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shell: predictions are hard, especially about the future
History repeats. Today you're going back to the last oil crisis. It's 1971, and you're strategy boss at Anglo-Dutch oil company, Shell.
You've spent a few years thinking about the oil industry and are worried about possible oil price shocks due to tensions in the Middle East.
You're concerned enough to warn your senior executives. But how do you tell them?
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Crude Beginnings
In the late 1960s, Shell was a lower-level player among the world's top oil companies.
To improve performance, they hired you, and bought a computerised forecasting tool called Unified Planning Machinery (UPM) to help you model the market.
You're Pierre Wack, and it's crunch time for you in 1971. Your new world-leading computer model ran the numbers on the basis of historical data, and after years of work, you sense the possibility of a crisis on the way.
Over the past few years you and your team examined oil geopolitics, raw material demand, and noticed America's deteriorating position as an oil producer.
How do you break your views to your senior leadership team so if you're right, they have some plans in place?
the strategy standoff
Strategy A: Give them a shock forecast to focus their minds
Use the new UPM computer to project the trends and give the directors a paper about what is likely to happen. This would give the leadership team something to work with and make the most of the investment in your team and the new system.
However, if the forecast turns out to be wrong, your team would lose credibility and Shell could find itself locked into the wrong response at the wrong time.
Strategy B: Supply a range of future scenarios to chew on
Present plausible future worlds, and ask your leaders to evaluate their strategy settings under each one. This could force decision-makers to question their assumptions and create new insights.
But your leaders are engineers looking for clarity, so this would feel speculative and the executives would probably want to debate which scenario was correct, reducing the impact of the exercise.
so, which did they choose?
Cast your vote to find out!
Do you give them a forecast?
Or do you show a range of futures?
better luck next time, strategy b was chosen!
good job, strategy b was chosen!
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But what did this mean for Shell...
outcome: facilitator commentary
Matt Braithwaite-Young
Managing Partner
t +61 2 9002 3100
Predictions are Hard, Especially About the Future
In 1972, strategy boss Pierre Wack presented his findings to Shell managing directors over three hours. He mapped out six scenarios as a river forking into streams, each dividing further into tributaries.
His approach focused on making the scenarios feel real: using stories about potential futures so each executive would mentally put themselves in each possible future and think about what it would feel like.
The scenarios helped the executives explore assumptions and war-game potential responses.
Luckily, one of the war-gamed scenarios featured skyrocketing oil prices. And when these arrived, the Shell leadership team was ready.
Above: Pierre Wack
Method in the Wack-iness
Pierre Wack wanted to avoid prediction (even projections from the new UPM computer system) to focus on creating genuine insight and emotional connection with leaders - a move he knew would make senior engineers uncomfortable.
His scenarios were explicitly meant to challenge his leaders' mental models and encourage them to take new perspectives, understanding and insight - and create options.
Wack had invented Scenario Planning.
It's still a great technique, and its real value comes not from the scenarios themselves but the alignment the dialogue creates between leaders.
In the case of Shell, it led to speed and clarity of action in the actual Oil crisis when it arrived.
Scenario Planning
Company Director magazine recently asked me to explain the method, and you can read that piece here. In essence, though, you can think of scenarios as wind tunnels that let your leaders stress-test their strategic choices.
When your leaders wrap their heads around a range of future worlds, they can easily ask what it might take for your firm to succeed. The dialogue always reveals insights that can unlock new options. And your team becomes collectively more intelligent because they share assumptions and explore potential implications together.
Shell Shocked
Thanks to its Scenario Planning exercise, when war broke out in 1973, Shell was the only major oil company with a strategy and prior preparation, ready for a quick response.
Faster than its rivals, Shell managers adjusted refinery operations, renegotiated contracts, and repositioned investments. They had already used scenario insights to decide on upgrading
refinery cracking capacity, which meant it was able to profit more from higher oil prices more than its competitors.
Deja Crude
The Iranian Revolution of 1979 gave the world a second oil shock, and Shell climbed from seventh to second among the world's oil majors. It held that position for decades.
By the end of the 70's, Shell had become a top 3 player, up from 7. Nice work, Pierre!
Try Scenario Planning
Scenario Planning is having a renaissance right now. And maybe that's not very surprising since we are experiencing another oil shock.
The head of the International Energy Agency says the current oil shock is larger than the 73 and 79 crises put together, and added to the Ukraine war price shock.
And that is before considering AI disruption and climate transition, both of which carry their own ranges of plausible future states.
Oils Ain't Oils
Be careful, though - the term Scenario Planning is increasingly misused.
ESG reporting and financial legislation often refer to sensitivity analysis and numerical projections as Scenario Planning requirements, which is precisely the kind of work Wack set out to avoid so his team could think more creatively.
If you're running predictive scenarios for a compliance task, that's useful. But just be aware it's not Scenario Planning in the original sense- it would be the equivalent of Shell using the UPM computer and missing a lot of value.
If your leadership team is navigating the current uncertainties, don't predict the future; make sure your team has thought together about what the future might demand.
You can read about the method here in the Company Director magazine, or go to our Scenario Planning page on our website here.
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