European Journal of Operational Research 59 (1992) 1-5 North-Holland

Foreword

Modelling to predict or to learn?

A.P. de G e u s *

Executive-in-Residence London Business School, Sussex Place, Regent's Park, London NW1 4SA, UK

Many a time, the search for a good answer to a good question leads to unexpected, but often satisfactory discoveries. Looking at the table of contents of this issue of the European Journal of Operational Research, one wonders whether one is looking at such a case. Rarely do the answers spring from one source, but in the early Eighties there were some fairly basic questions asked in one specific place, the Planning Coordination of the Royal Dutch Shell Group of companies. In those days, both Shell management and planners were looking at an enigma. During the previous decade, the Shell planners had picked up and further refined the scenario technique which Herman Kahn had pioneered at the Hudson Institute. In 1972, they had distributed in the Group, on a trial basis, the first edition of their new product. It may be called beginners' luck, but a fact is that in the middle of the first crop of scenarios there was one which in direction and in magnitude (though not in timing) described an oil supply crisis which one year later turned into reality. Of course, most managers, practical people as they are, had been careful to separate their decisions and budget submissions for the year 1972 from the influence of a novelty like scenarios. But come the harsh reality of the Oil Crisis of 1973/74, they did remember having read about it prior to the fact! So, during the following years, the regular new issues of scenarios by the Planning Coordination
* Arie de Geus was formerly Group Planning Coordinator for the Royal Dutch/Shell Group of Companies.

became obligatory, and indeed, eagerly awaited literature. The presentations by planning staff became popular events, not only inside Shell, but also among a growing and ever more influential public in the outside world. And quite rightly so. When one re-reads the scenarios published during the first ten $,ears, one is struck by how often these scenarios predict important developments in the world around the Shell Group, sometimes years ahead of time. The timing and the quantification of these events or trendbreaks were not always right, but the scenarios were often quite clear with regard to the direction of the change. Shell's scenariomakers may rightfully claim that in a number of cases they did describe the future ahead of time. As a result, Shell's management had the opportunity to take cognizance of important changes in the world early enough to make the decisions for change in their business as necessitated by these external changes. Many people would say that the Shell Group had an impor-

tant competitive advantage.

Yet, in the early 1980's, both top management and planners felt uncomfortable and both for the same reason: there was no discernable influence of this advance-knowledge of environmental change on the major decisions which had actually been taken during the previous decade. Top management saw an expensive planning outfit which produced colourful stories, very useful for public relations, but too far removed from the real business. They remembered well the occasions when the planners had sketched a future which had not come to pass and showed little awareness of the

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A.P. de Geus / Modelling to predict or to learn?

times when it had been more or less 'right'. They wished this planning effort would be somewhat more helpful to the running of the real business which they, the managers, had to do. The planners, obviously, were not as harsh in their judgment, but felt it equally difficult to cite a convincing example of a decision which had been taken on the strength of a major change-tocome in their business world as highlighted by a scenario. In their defence, the planners maintained that things did not work in such a crude and direct fashion. Scenarios served to 'change the microcosm' of managers (the way these managers saw and understood their world). Scenarios aim at perceptions inside the heads of decision makers, obliging them to question their assumptions about how their business world works. The scenarios should lead the managers to change and reorganize their inner models of reality (dixit Pierre Wack in the Harvard Business Review Sept.-Oct. 1985). As a result, these decision makers will take decisions different from the ones which they would have taken, had they not been exposed to the scenarios. But, how to achieve this 'aha' experience in the minds of managers was not quite clear. It was seen as the real challenge of scenario analysis and clearly not solely dependent on the eloquence of presentation and the beauty of the charts. For most outside observers, this internal debate would have been an enigma. Here was a company which had at its disposal reasonably reliable predictions of events and trendbreaks of great relevance to the business. Yet, there was at best a shaky, indirect connection with the decisions taken. It induced Pierre Wack to tell me the story of the Mayor of Dresden, which I prefer to recount as the story of the Mayor of Rotterdam, the town of my birth. In this story, the listener is invited to assume that a person with absolute powers to predict the future is visiting the Mayor of Rotterdam in 1920. The visitor tells the Mayor in vivid detail what is going to happen to his town and its German hinterland over the next 25 years (the period covered by a scenario!). It is thus, during an otherwise perfectly normal working day in 1920, that the Mayor hears about the advent of the Republic of Weimar, about hyper-inflation, the crash of the stock exchange in 1929 followed by the Great Depression, the rise of Nazism in

Germany with its (for Rotterdam) damaging economic policies of autarchy, the outbreak of the 2nd World War with the carpet-bombing of his town's whole city centre and, finally, the systematic destruction of the town's port installations during the calamitous winter of 1945. The question is: what does the reader think that the Mayor is going to do with this information which reaches him in 1920, amidst all the other opinions and facts which he hears in the course of executing his complicated task of running one of the world's biggest ports? The quasi-unanimous reply which I receive to this rhetorical question is: nothing-even if our Mayor would give this prediction a higher degree of credibility than much of the other information reaching him, he would neither have the courage nor the powers of persuasion necessary to take the far reaching decisions required by this prediction. The future cannot be predicted and, even if it could, we would not dare to act on the prediction. Most people accept this thesis in a cool, academic debate. Nevertheless, in real life there is an insatiable demand for predictions. The yearning for some certainty about the future is so strong that most of us, at times, will act against our better judgment and demand some precise information about the future: a prediction. Where there is a demand, there is a supply. There exists a worldwide industry, from fortunetellers and astrologers to planners and academics to supply information about the future. It is an industry rich in euphemisms, in which predictions become forecasts and in which the product is often wrapped in sheets of fine print and jargon which are not normally read by the customer. But the fine print does not matter anyway, because few people with real responsibilities dare to take decisions on the information, even though they had asked (and sometimes paid) for it in the first place. Some of the suppliers employ sophisticated means of prediction, to which has been added modelling since the advent of the modern computer. Computer-based modelling seems attractive, because it carries the promise that some day our knowledge of all the interrelationships and the power of the computers will be such as to allow a complete and precise representation of reality.

A.P. de Geus / Modelling to predict or to learn?

It appears to me that we are still a long way from this ideal. For a model to produce reliable predictions of living systems such as companies, markets, national economies, etc., it is necessary that such a model 1) is indeed complete; 2) is a precise representation of reality. Then for a manager to act on such predictions, it is necessary that the model is recognized by h i m / h e r as a complete and precise representation of reality. None of these conditions is likely to be fulfilled. Even the most simple business has so many internal and external interelationships, to which moreover new ones are added all the time, that it is most unlikely that the model describing a company will ever be finished. This point came home to me strongly when participating in Peter Senge's Leadership and Mastery course. During the course the participants were asked to list all the important facets and relationships with which to describe a simple one-product manufacturing firm in Milwaukee. After half an hour the whole wall was covered from floor to ceiling and it was clear that the group was still a long way from completing the description of this relatively simple entity and its environment. In my Shell career I have never seen a model which fully describes all the relevant relationships of a business unit or a business situation. The trouble is that an incomplete model will only give predictions surrounded by so many limiting conditions that no decision maker will be prepared to act on its predictions. Apart from these practical reasons, there are theoretical ones as well. No model can ever be a precise representation of reality. In the living world, like in the material world of inanimate objects, the observation of reality is influenced by the position of the observer. This makes it impossible to construct a model which so represents reality that a reliable prediction can be made from it and, anyway, it is unlikely that the manager will acknowledge the model as either complete or precise. Each one of us has participated in discussions like: "Life is not so simple as you make it look in your model", or "You must realize that from my vantage point, I see other (more distant) things which are the really important driving forces". And it leads to a useless discussion for the mod-

eller to argue that he had a look at these distant things and had discarded them as not (sufficiently) relevant. Even if the manager cannot think of what he believes are glaring omissions in the model, he is more than likely to start a discussion on the modeling methodology in order to discredit it. A fact is that I have not met a decision maker who is prepared to accept anybody else's model of his/her reality, if he knows that the purpose of the exercise is to make him, the decision maker, take decisions and to engage in action for which he/she will ultimately carry responsibility. People (and not only managers) only trust their own understanding of their world as the basis for their actions. "I'll make up my own mind" is a pretty universal principle for everyone embracing the responsibility of their life, be it their private or their business life. If the future is unpredictable - if models are unlikely to be useful as instruments for prediction and if the chances of a manager acting on the prediction of someone else are rather remote, what, if anything, could be the role of modeling in company management? Here the deeper meaning of Pierre Wack's remarks about 'changing the manager's microcosm' come into focus. Models and computer modeling can play an important role in facilitating a manager or a group of managers 'to make up their own minds'. Then, however, we are talking about a quite different category of models. We are no longer talking about the model, the understanding of this world as it has been acquired by a modeller or planner. We are no longer talking about a modeled understanding of this world as it has been acquired by an academic or some institute like a plan bureau to be used to make predictions. We are talking about the understanding of his~her world as it has been acquired by this manager or this management group - however incomplete or deficient their model may be. By computer modeling their world, we give them a 'toy' (a representation of their real world as they understand it) with which they can 'play', i.e. with which they can experiment without having to fear the consequences. The work of John Holt, Seymour Papert and the Tavistock Institute has shown that in the process of playing with a representation of the real world, children change their understanding
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A.P. de Geus / Modelling topredict or to learn?

of that world - they transit into the next phase of development - they learn. Experientially, these principles have been known to work as well for adults as they work for children, witness the use of flight simulators for pilots, pilot plants for chemical process engineers or flow models in hydraulic engineering. All are good examples of representations of real worlds with which the pilots and the engineers can experiment without having to fear the consequences. In the process they learn - and only then do they go and apply in practice their new and now confirmed understanding of this part of their world, accepting the responsibility for their actions. It is a matter of some concern that as a rule we do not give managers equally powerful means to learn their trade. The work of many managers has human consequences with potential for disaster equal to malfunctioning aeroplanes, chemical plants or dykes and dams. Nevertheless, we find it perfectly normal to send managers into positions of responsibility to learn by experience - by trial and error. We ask them to learn 'by experimenting with reality'. Being intelligent people, they will recognize and fear the consequences and learn a lot less and slower than they would have done otherwise. Further clues come from neurobiology. In 1985, David Ingvar published an article called "Memory of the future" in which he describes work done at the University of Lund on how the human brain deals with the future. Ingvar reports that one part of the brain is constantly occupied with making action plans -sequences of events into an anticipated future; from the next moment and minutes, to the coming hours, day, weeks, years, and so on. The healthy brain does not make one such timepath, it makes several of these sequences of actions under different anticipated futures (in well balanced people, usually a little more than half are 'favourable' futures). The interesting thing, says Ingvar, is not only that the brain makes those alternative time/action paths, but it also stores them: we have a memory of the future. Note that in dealing with the future, the brain does not rely on predictions. It figures out what the human being would do under several anticipated futures: "If the train arrives late, I'll call by phone from the station and than take a cab,

rather than the tube", but also, "If the train is on time, I'll take the tube halfway and walk the rest, so I can pass by the bookshop and see whether there is something interesting to buy". From Ingvar's work we are beginning to get a better perspective what the end product of 'modeling for learning' should be, especially if it is done with management teams, rather than individuals. Such a group should be playing with their own computer-based representation of their real world to work out a number of action sequences ( = options) to be taken by their business unit or company under several anticipated futures. Scenarios (internally consistent descriptions of possible futures, as Pierre Wack calls them) would be a useful input into this play process. We would normally expect a management team to come up with seven to ten options for two to three scenarios. This is already a major improvement over the traditional situation in which a company has at best one plan, one strategy: the Corporate OneTrack Mind is a dangerous thing to have! At this stage, we have now had seven to eight years of experimentation with these and connected ideas. Several of the people who have actively contributed in this process can be found in these pages of the European Journal of Operational Research. A lot of work remains to be done, but as, hopefully, the reader will conclude, there is now sufficient evidence that we have more than a promise. We may have come a little closer to the vision expounded by Jay Forrester as far back as 1961.

London Business School, September 1991.

References
Forrester, J.W. (1961), Industrial Dynamics, MIT Press, Cambridge, MA, reprinted by the Productivity Press, Cambridge, MA, 1990. Holt, J. (1964), How Children Fail, Pitman Publishing Corporation 1964, reprinted by Pelican Books, Penguin Books Ltd, Harmondsworth, UK, 1969. Holt, J. (1967), How Children Learn, Pitman, London, reprinted by Pelican Books, Penguin Books Ltd, Harmondsworth, UK, 1970. Ingvar, D.H. (1985), "Memory of the future: an essay on the temporal organization of conscious awareness", Human Neurobiology 4, 127-136.

A.P. de Geus / Modelling to predict or to learn?

Papert, S. (1980), Mindstorms: Children, Computers, and Powerful Ideas, Basic Books, New York. Wack, P. (1985), "Scenarios: The gentle art of re-perceiving", Harvard Business Review, September-October, 1985.

Winnicott, D.W. (1971), Playing and Reality, Tavistock, London, 1971, reprinted by Pelican Books, Penguin Books Ltd, Harmondsworth, UK, 1974, reprinted by Penguin Education, 1980.