Exploring what the world could look like in the long-term, can help organisations to react to crises and be more confident in times of uncertainty. Read our seven steps to strategic scenario planning
Scenario planning is a technique used by organisations to prepare for uncertainties by creating detailed and plausible scenarios of what the future could look like. It’s not about predicting the future, but instead it’s a training exercise that helps those who make strategic decisions to be more able to respond to crises.
Scenario planning options
There are several types of scenario planning, but exploratory scenario planning – pioneered by Harman Khan – is the potentially the most useful for navigating uncertainty. This approach uses scenarios to consider how different the future may become and the drivers of those changes.
Many accountants might be comfortable with operational and financial scenario planning which has a short-term focus and uses information about current conditions to generate several what-if scenarios. These are typically broken down into a worst, middle, and best-case scenario and the implications of which are modelled in financial terms.
Short-term scenarios, although useful exercises, won’t help companies rehearse or generate strategic options for disruptive, or game changing scenarios.
Strategic scenario planning looks out over a median to long-term horizon and uses trend information and evidence from today on how the world may change in the future. It often uses narratives to describe the future and help decision makers consider the implications of the changes.
This type of scenario planning helps managers consider appropriate responses ahead of time and identify potential “no-regret actions” – actions that can be taken by the organisation that will be beneficial regardless of the future that comes to pass. Other benefits of long-term scenario planning include the ability to:
- model many interrelated variables concurrently;
- test existing operations and business plans for robustness;
- create alternative strategic options; and
- rehearse what to do and when.
Scenario planning also creates a common language for management and the board. Each scenario will have its own jargon, which can be used as shorthand for emerging situations that are quickly understood by all relevant stakeholders. Consequently, threats can be more easily managed, and opportunities seized.
Seven steps to strategic scenario planning
1. Define the user and use
Scenarios explore the uncertainty of the firm’s future context for someone for a specific purpose. So the first step is determining (a) who the scenarios are for; (b) for what purpose are they being developed; and (c) exactly how the outcomes will be used and when.
2. Scope the process
Scenarios are created and used by moving between well-facilitated strategic conversations and desk research. A small organisational team can help execute this process, preparing inputs, organising, and helping facilitate conversations with stakeholders, as well as compiling the outputs.
3. Research potential futures
Identify developments, innovations or observations from today that suggests that the future could possibly be different to today's norm – “signals for change”. For example, research indicating greater consumption of non-meat proteins.
For a scenario of the future to resonate with your audience it needs to be grounded in something already present in the world otherwise, you risk creating a vision of the future that is too implausible to be accepted.
4. Understand driving forces
The next step is to identify the driving forces behind the ‘signals for change’, such as climate change, concerns over industrial agricultural practices and advances in cell line technology to cultivate mean (lab-grown meat). You must then evaluate the importance and uncertainty of these drivers and rank them.
5. Develop scenarios
Create scenarios based on the most important and uncertain driving forces and develop detailed and coherent stories around the scenarios.
Don’t forget scenarios describe a different and insightful configuration of an organisation’s future business environment, they do not describe the firm itself. For example:
- Scenario 1: increasing consumer demand for alternative protein and continued development of cell line technology.
- Scenario 2: increasing consumer demand for alternative protein that stalled development of cell line technology.
To be effective scenarios, must be:
- plausible although not necessarily probable;
- relevant to the business decision or issue at hand, and
- use storytelling to make scenarios immersive and engaging for the audience.
6. Assess the future business environment
Once the scenarios have been developed, they can be used to understand how the business environment would evolve and change in each scenario. Areas of interest might include understanding:
- which new stakeholders appear,
- how roles change (eg, has a client become a competitor?),
- who is doing well and who isn’t,
- how relationships between organisations change, and
- what opportunities and challenges or threats emerge.
7. Identify actions
After examining what the future could look like and the potential impacts on the business environment, this data should enable decision makers to identify potential mitigating actions. These can then be implemented or planned out as appropriate.
Tips for effective scenario planning
Plan for a range of scenarios
Most businesses prepare for well-known risks such as cyber-attacks. But what about less likely, high impact events? For example, a rogue solar flare that causes power outages lasting months potentially making virtual working and online commerce impossible.
One approach is to categorise events, such as natural disasters, technological emergencies, health events, and have a plan in place for each. It is important to drill down and consider how such an event would really affect the specific business being considered.
Data is key
Up to date data is vital to ensuring forecasts are robust. Every forecast needs a solid base from which to start so make sure management information and business records are up to date, and if possible, digitise them. A strong set of data will enable the business to respond to change in an agile way, with senior management confident that the numbers are reliable.
If possible, use a range of information sources to inform your forecasts, for example:
- Internal data – management accounts.
- Near time data – table bookings, room bookings, order books.
- Market research.
- Government and institutions – gov.uk, IMF, OECD, central banks.
- Press and media.
Periodic review
Circumstances change. Scenario planning and forecasts should evolve with the business, its environment, and changes to the wider economy. Periodic reviews are essential as otherwise forecasts can be rendered ineffective. Sometimes scenarios can be tweaked to reflect new information, but do not be afraid to develop new scenarios when necessary.
Collaborate and listen
Consider who provides input to the forecasts and who reviews them. Involve colleagues from operations, finance and procurement for example. An inclusive approach will provide different perspectives which might help shape future strategy of the business should disaster strike.
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