Scenario Planning
Scenario planning is a well-established approach to analyzing the impact and possible responses to major events and trends. These are generally external but may be internal as well. In fact, most businesses do a type of scenario planning as part of annual strategic planning exercises.
Scenarios, however, most often deal with extreme events rather than the typical range of threats and drivers of annual plans. Events of the past two years are examples of where scenario planning is most applicable.
Annual planning typically works under the assumption of a single view of the future — a single scenario, in effect. This base assumption may be recast somewhat into two bounding cases — optimistic and pessimistic — but the underlying base scenario is generally fixed.
This approach works acceptably in "normal" times but can prove disastrous in troubled times such as we are in today.
Few organizations can respond quickly enough when a major unforeseen event occurs to avoid serious consequences. Responding effectively can require careful planning and years of preparation.
Scenarios are alternative sets of assumptions about the organization's world that are often cast in the form of stories. Stories are useful in their ability to connect a complex set of factors and events into a coherent view.
At some point, however, stories must be made quantitative and specific in order to be connected to the organization. You must be able to see the impact in terms of business variables such as cash flow, investments, staffing, and financing. Competitive and regulatory responses are usually vital to consider as well.
Systems models are commonly used to provide a means of integrating complex and diverse data into a practical framework. At one end are the situations, events and trends that define the scenario or worldview. At the other end is the organization with its primary features and relationships.
These models are rarely simple and developing good ones requires a great deal of modeling experience and expertise.
Scenario planning should not try to predict events or even worry too much about probabilities. What is most important is that the scenarios can be ranked in order of probable impact. This means that very likely scenarios with minimal impact may be less important than very unlikely scenarios with huge impact. Lehman Brothers catastrophic failure in 2008 was a stark example of the latter.
Another important part of scenario planning is the identification of so-called "triggers" for each scenario. These are events that must occur for a particular scenario to become active or at least more likely to occur.
Related to triggers are early warning indicators. These are simply events and trends that are considered likely to accompany and signal the occurrence of a particular scenario. If an indicator flashes red, then one might begin to look for activity in related triggers.
Methodology
Typical steps in scenario planning include:
1. Choose a time frame, such as five years out.
2. Identify events, trends and situations (drivers) within this time frame that have the potential to impact your organization greatly.
3. Develop a small (2 to 4) set of scenarios that incorporate each of these drivers, individually or in combinations.
4. Give each scenario a short working name, such as "double-dip recession", or "strong economic recovery".
5. Determine the likely impact on your organization of each scenario.
6. Develop practical actions in response to each scenario that should mitigate damage and exploit opportunities.
7. Arrange to monitor drivers and to revisit scenarios as significant changes dictate.
There are many variations on this typical process, some aimed at simplifying it while others introduce elaborations to address specific needs.