputs are different in Australia, so the scenarios that emerge are likely to be different; but the underlying value of the exercise is similar. For example, one obvious scenario that could be considered is continued high Australian labour costs and low global commodity prices. In that scenario, Australian primary industries (including mining) might suffer, but it could create new opportunities to export high-value, high-margin equipment, technology and services overseas.

photo of underground tunnel

Corporate innovation strategy

In addition to guiding R&D roadmaps at a sector level, scenario planning can also be used by boards and executive teams to guide corporate innovation strategy and investments. Resources companies often find it difficult to realise full value from their innovation investments. Recent interviews that we conducted with senior executives in the Australian resources sector revealed several key reasons behind this.

Many of the executives we spoke with reported that innovation is often stymied by a myopic focus on short-term results driven by shareholders, with opportunity for better long-term innovation strategy and planning. They also reported that the industry lacks creative and innovative thinkers who are open to outside ideas and new ways of doing things. And they indicated that the industry’s aversion to risk prevents it from considering the impact of truly disruptive technologies. All three of these factors make it difficult for the industry to keep up with rapid technological and socio-economic changes.

Used effectively, scenario planning can help companies overcome these barriers and provide a basis for stimulating senior management discussion on a number of important questions. How will technological and socio-economic change impact your company? How can you anticipate these changes and harness them to create competitive advantage by getting ahead of the field? What emerging technologies do you need to be looking at now?  How should you most effectively allocate limited R&D resources?

Just as market and competitive analysis is a key component in developing a business strategy, scenario planning can be a used to assess external social, economic, environmental, and technological trends and develop innovation strategies to meet the opportunities and challenges they present. This can create opportunities for competitive advantage by anticipating change faster than the market and help build organisational resilience against future risks.

Evaluating research projects

Our interviews with mining executives also revealed a common concern that long-term market trends (both inside and outside the sector) can undermine the viability of innovative research projects. For example, a change in market conditions – such as the emergence of a new technology, a sudden change in the cost of an input, or a new low-cost producer coming online – can turn a financially and technically successful project into an unsuccessful one.

Scenario planning can be a useful tool to mitigate this risk by continuously evaluating ongoing R&D projects. This involves explicitly stating the assumptions and conditions that underpin the financial viability of each research project in the portfolio. These assumptions can then be checked across each possible scenario to estimate the feasibility of the project for each. For example, one scenario might have iron ore prices continuing to decline (perhaps due to the viability of new building materials that eventually replace steel). A research project that opens up new lower-grade ore bodies, but at a high cost, might not be viable under this  future scenario, whereas it would be profitable to continue to invest in the research under a scenario that has iron ore prices rising.

By creating a process to regularly validate your scenarios and check the assumptions behind your research projects against those scenarios, you can build an evidence-based stage-gate for deciding which projects to continue with.

Conclusion

Given the pace of change, it is likely that in the next few decades the resources sector will fundamentally reshape the way it operates. As market and operating conditions change, the sector will continue to look to innovation to create value, as it always has. A new generation of science, technology and innovation developed both within the sector and outside of it will help address a broad range of opportunities and challenges.

While it is impossible to predict exactly how the sector will change over the next few decades, it is clear that it will change. Scenario planning can be a useful tool for understanding the range of possible futures and planning for each. At a sector level, it can be used to develop technology roadmaps. For companies, it can be used as an input into innovation strategies and to identify opportunities to gain competitive advantage by anticipating change better than the competition. And it can also be useful for evaluating ongoing R&D projects. Each of these can help the industry navigate an uncertain future

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