What is scenario planning? When done effectively, it helps businesses adapt to ongoing market shifts and stay ahead of the competition. This guide will walk you through the ins and outs of scenario planning—from how to begin to the technology that enables it—so you can anticipate and navigate the unexpected.
What is scenario planning?
Scenario planning means preparing for uncertainty by developing plans for potential future changes in the environment, personnel, or processes that keep your business running.
Essentially, scenario planning rests on the premise that the best way to prepare for the future is to think through and plan for various eventualities. Once the “potential” events, or scenarios, are identified, scenario planning entails considering alternative ways to respond to the situations.
Why do organizations need to scenario plan?
Companies need to plan in order to understand how industry and organization dynamics can best respond to change. Traditional planning assumes that tomorrow will be just like today, whereas scenario planning defines various possible future scenarios. Scenario planning can help companies examine each possibility, deciding whether the corporation would succeed in those situations.
Ultimately, scenario planning can:
- Analyze the consequences of actions and decisions
- Identify and avoid issues before they occur
- Spot consequences for future events
What are the differences between scenario planning and forecasting?
Scenario planning uses both forecasts and trend analysis techniques while identifying disruptions to these predictions and any feasible outcomes. Although some scenarios might sound highly improbable, developing plans to overcome them can help organizations deal with other likely changes that may arise.
Forecasting, on the other hand, uses historical quantitative methods. These methods envision what the future holds by relying on data from the past and present. Instead of a more dynamic approach (e.g., scenario planning), forecasting results in a rigid risk management assessment. Forecasting neglects to predict quick yet significant changes to the market.
Scenario planning is more flexible and strategic compared to forecasting, with the goal of creating a higher level of preparedness.
What problems does scenario planning solve?
Scenario planning solves many issues that other methods ignore. It can help businesses:
- Avoid groupthink
- Challenge conventional wisdom
- Identify problems early
- Create contingency plans when problems do occur
Scenario planning avoids groupthink by encouraging participants to consider all potential issues. Scenario planning is impossible without a diverse group of people instructed to think individually. When engaging in scenario planning, try not to let the strongest opinions dominate the room.
The planning process should be structured to promote the participation of all stakeholders. Below are a few ways to encourage participation:
- Diversify stakeholders—The planning meeting should include workers from different departments of the corporation to ensure that all discussions consider multiple different perspectives.
- Promote different work styles—Since you’ll be working with a team of diverse individuals who all have different work preferences, provide meeting materials ahead of time. This allows participants to formulate some ideas in advance. Many participants might find it beneficial to research and come up with material to discuss before the meeting.
- Invite an external facilitator—Having a respectful discussion with a room full of people with different opinions can be made easier when led by an experienced facilitator from outside the company.
- Equalize participation—Electronic voting and formal group processes can help every individual use their voice.
Challenge conventional wisdom.
Scenario planning challenges conventional wisdom by identifying possible events not commonly considered. Bringing in diverse thinkers can help provide unique insights into these potential issues, protecting the organization and its employees from unexpected pitfalls down the road. The whole goal is to think outside the box and consider every possibility.
Identify problems early.
One goal of scenario planning is to identify early warning signals of a potential problem. Once organizations have a good picture of what events may add up to create a catastrophic situation, they can determine what the earliest indicators might look like, so they can deal with the matter before it gets out of hand.
Create contingency plans when problems do occur.
After determining possible scenarios, the organization should design unique strategies to address each situation. The strategies should first align with the direction in which the organization wants to proceed.
Next, the group can decide if the possible strategy supports the mission and vision of the company. Scenario planning is a valuable tool because it helps organizations plan and prepare for a range of potential challenges. When such an eventuality does occur, the team will already understand the repercussions of what’s happening, and they’ll have a plan of attack, with some backup contingency plans built in, to address any issues.
How to begin scenario planning.
Organizations should consider how changes in the environment will create opportunities to be more prepared. When creating a scenario plan, categorize these potential changes into internal and external forces. Internal forces could include responding to major accidents within the organization or changes in stock prices. External forces can include market forces, cost forces, and competitive forces.
When you start scenario planning, you should identify the core goal for the organization. Where do you see the organization progressing? Where do you see the organization in the next three to five years? These are all important factors to consider. With small improvements based on the core goal, the organization can lay out a clear vision.
Determine your direction.
Analyze any possible consequences of today’s actions and decisions. The impacts of today’s actions should align with your company’s core goal, so it’s important to sit down and strategize.
When scenario planning, teams should determine where they want to head as a corporation. From there, they should assess their current actions and ensure they are working in the right direction.
Identify what factors could impact your direction.
After your company has identified where it would like to head, examine potential factors that could impact its future. Scenario planning allows companies to explore each scenario and determine if their current strategies would help them to succeed in these possible situations.
Recognize the forces that could change those factors.
Next, teams should continue to examine likely scenarios, noting any possible forces that could change their approach. They should question traditional assumptions that the company faces in its industry, processes, and markets.
Essentially, they should consider the changes that could alter their current strategy. In this step, teams should develop solutions to these unique situations should possible issues develop.
Discuss conditions, assumptions, and probabilities..
In this next step, you’ll need to think about changes that can occur in your industry, department, region, and world during the period of your plan.
Consider the life cycle of the project, political conditions, competitors, and possible technological advancements. We recommend that you start by coming up with four to five assumptions.
Then, consider the probability of each scenario. Determining the likelihood will help your team balance resource allocation by placing the most focus on the most-likely outcomes while still acknowledging the possibility of other scenarios.
Evaluate the impact of each scenario.
This step requires that you balance creativity, imagination, and judgment. The team should attempt to think of any possible impacts of the scenario and determine their actions should a situation arise.
Once you’ve created scenarios, you might ask, “What will happen to our suppliers in situation A?” From there, another question might pop up, “How will this impact my customers?” In this step of scenario planning, your team should be able to answer these questions.
Identify early indicators for each scenario to catch them early.
This final step is vital when scenario planning. Scenario planning gives your company an edge like no other traditional method of planning. Developing early indicators for each scenario can help your organization stay on top of things and be proactive in your approach.
Questions to ask yourself during scenario planning.
Questions during scenario planning can be goal-specific or non-goal-specific. It’s up to your team to outline your own goal-specific scenarios, since they depend on the organization’s specific short- and long-term goals. However, there are also non-goal-specific questions that can apply to a variety of industries.
Non-goal-specific questions include:
- What needs to happen for the scenario to come true?
- How realistic is the scenario?
- What don’t you know about the scenario?
- How would you respond to the scenario?
- Do you need to tweak your approach knowing the scenario?
Once your team has created scenarios, they should be categorized as “realistic,” “pessimistic,” or “desired” scenarios. Categorizing "what if" scenarios can help organization leaders see the bigger picture instead of depending on data points that cannot foresee the future.
Scenario planning can help businesses prepare for the unknowns of tomorrow. As time goes on and reality shifts, organizations can return to the original scenario plans and adjust objectives according to changes. Scenario planning can be modified to fit the ever-changing environment.
Case study: Shell.
In the 1970s, corporations like Shell began to redefine scenario planning. It realized that forecasts and other traditional planning methods fell short of the company’s needs. In fact, traditional methods were becoming dangerous, as they depended on past trends to plan for the future. Shell found that scenario planning forced people to think about the future and think creatively to overcome any problems.
Why did Shell choose to use scenario planning? A decade after World War II, Shell needed to expand production and build tankers, depots, pipelines, and refineries. It found two main problems: coordinating the scheduling of new facilities and money.
It developed “Unified Planning Machinery” (UPM) to plan every level of development. Initially, UPM thought ahead up to six years; however, Shell soon found this was not enough time. The company then took an experimental approach to explore business development in the next 15 years.
Shell found that the UPM system had shortfalls. As a result, it started asking questions about the future of its industry. From there, the company developed solutions to possible problems. Shell developed four scenarios to deal with risk and uncertainty.
It was a bit of trial and error for a time, but Shell developed a system that worked: scenario planning. It considered current events and historical data to think through possible scenarios and plan for the future.
Scenario planning tools and software.
Strategic planning software with scenario planning tools available allow teams to think strategically through potential events that could disrupt or threaten the health of the organization. These tools can help you identify trends and uncertainties and develop plans for a multitude of possible outcomes. With Workfront's Scenario Planner, you can simplify the strategic planning process by easily creating and comparing scenarios, identifying possible resource bottlenecks, and determining the best path forward.
Common questions around scenario planning.
Why should firms use scenario planning?
Although scenario planning asks teams to take a different approach than historical forecasting techniques, it’s the most forward-thinking planning methodology. It asks companies to stray from linear thinking and approach risk management from a new perspective. Scenario planning empowers teams to create strategies that can withstand almost any eventuality.
How do you avoid making a scenario too broad or too narrow?
If a scenario is too broad, people might dismiss it because it sounds too unfocused or irrelevant. So zoom in a little closer. On the other hand, if the scenario is too narrow, it might seem too unlikely to be taken seriously. So expand your thinking to determine if this narrow scenario is just a minor variation of a larger scenario that, if framed differently, would feel impactful and relevant to the team.
Are there different approaches to developing impactful scenarios?
Where should a team start when trying to come up with potential future scenarios? According to Steven Schnaars and Paschalina Ziamou in "The Essentials of Scenario Writing,” from the Business Horizons journal, there are four common approaches to developing impactful scenarios:
- Optimistic vs. best guess vs. pessimistic scenarios—Using this framework, the team comes up with a list of “optimistic” scenarios by asking what would/could happen to improve the organization’s standing. They identify “pessimistic” scenarios by brainstorming everything that could go wrong. And they also brainstorm “best guess” scenarios that project current conditions and realities into the future.
- Good vs. bad scenarios—This approach forces participants to pay attention to the more extreme pessimistic and optimistic scenarios, rather than only considering what’s most likely to occur.
- Arrayed scenarios—This approach asks teams to pick a specific criterion or dimension and then look at a range of alternatives along a continuum related to that criterion.. For example, this could include planning responses to slight, moderate, or severe changes in the price of a certain key resource, like the price of gasoline.
- Independent themed scenarios—This approach isolates individual categories of change, such as technological innovations, environmental impacts, or market shifts, and looks at them in isolation from the others. Participants invent potential future scenarios within those categories.
Things to remember during scenario planning.
Although scenario planning asks you to consider the unexpected and design plans accordingly, it also asks you to be realistic. It’s easy to over-catastrophize and think of the worst of the worst, which is not very helpful and can make it harder to brainstorm solutions.
Teams should, however, err on the side of uncertainty and outline all possible scenarios that feasibly could occur, even those that are somewhat unlikely. To come up with the best and most comprehensive list, you should work in a group and hear every voice. Encourage everyone to think outside the box as you craft possible scenarios, so you have the best chance of being prepared for anything the future might bring.