Scenario planning is a great forecasting and financial planning feature, that enables businesses to evaluate a variety of possibilities in rich details. Using trends and uncertainties your business might face you can plan to accommodate your business growth and resource allocation to improve your business decision making and development.
Scenario planning simply means creating a variety of possible future scenarios for your business based on your forecasts. Organisations tend to use this information in a number of ways; you can use it as an analysis of the current situation of your business and where your business is standing now against the desired business targets or general goal setting.
However, some companies take scenario planning too far and unfortunately get tangled in a web of scenario planning pitfalls that can lead to serious issues within a business. Common problems that stem from a poor scenario plan often tangle businesses in too much preparation, poor risk management, and might lead to in-flexibility of the strategic plan.
Here are 5 most common scenario planning pitfalls and how to avoid them:
Pitfall 1: Unrealistic Goals and Expectations
Unrealistic goals and expectations aren’t only scenario planning pitfalls this is also a common issue with any strategic business or financial plan. Obviously, organisations tend to have a very optimistic outlook on their future, which is often unrealistic. Therefore, it is important to keep a tight rein on the expectations that are raised by the scenario planning process. Some decision makers tend to expect scenario planning process to contribute to the bottom line almost immediately, however, this is not a case. The initial purpose of scenario planning is not to produce plans or create KPI, but to help business owners understand what might happen to their current plans in the various possible futures that their organisation might face.
Pitfall 2: Too many scenarios
While too many scenarios aren’t necessarily bad, this tends to pose a problem when it comes to scenario management as it might dilute the attention and energy that is required to concentrate on the more important issues. It is recommended to develop about 5 scenarios in order to produce a reasonable strategic and operational plan. Scenario planning is there to paint a picture of the possible future states of the world, rather than paint an exact picture of what might happen to the business.
Pitfall 3: Too many trends
Some businesses tend to pay too much attention to current trends when completing their scenario plans. This simply projects the past and encourages to pay little attention to unpredictable possibilities that are harder to envision. It is human nature to be more comfortable with what you know already, rather than confronting the unknown, however, running a business can never be comfortable.
Pitfall 4: Not looking to KPIs
While KPIs and fundamental business drivers often to get overlooked, this is especially common when it comes to scenario planning. The focus is usually on margins, market share, costs of raw materials and other indicators. However, these are often the symptoms of the deeper forces that the scenarios need to look at. Ideally, your scenarios should deal with the determinants of these variables, taking into account supply, demand and consumer confidence.
Pitfall 5: No new strategic options
The ultimate result of scenario planning should be when the organisation embarks on successful new strategic initiatives. But quite often, the scenario process fails to create legitimate breakthrough options that the firm can accept. One of the biggest problems here is that often, these scenarios might not look attractive. However, a solution is to convince the leaders to view the insights about the future as valuable options and opportunities that are worth to be materialised upon, rather than afraid of.
The main goal of scenario planning is not just to create a surrogate crisis and try solving them. The key to avoiding scenario planning pitfalls is to push people past their comfort zone and encourage reviewing existing systems and strategies in place, encourage to face the unknown and be a little bit ready for it.