Scenario Planning for Businesses: How to Implement it
Scenario planning is a planning technique used by businesses to build a view of what future markets might look like. This can help businesses build a picture of every eventuality. Read on to learn how to implement scenario planning and how it could fit into your overall business plan.
If 2020 reminded us of anything, it’s that we really don’t know what’s around the corner. The events that affect businesses and shape their fortunes are often hard to predict, with the coronavirus pandemic a particularly dramatic and devastating example.
Most future events fall within a range of possibilities, however, even if they seem unlikely. Identifying those possibilities or uncertainties and understanding their potential impact is vital for any business that wants to navigate a safe path forward. This is what scenario planning for businesses is all about.
What is scenario planning?
Scenario planning emerged from the early cold war years, when it was used by military institutions to consider what might happen in the event of nuclear war. In the world of business it was pioneered in the 1960s by Royal Dutch Shell, which created a ‘long-term studies’ unit tasked with developing various scenarios of what the future might look like.
These days it’s a process followed by businesses of all shapes and sizes, that use it to build a view of what the future or alternative drivers of a market or a business might be. They then identify the implications of those drivers, the possible scenarios that might unfold as a result and develop strategies for dealing with those scenarios should they become reality.
By allowing them to consider the effects of disruptive events and work out how they might respond, scenario planning can help businesses survive and even give them a competitive advantage.
How to do scenario planning
Approaches to scenario planning continue to evolve as data analytics become more sophisticated and allow increasingly complex uncertainty modelling to be carried out.
The approaches used can vary considerably in their depth and level of sophistication, but most share some common principles. For example, it’s important to keep in mind that it’s not about trying to make accurate predictions about the future (even if such a thing were possible). Rather, it’s about identifying a range of plausible uncertainties that the business might face in future.
So it can include scenarios that might seem highly unlikely in the present but potentially easier to imagine further down the track. Similarly, you can start with a long list of scenarios and several alternatives within each of them, knowing that you can narrow them down later in the process.
There are other pointers to consider too. For example, consultants McKinsey suggest trying to understand the potential biases that might get in the way of your scenario planning, and using the process to engage different parts of the company and encourage open debate.
What are the steps to creating a scenario plan?
The process that smaller businesses follow will likely include at least the following basic stages:
1. Identify the forces that drive your business.
(a) This will likely include big picture forces such as demographics, political influences, societal shifts, technological advances, environmental factors and economic cycles.
(b) Then work out which of those factors have the most relevance to the business and sector that you’re in. For example, firms in the pensions industry might pay particular attention to demographic changes such as the ageing population.
2. Develop a range of scenarios.
There are several ways of doing this, including various software and matrixes. At its most basic, this stage is where you take the two main uncertainties or drivers you identified in stage one and brainstorm different scenarios for each of them.
These might be the possible variables within economic cycles, consumer behaviours or demographic trends, for example.
3. Consider the implications.
Once you have identified the most relevant uncertainties you can begin to imagine the impact they might have on your business, including specific aspects of the business and the market that you’re in. With that information you can make sure that your business strategy takes those possibilities into account.
4. Work out your response.
This is where you create a contingency plan setting out what you would do in the event of those scenarios becoming reality, including an assessment sense of how effective your responses might be and any unintended consequences that might follow.
How does this fit in with my overall business plan?
One way to look at scenario planning is to think of it as a tool in the wider strategic business planning toolkit. Any business strategy that seeks to plot a path forward for the company needs to consider the disruptions that might be faced in order to make the plan robust.
That’s where scenario planning fits in, as a risk management process that contributes to the future vision of a business. Without it, a business risks being ill-equipped to navigate an environment that can often be very uncertain and unpredictable – as 2020 reminded us in such stark terms. You may also consider other planning styles like a contingency plan, where you look at the plan B options for your business for different eventualities, including environmental and economic factors.
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Where can I find scenario planning templates?
An online search should reveal plenty of scenario planning templates that will offer a guide and that you can edit for potential scenarios for your business. However, approaches vary and the one that works for you will depend on factors such as your own resources and priorities.
Jeff is a freelance journalist who writes across finance & business. He was the personal finance editor at The Scotsman & Scotland on Sunday & a member of the Financial Services Consumer Panel. Read more