When thinking about the long-term direction for your business you wish you had a crystal ball to see what the future may bring. Lacking that crystal ball, we have to make assumptions about the future and develop a business strategy based on certain expectations. This is where scenario planning is helpful. This post looks at “what is scenario planning?”
What Is Scenario Planning?
Scenario planning is often conducted as part of strategic planning. It’s a methodology for making informed decisions about an uncertain future and determining what the future might look like.
In essence, scenario planning involves conducting qualitative and quantitative “what-if” analyses to develop a picture of the most plausible scenarios of the future.
You’ll be better able to anticipate opportunities and threats the company may be facing. With that insight, you then develop a business strategy based on this “educated guess” about the future.
Developing and evaluating scenarios is difficult in normal times. Let alone during the Covid-19 pandemic and the impact it has on the economy.
There is a good deal of uncertainty about what the post-covid world might look like. Because of this uncertainty, this is a good time for companies to reinvent themselves and set a new course to get ready for the post-covid economy.
Is Scenario Planning Important?
Used wisely, scenario planning can create a competitive advantage if you’re capable of identifying opportunities in the marketplace that the competition has failed to see.
Scenario planning helps you to visualize and quantify a range of possible viable futures given trends and uncertainties. The purpose is to eliminate the two most common mistakes in forecasting: overprediction and underprediction.
By giving you a better understanding of what the future might look like, the method provides a tool to better manage risk and support strategic planning.
Don’t think it’s just for large companies. Small businesses can benefit from this planning method as well to make better strategic decisions.
A few examples from industries that were caught unprepared for significant changes in their markets helps to understand how these companies could have benefited from asking important “what-if” questions about the future.
- BlockBuster missing the boat on on-demand streaming of movies, e.g., Netflix.
- Detroit automakers not recognizing that threat of Asian imports and then, once again, being late to the game for electric vehicles.
- Kodak not seeing the transition from traditional photography to digital photography, despite their technological lead in image processing.
- Hard-disk manufacturers not seeing the threat from solid-state devices.
- Traditional telephone companies underestimating the threat represented by cell phone technology and VOIP.
A good example of how scenario planning can be used to a company’s advantage is Royal Dutch Shell. As one of the pioneers in scenario planning, the company correctly anticipated events such as the 1973 energy crisis, the price shock of 1979, the 1986 collapse of the oil market, the fall of the Soviet Union, the rise of Muslim radicalism, and the increasing pressure to address environmental and social problems.
It’s a Tool – Not an Exact Science
Scenario planning consolidates 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 describing how various trends and uncertain factors may interact to create a possible picture of the future. By further analyzing the relationships between these elements, you get more insight.
Each detailed and realistic “story” helps to uncover aspects that could easily be overlooked if you didn’t use a methodology to think about the future.
Most of all, scenario planning is aimed at opening the mind to a new future and the opportunities and challenges that it may bring.
When Should You Do Scenario Planning?
The biggest benefit of scenario planning is building a vision of the future that can be shared and discussed throughout the organization. The method can be especially useful in these situations:
- Good deal of uncertainty about the future
- Industry is experiencing rapid change
- Opportunities are recognized late or not at all
- The firm’s strategic thinking is not very mature
- Serious differences of opinion about the direction of the organization
Scenario planning helps company executives better understand the impact of a number of plausible events. By involving key employees from across the organization, you can incorporate their insights and recommendations in the analysis.
Scenario planning offers a number of benefits, such as:
- More confidence in the future
- Prepared for new developments
- Contingencies for future threats
- Shared understanding of where the company is heading
- Better strategic planning
- Develop early warning signals
- Assess the value of strategic competencies
- Evaluate the ROI of each strategic option given the uncertainties
- Improve communication about the firm’s direction
Serious scenario planning is hard and it can take a significant amount of time to collect data and conduct analysis.
Also, assumptions and key factors describing the potential future can change quickly. That means it must be a living process, with constant updates as conditions and assumptions evolve.
Scenario planning is a great tool for envisioning the future to make better long-term strategic decisions. But don’t underestimate the time and effort that goes into doing it right.
The next blog post provides an explanation of how to do scenario planning.