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Tool Box Talks: Scenario Planning

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Management tools are a dime a dozen. And yet, contrary to popular belief, most of them are good and helpful if used correctly and in an adequately defined context.

In “Tool Box Talks” we introduce you to common and less well-known tools and show you how you can exploit their potential for your enterprise, with today’s focus on scenrio planning.

What is scenario planning and when should it be used?

Scenario planning is a strategic planning tool. It analyses the potential development of factors impacting the development of an organization and develops different pictures of its future. Thus, it allows for the development and the test of robust and adaptive stratgeties.

Whenever a company’s enviroment is characterized by ambiguity and frequent changes, scenario planning is a valuable extension in the strategic planning process. The tool’s strengths come into play whenever environmental factors impacting a company’s success are known but not the way they will evolve over time. In these circumstances, scenario planning helps to develop a realistic view on the future and derive strategies to achieve an organisation’s goals and objectives.

How is scenario planning used?

Scenario planning is a five-step process. First one needs to define the boundaries for the scenarios, i.e. the focus (e.g. a specific market, a region or country, a certain technology, etc.) and the time (e.g. the upcoming 12 months, the next 5 years, until 2050, etc.).

Next, the user needs to define the relevant impact parameter. If they are not already known, a PESTEL analysis is the tool of choice to ensure a holistic collection of impact factors. For each of the identified factors the user has to evaluate the potential future development. This should include the spread of potential outcomes as well as the accuracy of the prediction made. Finally, the impact of each factots on the defined targets and dependencies between different factors needs to be worked out.

The third step in the scenario planning process is the selection of scenario-defining parameters. These are characterized by (i) a high impact on the targets, (ii) a low predictability, and (iii) the absence of interdependencies. The number of scenarios is directly linked to the number of defining parameters: one parameter will lead to two scenarios, two parameters will result in four scenarios, three parameters can be used building eight scenarios and so on.

Once the defining parameters are selected, the user can formulate the final situation for each scenario by picking a set of extreme results from the defining parameters. These are used to depict a potential future at the end of the selected timeline. This should be as realistic and conclusive as possible and reflect all parameters identified in step two of the scenario planning process.

Finally, a narrative bridging the time between today and the future end points needs to be developed. As before, these stories need to be realistic, conclusive and meaningful for the organisation.

Beware of pitfall!

Scenario planning is not a prediction of the future. It rather highlights dependencies and helps making ambiguities tangible and handable. Thus, it is not the goal to develop the one correct scenario but rather a set of different, equally realistic ones.

As with planning in general, there is apotential danger that some initial impacting factors are unexplored or that the analysed data is biased. To overcome these obstacles, a wide range of people including externals should be involved in the scenario planning process.

Last, the development of a narrative may be tricky, too. The team needs to pay special attention to include all relevant impact parameters and use conclusive developments. Otherwise, the scenarios become blurry and are of little use for the organization.

What are the benefits of using scenario planning?

The primary result of the scenario planning process are the derived scenarios. These are the starting point for the development of robust strategies, i.e. strategies which allow the organization to achieve its goals and objectives independently of the future development. Besides, scenarios can be used to develop an early warning system. This enables the company to react to unfavourable developments early on rather than waiting for significant deviations in the results or to develop option-based strategies.

Another benefit from scenario planning is its systematic interaction with a company’s environmental factors. By frequently changing perspective from today’s boundary conditions to a potential furture development, the involved personnel develop a deeper understanding of how external factors impact the organization. This considerably improves the decision making process as external factors are more likely to be included.

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Using scenario planning to bridge the present and the future

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“Nobody could have foreseen Covid19 – or couldn’t they?” – The introductory question of an interview sequence about risk management conducted by “Businesstalk am Kudamm” reveals how unprepared many companies were when hit by the pandemic. While it is true that the Robert Koch Institute published a study in as early as 2012 showing what might happen in the case of a similar epidemic outbreak, the results of this scenario have been widely ignored by entrepreneurial strategists. Still, scenario planning can, more than any other instrument, help develop robust strategies for an uncertain future.

Crafting suitable scenarios

In his recent Harvard Business review “Learning from the future” [3], J. P. Scoblic emphasises that companies have to bridge the gap between long-term planning and short-term optimisation. While the first requires a prudent consideration of what will, could and might be, the latter demands focus on current processes, data and trends.
Here scenario planning helps to close the gulf in an ideal way, by combining analysis of current developments with an anticipation of the future. Creating scenarios means that present trends and dependencies are used to explore plausible far-future worlds, with a special focus on critical uncertainties.

Constructing robust strategies

Such a scenario planning typically results in a set of realistic scenarios which are also as distinct and dramatic as possible. In a next step, the company has to devise a strategy for its organisation and to put it to the test in the drawn-up scenarios.

Similar to scenario planning processes, strategic planning, too, combines what is relevant now with what might be in the future. In this context, it’s a company’s present environment in the form of existing capabilities, capacities and freedom of action that a strategic planning will start with. The relevant scenarios then show what challenges the organisation will have to face in the future.

The developed strategy usually refers to one scenario only. In the following test this strategy is adapted to the remaining scenarios. If a strategy is robust, it proves itself to be successful in all – or at least most – of the devised visions of the future.

Successfully ingraining these strategies

To ensure that reconciling short-term optimisation and long-term planning has been really successful, a third element has to be considered when it comes to scenario planning, and that is integrating it into the organisational structure of the respective company. Here, too, a balance must be struck between current developments and future unpredictabilities, thus helping to master the challenges described by J. P. Scoblic.

Ingraining scenario planning into a company is carried out in two directions: One goes from the scenario to the entrepreneurial context, the other leads from current external and internal developments to the scenarios. The first step is that all persons responsible for implementing the company’s strategy are constantly reminded that the depicted alternative futures are relevant to their decisions. In this way the drivers for and the relevance of the strategy are kept alive and future planning becomes more self-aware, thorough and prudent.

The second step in integrating scenario exercises in a company’s culture is to review critically the scenarios themselves at appropriate, regular intervals and to update them. Hypotheses which have proven to be unrealistic have to be replaced by new ones and the process has to be reiterated, at least partially. This will guarantee that the scenarios will stay relevant to the company and thus contribute to optimise strategic planning.

  1. Businesstalk am Kudamm (2020): „Corona wurde vorausgesehen“
  2. Robert Koch-Institut (2012): „Bericht zur Risikoanalyse im Bevölkerungsschutz 2012“
  3. J. Peter Scoblic (2020): „Learning from the future“
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Successfully implementing strategy

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The consultants completed their job and the corporate strategy is defined. After a two days’ workshop and three or four iterations of the report, the results are great: The company’s vision is now realigned, goals and targets for the next fiscal year are defined and a detailed action plan is derived. Shareholders, directors and management are satisfied and fully support both strategy and action plan.

The team enthusiastically starts working on the tasks, but soon daily business becomes top priority and strategic work is hardly performed. It is obvious in the mid-year review that the team will not be able to complete all the initiatives defined in the strategy workshop – and at the end of the year just one single project out of a dozen is completed and only one more reached implementation status.

Strategic planning vs. operational reality

I regularly come across stories like this. A corporate strategy is defined and a project for implementation is initiated. However, completion of the project fails because operational tasks are prioritised. There are many reasons, but you can make out some generic themes.

Assumed ability for change

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” This quote from Bill Gates is a fair summary: In the strategic planning for the next one or two years we often assume that we can achieve almost anything we’d like to. That the proposed change would be too much for the organisation, is only considered after the implementation failed.

Available resources
To implement a strategy, you need resources. If a company’s staff is busy with operational tasks, the organisation is simply not able to drive strategic projects and initiatives.

Lack of focus
And even if resources are available, daily business often compromises strategic work. It is the daily business which generates cash flow. Therefore, there is always a tendency to allocate resources to operational tasks, even if they were originally planned for strategic projects. This behaviour boosts short-term performance (and may be reasonable in some instances) but mostly results in issues with long-term strategy implementation.

Successful strategy implementation
I do not deny the importance of strategic planning, but it is the implementation of a strategy which supports success. To realise your strategy and thus secure long-term success of your company, you should focus on three things:

Realistic planning
The cornerstone of successful strategy implementation is realistic planning. Be true about what you and your organisation can achieve and plan accordingly. I propose to ask yourself two questions:

  1. What is it that I should do?
  2. What am I capable of doing?

In case you are not sure about the answer to question 2, you should work with priorities. This allows you to guide strategic initiatives according to their importance.

Providing resources
Once the planning is completed, you need to check whether you have the required resources for implementation available. This should include finance, skills and manpower. In case you identify a need, closing the gap is priority No 1. F this is about skills and manpower, you can either hire staff or engage a consultant.

Keep you focus
It is important for those responsible that they keep their focus on implementing strategy. Therefore you ought to make sure that managers and employees have sufficient free capacity for strategic initiatives.
In case an employee needs to be re-allocated from a strategic project to another task, you should carefully consider all aspects of the respective decision. You should not take such a step unless you are sure that the long-term benefit of an additional operational effort exceeds the value of the strategic project. Besides, such a decision should be documented – including the reasons for the decision.
If you plan realistically, provide the required resources and ensure that the team keeps its focus, you will probably be able to implement your strategy. And with a successful implementation of your strategy, your company will economically thrive.

For more insights, we recommend our articles “Three Steps to Project Success” and “Without any alternative? – Improved decision making“.

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Four requirements for scenario planning

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Making strategic decisions in an insecure, constantly changing environment is challenging for two reasons: first, the changes a company faces are normally unpredictable and second, in most decision-making processes there are systematic weaknesses.

Using scenario planning to improve decision-making processes

According to Kees van der Heijden it is several different mechanisms that systematically paralyse strategic decision-making processes. In his studies he identifies seven such mechanisms which individually or in combination can cause a strategic paralysis of companies:

  • Ingrained, inflexible attitudes
  • contradictory, unaligned perception
  • prejudiced way of receiving and interpreting information
  • embedded biases
  • risk aversion
  • overconfidence
  • misjudging the accuracy of one’s own predictions

These mechanisms can easily affect decision-making processes in a negative way, especially if the environment of a company is exposed to substantial change. All this leads to errors in strategic decisions and, eventually, economic failure.
One way of avoiding these traps is scenario planning. Scenario planning visualises possible future developments. This process, usually cooperative and drawing on data from different sources, bypasses the pitfalls listed by van der Heijden. It systematically improves the effectiveness of strategic planning, which, in turn, will become more responsive to shifting circumstances.

Key criteria for scenarios

If scenario planning is to have such a positive effect on decision-making processes, the developed scenarios have to meet the following criteria:

Relevant

The forecast spectre of developments drafted by scenario tools must be relevant to the decisions in question. This means that scenario planning must take account of all dynamics that have an impact on relevant decisions and their consequences.
In a similar way this is true for the specified timeframe: for a comprehensive evaluation it should cover the whole range of possible decisions and their effects. If the created scenarios, however, go significantly beyond this time span, they might distract attention from essential issues.

Comprehensive

Apart from being relevant, scenarios should also be comprehensive. In this context the term ‘comprehensive’ means that both uncertainties and certainties are considered. Uncertainties, i.e. dynamic situations and constellations which may develop in any direction, form the basis for thinking up plausible futures. However, certainties, i.e. factors whose future development can be easily predicted, are just as important in scenario planning because they help scenarios remain realistic.

Sufficiently revealing and realistic

The scenarios created by scenario planning should be sufficiently revealing. This means that they should extend the scope of possible futures and their timeframe as far as possible. If this requirement is met by two, three or more scenarios depends on the specific case in question.
At the same time, the scenarios should remain realistic by remaining within the scope of the prognosis. This scope should be made plausible, wherever possible, by available data and studies.

Restricted

Every scenario developed in the context of scenario planning should be restricted. Scenarios are no predictions of the future, but describe a possible way that things might turn. Such an outline has a clear beginning, usually the present, and a defined end-point, which is the end of the timeframe under consideration. Between these defining points lies the description of a development which begins at the starting point and goes through right to the end-point.
If these four criteria for scenario planning are met, the scenarios will be a strong tool to avoid the described weaknesses in decision-making processes.

We highlighted guidelines for the decision-making process in the article “Without any alternative? – Improved decision making”. Considering these tips will enable you to develop meaningful scenarios and create a positive impact on your company. If you have any questions, do not hesitate to contact us.

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