Scenario planning is a method for conducting “what-if” analysis to gain deeper insight into what the future may look like. The method can be very helpful in longer-term strategic planning. Let’s take a look at how to do scenario planning.
A previous post provided an introduction to “what is scenario planning?”.
How to Do Scenario Planning
Typically, business decisions that are based on trends that may impact the business and expectations about the future suffer from either underprediction or overprediction.
Scenario planning is an analysis tool that helps to address this. The method is one of the tools in a formal approach to planning for growth.
Instead of looking at a best-case and a worst-case, scenario planning takes a balanced approach. It considers more possible futures. But, at the same time, it keeps the scenarios realistic in terms of what’s possible and viable.
It’s important to recognize your depth of knowledge and what you know about the future:
- The things you know that you know
- The things you know that you don’t know
- The things you don’t know that you don’t know
The challenge is to distinguish between what you are very confident about and what is for the most part uncertain. Especially when we start thinking about what the post-covid world might look like.
You don’t have to take into account all 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 Step-by-Step
The following sections provide a step-by-step outline of how to do scenario planning. Keep in mind that this is not a complete “how-to” tutorial, but simply an introduction of the scenario planning process.
If you’re interested in the topic and would like to learn more about this blog post, there are many books on the topic of scenario planning.
Define a scope and time frame
First of all, you have to decide what to include in the planning scope. Think of products, markets, technology, customer behavior and preferences, economic and political climate, to name a few.
If the scope is too broad, you may get overwhelmed with the number of scenarios to review. If the scope is too narrow, you might miss key long-term trends and developments.
Next, select a time horizon for your scenario planning. Typically, scenario planning tends 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, perhaps two to three years.
Determine who the stakeholders are
Think about who has an interest in the possible futures you’re going to describe. Who is going to be affected by certain events?
Which companies, countries, or organizations might try to exert their influence to shape the future to their advantage?
To get a better understanding, it is important to get broad, diverse input from across disciplines and areas of expertise within your organization. You could even include other stakeholders, such as customers and suppliers in the discussions. Keep in mind that you can’t do scenario planning by yourself, or on the back of a napkin. Good scenario planning is a multi-disciplinary team effort.
Identify the basic trends
Start by identifying those trends that are currently visible and that are likely to continue into the future. These are the things you know that you know – probably with a reasonable level of confidence.
Next, 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 is also helpful to look at trends that are going to impact customers, suppliers, and competitors. Those trends, directly or indirectly, are likely to impact your firm as well.
There needs to be consensus within the planning team that these basic trends will be ongoing. Trends about which there is disagreement should be treated as uncertainties.
Determine the key uncertainties
After deciding on the basic trends, you start looking at the key factors and trends about which there is uncertainty. You could consider market, economic, political, societal, technological, and legal factors.
For each uncertainty, define what the possible outcome might be. For the initial analysis, and to keep it simple, limit it to two outcomes per uncertainty.
For more insight, look at the relationships (correlation) between the uncertainty factors. For instance, two uncertainty factors could be high at the same time (positive correlation). Or, when one is high, the other has to be low (negative correlation). Or, perhaps there is no correlation at all.
Develop the initial scenarios
In this phase of scenario planning, you are going to develop concise, yet compelling narratives for each scenario.
Start by selecting two major uncertainties and putting them in a 2×2 matrix as shown in the figure.
Each cell in the matrix represents a possible scenario to consider. For instance, the positive outcome of uncertainty #1, combined with the negative outcome of uncertainty #2 results in Scenario C.
Giving each scenario a catchy name brings them to life and makes it easier to distinguish between scenarios in discussions.
By selecting other pairs of uncertainty factors you can create additional scenarios to review.
Double-check the initial scenarios
Next, take a close look at the initial scenarios. Double-check them for internal inconsistencies, plausibility, or lack of a compelling storyline. For instance, you can think about:
- Are the trends within the chosen time frame?
- Do the scenarios combine outcomes of uncertainties that actually go together? How about their correlations?
- Is each future as described by its scenario acceptable to the key stakeholders for a longer period of time? Or would they try to move towards another, more favorable situation? In that case, you have to describe the more stable end scenario.
Select the learning scenarios
From the initial scenarios that have been created and double-checked, select those that are strategically most relevant to your business. 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 the learning scenarios for further research and analysis. These scenarios are not yet to be used for strategic decision-making.
Conduct more research and analysis
With the learning scenarios defined, it’s more than likely that you’ll have to conduct additional research and analysis to get a deeper understanding of the uncertainties and scenarios. You need to remove any blind spots and review assumptions.
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 scenario and how it may play out in the future.
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.
Depending on the specifics of a given scenario and your ability to quantify the model, you could even consider carrying out a probabilistic analysis.
Select the decision scenarios
The iterative process of reviewing the learning scenarios and conducting research and analysis 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.
Determine the validity of the final scenarios
Just like you checked the validity of the initial scenarios, the decision scenarios need to be double-checked as well. You can evaluate the decision scenarios on factors such as:
- Relevancy – The scenarios have to be relevant to and have an impact on key stakeholders
- Consistency – The scenarios must be internally consistent to be effective
- Distinction – Each scenario should describe a distinctly different future rather than a variation on a theme
- Stability – 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 transient and short-lived.
In addition, the scenarios should cover a wide range of possibilities and highlight competing perspectives, both from within and outside the firm.
Implications of the Scenarios
Each scenario represents a different set of strategic challenges, opportunities, and threats.
Scenario planning helps you position the company to take advantage of opportunities that you see on the horizon. And, it helps you to develop mitigation strategies for potential threats that could impact the business negatively.
Taking advantage of the opportunities that the future may bring, or developing a mitigation strategy to deal with potential future threats requires a number 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.
This post provides a high-level outline of how to do scenario planning.
Scenario planning is a tool to gain a deeper understanding and insight into what the future might look like. It’s a “what-if” analysis methodology, not an exact science, but it does sharpen your decision-making skills.
The process can look rather daunting. If you’ve never done this before, it would be smart to work with scenario planning consultants to learn the process and how it applies to your firm. There is also a wealth of books on the topic if you want to read up.
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 entirely new opportunities to take advantage of. And, in the end, that’s what scenario planning is all about.