Scenario Planning

What is scenario planning?

Scenario planning is how businesses across all industries plan for uncertainties by creating a strategy for potential future changes to ensure the business remains successful. These changes can consist of anything related to the business’s environment, personnel, or processes that could cause a shift in the organization.

Scenario planning builds on the premise that the best way to prepare for the future is to think through and plan for various instances or events. Once these potential scenarios are identified, planning goes into how the business could respond. 

It’s common for organizations to utilize strategic planning software to assist in building a mission statement regarding potential scenarios. These scenario planning tools can also easily create and share the values and goals of an organization and track various KPIs that make accomplishing the goals possible.

Types of scenario planning

There are four types of scenario planning to choose from, depending on the organization and the ultimate goal.

• Quantitative scenarios: These are financial models that show users the best and the worst-case scenarios for various models. The models can be adjusted when the variables and factors within the scenario are changed, referred to as quantitative data. This type of scenario planning is commonly used to develop business forecasts. 

• Operational scenarios: These scenarios are one of the most widely conducted types of scenario planning an organization can carry out internally. Operational scenarios take a deeper look into the immediate impact of an event while outlying short-term strategic implications. 

• Normative scenarios: This type of scenario describes a preferred or achieved end state or goal. These end goals typically relate to how a company would like to operate or perform in the near future. Normative scenarios can also easily be combined with other types of scenario planning for more conclusive data. 
• Strategic management scenarios: This type of planning is less focused on the industry or organization and instead focuses on the environment that products or services are consumed, bought, or utilized. It’s typically the most challenging type of scenario planning for companies to complete on their own, so it’s common to hire specialized analysts for assistance. 

Benefits of scenario planning

When done correctly, scenario planning can provide many worthwhile benefits to organizations across varying industries. The benefits include: 

• Helps executives and key decision-makers understand the effects of various possible events.
• Allows for finance, operations, and other departments to prepare response times.
• Assists in capturing insights and recommendations to better forecast business outcomes.
• Provides documentation to reference should an extreme event occur.
• Prepares a business to be agile as they are more able to adapt to multiple outcomes and eventualities. 
• Decreases response time to events where solutions were able to be planned.
• Allows businesses to better predict staffing needs, so overstaffing and understaffing become less likely and less costly. 
• Increases the amount of trust an organization could see from investors and outside stakeholders by presenting accurate forecasts and solutions to potential risks the company has in place.

Basic elements of scenario planning

Because scenario planning definines any critical uncertainties and develops likely scenarios to discuss the impacts and responses, there are basic elements to the process.

These elements are:

• Identify driving forces: These driving forces are typically any significant shifts within society, the economy, the business industry, technology advances, or politics that could affect the company. 
• Identify any uncertainties: Uncertainties represent the one or two driving forces that could have the greatest impact. This could be the price of materials, a change in consumer demand, or a political shift.
• Develop a range of scenarios: From the one or two uncertainties, cultivate four possible scenarios that could take place in the future. 
• Discuss any implications: Outline any potential implications or impacts of each scenario on the business and consider potential strategies. 

Scenario planning best practices

There are specific best practices to follow to ensure scenario planning is done correctly. 

• Determine a strategic position: As an organization, key stakeholders should come together to identify all strategic issues, examine customer insights, and collect industry and market data for a better picture of what a plan needs to look like for success. 
• Build the right team: In companies of all shapes and sizes, it’s common to utilize financial planning and analysis groups to lead the scenario planning process.
• List out critical triggers by priority: Guidelines need to be established for how an organization will respond in times of crisis. The historical data that is gathered will assist in determining the ramifications a business may face. 
• Develop multiple scenarios: Without feeling overwhelmed by possible outcomes, build various scenarios a team can reference at a moment’s notice. These should be kept relatively simple by sticking to a few uncertainties and building the scenarios out from there. This goes hand-in-hand with getting the correct data for the most accurate model possible.
• Build the necessary response strategy: Every scenario needs enough detail on how to make decisions and monitor in real-time if an ongoing response is essential and whether the strategic option will be a success or a failure. 

Scenario planning vs. business forecasting

It’s common for individuals to confuse scenario planning with business forecasting. Scenario planning uses both forecasts and trend analysis techniques to identify ways the forecasts could be disrupted, in addition to potential outcomes. Even though some scenarios may seem unlikely, developing a strategy ahead of time can help organizations deal with changes should they occur.

Forecasting uses specific and historical quantitative methods to estimate the future based on data from both the past and present. Business forecasting is also more commonly used within a risk management assessment.