The Covid-19 pandemic has thrown the economy into chaos. Stay-at-home orders, business shut-downs, partial openings, the potential of a second wave, and possibly more shut-downs. Many businesses, large and small, are in survival mode.
There is tremendous uncertainty about what the post-corona economy might look like and when we’ll get there. Scenario planning is an approach for making decisions about the future that might help us in this time of uncertainty.
Despite or perhaps because of the uncertain future, this is the time for companies to reinvent themselves and seize new opportunities.
One of the key tools for making decisions under uncertain conditions is scenario planning. Insight into what the future may look like helps to determine where the opportunities are and which direction the firm should be going.
Used wisely, the scenario planning method can create a first-mover advantage for identifying opportunities in the market that the competition may have failed to see.
This post does not provide a complete “how-to” of the scenario planning process. It aims to give you a high-level understanding of what the scenario planning method is about and how your company could benefit.
What Is Scenario Planning?
Scenario planning helps you to visualize and quantify a range of possible viable futures given trends and uncertainties. The purpose of scenario planning is to eliminate the two most common errors in making strategic decisions: overprediction and underprediction.
Especially in these chaotic times, it’s pretty much anybody’s guess what the new economy is going to look like. Some of the habits we had to adopt during the Covid-19 pandemic could be permanent. In other cases, we’ll be able to go back to the “old” normal, perhaps.
There are sufficient changes visible to see what will be different and what customers are going to expect and need. This insight drives the development of a number of plausible scenarios of the future to support strategic decision-making.
Scenario Planning Is a Tool – Not an Exact Science
Scenario planning simplifies all the information you have, including forecasts of what the future might look like, and the uncertainties of this happening, into a limited number of possible, viable futures.
In essence, each scenario is a story of how various trends and uncertain factors may interact to create a possible future. By further developing the relationships between these elements, you gain additional insight.
Each detailed and realistic scenario “story” helps to uncover aspects that are easy to overlook if you didn’t use a formal process to think about the future.
Most of all, scenarios are aimed at opening the mind to a new future and the challenges and opportunities it brings.
When to Use Scenario Planning
The biggest benefit of scenario planning is building a vision of the future that’s shared throughout the organization. You can especially benefit from scenario planning if:
- There is a great deal of uncertainty about the future
- The industry is experiencing turmoil and change
- New opportunities are not being recognized
- The organization’s strategic thinking is too routine or bureaucratic
- There are strong differences of opinion about the future direction of the organization
Scenarios can be used to:
- Develop early warning signals
- Assess the value of your strategic competencies
- Generate better strategic options
- Evaluate the ROI of each strategic option given the uncertainties
- Improve communication about the firm’s strategic direction
How to Create Scenarios
More often than not, decision-making based on future trends suffers from either underprediction or overprediction. Scenario planning helps to address this.
Rather than taking a best/worst case perspective, scenario planning takes a balanced approach. It considers more possible futures while, at the same time, keeping the scenarios realistic in terms of what’s possible and viable.
There are three levels of knowledge about what we know about the future:
- What we know we know
- What we know we don’t know
- What we don’t know we don’t know
When we consider the post-corona world, there are things we can be pretty certain about. There are things where we don’t know much about which way they’ll go. And then there are things where we have no idea that they’ll even be a factor in shaping the future.
The challenge is to distinguish between what you are very confident about and what is for the most part uncertain.
It is not important to account for all the possible outcomes of each uncertainty; simplifying the possible outcomes is sufficient for scenario planning. For instance, you may want to think in terms of three possible interest rates (high, medium, and low) rather than hundreds of them.
Scenario Planning Process
1 – Define Scope and Time Frame
You need to think about what to include in the planning such as products, markets, technology, customer behavior and preferences, economic and political climate, to name a few.
Next, you need to decide on a time horizon for your scenario planning. In normal times, scenario planning may tend to look 5 to 10 years out. However, if you’re trying to better understand what the post-corona world might look like, the time horizon is much shorter, say one or two years.
2 – Determine the Stakeholders
Think about who has an interest in the possible futures you’re going to describe. Who is going to be affected? Who might influence events to shape the future to their advantage?
Broad, diverse input from different departments in your organization is critical. You might even include other stakeholders, such as customers and suppliers in the discussions. You can’t do scenario planning by yourself, or on the back of a napkin. Good scenario planning is a multi-disciplinary team effort.
3 – Identify Basic Trends
Start by identifying the current trends that are likely to continue. These are the things we know we know- with a reasonable level of confidence.
Describe each trend and how it impacts your firm. List each trend in a table or chart and rate the impact on your business as positive, negative, or uncertain. It can also be helpful to extend your scope by looking at trends that will impact your customers, suppliers, and competitors. Those trends, directly or indirectly, are likely to impact your business as well.
The entire planning team should agree that these trends will be on-going. Trends about which there is disagreement should be treated as uncertainties.
4 – Determine Key Uncertainties
In this step, you determine the key factors that could impact your business about which there is uncertainty. You could consider market, economic, political, societal, technological, and legal factors.
For each uncertainty, define the possible outcomes. To keep it simple for the first analysis, limit it to two outcomes per uncertainty.
To gain further insight into the relationships between the uncertainty factors, it helps to look at the correlation between them. For instance, two uncertainty factors could be high at the same time (positive correlation). Perhaps when one is high, the other has to be low (negative correlation). Or perhaps there is no correlation at all.
5 – Develop Initial Scenarios
A first approach could be to develop extreme views of the future by putting all positive elements in one and all negatives in another.
Another approach is to select two major uncertainties and putting them in a matrix. Each cell in the matrix represents a possible scenario to consider.
By selecting additional pairs of uncertainty factors you can create more potential scenarios.
Develop a compelling story for each scenario by creating a narrative for that particular view of the future. Giving each scenario a catchy name helps to make them come alive and to distinguish between scenarios in discussions.
6 – Check for Consistency and Plausibility
Next, double-check these scenarios for internal inconsistencies or lack of a good storyline.
- Are the trends within the chosen time frame?
- Do the scenarios combine outcomes of uncertainties that actually go together?
- Is each future state acceptable to the stakeholders for a longer period of time? Or would they take action to move towards another, more acceptable situation? In that case, you have to describe the more stable end scenario.
7 – Develop Learning Scenarios
From the scenarios that have been created, select those that are strategically most relevant. Although the uncertainty factors appear in all the scenarios, they can be given more or less weight or attention in different scenarios.
At this stage, you have constructed learning scenarios, which are tools for research and study, rather than for decision making.
8 – Conduct Research
Once the learning scenarios have been defined, further research may be needed to get a deeper understanding of uncertainties and trends and remove any blind spots.
For example, do you really know how a key stakeholder is going to act in a given scenario? You may also want to look beyond your own industry to better understand a particular future scenario.
9 – Develop Quantitative Models
If possible, you may be able to develop some quantitative models for further analysis of the scenarios and their impact on your business.
10 – Select Decision Scenarios
The iterative process of reviewing the learning scenarios and conducting research should lead you to converge on a small number of key scenarios for testing business strategies and generating new ideas.
Make sure these are the decision scenarios you’ll be using for strategy development. If you’re not entirely confident about these scenarios, go back, and develop more learning scenarios and conduct further research. As you can see, scenario planning is part art, part science.
How to determine if the final scenarios are any good
- Relevant – The scenarios need to be relevant to and have an impact on key stakeholders
- Consistent – The scenarios must be internally consistent to be effective
- Distinct – A scenario should describe a distinctly different future rather than a variation on a theme
- Stable – Each scenario should describe a future that is likely to exist for an extended period of time. It does not make sense to prepare for a possible future that will be short-lived.
In addition, the scenarios should cover a wide range of possibilities and highlight competing perspectives, both within and outside the firm.
Implications of the Scenarios
Each scenario represents different strategic challenges and requires a different set of strategic competencies. Exploring them turns the initial learning scenarios into final decision scenarios.
It is up to you to decide whether to base your business strategy on a single scenario, stay flexible to exploit multiple scenarios, develop exit strategies in case things go wrong, or leverage strategic partnering or diversification.
Scenario planning is a tool for management to gain a deeper understanding and insight into what the future might look like. It’s is not an exact science.
When thinking about the future, it is useful to consider:
- Things we know we know
- Things we know we don’t know
- Things we don’t know we don’t know
An effective scenario planning process requires intellectual curiosity and the courage to accept information that does not fit current thinking.
What may initially seem to be a possible future with bleak prospects could, in fact, help you to uncover brand new opportunities. And, in the end, that’s what scenario planning is all about.