Chapter 8. Industry Dynamics – Oil Price and the Global Oil Producers
Model Development Process
A Closer Look at the Stakeholders and Their Investment Decision Making
Connecting the Pieces – A Feedback Systems View
A Simple Thought Experiment: Green Mindset and Global Recession
Using the Model to Generate Scenarios
Devising New Scenarios
The Oil Producers' Microworld
Previous chapters have dealt with firm-level dynamics of cyclicality, growth, stagnation and decline. In this chapter, we turn our attention to the dynamics of an entire industry, global oil, comprising thousands of firms and billions of consumers around the world. At first glance, this shift of perspective may seem ambitious, requiring an immensely large model to capture the vast web of interactions among so many players. What is really required is a shift in the unit of analysis, away from the individual firm and its functions to major groupings in the industry. Industries, as a whole, exhibit interesting and puzzling dynamics. The modeller's task is to discover feedback loops that explain observed dynamics. As always, the conceptual challenge is to adopt an appropriate perspective from which to view the situation and interpret its dynamic complexity. In this case, the model arose from a team model-building project with planners at Royal Dutch/Shell (Morecroft & van der Heijden, 1992).[] The team wanted to develop a simulation model of global oil markets. The project was part of a broad ranging scenario exercise to explore the strategic implications of changes in the structure of the energy industry.
[] The oil producers' project was part of a larger initiative at Shell International to reposition corporate planning as a process for organisational learning. This important role for planning is described by de Geus (1988) and is further developed in an influential book The Living Company (de Geus, 1999). Firms that successfully adapt and survive are those where important decisions and actions are embedded within an effective learning cycle.
In Shell, scenario planning is viewed as a way to discover new concepts and language that enable the organisation to become more agile in recognising significant industry trends, defining emerging business problems and preparing the minds of senior managers to deal with such problems. Scenario planning is not a way of predicting the future. It works by the development of consistent stories about alternative futures, as the basis for what-if thinking in the organisation (van der Heijden, 1996). A consistent story traces a time path into the future that forces managers and planners to think 'what would I do, within my area of business responsibility, if this future were to unfold'? The internal consistency of the stories, creating credibility and persuasiveness, is an important factor in evaluating the usefulness of scenariosy – much more important than the ex-post accuracy of the time paths. Scenarios are selected on their ability to make the organisation a skilful observer of the business environment. As such they do not have to describe the most likely future, but the reasoning behind the scenarios must be plausible.