Scenario planning is a process that helps people navigate the uncertainty of the future by supporting both short and long term decisions.
A scenario planning process begins by scanning the current reality, projected forecasts, and external/internal influences to produce a set of plausible potential futures (i.e., scenarios). The next task is to develop a series of initiatives, projects, and policies (i.e., tactics) that may help support a preferred scenario, a component of a scenario, multiple scenarios, or all scenarios.
Indicators that a scenario component is likely to occur (i.e., tipping points or triggers) may be established to alert planners that the likelihood of a scenario becoming a reality is higher. This would prompt them to take action on appropriate tactics such as allocating funding and moving into implementation.
Scenario planning enables professionals to respond dynamically as unpredictable circumstances unfold. The easiest way to answer the question, “What is scenario planning?” is to understand that it assists people in preparing for the future.
Why Is Scenario Planning Important?
Scenario planning provides a competitive advantage by enabling leaders to react quickly and decisively. Because a situation has been thought through and actions documented, no one has to scramble when in the midst of a crisis.
Scenario planning also gives executives and boards of directors a framework to make non-urgent decisions more effectively. It provides insight into plans, budgets and forecasts and paints a clearer picture of key drivers for business growth and the potential impact of future events.
Scenario Planning Advantages and Disadvantages
A comprehensive scenario planning exercise takes time, effort and money. But the advantages will almost always outweigh the disadvantages. Discover why here.
- Scenario planning will help executives understand the effects of various plausible events.
- Finance, operations and other teams can prepare initial responses.
- By having key personnel take part, the company captures their insights and recommendations. If these stakeholders are unavailable during an actual extreme event, the company then has documentation to fall back on.
- Scenario planning is a potentially extensive undertaking. It can be a lengthy process to collect data.
- Factors that impact plans can change quickly. That means scenario planning must be a living process, with constant updates as conditions and assumptions evolve.
Types of Scenario Planning
Quantitative scenarios: The quantitative scenario approach looks at the best and worst cases of a financial model by altering variables, assuming that the key variables identified have fixed relationships.
Operational scenarios: Operational, or event-driven, scenarios look at the short-term effects a circumstance may have on an organization.
Normative scenarios: Normative scenarios are a goal-oriented type of scenario planning often used to help organizations reach their desired operation.
Strategic management scenarios: Also referred to as "alternative futures," this type of scenario focuses on the environment where consumers buy their products.
Probability-based scenarios: Probability-based scenarios look at trends to determine the likelihood an event may occur.
Interactive scenarios: Interactive scenarios describe the interaction with select variables or parties in a competitive atmosphere.
How to do scenario planning?
1. Choose a time frame
To perform your scenario analysis, first set a time frame for your evaluation. For instance, Peter, the owner of a sunglasses company, may choose to look at a five-year scenario since he hopes to see his sunglasses company double its profits over the next five years. Then reflect on the conditions for the chosen set of times to see what changes occurred to help you predict future changes. So, Peter would look at the past five years and consider changes that occurred in the environment, such as the economy or government.
When choosing your time frame, consider what you hope to achieve. Some factors that may affect your time frame include:
- Your product's life cycle
- Technological advancements
- Political conditions in your country
- Your competitor analysis
2. Identify external forces
Next, determine what big shifts are likely to occur in society that may impact your company. To do this, conduct an environmental or PESTLE analysis to look at factors such as governmental policies. Peter may look at factors such as social trends that cause more people to buy sunglasses.
3. Find your critical uncertainties
From your list of driving factors, select two critical uncertainties or risks with the largest potential impact on your business. Then consider the extreme for each uncertainty. In Peter's situation, he may highlight the following uncertainties:
- Potential of a sunglass competitor
- Disposable income of consumers
4. Develop a scenario
Create a graph with your first critical uncertainty on the x-axis and your second critical uncertainty on the y-axis. Each end of the graph represents a different extreme of uncertainty, creating four separate scenarios. On Peter's graph, he would put the presence of a sunglass competitor on the top of his y-axis and no presence of a sunglass competitor on the bottom of his y-axis. For Peter's x-axis, he would put consumers having no disposable income on the left side and consumers having a lot of disposable income on the right side.
5. Evaluate a scenario
After creating a scenario, meet with your team to evaluate the implications of each scenario. Try to determine what scenario your organization is currently in and what direction you may move toward in your designated time frame. Once you have a general idea of the future of your organization, consider what preparations you can make to deal with the upcoming scenario.
Peter may identify that the company is currently experiencing no competitors but consumer disposable income is low. He then can develop a plan for how to market his sunglasses at a lower cost while still earning profits.
6. Update policies and strategies accordingly
Make adjustments to your current policies and strategies based on the evaluation of your scenario. Your scenarios can help you make decisions based on the direction your company appears to be going. By looking at your future scenario, you can plan how your business may need to adjust.
Scenario Planning Process
Scenario planning is a crucial strategic management tool designed to assist global enterprises in anticipating and preparing for potential future events. The scenario planning process usually includes seven steps.
To initiate this process, it is essential to define the scope and objectives clearly. By establishing a cross-functional team that encompasses diverse perspectives and expertise, you can ensure that you consider all the relevant factors that may impact its global operations.
Identify key drivers at risk
The scenario planning process commences with a thorough identification of key drivers at risk. These encompass a range of factors that significantly influence the organization, such as economic conditions, technological advancements, regulatory changes, market dynamics, and geopolitical shifts. The objective is to pinpoint the critical elements that are both impactful and uncertain, laying the foundation for a comprehensive analysis of potential future scenarios.
Develop and model scenarios
Once the key drivers at risk are identified, the next step involves developing and modeling scenarios. This means creating a set of plausible and divergent narratives that depict different ways in which the identified drivers could evolve. These scenarios explore a spectrum of potential futures, providing a nuanced understanding of the challenges and opportunities that may arise.
It’s crucial to ensure that these scenarios are internally consistent, realistic, and encompass a range of possibilities, allowing the organization to be well-prepared for a variety of potential outcomes.
Create a portfolio of actions
The next step is to create a portfolio of actions designed to respond effectively to each potential future. This involves crafting strategic initiatives, operational adjustments, and resource allocations that align with the characteristics of each scenario. The portfolio of actions aims to enhance the organization's adaptability and resilience, ensuring that it is well-positioned to thrive in the face of uncertainties. Each action within the portfolio is tailored to the specific challenges and opportunities presented by the corresponding scenario.
Determine key trigger points
To proactively manage and respond to unfolding scenarios, it’s crucial to determine key trigger points. These trigger points serve as indicators or signals that suggest a particular scenario is beginning to materialize. By establishing a monitoring system for these triggers, the organization can stay vigilant and adjust its strategies in time.
The Complexity of Scenario Planning Strategy
Scenarios by themselves do not determine strategy any more than a forecast does. A strategy needs to be developed in light of a set of scenarios. Think of scenarios as different hands of cards you might be dealt; think of strategies as the way you would play those cards.
Sometimes scenarios are developed after a strategy has been determined. In that case, the scenarios serve as a kind of wind tunnel for stress-testing a strategy.
Using scenarios to test a strategy can function like an insurance policy: You have a mechanism for surviving certain unfortunate contingencies. What if certain accidents happen? Do you have a contingency plan?
So, given a set of scenarios, there are several routes you can travel from scenarios to strategy. Rather than picking one scenario, it’s far better to find a strategy that covers a range of scenarios.
And sometimes the relevant scenarios are sufficiently diverse that no single strategy will work across all of them. In that case, it's a good idea to have a strategy appropriate to each, then attend very closely to early indicators that would tip you to the likelihood of one scenario over the others.
Scenario Planning Best Practices by o9 Solutions
o9 offers distinctive scenario planning capabilities that streamline the assessment of hypothetical scenarios, simplifying the process for planners. This collaboration among cross-functional teams, allowing them to collectively analyze multiple scenarios and arrive at more informed decisions.
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About the author
o9 SolutionsThe Digital Brain Platform
o9 Solutions is a leading AI-powered platform for integrated business planning and decision-making for the enterprise. Whether it is driving demand, aligning demand and supply, or optimizing commercial initiatives, any planning process can be made faster and smarter with o9’s AI-powered digital solutions. o9 brings together technology innovations—such as graph-based enterprise modeling, big data analytics, advanced algorithms for scenario planning, collaborative portals, easy-to-use interfaces and cloud-based delivery—into one platform.