What Is Scenario Planning And Why It Matters In Business

Businesses use scenario planning to make assumptions on future events and how their respective business environments may change in response to those future events. Therefore, scenario planning identifies specific uncertainties – or different realities and how they might affect future business operations. Scenario planning attempts at better strategic decision making by avoiding two pitfalls: underprediction, and overprediction.

Understanding scenario planning

In the context of business, a scenario is defined as the description of a possible future and how an organization might reach that future through a story.

Here, it’s important to note that the story does not describe an ideal scenario for the business. Nor does the story predict the future. A story is just one description of one possible future, and it includes:

  • The current position of a business and the issues it is facing.
  • Awareness of basic trends relating to demographics, economics, and politics. Trends must represent a global consensus in that they are based on fact.
  • An analysis of key future uncertainties and how they may impact on the organisation.
  • An awareness of the key local and global drivers of change and their potential impacts.

Ultimately, scenario planning attempts to address two common strategic errors in corporate decision making. Businesses who make these strategic errors invariably have strategies that are backed up by incomplete or inaccurate stories.

They are:

  • Underprediction – where businesses predict that the future will be much like the past and present. For example, Nokia underpredicted the rise of the smartphone and how its popularity would affect their bottom line.
  • Overprediction – where businesses predict that the future will be very much unlike the past and present. For example, many health and technology companies in the 1960s predicted a cure for all cancers and mass uptake of flying cars bye the turn of the 21st century. 

Implementing scenario planning

Once a business has identified the key driving forces and the uncertainties they may produce, it must develop several distinct scenarios that are most likely to come to fruition. Workshop discussions that encourage brainstorming are effective in formulating these scenarios. 

Here is a simple step-by-step process that workshop participants can use.

Step 1: Identify the driving forces

Start by identifying possible shifts in global society, specific to their relevant market segment or industry. Driving forces must have the potential to impact on business operations.

Step 2: Identify uncertainties

From the list of driving forces, businesses should pick three or four with the potential to make the biggest impact. Two of the biggest driving forces of uncertainty in agribusiness, for example, are consumer demand and food prices.

Step 3: Develop plausible scenarios

Plausible scenarios are realistic scenarios. They should have the ability to challenge a business moving forward and also have a reasonable probability of occurring in the first instance. While consumer demand for agribusiness is a realistic uncertainty, it would be unrealistic to suggest that demand for red meat would drop to zero, for example.

Step 4: Discuss the implications

Businesses who are aware of the potential implications of their various scenarios can then start to reconsider their strategy. They can achieve this by realigning their mission, goals, and values while still catering to every possible future scenario. In 1980s Detroit, three of America’s largest car manufacturers imagined that oil price fluctuations and changing consumer values were their biggest potential threats. They invested billions of dollars in infrastructure and car design and shared values of Detroit being a powerhouse of manufacturing for years to come. 

However, they did not see or plan for the rise of new competitors from Japan which ultimately led to the demise of Detroit as a car manufacturing hub.

Key takeaways:

  • Scenario planning is a future planning strategy in which organizations form an idea of potential future scenarios and how these scenarios may affective their strategic objectives.
  • Scenario planning is based on descriptive stories that are not future predictions but instead plausible alternate realities.
  • The four-step scenario planning assists businesses in telling the difference between plausible and implausible future events and planning accordingly.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"