Effective scenario planning

We humans learn fast and well, but this can become a limitation. What we figured out worked for us in the past may no longer hold true in the present, never mind the future. Yet we tend to cling to our recipes for success, enjoying the comfort of the familiar.

When we are under threat from change, our higher-level thinking shuts down, diminishing our ability to deal with complexity. Short-term survival takes precedence and danger can seem amplified. We believe we have less time than we really do. This is not conducive for taking advantage of any opportunities that the crisis might afford us.

Scenario planning is a great way for executives who make strategic decisions to keep their brains nimble and more able to respond. Sadly, it is often misunderstood. Rather than predicting the future, it is really about mental training. Like a military drill, it is not for the faint-hearted. It forces us to challenge our beliefs about the future and demands that we put attachment to unrealistic optimism (a tendency of salespeople and politicians) temporarily aside.

A common misconception is that you only need to build a couple of scenarios based on probability, such as a best and worst case. The danger of this is that those who construct them tend to have a heightened expectation that either one will come to pass, blinding them to other possibilities, and thus biasing their responses to unfolding circumstances.

Good scenario planning yields its richest benefits when a wide range of scenarios is addressed, varying the parameters and including eventualities that have both low probability and severe consequences – like a stock market crash or a pandemic, to name two in living memory. Both have been dismissed by political leaders in favour of anticipating more optimistic futures.

A serious scenario planner and their colleagues will be willing to face the deeply unpleasant and disruptive future possibilities while in a safe environment in order to figure out intelligently – precisely because they are not stressed or panicking – what could be done to cope.

This is not about being a doomsayer or a pessimist. It’s about having the courage to think about the unthinkable temporarily, and plan how you would respond, so that if it ever comes to pass, you’ll be confident that you can cope; you’ll respond rather than react. We are talking about mental agility – being capable of a clear-thinking response rather than a poorly-considered knee-jerk reaction when a real organisational threat appears.

Take an example from nature. Buffalo and cattle behave quite differently when faced with an oncoming storm. The more domesticated cattle run from it, inevitably it outruns them and their distress is prolonged. Buffalo, on the other hand, go to the crest of a hill to face the storm. They charge into it, minimising their duress. Scenario planning emboldens us to face a storm feeling more confident and prepared.

To look at an example from real life, in the 1970s the price of oil crashed. Then something remarkable happened – when it recovered, Shell, previously a modest, second-league oil producer, was catapulted into the top league. Before the crash, it had been playing with scenario planning. One scenario included the collapse of the oil price. Having worked through the options for response and their consequences, the business concluded, counterintuitively, that it would be good to invest in plant and equipment should a crash occur – and even if it didn’t. Like the buffalo, when the price did crash, it was unfazed and kept investing, while others instinctively retrenched. The rest, as they say, is history.

There are various schools of thought on what goes into a scenario, but ideally you want a mix of three key elements.

1. The certain: knowing what you can know. This could be statistics on demographics, consumers or your competitors’ market shares. It means researching and not just relying on what is in your head. You will have to select to some extent, given the huge amounts of data at our fingertips. But AI can help, as can discernment.
2. The uncertain but possible: this requires trend analysis – the gathering of sophisticated data on emerging patterns from reliable sources and research. Extrapolating trends has its risks, as any seasoned investor will know. So, play with different trend projections.
3. The improbable that have big consequences: these are often referred to as ‘black swans’ – highly unlikely events that challenge our beliefs (and comfort levels). As long as your assumptions are not in your awareness then your imagination is being limited, so there is benefit from having diverse participants in the exercise – people from outside your system – as their creativity will not be curbed by organisational inculcation. Lateral thinkers are also great to invite in. Why not involve your stakeholders in the process? They will learn a lot, but also add richness to the scenarios you create. Make sure you participate fully yourself, and include senior peers rather than delegate to others. There is no substitute for going through the process first hand. Hearing about the conclusions others have come to dissipates their power to make your mind more agile; it is also easier to dismiss them.

Take the conclusions from the World Health Organization in 2018, for example, that global pandemic plans were inadequate. Some governmental groups did actually conduct scenario planning-type exercises. But neither politicians nor big business took action. They were reluctant to consider a future deemed both highly unlikely and with devastating consequences, even when others had done so and were begging to be heard.

There are an infinite number of possibilities in creating scenarios, so it is important to remember that it is not about likelihoods, or simple dichotomies such as best case and worst case – it is about experimenting with many combinations.

Look at each from varying perspectives in that future world. Consider the plans your organisation might make and evaluate what they might mean for your organisation now. Some important themes may emerge.

As a bonus, participants gain a richer sense of, and respect for, the complexity of the systems in which they operate. They learn to step into different perceptual positions and see scenarios through a variety of different lenses. This helps to mitigate the unintentional but inevitable corporate blindness of those who have spent much of their career in one environment.

Choose to be brave. Work together with colleagues and stakeholders to create and face scenarios that include the dark as well as the light. You will all have your full mental faculties available to you – your neocortex will be engaged and capable of working out effective tactical responses. Then, should a future ever unfold that has elements of what you’ve already faced in the hypothetical realm, you’ll embrace them with greater pace and intelligence.

Be more buffalo! Make scenario planning a regular practice and increase your chances of confronting future challenges with confidence and agility.

The ICAEW Library & Information Service provides access to leading business, finance and management journals, as well as eBooks. Further reading on scenario planning is available through the resources below.