Since the oil shocks of the 1970s shook the business world, scenario analysis has become an inseparable part of running a business in an unpredictable economic environment. After many organisations have seen the success achieved by large organisations with scenario planning, approximately half of the largest European and US companies now use scenario analysis to support their long-term planning and decision-making.
The rise of scenario analysis can be largely attributed to the failures of traditional once-a-year forecasting techniques, as they are static, inflexible and fail to provide credible answers to 21st businesses. So, unlike traditional forecasting techniques scenario analysis provides a radically different approach to strategic management. Instead of trying to avoid any uncertainty, scenario planning deliberately confronts business managers with environmental, economic, political and other uncertainties by presenting them several outlooks of the future.
Here is how you can use scenario planning as a strategic management tool in your business.
Scenario Analysis (in short)
In short, using uncertainties that your business might face, scenario analysis can help to accommodate your business growth and resource allocation to improve your business decision making and development. By varying the uncertainties of your business, each scenario depicts another possible outcome for your business. In doing so the scenarios together highlight the importance and the consequences of these uncertainties. However, for strategic management, these analyses must not have to reflect “most likely” outcomes. The scenarios are supposed to be used to embrace the future of the business with more context of the business.
Scenario Analysis for Your Strategy
Overall, the process of the scenario analysis is quite straightforward. Traditional ideas of scenario analysis have stayed the same since the 1970s and the new ideas about scenario analysis have grown from businesses using this tool to evaluate their future endeavors.
Multiple scenario analysis techniques are now claimed by various authors to fulfill a range of functions within the business. Below we look at some of the more strategic functions that have been attributed to scenario planning:
1. Evaluation and selection of business strategies
First of all, using scenario analysis in your business can help you narrate your business strategy, as it can give your business a framework within all the various factors and information can be more effectively judged. Some academics suggest using scenario analysis to pick a strategy too. By running a scenario analysis on a couple of strategies one can pick more or less a better or more informed strategy for their future endeavours.
2. Integration of future-oriented data
Secondly, using scenario analysis one can predict what future data should be tracked. This is particularly useful when setting up a strategy from a scenario analysis. Additionally, using this tactic it is easier to set up KPIs in line with your business strategy and aligning your business goals with your long-term strategy.
3. Identification of future possibilities
Third, a crucial and a definitive idea of a scenario analysis is that it allows a business to explore their future and identify what might possibly happen and how an organisation can act or react upon feature developments. Preparing your decision-makers for such events.
4. Making managers aware of environmental uncertainties
This is a far more recent development. Recently businesses began to use scenario analysis to make decision-makers aware of the unstable business environment and enable them to accept the uncertainty and make it a part of the business reasoning.
5. Stretching of managers’ mental models
This strategic functionality can be directly attributed to the previous one. Whereby directly ensuring the uncertainty, it challenges managers existing mental ideas.
6. Triggering and accelerating processes of organisational learning
Finally, scenario analysis is increasingly considered a tool to trigger to accelerate processes of organisational learning.
Traditionally, learning about the business/from the business/and so on, on a strategic level is based on a long-timespan which isn’t functional in a business world. Therefore, using a scenario analysis as a tool for a strategic management can help to show the cause and affect within the business without waiting for such a scenario to happen in a ‘real-life’.
Traditional scenario analysis function was to add more flexibility to strategic business planning. Especially post 1970s oil shock, which hit a large amount of business into a panic. Whereas now, scenario analysis is much more used for strategic business management, to change mindsets and introduce a better decision-making process in a face of uncertainty.
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