Businesses identify past and current market trends through data research and market analysis. But successful organizations also need future indicators to guide their strategic decision-making. Scenario planning is the perfect tool for company policymakers seeking to predict the future and plan for both positive and negative exigencies.
In this article, we'll explain the fundamentals of this tool. We'll also describe how businesses can use it to make better decisions, both in the short and long term. Further, we'll provide an example of how a hypothetical company may use this tool to ensure its long-term viability, profitability, and relevance.
What is it?
Scenario planning was initially developed by the military, for whom preparing for every possible outcome could be the difference between life and death. The fundamentals of this principle extend to business strategy planning. Scenario planning involves making projections into the future, guided by fundamental trends, and developing tailored responses for every potential outcome. In simpler terms, scenario planning helps company decision-makers identify possible future business scenarios based on a set of assumptions in the present.
It helps businesses stay ahead of the curve and keeps them proactive. Beyond assisting businesses to deal with uncertainty and potentially mitigate risk, scenario planning helps organizations visualize various representations of their future. Companies that can predict upheaval both within their internal structure and in their industry are better placed to draft policies for navigating those pitfalls.
When do we use it?
Risk identification and management is an essential responsibility of business management. Companies periodically need to make decisions that may impact their brand or customers in unknown ways. Before effecting any structural, business, or policy adjustments, successful companies first model different hypothetical situations using scenario planning.
Scenario planning, through a representation of multiple plausible futures, helps companies understand how certain decisions may influence several business outcomes. For instance, a company that specializes in innovative products may use this tool to gauge how a brand-new product may be received in the future based on present market trends and current technological advancements.
Beyond this, scenario planning will prove invaluable when organizations need to determine whether:
Hiring a new employee or scaling up production is a good business decision.
A market entry strategy is right, considering the company's profile.
A product or service should be continued or discontinued based on its projected financial earnings.
What business questions is it helping us to answer?
Scenario planning addresses multiple business questions, including:
How does this business decision or structural adjustment affect my brand and customers?
What impact does a business decision have on potential business outcomes?
Is hiring a new employee or increasing production a solid business decision at this time?
Considering my company's market profile, what market entry strategy should I employ?
Based on my company's projected earnings, should I continue or discontinue a product or service?
How do we use it?
Businesses can only develop plans to cope with emerging developments if they have an idea of what these developments might entail. The bottom line of scenario planning is to provide a base for organizations from which they can respond dynamically to unknown futures.
Companies can plan and create potential scenarios by:
Identifying the driving forces affecting their business environment. To do this, they need to account for technological, political, societal, and political changes. Any of these shifts will likely affect their business and industry in general.
Next, company decision-makers must identify critical uncertainties. Each of the driving forces above will impact your business in different ways or not at all. Next, you must determine two that will impact your business most significantly.
The next step is to develop a range of plausible scenarios. The two uncertainties can be represented as the two axes of a matrix, and each quadrant can be evaluated independently as a potential scenario.
Finally, you must discuss the implications of each scenario. At this point, you should start reevaluating your strategy after discussing each scenario's different implications and impacts. Each scenario should be taken into consideration when setting your mission and goals.
Practical example
Freelio, an automobile company, is considering pivoting from manufacturing gas-powered cars to making electric cars. The driving forces affecting their business and business environment are both political and societal. The government is planning to kickstart an audacious program designed to reduce the emission of greenhouse gasses by 90% in the next decade; plus the company carried out a survey that showed that around 65% of car owners think electric cars are more efficient.
These two uncertainties form the basis of the company's scenario planning. The company hires experts to examine all scenarios from the two uncertainties. Working with available trends, these experts can deduce that the government's plan is unlikely due to the tightness of the specified time frame. However, things are dicey on the social front.
Nevertheless, Freelio resolves to prepare for all possibilities. The company decides to gradually reduce its production of gas-powered cars over a ten-year span. At the same time, the company decides to begin small-scale production of electric cars.
Advantages
These are some of the advantages of scenario planning:
Scenario planning aims to prepare management for possible business challenges that may arise due to changing demand curves, economic conditions, or political conditions. Consequently, it provides management with the information it needs to develop a future-proof plan against adverse events.
Scenario planning can improve your decision-making, potentially helping your business cut costs and maximize business opportunities.
Having your team think up potential scenarios and plan adequately for them is a great way to build team bonding and encourage creativity.
Disadvantages
There is a potential for quite a large amount of work involved in preparing scenarios. Obtaining data and identifying driving forces can take a lot of time. The planning process can take months in large companies.
Changing variables can have a major impact on a plan very quickly. In light of this, scenario planning should be an iterative process that is updated frequently as assumptions and conditions change.
Due to the time and effort-intensive nature of preparing scenarios, scenario planning may be expensive if assigned to third parties.
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