The idea of scenario planning was first pioneered by the U.S. military during the early stages of the Cold War. In the decades that followed, companies began integrating this practice into their strategic frameworks. This concept creates a more robust decision-making process and, when paired with measurement programs, improves the average return on investment by 25-70%. Scenario planning is designed as a way to reduce tunnel vision and overconfidence while also increasing the agility, creativity, and decisiveness of decision-makers. It may not produce perfect answers to what the future holds, but it does create a useful point of reference for future decision-making and encourages a flexible state of mind that forces people to ask the right questions necessary to foster resilience before crisis hits.
Scenario planning analyzes the current situation, generates potential futures, and helps companies determine the best course of action should these futures arise. It provides companies with carefully crafted, logical guidelines at a time when others maybe panicking. When properly developed and implemented, scenario planning takes away the surprise of disruptions and allows companies to effectively weather the storm with confidence.
Scenario planning should be used to inform strategic planning and to create an atmosphere of adaptation among decision-makers. Though events rarely unfold exactly as expected, scenario planning facilitates rapid and decisive decision-making in times of uncertainty and fortifies the strength of decision-makers as they become accustomed to the new state of the market.
Step 1: Set the scope. Depending on your industry and its rate of change, scenarios may unfold at different times and in different scopes. One technique for setting the scope of scenario planning is to look at past changes in your company and its industry. How widespread were these changes? How long did it take for them to develop? What areas of your company were affected?
Step 2: Identify key stakeholders. Decision-makers and those with the most exposure to change should be included in scenario planning sessions while keeping the number of participants to a manageable size. Additional insight on trends and possible scenarios could be gathered from all levels of your company via surveys, helping to inform the scenario planning process.
Step 3: Identify trends. Selecting disruptive forces in society, economics, politics, and your industry that shape your company's actions is vital for developing useful scenarios. Each trend identified in this step should fit into the scope selected in step 1.
Step 4: Identify key uncertainties. Similar to the previous step, look at societal, economic, political, and industry changes to identify areas where the future isunclear. Select the changes that will have the largest influence on your company in ways that are not yet known.
Step 5: Construct initial scenarios. Turn separate ideas into cohesive scenarios by combining some of the trends and uncertainties that were identified in steps 3 and 4. This can be done in a variety of ways, though a simple approach is to place all positive factors in one scenario and all negative factors in another.
Step 6: Check for plausibility. Look through your newly developed scenarios and remove factors that do not fit as well as[MH7] those that conflict with each other.This step will refine your scenarios to ensure that you are preparing for a realistic future.
Step 7: Develop learning scenarios. Now that you have plausible scenarios, you can begin developing themes and building stories for the stakeholders. Building a story around each scenario helps foster creativity and engagement so that stakeholders get the most out of each scenario planning session.
Step 8: Identify research needs. Research the uncertainties and trends, both inside and outside your industry, that are involved with your learning scenarios to ensure they are well understood and not based on inaccurate perceptions. Additionally, each learning scenario should have key performance indicators(KPIs) to show the true impact of your scenarios on the company and measure the effectiveness of responses.
Step 9: Develop models. To ensure scenarios withstand the scrutiny of stakeholders and do not wander into the realm of implausibility, models that keep key performance indicators within a reasonable level should be developed. Without restrictions in absolute and relative terms to other KPIs[MH9] , well-developed scenarios could become ineffective or even counterproductive in the real world.
Step 10: Evolve towards decision scenarios. Your finalized scenarios should be relevant to your company, plausible, broad enough to be applicable in a variety of situations, and descriptive of long-term trends. Once all of those criteria are met, and you have verified that the best three or four scenarios are selected, then they are ready to be presented to stakeholders.
When it comes to integrating scenario planning into strategy meetings, there are two paths that can be taken. The first path uses the steps above to develop scenarios, which are then presented to stakeholders in order to promote discussion. The second path allows stakeholders to develop and discuss their own scenarios.
Developing scenarios with stakeholders first requires that you create a list of the major trends and uncertainties facing your company. Once this list is created, select the two most impactful items and place them into a two-by-two matrix that allows each item to be stretched to the extremes. The example below considers scenarios where the availability of new talent and the potential for competitor growth are uncertain. After your matrix is developed, review each of the four scenarios to ensure they are plausible - if they are not, replace one of the items to create more realistic scenarios.
Now, with four impactful scenarios, stakeholders can begin their discussion. Depending on the amount of available time and the interest of stakeholders, anywhere from one to four scenarios could be debated. Conversation should be as free flowing as possible and center around which skills, capabilities, and resources are crucial for the company to succeed in each scenario. Keeping the focus on strategic high-level questions will ensure that stakeholders do not waste time dealing with unproductive, tedious matters. If certain qualities are repeated when discussing each scenario, then those qualities may be valuable strategic goals to pursue in the future.
Royal Dutch Shell, a group of energy and petrochemical companies, has been at the forefront of scenario planning since the 1970s. In 1972, Shell's newly developed scenario planning team surveyed the globe for trends and uncertainties that could influence the energy market. From these discoveries,Shell developed several scenarios, one being a sharp rise in oil prices due to the growing power of OPEC.
The scenario planning team disseminated their findings to the company's major stakeholders, fostering discussion, debate, and preparedness should this future arrive. One year later, OPEC issued an oil embargo on western countries.
Because of Shell's prior consideration of this outcome, their leaders were better prepared and better equipped to endure this six-month-long crisis than their competitors. They were also able to more quickly recover and better position themselves in the oil market while competitors scrambled in a return to normal.
Shell's response proved so effective that other energy companies began adopting similar practices while Shell's Head of Scenarios presented the oil crisis scenario to leaders in the British and American governments.
To Learn More, Read the Case Study: "Insights from a PhD Data Scientist"
Scenario planning requires the careful analysis of potential disruptive changes in the market, the development of those changes into plausible scenarios, and the integration of scenario discussions into the strategic planning process. It informs decision-makers about market trends and creates agility, decisiveness, and confidence in the face of disruptive conditions.
Plans can provide useful guidelines for coping with market changes, but scenarios never unfold exactly as expected. One of the greatest strategic planners in history,Dwight D. Eisenhower, is known for stating "plans are useless, but planning is indispensable." Plans may or may not be valuable in the future, but the adaptable state of mind and contextual knowledge created by planning will pay dividends no matter what the future holds.
Learn how Bâton Global supports organizations in conducting scenario planning here.
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