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Scenario planning

Mon, 29 July 2002

Scenario planning can be used both to look generally at what might happen in the environment (for example, the effect on the economy if the government changes) and to help you think specifically about your own business and its position within the market place.
Scenario planning is a way of helping businesses to organise what they already know, or can easily discover, about the possible environment in which they will be working, say, five years ahead. It helps to add a framework to the process of strategic thinking.

Always remember, though, that scenarios are not forecasts - they simply reflect one possible way in which the future might emerge. It makes sense, therefore, to consider two or three scenarios, that is, two or three views of the future.

When preparing scenarios, build in sufficient milestones in order to identify which one is unfolding. In other words, what will be the key developments within each scenario? This is essential if scenario planning is to be an effective tool in your planning process.

Scenario planning can be used effectively by small businesses as well as large ones. Peter Schwartz, in 'The Art of The Long View', explains that the key is to define the driving forces, the predetermined elements and the critical uncertainties, all of which have considerable overlap.
The ideal scenarios are prepared to help with a key decision, or to decide whether you should start a business or launch a new product. You need, therefore, to consider the driving forces appropriate to your decision. Driving forces might include demographics, level and cost of imports (of competing products), changing technology, etc. Schwartz looks for driving forces under the categories mentioned in the PEST analysis: Political, Economic, Socio-logical and Technological.
Predetermined elements are those that can be predicted accurately because they change very slowly (such as demography), are tightly constrained or are already in the pipeline. For example, if you are selling to people aged 18-25 (like night clubs, say) then you are targeting a declining market - but the size of the market and the way it will change is known in advance. Similarly, the consumption of items such as food only changes slowly.
Critical uncertainties need to be explored carefully. Your actions will depend on the ‘what if?' questions you pose. For example:
  • What if interest rates rise? What effect will that have on mortgages and, in turn, on dispensable income? Will people be likely to stop spending on certain non-essential items - like paying others to do repairs, painting and decorating? Or will they be less likely to move - and spend more on repairs, painting and decorating? Will they do more themselves - increasing the level of DIY sales?
  • What if the numbers of cars on Britain’s roads continues to increase? One outcome might be that the Chancellor keeps on putting up the price of fuel, resulting in people buying much smaller, more economical cars. This will make it harder for them to carry bulky items (say, for all their DIY purchases), so there may be opportunities for cheap, efficient, local transport businesses. Another outcome might be that people spend even more time stuck in traffic jams and look for better in-car hi-fi systems. Or more people may decide to abandon their cars in favour of public transport.
Scenario planning helps businesses to build models of the future, which reflect the real world and that are shared and accepted by the business’ management team. As you might expect, if the key members of staff, usually the management team, are involved in researching and preparing the scenarios, it is more likely that there will be mutual ownership. Furthermore, the preparation will be particularly helpful in identifying key features in the business environment, including opportunities and threats. Do not develop too many scenarios. Aim for no more than two or three. Give them names so that you can refer to them easily.
Scenarios will help you to replace uncertainty with understanding. An external facilitator may be helpful both in preparing the scenarios and in developing responses. If possible, involve some of your key stakeholders - perhaps a major customer. Do they share your analysis?
Once you have prepared your scenarios you will need to consider how your business will respond. What opportunities and threats are posed by each of the scenarios? How should you address each of those? How do you want to position your business in the external environment? What can you do now to achieve that? Define your responses dependent on the milestones. And then watch for the milestones.
Do not worry if you prepare scenarios that do not eventually come to pass; as you practise identifying driving forces, predetermined elements and critical uncertainties, watch how the future compares to your options. Then you will become more skilled at scenario planning.
The most difficult part in using scenarios is determining the critical uncertainties and then using them to help you decide how your business should respond. One way is to follow these six steps1:
  • Seek a shared understanding of the important features which influence the business and develop a model of how things work;
  • Rank the features for their importance to the business;
  • Distinguish the factors over which the business can exercise choice;
  • Build a map which defines the options open to the business (vision, unique selling point, competitive positioning, what business are we in?, etc);
  • Define and prioritise the work needed in order to decide between those options; and, 
  • Set up a mechanism to deliver.
The process is ‘soft’ but the focus must be ‘hard’, with clear steps and concrete end products.

1 Oliver Sparrow, 'Management Options', Shell, 1993.

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