What is scenario planning in strategic management?

Summary

1. Scenario planning is also known as scenario thinking, scenario analysis, scenario prediction and the scenario method.
2. Scenario planning differs from other tools such as contingency planning, sensitivity analysis and computer simulations
3. Scenario thinking helps managers to foresee and prepare for change in the business environment

Scenario planning is the process of making predictions about the future and how your company’s landscape will transform over time as a result of the varying scenarios. A more precise definition of scenario planning is the identification of a particular set of uncertainties, or various “realities,” of what might occur in the future of a company. Other terms used to refer to scenario planning are scenario thinking, scenario analysis, scenario prediction and the scenario method.

While many consider scenario planning a sheer waste of time and resources, it is probably one of the secret sauces of success that differentiates companies that fail from those that succeed. In the business world, where many managers, business owners, and investors view it as a crucial tool for making strategic decisions, scenario planning is also growing in popularity. Scenario planning is also widely used by military planners to address well-known tactical or strategic issues. 

Benefits of scenario planning

1. Helps to foresee and prepare for change
   Scenario planning is a crucial strategy in every business sector, from marketing to recruitment or talent management to capital management to portfolio management. Scenario planning helps to foresee the likely situations that may occur in the future, and, thus, the business is able to make plans on possible ways of adapting to such change in a strategic manner. As has always been said, failing to plan is planning to fail, a statement that validates the extra stress companies ought to go through to secure their future through meticulous and comprehensive scenario planning.
2. Helps to weight and take calculated risks
   Scenario planning is also important because it helps companies to weigh risk, and determine what is worth risking and what is not. By foreseeing the different likely outcomes from an action, a company can make informed decisions on the activities they will do, based on the risk those activities pose in their outcomes. For example, a government can decide to add a university lecturer’s salary because failing to do so will likely cause a nationwide strike, affecting semester dates and subsequent year dates. This may come after comparing different scenarios such as the government considering firing any lecturer who goes on strike and getting under fire from national labor unions, heeding to all demands made by the unions and looking weak or ignoring them and risking a strike.
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3. Provides business continuity
   Because scenario planning entails the exhaustive thinking through and documentation of scenarios and possible tactics the business can choose to adapt, it provides some sort of business continuity, as such changes can be implemented even without the need for the people who did the planning to be present. If a scenario happens later after such employees have left the company, their findings, if relevant, can still be used by their predecessors.

Scenario planning involves the following steps:

1. Identifying the driving forces
   This includes the major societal, economic, technological, and political changes that will occur in the future and how they will impact your business.
2. Identifying critical uncertainties
   From the list of major driving forces, the forces with the highest impact are selected.
3. Creating a variety of about 10 believable scenarios
   This step involves taking the forces and developing possible outcomes of each from them, to come up with a large number of scenarios.
4. Narrowing believable scenarios to just 2 or 3
   This step involves creation of a matrix using the two or three major uncertainties as axes x, y and z, then creating four different future scenarios based on which direction each of the uncertainties will go.
5. Discussing the implications/ matter arising
   In this last step, the various effects and implications of each scenario are evaluated and reevaluated. A set of adaptation goals are then set while taking each scenario into account.
6. Building a response strategy
   In this step, strategists develop a well consulted manner in which to respond to each strategy. The response is documented and kept ready for use.

Systems thinking may be incorporated into scenario planning, specifically the knowledge that many different factors may interact intricately to create occasionally unexpected futures. Scenario plots are produced by systems thinking and scenario planning by illustrating the causal relationship between the variables. This combination leads to the creation of dynamic scenarios.

When putting this strategy into practice, managers need to be aware that scenario planning is just one of the strategic management tools available.

Difference between contingency planning, sensitivity analysis and computer simulations

While contingency planning, sensitivity analysis, and computer simulations are strategic planning tools, they are not the same as scenario planning. 

• Contingency planning refers to a “What if” strategy that only considers one unknown. However, each scenario’s combination of uncertainties is taken into account during scenario planning. Planners also make an effort to choose social development combinations that are particularly plausible but unsettling.
• While scenario planning aims to expose decision-makers to significant interactions of key variables, sensitivity analysis only analyzes changes in one variable, making it useful for simple changes.
• While scenario planning can benefit from computer simulations, scenario planning is less formalized, and can be used to make plans for qualitative patterns that show up in a wide variety of simulated events.

We hope you have learned how and when to apply scenario planning to your business, and will not wait to be caught off guard by the next round of inevitable change.

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