What is scenario planning?

Scenario planning involves many different approaches to future proofing a business. The following are four commonly used types of scenario planning:

Planning for operational scenarios is the most widely employed form of scenario planning. In operational scenarios, a business identifies and explores the immediate impact of a specific situation. The short-term implications are explored, and plans are devised to promote positive outcomes.

In normative scenario planning, businesses start with a preferred result or outcome. This form of scenario planning blurs the line slightly with a statement of goals, but with a focus on how the organization hopes to operate in the future, rather than simply what it wants to achieve. Normative scenario planning is a valuable addition to other forms of scenario planning, clearly expressing and summarizing necessary changes and target activities that will be needed to reach the proposed scenario.

Quantitative scenarios allow for quick changes to financial models by altering a limited number of variables with fixed relationships. These models present best and worst-case versions for each scenario and are useful in forecasting annual business returns.

Focusing on the environment of the business products and services more than the business itself, strategic management scenarios require a comprehensive view of the industry, market, and economy.

With the driving forces identified and discussed, the next step is to refine the list to focus on only two of the most potentially impactful. These ‘critical uncertainties’ are those that may represent the greatest potential impact and would yield the best results if prepared for. Possible uncertainties may include priority, cost, and availability or resources.

Top-two critical uncertainties in hand, it’s now time to turn these uncertainties into scenarios. Plot the uncertainties on a simple graph, with one acting as the x-axis and the other as y-axis, with the two extremes for each uncertainty represented by the ends of each axis. This will result in there being four different quadrants, ranging from least desirable to most desirable for the business.

The team is again brought together to discuss the implications of each scenario. They then should identify where on the graph they feel the business currently is. Then, the team should plot a new point representing where they believe the organization will be on the graph after an established amount of time (such as one year). Finally, the team will discuss how best to prepare for that future and catalog any options that might be worth considering.

The above process should allow most organizations to get started with scenario planning. To help ensure an effective approach, consider these best practices:

Scenarios are more useful and easier to plan for when they are kept simple. Focus on two only two critical uncertainties at a time. Other scenarios can be further pursued once the two most critical issues have been fully explored.

The beauty of scenario planning is that it allows organizations to prepare for a range of circumstances, rather than only preparing for the best-case scenario. When building a strategy, be sure that it is one that will be relevant no matter what scenario plays out.

Scenario planning does not need to be limited to the immediate future. With the right information and some educated assumptions, businesses can prepare for scenarios far ahead. Long-term scenario planning not only allows for the creation of effective strategies to guide companies for years down the road, but it also unlocks a culture of looking towards the future, which can be a benefit in and of itself.

Although finance and analysis experts are essential to most approaches to scenario planning, planning teams should include leaders from departments and levels across the entire organization. Bringing in more groups will provide increased insight and help ensure that scenarios are as fleshed out as possible.

A substantial portion of scenario planning is based on educated guesswork; it must be supported by reliable data for it to be relevant and applicable. More data means more accurate models, and helps inform goals, establish baselines, and determine which products and services are the most foundational.

Scenarios need to be as fluid as the futures they represent. When changing conditions render scenarios obsolete, then they should be retired and replaced with ones that are relevant to the anticipated circumstances.