Effective planning depends on what we know and the skill sets we have. However, unknown factors can drastically impact plans and enable or disrupt them. What is the best way to deal with the unknown-unknowns or plausible developments that may make or mar future-coping initiatives?
Scenario planning allows us to create stories about the future which might affect organizations, societies, and our world. Such scenarios are not attempts at fortune telling but triggers to illustrate different challenges, opportunities, and threats that may arise as chain reactions from external driving forces. The basic idea is to identify the root causes and long-term effects of future dynamics resulting from innovations in science and technology, economic conditions, and sociopolitical changes.
These considerations are usually referred to as the social, technology, economic, environmental, and political (STEEP) factor, and it is important to scan the contextual environment regularly to identify emerging trends, which in turn point to underlying causes or driving forces with the potential to disrupt the status quo.
The purpose of scenario planning is not to forecast exactly what will happen in the future. It is instead about creating a picture of uncertainties illustrating known and unknown forces that may drive organizations in the future. We must therefore be careful about the strategic decisions taken in both the short and long terms.
Scenario planning is a useful tool for pinpointing weaknesses that can be overcome before they affect organizational strengths. It allows organizations, managers, and policymakers to learn from potential mistakes without actually making them.
The art and science of scenario planning
When examining the future, predictions or forecasts come first. Improving current products, services, or technologies generally does not consider a future that has not arrived, appears unattainable, or differs radically from the current situation.
In the past, we often built a single image of our desired future. Some would call this the “official future.” It was usually a single, straight-line graph related to the organization’s finances or linked to three possible scenarios, the best-case, normal-case, and worst-case scenarios.
Presently, our view of the future comes from forecasts that are based heavily on our current knowledge, in the form of trends, as well as uncertainties or the things we cannot accurately forecast. Scenario planning, on the other hand, uses long-range future management to understand and analyze the surrounding environment, which is important in developing strategies for organizations.
Today, scenario planning is a widely used tool for developing long-term strategies, whether it is by organizations and departments in government, in the private sector, international organizations, social organizations, or various kinds of foundations. This is because scenario planning helps these organizations better pursue success and manage the uncertainty, ambiguity, and volatility of the modern world. It also provides inputs that are important for developing and planning strategies through testing and adjusting existing strategies and by helping to create new ones.
Testing and adjusting existing strategies: After developing scenarios, managers can use them to test existing strategies by identifying the ones that are the most robust and future-ready with the highest impact factors, regardless of the scenario. The scenarios can also be used for identifying the factors that are irrelevant and reduce the efficacy of the organization across different scenarios. This also helps decide whether the scenarios generated fit with existing strategies. If not, it is an indication the strategies need to be revised.
Creating new strategies: After going through the scenario development process, managers can figure out the future implications of the scenarios on their organizational strategy and use this insight to develop strategies that fit the different scenarios. The scenario planning approach can also be used to measure the risks associated with different strategies by identifying those with low failure rates that can be used for every scenario. The process also enables us to understand strategies with medium and high failure rates. While strategies with medium failure rates can be used for supporting two or three scenarios, the high failure-rate strategies may have potentially greater returns but can only work in one possible scenario.
However, it is prudent overall for an organization to select a mix of strategies that have low, medium, and high failure rates. This all depends on the risk-taking appetite of the organization, and how impactful the different strategies are and their ability to help the organization achieve its objectives effectively in the long run.
Benefits of scenario planning
• Promotes organizational learning
• Challenges business-relevant assumptions and predictions
• Helps review business strategy directions
• Indicates key driving forces that may influence the future of the organization
• Helps recalibrate long-term planning to make it a shared process
• Enables the organization to anticipate a more realistic future
• Helps include both globalization and change management in the organizational analysis and strategy process
Scenario planning is also useful in helping organizations identify their weak points, allowing them to avoid or reduce the negative consequences arising from those weak points. Creating scenarios and analyzing their likely outcomes can be viewed as a way to avoid organizational missteps while still benefiting from their lessons.