Saddam Hussein’s rule over Iraq has ended. Jay Garner, a retired U.S. lieutenant general, is touring Baghdad and trying to establish a new government. And yet, questions linger over whether these developments will bring about the psychological and economic boost that many had expected would follow the end of a short, swift war in the Middle East. Among the uncertainties that persist are key issues such as the ability of the U.S. and its allies to sustain the peace in Iraq as decisively as they have won the war; the possibility of retaliatory terrorist attacks; and even more significantly, the prospects that the world economy will climb out of the morass in which it has been floundering.
While the world seems as confusing as ever, Eric Clemons, a professor of operations and information management at Wharton, contends that despite the enormous might of the U.S., the country has little ability to predict and control the independent, non-state forces that confront it. This reality greatly increases uncertainty and complexity in planning for Corporate America.
Clemons and Steve Barnett, an adjunct professor in operations and information management at Wharton, led two workshops recently for faculty and business leaders in Philadelphia to explore these questions. Organized by the Reginald H. Jones Center for Management Policy, Strategy and Organization at Wharton, the workshops analyzed the origins of the conflict between the U.S. and forces in the Middle East. Clemons describes the workshops as an attempt to develop insights into the form and duration of the situation, as well as an opportunity to understand the “business implications that might result and the strategies that might provide appropriate responses in different strategic contexts.”
So how does a firm evaluate its options for future courses of action in such a highly uncertain environment? In a recent research paper titled “Strategic Uncertainty and Alternative Futures: Evaluating Our Options in the Post-September 11 World,” Clemons and Barnett argue that business executives and political leaders need a mechanism for putting some structure around that uncertainty in order to filter significant events from vast amounts of distracting noise and prepare responses to a whole range of futures. Building on the results of the recent workshops, the authors advocate the use of scenario analysis to achieve this aim.
The scenario analysis technique requires identification of key drivers in a particular strategic context — variables that are both highly uncertain, as well as highly significant in determining the future. The strategist then predicts and prepares for multiple futures, or scenarios, based on different combinations and permutations of these driving factors. This planning technique accepts the presence of volatility and seeks to reduce it by eliminating, as much as possible, the element of being caught off guard.
Continental Airlines, among other companies sponsoring Clemons and Barnett’s work under the Jones Center program, has made extensive use of the research in formulating the company’s post-September 11-business strategy. Bill Brunger, vice president-distribution planning at Continental Airlines, believes that most business planning is done with an “implicit scenario analysis in mind. The issue is the extent to which it becomes explicit.” Brunger notes that companies “previously defined the future by “good case, probable case, bad case,” along a single dimension. He adds, “We have found that specifying the scenarios is useful, because potential future environments are discontinuous, and not just about a range of possibilities.”
By identifying and analyzing many possible scenarios that could occur in any particular military, political or strategic conflict, executives can establish a mechanism for anticipating significant future events, determining what would cause them, and develop responses to them. With business operating in a global context, with products and supplies, as well as customers and clients in far-flung locations, the use of scenario analysis should gain growing use, especially in such unpredictable times. The authors note, “Since shifts between or among scenarios cannot always be predicted and cannot be averted by the actions of individual firms, hedging strategies and the avoidance of massive and irrevocable commitments will be increasingly important.”
According to the authors, the greatest challenge for the participants in the workshops came in trying to characterize the relationship that exists between the U.S. and various players in the Middle East. Despite the difficulties involved, Clemons and Barnett explain that choosing the correct “drivers” remains critical to developing future scenarios. Drivers determine the scenarios, and scenarios determine which strategies will succeed and which will fail.
The groups participating in the workshops found that fundamental differences existed in the potential outcomes based on whether the basis of the current conflict was considered “driven” by economic or ideological pursuits. An economic conflict might end if the cost to one participant exceeds the expected value, or if sufficient economic benefits are offered for ending the conflict. In contrast, an ideological conflict is seldom ended by cost-benefit analysis, and offering to pay participants off may only increase the strength of the ideological resentments.
The participants also noted that the type of adversary — an organized state or a non-state group — would act as a key driver in any given scenario. Obviously, the best course of action for a dominant power would be markedly different if the conflict were against a state with geographical boundaries, clear targets, and a government capable of negotiating and enforcing a treaty or other end to a dispute. However, the options of a dominant power are more limited if the opponent is an amorphous movement without clear targets and lacking a mechanism for ending the dispute. Clemons says, “If you apply the same rules to a non-state force, you make a much more dangerous opponent. It becomes an ideological fight, with the U.S. in danger of fighting hundreds of little movements, if you apply the wrong model.”
The drivers identified — economically or ideologically based conflicts with state or non-state opponents — yield four very different scenarios, each requiring different strategies from the U.S., and each with very different implications for American business. The authors assign catchy titles to the four possible scenarios selected by the participants, to capture “the origins, the look, and the feel” for each potential form a conflict may take. Clemons and Barnett specifically choose titles that do not reflect on events in the region, in order to avoid constraining the analysis to “any prior assessments of the Middle East situation.” Instead, they draw the titles of the four scenarios (The Plains of Abraham, The New Cold War, Red October, and The Thirty Years War) from other historic events or famous military conflicts.
Four Possible Futures
With the potential futures determined based on the defined scenarios, strategic planning can then be discussed in relationship to each potential circumstance. The first scenario discussed in the paper, the “Plains of Abraham,” represents a conflict between two states based on a dispute over economic assets. This scenario, named after the dispute fought on Canadian soil between British and French troops, resulted in a decisive victory for the British and the ouster of the French from Canada. The war is a prime example of a short, decisive conflict with enormous political impact, but with minimal chaos or economic disruption.
This scenario entails a conflict between organized armies, looking “to achieve military objectives in support of economic goals.” The winner of this sort of battle is clear, and “further conflict becomes pointless and economically impossible to justify.” “Economic globalization, interlocking markets, and mutual dependency” ensure that there be limited overt military conflict between major nations and if indeed the nature of the current conflict were to be similar, it could be viewed as a self-limiting problem that is likely to be resolved sooner rather than later.
The second scenario, the New Cold War, describes a situation where lasting ideological conflict exists between states or empires. As was the case between the U.S. and the Soviet Union, such hostility can last for decades or even centuries. “While investments in defense pose a drag on the economy,” if an expensive armed conflict is avoided, this scenario “can support sustained economic growth.” The existence of and pre-occupation with internal objectives can deter state-based adversaries from armed conflict even in the presence of strong ideological disputes.
The next scenario, “Red October,” takes its name from the October 1917 revolution in Russia and the subsequent civil war, which led to the Bolsheviks taking power. The authors describe this scenario as one where a state faces a non-state adversary in a conflict rooted in an economic dispute, such as the American Revolution or the early stages of the Palestinian struggle. This situation need not be economically devastating, as the Israeli experience with the early years of the Palestinian conflict illustrates. And it need not be a conflict without rules or restraints on either party. However, this scenario can shift to one in which the struggle is over ideological rather than economic issues, especially if the non-state entity consciously adopts an ideological banner to enable it to enlist supporters. This suggests that the use of force by a powerful state, against the forces of a non-state, may be highly risky. Indeed, this strategy can result in converting the counter-party into a more intractable and more dangerous adversary.
Additionally, non-state opponents are difficult to defeat, and military force may simply drive them out of one location and into another. If the current conflict faced by the U.S. is of this nature and the real adversary is an amorphous Al-Qaeda organization, then the use of force against Afghanistan or Iraq could prove to be counter-productive. Not only would it potentially increase support for Al-Qaeda, but it would also fail to destroy the movement, which could resurface in any number of other geographic locations. This scenario is unstable, and carries the risk of deterioration into a far more chaotic scenario, described below as the Thirty Years War.
Clemons and Barnett define the “Thirty Years War” scenario as a “conflict in which one of the parties does not yet control a sovereign state,” and consequently becomes unable to build an organized army. In this respect, it is similar to the Red October Scenario above. However, in the Thirty Years War scenario, the non-state party has an ideological, rather than an economic basis for its following, and may enjoy a force of followers willing to fight and die for their principles. The paper adds that “when these conflicts are unsuccessful, they may drag on for decades with little or no chance of success, simply because there is no mechanism for negotiating an end to ideological-based wars of attrition.” Of the four scenarios discussed in the paper, this one is the most savage of all, with the possibility for this type of struggle emerging in the Middle East, due to the actions of the displaced Taliban and Al-Qaeda fighters.
The authors note that the “damage to Western infrastructure,” such as was the case in the World Trade Center terrorist attacks, could be extremely expensive in this scenario. Clemons and Barnett also note that conventional military action against the enemy, bringing “overwhelming firepower to bear,” is one conventional response to the Thirty Years War scenario. But a “non-traditional foe” may not be so easy to stop, they suggest, as “shadow groups can attack and vanish at will.”
The authors note that “this scenario can also entail enormous frictional costs to Western business and to Western society, even when attacks produce no real damage to the infrastructure or institutions of the West.” The September 11 attacks and a single shoe bomber continue to slow airline travel, as security measures are increased and passengers more effectively screened. Clemons notes, “There may be lasting changes in consumption patterns, as individuals curtail air travel, due to fear and the desire to avoid the added wait at the airport.”
The participants noted other possible implications of the Thirty Years War scenario. Some countries might reject globalization and attempt a move to self-sufficiency. In the U.S., for instance, an inevitable return to patriotism could result in a “reduction in the drive towards globalization of the economy.” The authors state, “Conspicuous consumption and self-indulgent extravagance might decline, while purchases for the home, or in support of home-based recreational activities (cocooning) might increase.” If levels of fear increase to a fever pitch, luxury spending could be significantly curtailed. Companies, in turn, would need to respond by shifting their products and services, wherever possible, to those under demand in this scenario.
While the sociology and anthropology of life in the U.S. would change, the country is large enough to be relatively self-contained in many respects. Some regions or countries could be harder hit by a cocooning effect. However, certain U.S. and worldwide industries, like travel and tourism, could be irreversibly damaged.
Referring to post-September 11 planning, Clemons and Barnett argue that it may be presumptuous for U.S. political leaders to believe that the use of force against any specific country will resolve the current uncertainty and conflict in the Middle East. Indeed, the authors fear that shortsighted actions on the part of the U.S. government, while serving to address the crisis at hand, might actually create greater threats going forward. Clemons applies this point to his analysis of the situation in Iraq. While the battle to wrest Iraq from Saddam Hussein has been won, he wonders if there will be subsequent ramifications due to the U.S. war there. To support his theory, he notes that despite U.S. military victory in Afghanistan, the threat from militant factions there still remains. Of course, any unexpected action by radical factions, such as Al-Qaeda or others, against the U.S., will impact business domestically and abroad.
Scenario analysis can provide Corporate America with a necessary buffer against the shocks of global conflict. Nonetheless, in a business environment dominated by facts and figures, risk management based on the unknown is still likely to be anathema to some. Clemons and Barnett maintain that the greatest limitation on the adoption of scenario analysis as a strategic tool is the desire of corporate leaders and government officials for certainty. This makes it extremely difficult for them to admit that they cannot specify even the broad outlines of the single correct environment for which they need to perform strategic planning. As scenario analysis gains acceptance across a wider variety of industries, particularly as world events demand it, Clemons believes it will provide business leaders with the needed “bridge between formal analysis and intuition.”