Introduction To Scenario Planning
Scenario planning is a Foresight technique that can help provide a view into the future in a world of great uncertainty. Scenarios are carefully crafted stories about the future embodying a wide variety of ideas and integrating them in a way that is communicable and useful. Using scenario planning techniques, teams can imagine plausible futures with the objective to explore potential surprises and unexpected developments. It can help manage strategic risks and opportunities.
Scenario planning has its roots in military strategy studies, but it was transformed into a business tool in the late 1960's and early 1970's, by Pierre Wack of Royal Dutch/Shell. By applying scenario planning techniques, Shell was better prepared to deal with the oil shock that occurred in late 1973. As a result, Shell greatly improved its competitive position in the industry during the oil crisis and the oil glut that followed.
Why Should Companies Do Scenario Planning?
Scenario planning is a technique analysts and strategists can use to deal with major, uncertain shifts in a company’s environment. Scenario planning is particularly useful in emerging markets or when existing markets are gong through rapid changes and disruption. It is during these times that information is limited and it is hard to predict with certainty what might happen in the future. In these cases, traditional forecasting techniques often fail to predict significant changes going on in the external environment. Consequently, important opportunities and serious threats may be overlooked and the very survival of the firm may be at stake.
Other benefits of scenario planning include:
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It forces people out of their typical view of the market and therefore can expose blind spots that might have been overlooked in the current long range strategic plans
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As the future unfolds, we are better able to recognize a scenario in its early stages as it happens, rather than being caught off guard.
It is important to understand that the objective of scenario planning is not to fully predict the future. Instead, it attempts to help describe what is possible. The objective of scenario planning is to describe a group of distinct futures, all of which are plausible. Once those potential futures are developed, the challenge then is how to deal with each of them.
The Basics Of Scenario Planning
Scenario planning usually takes place in a workshop setting. The workshop can range from a half a day to a number of days, depending on the complexity of the market being studied. It is best to have a diverse team assembled, including analysts, strategists, subject matter experts, and industry leaders. The idea is to bring together a group that has a wide range of viewpoints in order to fully explore alternative scenarios that are outside the current accepted forecasts.
Any scenario planning workshop should encourage unstructured thinking, therefore, the process itself should not necessarily be too structured. With that in mind, the following outlines the sequence of actions that may constitute the process of scenario planning.
- Form Team. Identify people who will contribute a wide range of perspectives.
- Conduct pre-workshop interviews as appropriate. Ideally, the process should include pre-workshop interviews with managers who later will formulate and implement strategies based on the scenario analysis. Without their input the scenarios may leave out important details and not lead to action if they do not address issues important to those who will implement the strategy.
- Begin workshop. Introduce Scenario Planning Exercise. Define goals/objectives. Specify the scope/time frame.
- Develop a clear understanding of the present situation. This will serve as a common departure point for each of the scenarios.
- Document current trends any future events/elements that are virtually certain to occur.
- Understand external environment. Identify the critical uncertainties in the political, economic, social, and technological factors.
- Identify the more important driving forces. Take into account the potential variation and impact of each driver. After listing all driving forces, rank the driving forces in order of significance.
- For the most important drivers, consider a few possible values for each. Range between extremes while avoiding highly improbable values.
- Understand potential interaction between the driving forces. One way to do this is to develop a matrix of scenarios using the two most important variables and their possible values. Each cell in the matrix then represents a single scenario. Assign names to each scenario and sketch out rough pictures/descriptions of different futures based on these scenarios. One of these scenarios most likely will reflect the mainstream views of the future, while others will shed light on what else is possible. At the end of this step, there is not any detail associated with these rough scenarios. They are simply high level descriptions of a combination of important environmental variables.
- Develop Detailed Stories. During this step further work is needed to develop detailed impact scenarios that explain in more detail how each scenario might affect the corporation. Specifics can be generated by writing a story to develop each scenario starting from the present. The story should be internally consistent for the selected scenario so that it describes that particular future as realistically as possible. Experts in specific fields can be called upon to develop more detail around each story. The goal of the detailed stories is to transform the analysis from a simple matrix of the obvious range of environmental factors into decision scenarios useful for strategic planning.
- Quantify the impact of each scenario on the firm, and formulate appropriate strategies.
- At this point, if the team is comfortable doing so, it can be useful to assign a probability to each scenario.
- Establish signposts for each scenario. During this step, the team should identify a set of early warning signals or signposts for each scenario. These are event that could happen that would indicate to the team that the particular scenario is beginning to unfold.
- Finally, the team should establish a process that regularly monitors, evaluates and reviews the scenarios.
What comes out of the scenario planning process is a number of plausible scenarios that can be used to as input into strategic planning discussions. The point is not to select one scenario as the preferred future and hope for it to become true. Nor is the point to fund the most probable future and adapt to it. Rather, the point is to make strategic decisions that will be sound for all plausible futures.
It should be noted that strategists/executives may not take scenarios seriously if those scenarios deviate too much from their preconceived view of the world. Many will prefer to rely on forecasts and their judgment, even if they realize that they may miss important changes in the firm's environment. To broaden their thinking, it is useful to create "phantom" scenarios that show the adverse results if the firm were to base its decisions on the mainstream view while the reality turned out to be one of the other scenarios. For each scenario, I always like to ask the question: What is the worse impact that we can imagine will happen if we do nothing and this scenario comes true?
Summary
Scenario planning works by understanding the nature and impact of the most uncertain and important driving forces affecting the company's future. It is a group process which encourages knowledge exchange and development of mutual deeper understanding of central issues important to the future of the business.
The goal is to craft a number of diverging stories by extrapolating uncertain and heavily influencing driving forces. The stories together with the work getting there has the dual purpose of increasing the knowledge of the business environment and widen both the receiver's and participant's perception of possible future events.
I'd encourage you to try out scenario planning as a way to imagine the potential futures.
Additional Reading/Resources
Scenario planning is a standard feature of every modern simulation software.
Posted by: manufacturing simulation software | February 15, 2011 at 12:15 AM