Information gathering and construction of base case scenario

The first stage of the SP process, which begins in September each year, concludes with the development of the initial base case scenario. The process begins with regional marketing managers from each of NZ’s various industry-based business units developing a strategy and forecast of sales and growth potential for the next five years based on price, penetration, industry growth, market share and new products.The forecasts are consolidated by the global marketing manager in consultation with the marketing director. Each industry strategy has input from employees from legal, finance, production, patenting, and R&D with the intention to pressure-test the different strategies. Out of this process, a base scenario for sales growth is created. Scenarios are also informed by anchor budget projections regarding the forecast of costs expected to be disbursed in achieving the anticipated sales – e.g., projections for raw material costs or human capital spending. These processes produce the anchor budget and the medium term planning forecast.

After sign off by executive management, this 5 year forecast becomes the raw data for developing the base case scenario and subsequent scenarios. At this point the process becomes more centralized and a core SP team takes over. The core SP team is formed by three individuals anchored in the three functional areas of finance, marketing and supply operations. The main task of this scenario team is to analyze the base case scenario (5-year forecast) and stress-test its impact on different key parameters for the company such as steel capacity, investments needs, or overall profit margins. The study found that the individual-level learning that occurred through base-case scenario construction and its transmission to Stage 2 was influenced by two factors: (1) searching and scanning routines and (2) individual cognitive biases.

Searching and scanning routines. Interviewees explained that when conducting environmental scans for information used in creating the strategies and forecasts that form the base case scenario, the organization focused their attention on 1) tracking the actions of main competitor’s, largely through publicly available information; 2) gaining a granular understanding of the market share in the company’s core enzyme business; and 3) ad hoc market intelligence requests. For example, special attention was given to conference calls from competitors and reports of key takeaway from these calls were routinely generated by NZ analysts and subsequently distributed to senior managers and executives. However, the organization did not engage in similar behaviors when scanning for possible competitive actions outside the obvious players, or new technologies. As one NZ analyst explained, this constrained NZs ability to learn about market dynamics:

“…to give an honest opinion, I don’t think the information flow and analysis is that good at NZ… to give an example, we do not have clarity on the market share and size in this new market… NZ is mostly focusing internally towards what we are developing. How can we reach the market and so on, but what are the competitors doing? What is the next competitor move? We are not sure….

In learning terms, NZ’s scanning activities determine what information is filtered into the SP process. This filtering process, in turn, shape the content of the SP learning system being fed up the organizational hierarchy. In this way, the searching and scanning routines provide the basis for the development of industry strategies and later scenarios, thus acting as a barrier to the feed-forward process of learning

Individual cognitive biases. During the scanning and scenario construction processes, the individual bias of overconfidence influenced the learning that occurred through SP by affecting perceptions of the competitive environment and NZ’s ability to compete successfully in it. For instance, the following statement from a senior manager discussing the

competitive landscape illustrates an overconfident attitude of environmental stability: “…I see possibility for all competitors, but that will probably go hand in hand with a big expansion in the market..”. As another director acknowledged, over-confidence in an organization’s knowledge about its environment can undermine learning when it limits the acquisition of new insights: “… I am not sure if we know enough about competing technologies. We have great knowledge in our core business, but I am not sure if we know enough outside our core areas…”.

Interviewees also felt that estimations of future conditions were often over-confident, citing examples such as overestimations of future market potential and underestimations of investment costs. Analysis of five years of NZ’s SP presentations and projections show that projections are commonly over-estimated and then adjusted in the following years’ scenarios.

As one manager explained, the tendency to over-estimate can also be exacerbated when projections are made over longer time periods:

“The first year budget is typically much more realistic….but as you get further out… what you put into the projection in 2018 or 2019, most likely you will be in another position [within the organization] and will likely be less accountable for those numbers. And there is a long way to 2019, so the further out you go, it is more about being ambitious and seeing all the opportunities…..there is tendency to err on the side of being too optimistic rather than being cautious and conservative”

Hence, overreliance on a stable environment and overconfidence in the organization’s capabilities were reflected in the form of high growth estimates, which may act as a barrier to explorative learning by affecting (biasing) the information that is filtered into the SP system.

Moreover, such perceptions may also reduce credibility of the learning outcomes from the scenario process. As one director recalled:

“I remember looking at these projections [from the scenario work] and I see something that goes like shooting to the sky… and I just thought, this sounds ridiculous to even be discussing this… how much uncertainty is out there and when we are discussing such new markets with this long run projections, I think we are wasting our time a little bit…”

The findings illustrate how over-confident estimations of future conditions may hinder forward learning in the organization by generating inaccurate understandings of the business environment and fostering perceptions in some organizational members that the SP process is based on unrealistic premises and thus of limited value.