Where it all started: the best-known example

1973 and all that

Shell, OPEC and the price of oil

Scenario planning in one form or another has been around since the 1940s, when it primarily had military applications. But one company in particular is associated with its later success in the business world: Royal Dutch/Shell.

In the early 1970s, Shell began to invest in scenario planning, because they had come to realize that traditional forecasting gave them too narrow a view of future developments. So they decided not to try to predict the price of oil per se, but instead to develop a set of possible future scenarios, and then analyze what could happen to the price of oil in each of these different imaginary, but plausible, situations.

The magazine Fast Company takes up the story:

 

In one scenario, an accident in Saudi Arabia led to the severing of an oil pipeline, which in turn decreased supply. That created a market reaction that increased oil prices, allowing OPEC nations to pump less oil and make more money.

The tale spooked [Shell’s] executives enough to make them reexamine their assumptions about oil price and supply. Was OPEC preparing to increase oil prices? What would be the implications if they did? As a consequence, when OPEC announced its first oil embargo [in 1973], Shell handled the challenges better and faster than the competition. Within two years, Shell moved from being the world's eighth biggest oil company to being the second biggest. Scenario planning had earned its stripes.

 

The rest is history.