Why Scenario Planning Is An Effective Strategy Tool

We live in an era of turbulence — even before Covid, rapid technological change, economic crises, and political instability made strategy development complex. Managers constantly asked themselves, "What’s next?" and "How do we prepare for the future?". In many cases, the past can guide us in predicting the future through analysis. However, when something unprecedented occurs, that approach fails.

Scenario planning is a strategic planning tool that allows to manage uncertainty effectively. This tool helps not only to anticipate possible futures, but also to develop an actionable plan for each scenario. In this article, we’ll explore the fundamentals of scenario planning, its stages, advantages, and disadvantages.

What is strategy and how is it formed

In general, strategy is a high-level plan for achieving complex long-term goals. To develop a strategy, one must first understand the current position (Point A), define where they want to go (Point B), and set interrim objectives.

Developing a strategy begins with analyzing the current situation, which includes:

• Market evaluation
• Competitor analysis
• Target audience research
• Formulation of a value proposition

Once you have analyzed the current situation (Point A), the next step is defining the destination—Point B. Point B is essentially the vision, the long-term goal to achieve. Often it comes down to finding a BHAG (Big Hairy Audacious Goal).

The next step is to build a bridge between the current state and the desired future through the formulation of strategic goals.

Issues with the Traditional Approach to Strategy

Strategic Goal ≠ Strategy

It is not enough to assess the current state, imagine a BHAG, and set strategic objectives and OKRs. Strategy is not the same as strategic goals or vision. You often hear “strategies” like this: “become an industry leader” or “to have a 20% revenue growth every year while maintaining a 20% margin”. Without an answer to how we can achieve this, it will be impossible to do this. Ambition does not equal strategy; if neither you nor your team understand exactly how to achieve these goals, then nothing will work.

Too Many Goals

Strategy is not only about what the organization will do, but also about what it will not do. When there are too many strategic objectives, priorities become unclear. Given that resources are always limited, achieving all goals simultaneously is unrealistic.

No Plan B

Imagine you’ve established your current state, vision, mission, values, goals, and initiatives. Then, an unexpected change occurs in the external environment — like, for example, COVID-19, and your plans are no longer relevant. A change in the external or internal context often leads to the fact that traditional strategies are unprepared for new challenges.

If the strategy does not include an understanding of the key factors that can influence your company, you haven’t identified the problem, and you do not have a strategy. Instead, you have goals, a budget, or a list of initiatives that you would like to do.

Scenario Planning as a Way to Make Strategy Robust

Scenario planning is a strategic planning method that allows you to manage uncertainty. The concept of scenario planning appeared in the 50-60s of the twentieth century as a way to anticipate and plan potential events. One of the founders of the method is considered to be Herman Kahn, who conducted an analysis of possible military conflicts for the American center for global policy RAND Corporation after World War II.

In the business environment, the idea of scenario planning was first used by the oil company Royal Dutch Shell, which began studying the possible scenarios in case of oil prices increase by exporting countries. Through this analysis, Shell predicted the energy crises of 1973 and 1979, prepared accordingly, and became one of the top five oil companies in the world.

The tool gained popularity in the era that researchers called VUCA (volatility, uncertainty, complexity and ambiguity). Even before COVID-19, rapid technological changes, economic crises and political instability made predicting the future difficult. Managers have always wondered what will happen next and how to prepare for the future. In many cases, you can rely on the past to predict the future, analyzing it. But when something happens that has never happened, this becomes impossible. The most striking example was COVID-19.

The Difference Between Scenario Planning and Forecasts

• Forecasting: Predictions about future events based on current trends, using statistical or economic methods. Forecasts focus on quantitative outcomes and often and does not take risks into account.
• Scenario Planning: Descriptions of possible future developments based on specific conditions and assumptions. Scenarios aren’t precise predictions but frameworks for considering risks and opportunities.

Strategic planning does not answer the question of "what" to think about the future. It helps us understand "how" to think about it.

Scenario Planning Stages

Scenario planning involves five key steps:

1. Identify the focus and constraints
2. Identify key uncertainties
3. Building scenarios
4. Creating a list of actions
5. Implementation of scenario planning

1. Identify the Focus and Constraints

• Define the key question you would like to address in the planning (e.g., "Should we invest in AI?" or "Should we enter new markets?").
• Set time and geographic boundaries.
• Assemble a team with different perspectives and experiences.

2. Identify Key Uncertainties

• Select 10-20 factors that could significantly impact the business. For example, changes in demand, competitor actions, or emerging technologies.
• Assess the influence and uncertainty of each factor on a 0–10 scale

3. Building Scenarios

• Select key factors and set polar values for them: will it happen or not
• Create a 2x2 matrix and develop scenarios for each quadrant

For example, this set of scenarios developed for one of the Detroit Three automakers back in 1984, contained the “official future” in the lower left quadrant: cheap fuel with neo-traditional consumer values. This was the future Detroit had been planning for decades. But higher fuel prices and changing consumer values required them to think about new types of vehicles that would fit different environments. As a result, the customer began to think more about smaller cars, as well as minivans and SUVs that would appeal to consumers with nontraditional values.

All scenario options must meet these criteria:

• Differentiation. The stories in each quadrant must be different from each other. If this is not the case, then one of the factors does not have a significant impact on the course of the story and was chosen incorrectly.
• Realism. The developed scenarios have a minimal but still a probability of occurring.
• Potential for decision-making. Each of the scenarios should contain events on the basis of which management decisions can be made.
• Logic. Each scenario should be internally consistent and have no internal contradictions.

4. Creating a List of Actions

• Select the most favorable and the most negative scenario.
• Define actions to achieve the favorable scenario and avoid the negative one.

If you already have a strategy:

Sometimes scenarios are developed after the strategy has been defined. In this case, the scenarios serve as a stress test for the strategy. Look at what projects and plans you have at the moment and assess how relevant they are in the developed scenarios.

5. Implementation of Scenario Planning

Strategic sessions should be held regularly to adjust scenarios, maintain flexibility and adapt the company to external changes. Today, the use of scenarios is widespread. But too often, organizations conduct only one exercise and then shelve everything they have learned. If companies want to develop effective strategy in the face of uncertainty, they need to set up an iterative scenario planning process, conduct such sessions regularly, and adjust scenarios as the situation changes.

Advantages and Disadvantages of Scenario Planning

Advantages:

• Scenarios are easy to understand.
• Teamwork helps create a big picture.
• Reduces uncertainty to a manageable level.

Disadvantages:

• Based on assumptions rather than precise data.
• Does not provide specific forecasts.

Conclusion

Scenario planning is a powerful tool that helps companies to navigate uncertainty. It is based on identifying critical factors and creating an action plan, which makes strategies more flexible and effective.

In a rapidly changing world, the ability to foresee potential scenarios and adapt accordingly is a key success factor. Modern flexible strategies, including regular scenario updates, help companies successfully go ahead and minimize risks.