Scenario Planning

Scenario planning is a way to help organizations think through their assumptions and become better prepared to flexibly respond to possible future conditions. A scenario is a description of a possible future that identifies possible significant events that may happen in the future, major parties involved in that future, and the assumed motivations of those parties. The intuitive approach to scenario planning is based on the assumption that scenarios are not forecasts about the future, but possible alternative pictures of how organizational environments may develop. The formal style is more closely aligned with forecasting and uses computer modeling in an attempt to attach probabilities to the alternative scenarios. Although some organizations find scenario planning to be a useful tool, it is not without its detractors. However, if one is careful to avoid the various potential process and content pitfalls that can affect the quality of the scenario, this approach to strategic planning can be very useful in helping an organization transcend its blind spots and give it the tools to be flexible in responding to future events.

The need for an alternative plan has become almost axiomatic in our constantly changing society. Alternative plans may be as simple as planning on staying close to home for vacation if the price of a barrel of oil continues to rise or as complex as planning how to operate in the global market if oil prices continue to rise. The need for planning against various contingencies has even infiltrated our entertainment media as exemplified by the thought bubble above the cartoon character falling over the cliff saying: "Time for Plan B."

One approach to future planning for business is called scenario planning. In this context, a scenario is a description of a possible future that identifies some significant events, the major parties involved in that future, and the assumed motivations of those parties for their actions in that future. Scenario planning is an approach to strategic planning in which a limited number of possible scenarios are drawn to describe possible alternative futures that may affect the functioning of the organization. Scenario planning helps the organization to better understand the nature and impact of forces driving its future. This process emphasizes the open exchange of knowledge from all involved parties and a mutual understanding of issues that are central to the healthy functioning of the organization. Scenario planning has been an important tool for military planning for centuries and more recently has been used in making strategic business decisions. The use of scenario planning can help organizations make decisions based on likely futures such as whether to invest in more brick-and-mortar retail locations or to move more of their retail selling online instead.

Schools of Scenario Planning Thought

There are two general schools of thought on how best to approach scenario planning.

Intuitive Approach

The intuitive approach, taken by such companies as Shell Oil, is based on the assumption that scenarios are not forecasts about the future. Rather, this approach is based on the assumption that the future is uncertain and unknowable. Scenarios developed using the intuitive approach are possible alternative pictures of how the organization's environment may develop. For example, Shell Oil's approach to scenario development is an iterative process comprising five activities. The first phase in this approach to scenario planning is preparation. During this stage of the process, the organization articulates its goals and resources. This phase includes planning the project, allocating responsibilities, securing time for the process, setting research priorities, and conducting interviews with key stakeholders. Phase 2 of the scenario development process is pioneering. During this phase, the organization gathers information across disciplines in order to challenge the conventional wisdom and address its blind spots. During this phase, themes are identified and scenarios outlined and built. Phase 3 of the process is mapmaking. During this phase, dynamics of the situations are clarified, illustrating information is gathered, and endorsements are gained. Phase 4 is navigation. During this phase, the organization navigates its way to the actual events as they unfold. During this phase, scenarios provide a common language that can be used to discuss complex issues and shape strategic conversations. The next phase of the scenario planning process is reconnaissance. During this phase, data are gathered concerning the viability of the scenario and the implications of the scenarios are tested. These steps are repeated in a continuing process over time to improve the scenarios in response to changes in the organization's environment.

Formal Approach

An alternative approach to scenario planning is offered by the formal style used by Rand Corporation and other organizations. Although similar in many ways to the intuitive approach, the formal approach is more closely aligned with forecasting than is the intuitive approach. The formal approach also uses computer modeling in an attempt to attach probabilities to the alternative scenarios.

Shortfalls of Scenario Planning

Scenario planning is not without its detractors. This approach to strategic planning requires decision makers to be willing to set aside their assumptions and preconceptions and to look objectively at possible futures that may run counter to their existing plans and philosophies. In addition, scenario planning requires research and the insights of external experts. As a result, the development of good scenarios requires more work than some organizations are able or willing to devote to the task. Further, scenarios are only possible futures, not infallible predictions. Peter Schwartz -- one of the leading proponents of scenario planning -- once famously made a prediction that "our view of the future is positive -- but no more so than the times warrant. We live in extraordinary times. The opportunities that are opening up in the next 20 years are enormous" (Stauffer, 2002). This statement, made in 1999, was followed by the first recession in a decade, the terrorist attacks of September 11, and the Enron scandal.

Strengths of Scenario Planning

Despite the fact that some events are simply not reasonably predictable, scenario planning remains a useful tool if one understands its goals. Scenario planning is used to improve the organization's ability to be flexible in responding to rapidly changing environments, not to predict single-point changes in the organization's environment. There are several reasons why scenario planning remains relevant for organizations.

• First, scenarios can help organizations ensure that they are focusing on opportunities that may be provided by a changing environment. Scenario planning is not a substitute for crisis planning. Rather, scenario planning is a long-range planning technique that allows decision makers to investigate the opportunities presented by likely futures. This allows organizations to better plan for both negative and positive future situations.

• Second, scenario planning enables organizations to more prudently allocate their resources. Scenario planning allows the organization to examine a range of potential futures, so that it can be better prepared to respond to any of the envisioned plausible scenarios.

• Third, scenario planning allows the organization to preserve its options. If one understands that the future is not certain, as well as how to prepare for some of this uncertainty, one can react to future events in a more timely and proactive manner.

• Fourth, scenario planning helps organizations to look ahead rather than to merely assume that the future will be a simple extrapolation of the past. The scenario planning also helps organizations to articulate and question their assumptions as well as to take into account the insights from other stakeholders so that a more realistic picture of the future can be painted.

• Finally, scenario planning offers organizations the opportunity to rehearse for the unexpected. Although the future scenario envisioned will most likely never be exactly the same as the actual future, by envisioning and planning for likely scenarios, the organization can be better prepared to respond to what the future actually brings.

Applications

Potential Pitfalls of Scenario Planning

Scenarios are based on the insights of experienced stakeholders as they attempt to consolidate and express their observations of past experience and future trends. As opposed to forecasting -- which is an attempt to scientifically quantify and synthesize the data affecting a particular situation -- scenario planning is more qualitative. This can be both a benefit and a hindrance for strategic planning.

Integration Problems

Shoemaker (1990) lists a number of potential pitfalls that can be experienced when attempting to do scenario planning for business. These pitfalls stem from two primary sources: process problems in the activities related to scenario development that unfold and build over time and problems with the quality of the content of the scenarios themselves. Process problems include issues related to the failure to integrate the scenario-planning process into the other activities of the organization. For example, as with any organizational change activity, the failure to gain the support and involvement of top management early in the scenario-planning process can derail the process before it even begins. If top management is not a stakeholder in the process and its outcomes, it is unlikely that the process will receive either the resources or support necessary from other stakeholders. Similarly, even if the scenario-planning process leads to valid and important predictions that require changes in the way that the organization does business, if top management is not vested in the process and its outcomes, it is unlikely that these will be acted upon. In addition, when doing scenario planning, it is important to remember that these activities are only one part of the overall planning and decision-making processes within the organization. Activities such as risk assessment and simulation can help integrate the scenario-planning process into the overall organizational decision analysis process.

Incomplete Inputs

A second category of process pitfalls in scenario planning is an outgrowth of the failure to include all the necessary inputs into the mix when developing scenarios. Scenarios are typically centered on external changes, so it is important to get the inputs of representatives of the communities that may affect change in the future (e.g., customers, suppliers, government regulators, academics, and other analysts) to provide their insights to the process. Similarly, it is important to secure the support of both line and staff members in the scenario-planning process. These two groups of people view the organizational universe through different lenses, and the inputs of both are needed. There is often an unfortunate tendency to emphasize the inputs of staff members. However, although staff personnel may understand the "big picture" better, it is the line personnel who understand the minutia of organizational operations that can make an organizational plan a success or failure. It is important to have both line and staff personnel equally involved in the scenario-planning process.

Misunderstandings

Another cluster of potential pitfalls related to process issues in scenario development arises from a lack of understanding of the scenario-planning process and its outcomes. Some organizations, for example, enter into scenario planning without a clear understanding of the process and roles of the various participants in the process. Scenario planning is typically a time-consuming process that requires research and the abilities to abandon one's assumptions and to see situations from alternative perspectives. Scenario planning is not a process that translates into a quick fix for the ills of the organization. The primary purpose of the process is to help stakeholders and decision makers to better understand the ramifications of various possible scenarios on their strategic plans. In addition, scenario planning is only one potential step in strategic planning. To assist in this process, it is helpful to articulate a clear roadmap for the participants so that they know what to expect. Failure to do this can result in participants who are unwilling or unable to put in the work necessary to make the process a success.

Failure to Take All Necessary Steps

Another group of process-based pitfalls that can be encountered in scenario planning stems from not doing all the required steps necessary for the development of realistic scenarios. Scenario planning is -- at its core -- a learning process that cannot be rushed. Sufficient time needs to be allowed for learning about trends and factors that can affect the organization's future plans. Unlike a math problem, the goal of scenario planning is not to get the "right" answer the first time. Adequate time needs to be allowed to explore various likely alternative scenarios and play them off each other to help participants better understand the underlying factors and assumptions. Because of this, it is also important not to develop too many scenarios. Scenarios should be distinctly different from each other in order to maximize the usefulness of the technique (usually between three and five). Finally, scenario planning can be a continuing process as more data are acquired and processed. Scenarios and resultant strategies alike need to be refined to better fit the continuing stream of data and changes in trends over time.

Failure to Address Underlying Issues/Problems

In addition to process-based pitfalls, the scenario-planning process can also suffer from problems with the quality of the input to the process. For example, it can be difficult for many organizations to objectively think about long-term scenarios when they already are successfully thriving in the marketplace. Too many organizations tend to deal with the symptoms (i.e., "put out fires") rather than the underlying problems. Although this may be a successful strategy in the short term, it tends to be counterproductive in the long term. Particularly in this age of rapidly emerging technology, emphasis on information, and increasing globalization, it is essential that organizations carefully consider the impacts of such changes in the marketplace on their strategies. To do this, the organization must take into account the historical perspective without being bound by it. It can be helpful, for example, for the organization to compare itself with other industries that have experienced unexpected discontinuities or progressed further in terms of various issues of concern (e.g., regulation, technological advances). However, focusing too intently on trends can lead to scenarios that simply project the past into the future without truly applying the type of out-of-the-box thinking required for the development of good scenarios.

Lack of Diverse Viewpoints

Another problem that can be experienced during scenario development is that all the scenarios are merely variations on a single theme. A set of scenarios should represent the full range of viewpoints both within and outside of the industry. In particular, scenario development should take into account the viewpoints of creative and innovative thinkers. In addition, in order for scenarios to be useful, they need to be internally consistent. One should make sure that the main trends within a scenario are mutually consistent with each other and that the key uncertainties within a scenario are compatible. For example, it is unlikely that the near future will include a situation where there is full employment and zero inflation. Similarly, when postulating possible actions of major stakeholders, one should make sure that these actions are consistent with their interests. One way to help in the development of a realistic scenario is to try to understand the underlying problems and factors that can affect the future rather than merely brainstorming a wide-ranging list of possible symptoms.

By its very nature, a good scenario will often fly in the face of the conventional wisdom of the organization. Although organizational management may have legitimate political, emotional, and other concerns, the development of the good scenario must be predicated on intellectual honesty and an objective look at all the relevant factors that may affect the organization's future.

However, a good scenario is not merely a snapshot of what the future might hold. Rather, it is a roadmap showing how the situation may develop from its current state to the projected future state.

Lack of Decision-Maker Input

Finally, good scenarios need to be relevant to the key decision makers within the organization. It is the responsibility of those who develop the scenarios to make sure that decision-makers understand its relevance. For example, the implications of the rising cost of a barrel of oil may not be immediately apparent to widget manufacturer. However, if that manufacturer is involved in the global economy, the rising cost of a barrel of oil will translate into rising transportation cost both upstream and downstream in the supply chain that could potentially price the organization out of competition. Similarly, even if the widgets are only sold locally, rising fuel costs could translate into a situation where fewer potential customers are willing to pay for the fuel necessary to go to the widget store to purchase a widget. However, if the decision makers do not understand such facts, they may dismiss a realistic scenario out of hand.

Conclusion

Scenario planning is an approach to strategic planning helps the organization better understand the nature and impact of forces driving its future. Scenarios are based on the insights of experienced stakeholders as they attempt to consolidate and express their observations of past experience and future trends. Scenario planning has been successfully used by many Fortune 1000 companies. However, it is often not used more widely because scenario planning requires decision makers to think "out of the box" and envision possible likely futures that may run counter to current corporate plans and philosophies. In addition, scenario planning is not universally successful due to a number of potential pitfalls stemming from both the process used for developing the scenarios as well as the quality of the content of the scenarios themselves.

Terms & Concepts

Decision Analysis: A collection of procedures, methods, and tools used to identify, represent, and assess the important aspects of a decision being considered in a decision-making process.

Forecasting: In business, forecasting is the science of estimating or predicting future trends. Forecasts are used to support managers in making decisions about many aspects of the business, including buying, selling, production, and hiring.

Globalization: Globalization is the process of businesses or technologies spreading across the world. This creates an interconnected, global marketplace operating outside the constraints of time zone or national boundary. Although globalization means an expanded marketplace, products are typically adapted to fit the specific needs of each locality or culture to which they are marketed.

Management: The process of efficiently and effectively accomplishing work through the coordination and supervision of others.

Model: A representation of a situation, system, or subsystem. Conceptual models are mental images that describe the situation or system. Mathematical or computer models are mathematical representations of the system or situation being studied.

Risk: The quantifiable probability that a financial investment's actual return will be lower than expected. Higher risks mean both a greater probability of loss and a possibility of greater return on investment.

Scenario: A description of a possible future that identifies some significant events, the major parties involved in that future, and the assumed motivations of those parties for their actions in that future.

Scenario Planning: An approach to strategic planning in which a limited number of possible scenarios are drawn to describe possible alternative futures that may affect the functioning of the organization. Scenario planning helps the organization to better understand the nature and impact of the forces driving its future. Scenario planning emphasizes the open exchange of knowledge from all involved parties and a mutual understanding of issues that are central to the healthy functioning of the organization.

Stakeholder: A person or group that can affect or be affected by a decision or action. In marketing, stakeholders may include the organization's employees, suppliers, distributors, and stockholders.

Strategic Planning: The process of determining the long-term goals of an organization and developing a plan to use the company's resources -- including materials and personnel -- to reach these goals.

Strategy: In business, a strategy is a plan of action to help the organization reach its goals and objectives. A good business strategy is based on the rigorous analysis of empirical data, including market needs and trends, competitor capabilities and offerings, and the organization's resources and abilities.

Supply Chain: A network of organizations involved in production, delivery, and sale of a product. The supply chain may include suppliers, manufacturers, storage facilities, transporters, and retailers. Each organization in the network provides a value-added activity to the product or service. The supply chain includes the flow of tangible goods and materials, funds, and information between the organizations in the network.

Bibliography

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Rasmus, D. W. (2011). Scenario planning the future. Chief Learning Officer, 10(2), 28-31. Retrieved November 20, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=57636393

Shell International. (2003). Scenarios: An explorer's guide. Retrieved January 3, 2008, from Shell International website. http://www.shell.com/static/aboutshell-en/downloads/our%5Fstrategy/shell%5Fglobal%5Fscenarios/scenario%5Fexplorersguide.pdf

Shoemaker, P. J. H. (1990). Twenty common pitfalls in scenario planning. In L. Fahey & R. M. Randall (Eds.). Learning from the future: Competitive foresight scenarios (pp. 422-431). New York, NY: John Wiley and Sons.

Stauffer, D. (2002). Five reasons why you still need scenario planning. Harvard Management Update, 7(6), 3-7. Retrieved January 2, 2008, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=6756894&site=ehost-live

Tips for strategic scenario planning. (2013). Controller's Report, 2013(7), 2-3. Retrieved November 20, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh &AN=88426965

Verity, J. (2003) Scenario planning as a strategy technique. European Business Journal, 15(4), 185-195. Retrieved January 2, 2008, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=12548913&site=ehost-live

Wilkinson, A., & Kupers, R. (2013). Living in the futures. Harvard Business Review, 91(5), 118-127. Retrieved November 20, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=87039876

Suggested Reading

Axson, D. J. (2011). Scenario planning: Navigating through today's uncertain world. Journal of Accountancy, 211(3), 22-27. Retrieved November 20, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=58704579

Chermack, T. J. (2011). Scenario planning in organizations: How to create, use, and assess scenarios. San Francisco, CA: Berrett-Koehler. Retrieved November 20, 2013 from EBSCO online database eBook Academic Collection (EBSCOhost). http://search.ebscohost.com/login.aspx?direct=true&db=e000xna&AN=354488&site=ehost-live

Goodwin, P., & Wright, G. (2001). Enhancing strategy evaluation in scenario planning: A role for decision analysis. Journal of Management Studies, 38(1), 1-16. Retrieved January 2, 2008, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4110445&site=ehost-live

Hindle, T. (2003). Scenario planning. In Guide to management ideas(2nd ed.). New York, NY: Bloomberg Press, 191-193. Retrieved January 2, 2008, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=26023622&site=ehost-live

More, H. (2003). Scenario planning or does your organisation rain dance? New Zealand Management, 50(4), 32-34. Retrieved January 2, 2008, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9819185&site=ehost-live

Shell International. (2005). Shell global scenarios to 2025: The future business environment -- Trends, trade-offs and choices. Hague, Netherlands: Author.

Shell International. (2007). Signposts: Supplement to 'Global scenarios to 2025.' Hague, Netherlands: Author. Retrieved November 20, 2013, from: http://s06.static-shell.com/content/dam/shell/static/aboutshell/downloads/our-strategy/shell-global-scenarios/supp-glo-sc.pdf