Why are scenarios and bets important?

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  • May 28, 2018
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In a recent issue of Fortune magazine, Elon Musk of Tesla was voted one of the most overrated CEOs. In the same issue, Musk was voted one of the most underrated CEOs!

How is that possible?

The survey consisted of 1450 senior executives who voted for leaders of top blue-chip companies.  A significant portion of those surveyed thought his policies at Tesla were not great, as Tesla has been making huge losses. GM’s Chevrolet Bolt EV vehicle has been making strides [1] and beat Tesla’s Model 3 to the market with a battery that outlasted Tesla’s. Tesla’s Model 3 has been plagued with problems, and the firmware updates to the models were leaving customers worse off. The fact that Tesla can deliberately throttle battery capacity and driving range, via software, for lower-end models has angered the community[2].

There was an equally polarised group that “probably” focussed on Elon Musk’s visionary outlook, choosing to set aside his current Tesla operational performance. Instead, they admire his bold and ambitious attempt to colonise Mars, and how he has opted to not take his salary but rather be compensated via stock options once Tesla hits its milestones (that includes a trillion-dollar valuation). “The compensation plan is perhaps the most radical in corporate history, Elon Musk will be paid only if he reaches a series of jaw-dropping milestones based on the company’s market value and operations. Otherwise, he will be paid nothing” [3]. His bold move to not take a paycheck has won him a number of female fans. A highly unlikely event, but should it occur, it will make Elon Musk the world’s wealthiest man.

Who is right?

People place bets. Some people believe him to be a great CEO, whilst others think he is a bad one. That is because the former are looking at what he might achieve in the future, whereas the latter are looking at Tesla’s immediate cash flow and counting the losses. As Scott Anthony, author of The First Mile, said: “every strategy is partially right and partially wrong”. The same goes for these bets. The future is precarious and even more unpredictable nowadays than it was a few years ago.

A senior leadership team sat down at the Shell headquarters to forecast the demand for oil. They came up with different scenarios. In one scenario they predicted that demand for oil would peak in the 2020s and then taper off. This was a world in which alternative technologies would gain a secure foothold in the energy market, and combined with greater market efficiency, would actually reduce the fossil fuel energy requirement.

In a different scenario by the same team, the same company predicted that the demand for oil would peak in the 2040s.

So, what do they do?

Why is scenario planning so critical at Shell?

Shell has to make big bets.

It divested $7.25b of its stake in Canada’s oil sands to a Canadian conglomerate recently[4]. Shell bet on the scenario that the current and future price of oil could not justify the technology and drilling costs. The Canadians believe otherwise. Someone is right, and someone is wrong. Time will tell.

So why do companies go through this process? Large companies like Shell have huge amounts invested in infrastructure. It sits within a huge ecosystem of suppliers, assets, licenses, customers and technology. For them, changing focus is (appositely) like turning an oil tanker.  It is hard, expensive and slow. So, Shell needs to make bold decisions. If oil is “lower forever” (a scenario Shell believes is likely to be played out) then new means of business growth need to be explored. This bet led by CEO Van Beurden is playing out in Shell’s various holding companies – a move from Big Oil to Big Energy.

I had the privilege to listen to Raoul Restucci, the MD of Petroleum Development Oman[5] (Shell owns 35% of PDO), and he responded similarly. Petroleum Development Oman was repositioning itself as Energy Development Oman (EDO)[6]

 

In the past, “there was a funnel of outcomes that we had to navigate in, where a conservative approach could still work,” says van Beurden. “What is a challenge at the moment,” he says, “is that we don’t know anymore where the future will go.”

 

Shell had experimented a lot in the past, but not in a strategic way.

Strategic experimentation is critical to innovation. Experimentation requires placing controlled/ calculated bets on the future and leveraging all forces and influences to create a reality that works in favour of the “innovating company”. Experimentation is not limited to big companies; small companies need to experiment as well. However, they do so differently. A topic that is discussed in this article.

[1] Fortune.com Oct 1 2017, Mary Barry CEO General Motors takes Tesla head-on, Mary Barry ranked 01 in Fortune’s 50 most powerful women 2nd year running Fortune Oct 2017.

[2] Fortune.com Oct 1 2017, “Tesla’s good deed sparks a backlash”. A Florida man, an owner of a Tesla Model S60, evacuating from Hurricane Irma requested the automaker to unlock battery capacity to get the extra range to hasten the trip. Tesla complied with the emergency and the move prompted a backlash from the community as to why its batteries are stunted in the first place. Tesla is not alone, other automakers throttle engine power in lower end models via electronics. Apple slows down iOS for older models of phone as customer upgrade to new versions,

[3] “Tesla’s Elon Musk May Have Boldest Pay Plan in Corporate History” https://www.nytimes.com/2018/01/23/business/dealbook/tesla-elon-musk-pay.html

[4] “Inside Oil Giant Shell’s Race to Remake Itself For a Low-Price World”. Jan 24th 2018 http://fortune.com/2018/01/24/royal-dutch-shell-lower-oil-prices/

[5] The future of Oil. A Talk by Raoul Restucci at the Public lecture series in Muscat University 27th February 2018

[6] Shell is building an offshore wind farm in the North Sea; it’s part of consortia installing solar farms in Oman and California, and it has bought one of Europe’s biggest electric-car-charging firms and a major British electricity provider.

 

- Viren Lall