Scenario Planning: A Detailed Guide
“The task is not so much to see what no one has yet seen; but to think what nobody has yet thought, about that which everybody sees.”
Erwin Schrödinger, Nobel Prize-winning Austrian-Irish physicist
Schrödinger’s belief in ‘thinking about what nobody has yet thought’ was related to the advancement of quantum mechanics, but one cannot understate its relevance in modern-day scenario planning. We hear that “change is the only constant,” and how the entire business ecosystem has undergone a never-before metamorphosis in the past two years establishes that the adage holds true. An ever-evolving marketplace, impacted by innumerable disruptions, such as technological, social, and even health crises like COVID-19, underscores the need for planning.
That scenario planning is a complicated endeavor and requires the best minds to decipher what may lie ahead is a given. In the organizational context, it mandates the best estimate of its future. Thus, planners must use past events and trends to embark on the challenging task of translating that knowledge into a beneficial forecast for the future. This desire to minimize the impact of the unforeseen and continue with ‘business and usual’ has led to the conceptualization of scenario planning. It has stemmed from the need for preparing for an uncertain future while factoring in multiple alternatives.
What Is Scenario Planning?
Scenario planning is a business tool that empowers organizations to make prudent decisions, reduce the time required to act, and mitigate risks. It also helps them maximize profits by preparing for what may lie ahead, nullifying the element of surprise. While organizations of any size may use scenario planning, usually larger organizations adopt it to become future-ready for unforeseen challenges.
Scenario planning has been around for ages, and armies and governments have used it to better prepare for wars and administration. On the contrary, scenario planning in business is a relatively new concept. Organizations use it to envisage the future and create many different environments and realities in which it could occur and determine their long-term standing. They use scenario planning to mitigate the risks that they may face ahead and formulate plans and strategies to guide their decision-making process. It is a tool to make strategic, longer-term decisions in a manner that stands the test of time.
Organizations usually think of scenario planning as a financial tool to determine their course of action based on their revenues. However, finance is only one aspect of scenario planning at an enterprise level. It helps organizations construct choices about how they would act based on external factors or environments. It allows organizations to take actions confidently, believe in their business choices, and know that they are adding value to their mission, vision, and constituents, besides making a longer-term impact, even if external circumstances change with time.
Scenario Planning in Business: How It Works
Imagine a company that needs semiconductor chips to manufacture vehicles. Its dependence on one source market and disruption therein can cause a shortage of a critical component, derailing its manufacturing process. Many vehicle manufacturers underwent a similar turmoil when the pandemic derailed the global supply chains. The predominant source market stopped supplies as it waged a prolonged battle to regain normalcy.
Scenario planning allows planners to replace the futile job of predicting future events with a more feasible task of preparing the organization to face its most relevant effects.
Organizations assume that the future could mimic the recent past for shorter durations, such as a quarter or even a financial year. But even this logic has come under the scanner as the pandemic has challenged all traditional notions, underlining that large-scale disruptions can manifest in any form. Aside from COVID-19, natural disasters, political instability, changes in financial policies and regulations, and tech evolution occur regularly. Traditional forecasting methods are not designed to factor in these unforeseen changes; besides, using them to plan for longer-term horizons will create projections of similar trends that exist now. Using them to outline the distant future is akin to shooting in the dark – the likelihood of missing the target is statistically more than hitting it. Therefore, the idea of planning is to align with the changes closely.
Why A ‘Traditional’ Outlook Won’t Work
Even if companies go by the logic that the near future would be similar to the recent past, this traditional approach does not perform well when planning for extended periods, such as a decade or more. Scenario planning is a different approach that helps make such long-term forecasts. Instead of predicting one future, it helps predict multiple futures simultaneously. Scenario planning follows the principle that organizations are better off preparing than predicting, and it is a way to prepare for numerous likely futures. They do this by answering what they ought to do today, given that the particular future would manifest.
Importantly, each future that organizations choose using scenario planning is one potential future out of many. Therefore, organizations must not predict which future will come to pass because an infinite number of probable futures are likely. Companies can’t explore all of them as there are way too many. Thus, they must create a handful of plausible alternative futures that cumulatively capture the most relevant uncertainties and driving factors.
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Principles of Scenario Planning
Let us look at some principles of scenario planning
Take the Long View, But!
Companies often fall into the trap of taking an unrealistically long-term view. While scenario planning factors in longer-term uncertainties, organizations must not plan so distant into the future that planning loses its relevance. For instance, accounting for the fast-changing tech landscape is highly challenging as it evolves rapidly, and companies usually play catch up rather than the other way around. Therefore, a five-year plan makes more sense and is likelier to hold than a twenty-five-year plan.
Use the Outside-In Approach
The outside-in approach refers to roping in experts who are not directly associated with the company undertaking the scenario planning exercise. This mechanism helps gather uncluttered and unbiased viewpoints that are unaffected by familiarity with the organization’s policies and approaches. Thus, a fresh, third-person vantage point will likely unlock untapped perspectives.
Encourage Multiple Viewpoints
Allowing different teams to share their views helps bring out all possible alternative futures, strengthening the scenario planning exercise. Management may not necessarily agree with every viewpoint, but they must encourage employees to share them. One of the key reasons to undertake a scenario planning exercise is to list all possible outcomes, and such an approach helps achieve its objective.
Six Steps of Scenario Planning
Let us understand the steps involved in a scenario planning process.
1. Understand the Focus Area
The first step is focusing on what the organization is trying to find through the process. For instance, an organization can assess how it can continue with its expansion plans amid the pandemic and other such future disruptions. Here, it is essential to shape a question that gives scope and an end goal to keep the exercise focused, specific and result-oriented.
The organization can list the unknowns after it has firmed up the question. Here organizations must outline the broadest possible set of unknowns and understand the bottlenecks that deter them from making a decision. These could include the political climate, changes in the tech landscape, and the organization’s product lifecycle.
Uncertainty is not a feeling but a lack of information that persists after detailed research.
Organizations can evaluate subject-specific forecasts available in the public domain on which they intend to plan. For example, what is the consensus on the timeline in which the pandemic would dissipate? Or what other similar-sized companies are doing to continue with their expansion plans. This deep-diving helps organizations gain a more holistic understanding of the challenges in each area.
2. Trigger Events
Trigger events are new events that can provide organizations with further information, helping them make decisions more confidently. These events do not necessarily resolve the uncertainties but only offer new insights. Such a forecast enhances organizational belief in the decision-making process. For example, the government’s decision to provide booster shots to all can be a trigger event that can reduce the impact of the pandemic, expediting normalcy, and allowing the organization to moot its expansion with greater resolve.
Describe Your Unknowns
|Best-case Scenario||Worst-case Scenario||Most Likely Scenario|
|No new COVID-19 variant emerges.||New variants emerge, and the government reinforces lockdowns||General awareness and fast-paced vaccination will stymie the pandemic’s spread|
|No new pandemic or endemic occurs.||New infections emerge soon.||Governments globally will focus on research and genome sequencing, reducing such risks.|
‘Best case scenarios’ refer to the outcomes that organizations can realistically hope will happen, whereas worst-case scenarios are the most challenging outcomes that organizations may have to face. And ‘most likely scenarios’ are the most likely outcomes amid the present-day variables. Organizations must be wary of the fact that best and worst-case scenarios can often lead to unrealistic and unbeneficial examples. Therefore, they must set them realistically.
Planners often get caught in a swirling vortex of circular conversations with their board members and employees on these scenarios. Therefore, they should firm them up based on a majority agreement. Then, planners can build their strategy after they have finalized the projections and unknown factors for each box.
3. Build Your Scenario
The second step is centered on combining the conditions from the established unknowns to envisage a situation that the organization may have to face. For example, the government does not offer a booster shot for the entire population, increasing the likelihood of a recurring wave. Therefore, planners must limit their unknowns to three to four and mix them to focus on what matters the most to the organization.
4. Create a Scenario Planning Template
The third step of the process is to identify the driving forces of the environment, i.e., the critical factors on which the planners have focused. These driving forces can come up in areas, such as changes to the societal structure, including its demographic, economic, and political factors, besides public perception.
Markets and consumer behavior, tech innovation, the competitive ecosystem of the organization’s industry, and its core competencies are other factors that planners need to consider before creating their template.
5. Develop and Implement the Scenario
Developing the actual scenario is the most critical task of scenario planning. Planners must construct a condition according to each factor discussed above to create a situation according to market trends. Planners must also identify the strengths and weaknesses and work while building a scenario, following which comes its implementation.
The planners discuss the implications of each scenario with the organizational leadership. Finally, the organization decides the direction in which its reality will move in the deliberated time frame.
6. Adjust and Update to Keep the Strategy Relevant
Developing and implementing scenario planning is not the final step. It also requires continuous tweaking after evaluating the strategic plan and updating policies after factoring in evolving market trends. Also, the marketplace is under constant change, depending on macro-environmental factors. Thus, regular assessment helps organizations stay on track and update accordingly at specific intervals.
Advantages of Scenario Planning
Scenario planning offers several benefits.
1. Resource Optimization
Team leaders and project managers can better understand the extraneous factors, their organization’s future roadmap, and longer-term mission and vision. These insights allow them to deploy resources optimally and rationally, without under-or-over allocating. Optimal utilization of resources is a must for companies seeking to maintain a competitive advantage in a transient marketplace.
2. Enhanced Organizational Ability to Envisage Their Future
Organizations can manifest several futures and decide how they wish to proceed with their business goals. This ability to imagine allows them to take pre-emptive measures to likely bottlenecks, streamline operations, and align themselves to possible changes in the future.
3. Team Building and Better Appreciation of Cultural Differences
A scenario planning exercise offers the opportunity to engage all team members where they can voice their worldview. Outlook and worldview vary significantly owing to cultural and political differences. This divergence leads to starkly different manifestations of the future outlook and lets all employees share their perspectives without causing any discontent or friction, which is not otherwise not possible.
4. Risk Mitigation
One of the critical advantages of scenario planning is its ability to mitigate risks. As organizations can foresee numerous alternative futures, they can prepare and align themselves better. Thus, they can insulate themselves from possible disruptions and headwinds. This benefit helps them move forward more assuredly and make business decisions more confidently.
Disadvantages of Scenario Planning
The cost of a scenario planning exercise depends on several variables, such as the organization’s size, the timeframe for which it is undertaking planning, the size of the team involved in the process, and the overall mandate of those involved in the strategic planning process. Usually, large-sized enterprises conduct scenario planning. Therefore, the number of individuals tied to the process is high, which costs significant financial resources. Besides, we have also mentioned that organizations bring in outside expertise to aid the process, further increasing expenses.
2. Needs Time
Organizations may typically take six to twelve months to engage in in-depth, multi-scenario planning. The process involves collecting vast tracts of data and information from various sources before experts can interpret them. Such an elaborate process extends the timeline, making it a time-sapping activity.
3. Requires Significant Resources
Financial resources are only one aspect of the exercise. It also needs a scenario management team and experts from outside the organization who work in tandem with internal teams. Members from all business-related departments usually partake in a scenario planning initiative. As scenario planning is a full-time activity, such resources are effectively not involved in daily operations, reducing the teams’ bandwidth, and costing the company significant billable hours. Also, it needs massive data inputs from all departments.
In summary, scenario planning provides critical trends and insights into what may happen, offering organizations a clearer understanding of their future roadmap. It creates a sense of proactiveness and keeps organizations relevant in an ever-transforming marketplace, nurturing proactive thinking and strategic planning.