Scenario Planning for Strategic Thinking

Managers implicitly act against a scenario or mental model that
highlights how the world will work into the future.

Scenario planning is a tool in the strategic planning toolkit that
creates the possible futures that are increasingly likely to happen.
They open up the possibilities of change by creating some possible
futures that can be used to guide decision-making. Many businesses often
get stuck into a tunnel vision mentality that predicts that everything
will be the same today as it was yesterday. Yet the world changes and to
understand some of these forces – scenario planning is used to act
differently.

Using Scenarios

Scenario planning is not a one size fits all solution so it is best
to know when to use them. Scenarios gets used when

• Too many costly surprises have occurred in the past.

• The company does not perceive or generate new
  opportunities.

• The quality of strategic thinking is low and the organisation
  becomes too routine oriented and bureaucratic.

• The industry has experienced significant change or is about
  to.

• There are many changes in the scope of the business and their
  interactions are hard to predict.

• The company wants a common language and framework, without
  stifling diversity.

• There are strong differences of opinion, with multiple opinions
  having merit.

• Competitors are using scenario planning.

An organisation with a strong scenario planning discipline may
evaluate new initiatives against scenarios and even consider different
investment parameters as scenarios change.

Constructing Scenarios

Scenario planning attempts to compensate for our tendency to imagine
the future without such a rate of change and to balance against
futurists who usually over-predict and present the future like it is
going to happen tomorrow.

Scenario planning, then, allows us to chart a middle ground between
under- and over prediction. It helps expand the range of possibilities
we can see, while keeping us from drifting into science fiction.

Some people use existing scenarios to contextualise it for their own
business.

Scenario planning does this by dividing our knowledge into two
areas:

(1) Things we believe we know something about and

(2) Elements we consider uncertain or unknowable.

It is not possible to account for all the outcomes of each
uncertainty but we need to analyse the tendency of many variables as
these indicate the trends that are likely to be more prominent.

It is also important that scenarios depict possible futures but not
specific strategies to deal with them.

To develop this view it makes sense to invite outsiders into the
process, such as major customers, key suppliers, regulators,
consultants, and academics.

The overall purpose is to build a shared framework for strategic
thinking that encourages diversity and sharper perceptions about
external changes and opportunities.

One process for developing scenarios is outlined below.

1. Define the Scope.

The first step is to set the time frame and scope of analysis (in
terms of products, markets, geographic areas, and technologies). Once
you have determined an appropriate time frame, ask what types of
knowledge would be of greatest value to the organization that far down
the road. Timeframes are typically longer but scenario analysis is
useful on shorter timeframes as well.

2. Identify the Major Stakeholders.

Who will have an interest in these issues? Whom they will affect? Who
could influence them? Stakeholders typically include customers,
suppliers, competitors, employees, shareholders, government, and so
forth. For scenario planning we need to identify their current roles,
interests, and power positions, and ask how they have changed over time
and why.

3. Identify Basic Trends.

What political, economic, societal, technological, legal, and
industry trends are sure to affect the issues you identified in step
one? It may be helpful to list each trend on a chart or so-called
influence diagram to identify its impact as positive, negative, or
uncertain. Everyone participating in the process must agree that these
trends will continue; any trend on which there is disagreement (within
the time frame) belongs in the next step.

4. Identify Key Uncertainties.

What events, whose outcomes are uncertain, will significantly affect
the issues you are concerned with? Will a particular piece of
legislation be passed? Will a new technology be developed? What will
consumers value in the future? For each uncertainty, determine possible
outcomes. Again, it’s best to keep these outcomes simple, with a few
possibilities at most.

5. Construct Initial Scenario Themes.

By grouping themes or trend that tend to belong together you can now
have build some common scenarios. This process of refinement of ideas
that belong together and that have similar drivers that all participants
agree is present is really the heart of scenario planning.

6. Check for Consistency and Plausibility.

The results need to be compared against the timeframe. The different
elements of a scenario need to support each other and create a story
line that makes sense.

Each scenario ideally should describe equilibrium or a state in which
the system might exist for some length of time, as opposed to being
highly transient. It does an organization little good to prepare for a
possible future that will be quite short-lived. In short, the scenarios
should cover a wide range of possibilities and highlight competing
perspectives (within and outside the firm), while focusing on
inter-linkages and the internal logic within each future.

7. Develop Learning Scenarios.

From this process of constructing simple scenarios and checking them
for consistency, some general themes should emerge. The initial
scenarios provide future boundaries, but they may be implausible,
inconsistent, or irrelevant. The goal is to identify themes that are
strategically relevant and then organize the possible outcomes and
trends around them. Although the trends, by definition, appear in all
the scenarios, they can be given more or less weight or attention in
different scenarios.

Naming the scenarios is also important. It is also important
effectively name scenarios e.g. “Everyone has a digital device” against
“Poor cannot afford digital devices”. You then describe what happens in
relation to these macro trends.

A scenario is a story; by capturing its essence in a title, you make
the story easy to follow and remember. At this stage, you have
constructed learning scenarios, which are tools for research and study,
rather than for decision-making. The titles and themes are focal points
around which to develop and test the scenarios.

8. Turn scenarios into models

Scenarios may require additional research to guide the uncertainties
that were identified. Also – once the underlying trends are understood
they are often developed into quantitative models against which future
impacts can be tested.

Conclusion

Scenario planning is an internal discipline whereby we look at likely
futures and start putting in place models that allow us to evaluate our
business decisions against these. To make them effective the futures
that they predict should be plausible and useful for the organisation.
By translating these into practical models it can assist in building
resilient organisations that transcend the typical cycles of business by
preparing and building responses to different market conditions.