More Related Content Similar to Scenario Modelling: developing new products in uncertain times (20) Scenario Modelling: developing new products in uncertain times1. Extract article from
PA perspective
on insurance
Scenario modelling:
developing products in
uncertain times
First edition 2009
2. PA perspective on insurance
Scenario modelling:
developing products in
uncertain times
When markets are uncertain, scenario modelling can be a powerful way to guide
product development. This article looks at some factors critical to its success,
and how scenario modelling was used at Storebrand, Scandinavia’s largest life
insurance company.
BY: KeNNeTH HaNSeN, STOreBraND lIfe INSuraNCe aND
alexaNDer HuuN IN NOrWay
Kenneth
Hansen
Developing new products is challenging, and there is no This article will stick to the accepted definitions and
guarantee of success. Yet new products are essential theories of scenario modelling, but will examine how
– to respond to regulation, changing markets and they can be more effectively used in the real world.
competition, or simply to grow.
Scenarios must be a practical tool
The financial crisis will make launching new products Too often, scenario modelling disappoints business
more difficult. Although many companies will lessen their leaders. Scenarios require significant effort to develop,
activity, most will continue to develop new products in and many find the results too generic or abstract – and
some form. Using scenario modelling can vastly reduce therefore doubt their value as a practical tool to make
the risk of misjudging the market. better decisions.
The product development team after the first ‘TV debate (Photo: Storebrand)
© PA Knowledge Limited 2009. All rights reserved.
3. In addition, the sheer magnitude of issues involved
Scenario modelling
in developing products can be overwhelming, without
Scenario modelling is a framework for analysing
the complication of considering several diverse
the main uncertainties about the future to help a
future scenarios.
company make key decisions. Typically, it results in
four distinctly different descriptions of the future.
Scenarios must be specific and relevant to the product
Strategies, product-design options and other critical
and its developers. It is essential that they are means
decisions can then be tested against the different
used to guide companies towards making more
scenarios to evaluate their robustness.
profitable products, and not ends in themselves.
Scenario modelling is distinctly different from
Developing credible scenarios
making prognoses, as the aim is to identify extreme
To develop quality scenarios, with a broad frame of
but probable futures. The analysis is primarily
reference, a company should not solely rely on the
qualitative but can to some extent be quantified.
executive committee. Instead, a cross-functional
team of experts should consult and collaborate with
management. Diverse expertise will also ensure the
By the time they were ready for a wider audience,
scenarios are credible in the eyes of the wider workforce
the scenarios had been rigorously challenged and
later in the process.
improved by the dialogue between the two teams. Upon
presentation, the scenarios were immediately adopted
However, a common pitfall is involving too many
and sparked fruitful debate.
people in the early stages. The result is often the same:
scenarios so far removed from real-life situations they
are not precise enough to help decision-making. ‘Ask the audience’: communicating
the scenarios
At Storebrand, the iterative process between the The objective of scenario modelling is to be useful
cross-functional expert group and the management during all phases of product development – from the
review team robustly defined the scope of the scenario development process itself, through to marketing and
exercise, vastly improving the quality and usefulness of sales. This requires a strong common understanding
the final scenarios. Picking a small expert group meant of the scenarios among people from many different
all efforts could be concentrated on the scenarios, and functional areas.
minimal time was spent co-ordinating proceedings.
© PA Knowledge Limited 2009. All rights reserved.
4. PA perspective on insurance
The key challenge is to convey the details of several Power in numbers
diverging scenarios. Textbooks recommend documenting Product development often involves choosing IT
them as one-page stories, yet these still demand a great systems, deciding sales and delivery strategies and
deal from readers if they truly want to understand the calculating costs, market volumes and long-term
ramifications of each. Even more creative solutions, profitability. For these reasons, quantifying scenarios
such as producing fictional future newspapers, do greatly improves their usefulness.
not address the mental challenge of comparing and
contrasting different scenarios. Our experience is that Practitioners often resist quantifying scenarios – perhaps
the use of theatre and interactive plays can be powerful to avoid equating scenarios with prognoses. In a scenario
aids to communication. modelling exercise, no one scenario should be seen as
more probable than the others. However, once you put
At Storebrand, a studio-based ‘TV debate’ became a the numbers in, the temptation for some stakeholders is
powerful communication vehicle. It comprised a host, immediately to calculate the average. For this reason,
a studio audience and four expert panellists played it may be a good idea to seek advice beforehand, to
by carefully rehearsed Storebrand executives. Each reduce the pressure to ‘average out’ the scenarios.
panellist became the advocate of a specific scenario
and, guided by the host during the 25-minute ‘show’, the At Storebrand, quantifying some key indicators made the
four of them passionately debated how different issues scenarios much more tangible and useful. A fundamental
would affect each possible future. Then they ‘asked internal debate over a future system platform was
the audience’ their opinions: each audience member significantly advanced once customer volumes were
voted with a special handset and the results appeared taken into account.
immediately on screen – just like on TV.
The corporate profitability model also benefited hugely,
The first debate helped an audience of 65 product- as modellers ‘stress tested’ it under each scenario (see
development specialists question product-development Figure 1). This gave the top management new – and
options against the scenarios. Subsequently, the TV sometimes surprising – information about possible
debate format was used in strategy discussions within outcomes. The so-called ‘worst-case’ scenario did not
the Life division and at a meeting for 50 top executives appear so bad when seen in the model.
from across the company. As a result, a large number of
people developed an intuitive feel for the scenarios, and
Measuring market development
could measure up the available options against them.
If a company decides on an option that will not thrive
under some scenarios, then monitoring how the market
develops is crucial. One solution is to employ a market
intelligence unit; gauging opinion through internal
surveys is another.
Storebrand decided to poll 50 of its leaders monthly
for their views of the market’s future direction.
Then, it reported the results in a newsletter, which
gave early warning of changing priorities and enhancing
the wider understanding of the scenarios. Leaders
© PA Knowledge Limited 2009. All rights reserved.
5. figure : The corporate financial model was stress tested against the quantified scenarios
200
180
Scenario 1
Scenario 2
Profitability index
160
Scenario 3
Scenario 4
140
120
100
80
2007 2008 2009 2010 2011 2012
completed the polls online, measuring each scenario The results for Storebrand
against the month’s news and research papers. Many Scenario modelling has helped Storebrand view the
found this process fruitful, helping them to engage with recent extensive regulatory changes as an opportunity
current events. rather than a threat. It has been key to its success in
becoming more competitive.
Storebrand’s chosen product design would have been
highly unsuccessful if one of the four scenarios were In 2006 Storebrand seized the largest market share
to become reality. This scenario, initially thought so of the new Mandatory Occupational Pensions (MOP).
unlikely it was almost removed, soon revealed itself to Then, in 2008, it increased its market share by 6%
be a real possibility. Thanks to the initial scenario work, compared with its closest rival with its new Defined
top management were able to immediately engage in Benefit (DB) products (Q3 figures). In the MOP project,
deciding what to do. the scenarios were built into the financial model,
giving information on vital decisions about pricing and
profitability. In the DB project, scenarios were employed
to help decide strategic and tactical issues, ranging
from product design, system development and process
changes to financial modelling.
© PA Knowledge Limited 2009. All rights reserved.
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