Over the last few years we have seen many organisations suddenly falling into crisis because of some changes in external factors of macro-environment. These companies seem to have one thing in common – they don’t think about the future enough. While there are a few tools in their business toolbox, the best one to predict the ever-changing business environment and to help prepare from uncertainty from macro-environment is scenario planning. Scenario planning is great to help organisations think about the future, grasp the potential new trends and to look for new revenue opportunities.
Scenario planning is an excellent business tool based on making assumptions on what the future is going to be by identifying a specific set of uncertainties. While it sounds like a simple task, building a set of exhaustive assumptions is one of the best strategic analysis to help guide the long-term goals of a business. When done correctly, scenario planning can hep to reduce costs, risks and find new business opportunities. So, there is no doubt that companies can benefit from good scenario planning, and here are some things one should consider before implementing scenario planning strategy in your business.
Predetermined Factors Frist
A good scenario planning strategy will often identify some particularly powerful drivers of change. These drivers result in outcomes that are the inevitable consequence of events that have already happened, or trends that are developing.
Developing scenario planning strategy, companies should search for predetermined outcomes, and they can be simplified to four kinds; demographic trends, economic action and reaction, the reversal of unsustainable trends, and scheduled events (which may be beyond the typical planning horizon). Some have tried to capture the essence of them, by saying “it has rained in the mountains, so it will flood in the plains.”
For example, for demographic trends, one can look at the changes in population size and structure as they are among the few highly predictable aspects of the future. It is also possible to look at economic actions and reactions by looking and good old demand. If demand shoots up, prices will too—which will limit demand and drive increasing supply—with the result that demand, prices, or both will drop.
Using this idea of strategic planning your company’s planners can prepare for any big changes in the market that you operate in.
While developing scenarios the golden standard is to come up with four alternatives. This is due to the nature of people, really. If you have three scenarios, people will tend to go for the one in the middle. Two and your strategy is not exhaustive enough. More than four and you are going to get lost in unrealistic scenarios that will move your strategy away from the important factors and so on.
Sticking with four scenarios will help you to identify your business driving forces, the most important change factors and will aid your strategy. For more information on creating these four scenarios and aligning them with your business KPIs read our article about basic scenarios and their differences and provide guidance for creating a scenario for your business.
Don’t rely on a narrow set of outcomes
This is a tough one. Using scenarios for strategic planning can be somewhat misleading by creating a sense of complacency and sense of having everything under control. Creating scenarios that are too optimistic in a growth scenario and too pessimistic in a downturn is a comfort trap that all of us are subject too.
Even the best analysts are subject to this. So whenever possible, include a core worst case scenario. It doesn’t take another plague to get most of the businesses down, some might suffer significant losses just from an increase in supply costs. So set scenarios that can be tested with some extreme events as well, try basing them on the events of the last 30-40 years and see how your business would survive.
As always, the most important part about setting scenario planning strategy is to monitor it after the fact. Depending on the scenario you have predicted it can be easy to put some reference to your strategic business plan and forget about them. However, you need to keep monitoring any changes in the market during the period of your scenario implementation. This will help your business prepare for any further affects changes might have on your business.