scenario-planning

What Is Scenario Planning And Why It Matters In Business

Business / By / September 24, 2023

Businesses use scenario planning to make assumptions about 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

Were 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.

Scenario Planning: Meta Case Study

Let’s run a scenario planning on the current market’s landscape.

Take the case of Facebook, which rebranded as Meta.

Why did it do that? What scenario did the company plan to get to that point?

We don’t know for sure what was the internal decision-making process, yet thanks to a scenario planning analysis, we can imagine how things went down.

Imagine that, as Apple implemented stricter and stricter privacy policy changes through the App Store, thus requiring users to opt-in to tracking, that brome the whole Facebook business model.

Indeed, one of the main components’ of Facebook’s advertising machine was its ability to follow you anywhere on your smartphone.

Indeed, once you signed and accepted Facebook’s terms and conditions, the company could follow you also into other activities you did with your smartphone.

For instance, let’s say you jumped off Facebook and you went on to purchase an item on an e-commerce shop, yet you didn’t finalize the sale.

Since Facebook had followed you along the way, it now knows that it might make sense to advertise the product you were about to purchase, as you didn’t finalize it.

Thus, the e-commerce company will run a pixel campaign on Facebook. It means that as you abandoned the cart, that same company can re-target you on Facebook’s feed, thus making sure that you see their product again and maybe but it!

So the above was the advertising mechanism on top of Facebook.

Once that mechanism had been broken by Apple’s policy changes since most of Facebook’s revenues came from Instagram and mobile, the company had to run a scenario planning of what would come next.

They realized that the threat from Apple was quite strong and that in a future scenario where Facebook did not own its digital advertising pipeline, that would happen again.

So they run a future scenario analysis imagining how Facebook would look like if it owned the digital advertising pipeline (let’s say if Facebook had a successful smartphone on the market).

Thus, realizing that, Facebook rebranded as Meta to try to completely pivot into a new industry, VR, where the company could try to own its distribution pipeline.

Facebook, now Meta, is doing it with Oculus, rebranded as Meta Quest!

Case Studies

Retail Chain Scenario Planning

Step 1: Identify the driving forces

  • E-commerce competition intensifies.
  • Economic downturn affects consumer spending.
  • Increased focus on sustainability and eco-friendly products.

Step 2: Identify uncertainties

  • E-commerce growth accelerates, impacting brick-and-mortar stores.
  • Consumer demand shifts towards affordable products during an economic downturn.
  • Sustainability trends lead to a surge in demand for eco-friendly products.

Step 3: Develop plausible scenarios

  • Scenario 1: E-commerce Dominance
    • E-commerce sales skyrocket, leading to store closures.
    • Strategy: Rapidly expand online presence and delivery services.
  • Scenario 2: Economic Downturn
    • Consumer spending shrinks, affecting sales.
    • Strategy: Focus on cost-cutting measures and value-based marketing.
  • Scenario 3: Sustainability Boom
    • Consumers prioritize eco-friendly products.
    • Strategy: Invest in sustainable product lines and marketing campaigns.

Step 4: Discuss the implications

  • Each scenario requires a different strategic approach.
  • Realignment of goals: Scenario 1 emphasizes online growth, while Scenario 3 focuses on sustainability.
  • Adaptation of mission: Mission statements may need to incorporate sustainability goals.

Tech Startup Scenario Planning

Step 1: Identify the driving forces

  • Rapid technological advancements.
  • Evolving consumer preferences.
  • Regulatory changes in data privacy.

Step 2: Identify uncertainties

  • Emergence of a groundbreaking technology that disrupts the industry.
  • Consumer demand shifts towards more privacy-focused products.
  • Stringent data privacy regulations impact business models.

Step 3: Develop plausible scenarios

  • Scenario 1: Tech Disruption
    • A new technology revolutionizes the industry.
    • Strategy: Rapidly adapt and incorporate the new technology into offerings.
  • Scenario 2: Privacy-First Trend
    • Consumer demand for privacy-focused products grows.
    • Strategy: Develop and market products with robust privacy features.
  • Scenario 3: Regulatory Hurdles
    • Stricter data privacy regulations limit data usage.
    • Strategy: Comply with regulations and explore alternative revenue streams.

Step 4: Discuss the implications

  • Different scenarios require distinct actions.
  • Mission realignment: Scenario 2 emphasizes privacy as a core value.
  • Goal adaptation: Goals may need to change based on the chosen scenario.

Agricultural Business Scenario Planning

Step 1: Identify the driving forces

  • Climate change impacts on crop yields.
  • Fluctuations in global food prices.
  • Technological advancements in agriculture.

Step 2: Identify uncertainties

  • Extreme weather events affect crop production.
  • Food prices become more volatile due to global factors.
  • Adoption of advanced agricultural technology accelerates.

Step 3: Develop plausible scenarios

  • Scenario 1: Climate Challenges
    • Crop yields are severely affected by extreme weather.
    • Strategy: Invest in climate-resilient crops and sustainable farming practices.
  • Scenario 2: Price Volatility
    • Food prices fluctuate unpredictably due to global factors.
    • Strategy: Diversify revenue streams and engage in futures contracts.
  • Scenario 3: Agricultural Tech Boom
    • Adoption of advanced tech boosts productivity.
    • Strategy: Embrace cutting-edge agricultural technology and precision farming.

Step 4: Discuss the implications

  • Strategic decisions vary based on scenarios.
  • Mission and values alignment: Scenario 1 emphasizes sustainability, while Scenario 3 focuses on technology integration.
  • Goal adjustments: Goals may need to change to align with the chosen scenario.

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.

Key Highlights:

  • Scenario Planning Overview: Scenario planning is a strategic approach that businesses use to envision and prepare for potential future events and changes in their business environment. It involves identifying uncertainties, developing plausible scenarios, and understanding the implications of each scenario.
  • Scenario Definition: A scenario in this context refers to a description of a possible future, outlining how an organization might reach that future through a narrative. It’s important to note that scenarios are not predictions but rather alternate realities.
  • Components of Scenarios: Scenarios include the current state of the business, awareness of trends (demographics, economics, politics), analysis of key uncertainties, and an understanding of drivers of change (local and global).
  • Pitfalls Addressed: Scenario planning aims to prevent two strategic pitfalls: underprediction and overprediction. Underprediction is assuming the future will be similar to the past, while overprediction is expecting drastic changes that don’t materialize.
  • Steps of Scenario Planning:
    • Identify Driving Forces: Recognize shifts in global society relevant to the business sector.
    • Identify Uncertainties: Select a few key uncertainties with potential significant impacts.
    • Develop Plausible Scenarios: Create realistic scenarios that challenge the organization and have reasonable probabilities.
    • Discuss Implications: Consider the implications of each scenario on strategy, goals, and values.
  • Meta (formerly Facebook) Case Study: Analyzing the rebranding of Facebook to Meta through scenario planning.
    • Trigger (Apple’s Privacy Changes): Facebook’s advertising model was impacted by stricter privacy policies from Apple.
    • Scenario Analysis: Facebook realized the threat from Apple’s changes and explored scenarios without owning the advertising pipeline.
    • Strategic Pivot: Facebook rebranded as Meta and shifted its focus to VR (Oculus rebranded as Meta Quest) to own a new distribution pipeline.
  • Key Takeaways:
    • Scenario planning assists organizations in preparing for potential future scenarios.
    • Scenarios are descriptions of plausible futures, not predictions.
    • The process involves identifying driving forces, uncertainties, creating plausible scenarios, and assessing implications.

Connected Strategy Tools

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Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces

Ansoff Matrix

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You can use the Ansoff Matrix as a strategic framework to understand what growth strategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growth strategy can be derived by whether the market is new or existing, and the product is new or existing.

Blitzscaling Canvas

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The Blitzscaling business model canvas is a model based on the concept of Blitzscaling, which is a particular process of massive growth under uncertainty, and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.

Business Analysis Framework

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Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.

Gap Analysis

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A gap analysis helps an organization assess its alignment with strategic objectives to determine whether the current execution is in line with the company’s mission and long-term vision. Gap analyses then help reach a target performance by assisting organizations to use their resources better. A good gap analysis is a powerful tool to improve execution.

Business Model Canvas

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The business model canvas is a framework proposed by Alexander Osterwalder and Yves Pigneur in Busines Model Generation enabling the design of business models through nine building blocks comprising: key partners, key activities, value propositions, customer relationships, customer segments, critical resources, channels, cost structure, and revenue streams.

Lean Startup Canvas

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The lean startup canvas is an adaptation by Ash Maurya of the business model canvas by Alexander Osterwalder, which adds a layer that focuses on problems, solutions, key metrics, unfair advantage based, and a unique value proposition. Thus, starting from mastering the problem rather than the solution.

Digital Marketing Circle

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A digital channel is a marketing channel, part of a distribution strategy, helping an organization to reach its potential customers via electronic means. There are several digital marketing channels, usually divided into organic and paid channels. Some organic channels are SEO, SMO, email marketing. And some paid channels comprise SEM, SMM, and display advertising.

Blue Ocean Strategy

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A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

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About The Author

Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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