Traditional strategic planning and forecasting techniques tend to be somewhat rigid, and generally fail to accurately predict significant changes in markets or industries, particularly when the environment is very dynamic. As a result, traditional strategic planning techniques tend to overlook potential opportunities and threats which may have critical impacts on the viability of the firm. Scenario planning was developed to hypothesis about possible development in the firm’s environment and how the firm would adapt to deal with them. As such, scenario planning is not focused on predicting the future, but rather on considering possible options and how they would be addressed.
Scenario planning is generally carried out amongst the top executives in a firm, together with a range of technical and industry experts. The aim of scenario planning is to create a range of ideas and perspectives around future scenarios which, although not likely, are quite possible. As part of the process, managers are generally interviewed to determine any important details and ensure that any responses formulated will be appropriate to the firm.
One of the main benefits of scenario planning is that it forces executives and managers to accept the uncertainties that exist in their environment and consider whether they are taking a holistic view of said environment. It also allows key decision makers to recognise the chain of events which leads up to critical changes in the environment, and hence react better to all scenarios, even those not explicitly included in the planning. Finally, managers tend to obtain a better understanding of the disagreements and issues which often occur in organisations through the scenario planning process.
The Scenario Planning Process
The planning process itself tends to be quite fluid depending on the company and the industry; however the following nine actions can be seen as a fairly generic scenario planning process.
1. The scope, scale and time frame of the scenarios needs to be specified
2. There needs to be a clear understanding of the point at which the scenarios depart from the current situation.
3. Participants should identify certain events which have to occur in order for the scenario to proceed, and those which will be driving the scenario.
4. Participants should also identify the critical uncertainties which exist in the environment, on both the macro and micro levels, and how these may vary.
5. Participants need to analyse the drivers and identify which will be the more important in the scenario.
6. Participants need to consider the uncertain variables, and how these can vary up to the most extremes likely values.
7. A matrix of scenarios should be used to analyse how the key drivers and uncertain variables will interact, and the specific scenarios which will emerge from each interaction.
8. Each scenario created from this matrix should be analysed and, with the help of industry and technical experts, as many specific details should be added as possible.
9. The potential and likely impact of each scenario on the viability of the firm should be assessed, and appropriate strategies should be formulated to overcome any impacts.
In addition, it is possible to assign probabilities to each of the scenarios. However, it can be difficult to determine any definite probabilities, particularly those which relate to any contentious or radical scenarios. As such, there is debate in the literature around the value of assigning probabilities to different scenarios. When considering probabilities, it is important to realise that business unit managers may not accept the results of any scenario planning if they see the scenarios as being too unlikely. As a result, many managers will continue to rely on their judgement and forecasts, even if they accept that these may not be complete and accurate. This can be difficult to overcome, and often executives will need to use examples from previous occasions to demonstrate the problems which can occur if a business solely followed its forecasts and an unexpected and harmful scenario occurred.
On top of our MBA help guides we also have a range of free resources covering the topic of business strategy: