Tomorrow is never precisely the same as today. Before the future arrives as a surprise, it is essential to start thinking differently. From the lessons learned from the Covid-19 pandemic, guiding a business to the future stands as the top priority today. Businesses of any size should have a structured response strategy to help the company sail through the future without any friction.
Scenario planning is one such practice that businesses consistently undertake to help the team react quickly, mindfully, and decisively during any circumstances. Scenario planning bolsters organizational resilience, empowers companies to create coherent plans to mitigate future risks, and provides business leaders with insights for decision-making.
GoodFirms’ research “Scenario Planning - Objectives, Benefits, and Methods of Application” attempts to identify the objectives, benefits, types, application methods, and challenges in scenario planning. Goodfirms conducted an online survey between 15th Sept 2022 and 21st Sept 2022. A total of 210 responses were collected. The survey queried selected organizations across the world on their scenario planning initiatives, methods, experience, and challenges. The research aims to help organizations efficiently identify future probabilities and enhance their future awareness.
Table of Contents:
- Key Elements of Scenario Planning
- Objectives of Scenario Planning
- Need for Scenario Planning
- How Often Do Companies Review their Scenario Planning?
- Scenario Planning Responsibilities
- Quantitative Scenario
- Strategic Management Plans
- Operational Scenario
- 4 Archetypes Method
- Shell Method
- 2X2 Matrix Method
- Interactive Management (Game-based)
- Normative Scenario
- Other Methods
Benefits Organizations Have Achieved From their Scenario Planning Initiatives
Situations Addressed in Scenario Planning Strategy
Scenario Planning Biases and Challenges
All strategic and operational decisions can be better planned with a sound scenario planning process. As Peter Ducker said, “extrapolate the present to look at the future.” It is a method to visualize different ways how the future might appear for a business. This kind of practice is scenario planning. Scenario planning stands as a critical exercise that every business manager and leader should apply. It guides organizations to create plans at different points to improve decision-making and safeguard the entities against future uncertainties.
However, considering the complex business environments in the present times, planning future scenarios is a herculean task. Businesses have, therefore, resorted to technology to plan compelling scenarios and mechanisms for future possibilities.
GoodFirms’ survey “Scenario Planning - Objectives, Benefits, and Methods of Application” identifies and analyzes the objectives, benefits, types, application methods, and challenges in scenario planning. The research aims to empower organizations with the ability to mobilize appropriate resources and initiate actions in case of unforeseen circumstances.
Overview of Scenario Planning
"Judge a man by his questions rather than his answers,” said Voltaire, a French Writer. He may be right. Organizations should think beyond the solutions and focus on questions about plausible scenarios.
Scenario planning is a strategic envisioning and creating alternative future scenarios or multiple different environments that may emerge in the future. The prime intention of scenario planning is to derive several future alternatives. Scenario planning opens up thinking and allows the organization to focus on questioning. To put it simply, scenarios are imaginative descriptions of different futures. Planning scenarios start with developing scenarios and using them for strategic action. Scenarios had to be connected to a purpose. Once scenarios are generated, it is necessary to test plans and decisions with scenarios. It is also equally important to assess the financial benefits of scenarios. Once this process is done, organizations can model their budgets with the scenarios.
Forecasting reveals the possibilities Scenario planning reveals the plausibility: While scenario planning and forecasting may appear to be similar, they differ in terms of how they are conducted, approached, and communicated. Forecasting reveals the possibilities and predictions that are more likely to happen based on the currently available information. For example, financial forecasting about the next fiscal quarter or revenue forecasts. Scenario planning is focused on plausible events that may or may not happen in the future but are predicted so as to prepare the organization for a valid response. A wider strategic assessment is required to find plausible scenarios (events that are reasonably considered and might happen under certain situations or changes in variables).
Scenario planning includes multiple factors, from government stability, commodity prices, federal interest rates, and pace of technology to consumer trends, population growth, household savings, and even traffic density. The uncertainties are evaluated on different time frames, such as yearly, five years, ten years, or longer.
Key Elements of Scenario Planning
- Objectives: Scenario planning is a strategic management technique with objectives to identify risks, opportunities, and threats related to the business environment in the coming years.
- Drivers of change: Scenario planning helps organizations identify the drivers of change, such as technological innovations, demographic changes, political events, and economic trends that might affect or disrupt the business environment in future.
- Narratives: Scenario planning involves the creation of different narratives of future events. It helps companies plan for uncertain future circumstances by developing different stories/narratives about possible future events, called scenarios. The implications of the narratives are then examined to make decisions for the organization’s strategy, operations, and investments.
- Strategies: Scenario planning allows organizations to create flexible strategies to deal with different possible outcomes related to these changes. It can be used as a planning tool for various kinds of decision-makers, including strategic planners, marketing managers, financial analysts, and risk management officers.
- Risks and opportunities: Risk management is an important step in scenario planning. It involves a careful examination of risks and opportunities in each speculated scenario.
Objectives of Scenario Planning
The main objectives of scenario planning are to identify and mitigate risks and threats related to the business environment in the coming years and develop strategies to achieve desired results in spite of uncertain future circumstances.
GoodFirms surveyed global leaders to find the objectives of their scenario planning initiatives. Uncertainty mitigation emerged to be the topmost objective of scenario planning for businesses, followed by accurate budget and resource allocation.
‘Uncertainty mitigation’ is the topmost scenario planning objective for 81.4% of organizations surveyed by GoodFirms
Unforeseen technological changes, political turmoils, economic recessions, natural disasters, wars, new regulations, etc., can disrupt even the most stable businesses. Uncertainties such as international conflicts, market slumps, pandemics, and employee strike situations can derail the progressive streak of businesses.
Forward-thinking businesses try to inculcate uncertainty mitigation policies and planning to deal with uncertainties to some extent. With value-focused and proactive scenario planning, businesses can lower the impact caused by uncertainties, especially on operations and supply chains.
57.5% of businesses state ‘accurate budget and resource allocation’ as a prime objective of their scenario planning initiatives
Given the present recession looking at our faces, there are ample possibilities of financial hits such as revenue slides, price wars, business interruptions, and many unforeseen situations. The C-suite of more than half of the global organizations agreed that scenario planning’s main goal is financial resilience in times of multi-faceted vulnerabilities. Scenario planning helps them prepare for situations of frozen sales pipelines and disrupted cash flows, among others.
“We then try to build our financial models and projections under at least three different scenarios: The best estimate scenario (what we think is most likely to happen), a pessimistic scenario (what it looks like if things turn out to be worse than expected) and an optimistic scenario (what it looks like if things turn out to be better than expected), says Dr. Mark Farrell, who teaches scenario planning on an Enterprise Risk Management course at Queen's University Belfast and is also the CEO of ProActuary.
44.1% say that ‘gaining competitive advantage’ is the main objective of their scenario planning goals
Even commercial behemoths and well-known companies now face significant competition risks from peers who imitate their products, services, and marketing tactics. Then, there is a risk of those who disrupt the market with exceptional products and unique services. Amidst such a hyper-competitive business environment, failing to identify future expansion and growth possibilities can drastically impact business sustainability.
The world has already witnessed how fintech is upending traditional banking or how e-commerce forces even the biggest offline retailers and malls to go online. These examples demonstrate the serious consequences of competitive threats that traditional banking and retail leaders did not see coming. Only competent scenario planning can protect organizations from such competitive threats. Therefore, gaining a competitive advantage is among the top three objectives of scenario planning.
44.1% of the global leaders surveyed by GoodFirms admitted that gaining a competitive advantage is the main objective of their scenario planning. Having all the possible scenarios considered, the leaders can record the outcomes and strategize response action. It helps them respond swiftly and decisively without rushing into things.
34.2% of organizations plan scenarios for ‘better future forecasting’
Besides risk mitigation and gaining a competitive edge, scenario planning also serves the purpose of a future-ready business. Although many mistake forecasting with scenario planning, the latter provides a broader perspective. While forecasting offers one possible future, scenarios present multiple conceivable futures.
Corporate leaders and managers create different scenarios by considering all potential causes or drivers, their proportional impacts, how they interact with one another, etc. It helps generate a wide range of prospective forecasts and identify certain extremes by creating projections based on scenarios.
The survey results showed that one-third of global companies prefer scenario planning to better forecast the future of their businesses.
‘Enhanced decision-making’ is one of the objectives for scenario planning, say 33.6% of organizations
It is usual for managers and leaders to act hurriedly and make poor decisions during times of crisis. The scenario-planning tool exposes leaders to implicit information outside their context and allows them to define and utilize it. Leaders can use their anticipatory skills and foresight to supplement the scenario planning outcome and equip their teams with well-thought responses and action plans. Scenario planning contains the aspects of knowledge management. By deploying their key personnel to the activity, companies can capture their insights and recommendations when they are much needed.
"The main motto of scenario planning and thinking is to create a broad interpretive framework into which we can place future events. We use it to teach managers how to think about emerging threats, look into established market trends and complex relationships between events, and move them out of their comfort zones", says Karthik Manoharan, the co-founder of WeCodee Innovations Pvt. Ltd.
27.8% organizations attempt scenario planning to achieve the objective of ‘unhampered organizational performance’
Nobody has to be reminded of how the pandemic disrupted supply networks. Even as businesses have recovered, markets and economies remain unpredictable and volatile.
That is why 27.8% of businesses prioritize scenario planning to ensure business continuity and optimal organizational performance in unforeseen circumstances. Scenario planning backed by data is the first step toward business resilience. In the digital transformation age, planning without sufficient data wastes resources. Data analytics assists in disseminating crucial information that makes scenario modeling the most effective. The higher the quality of data, the better the scenario model.(1)
‘Continued growth’ is our objective for scenario planning, say, 19.1% of organizations
Although expanding product offerings and entering new markets are well-thought-out business strategies, the unexpected is always possible. One such instance is the sudden popularity or overnight spike in demand for a product. That is where scenario planning becomes crucial, enabling businesses to tap into the opportunities and hedge their businesses during uncertain times. When it comes to making the most of unanticipated possibilities, scenario planning is just as important as planning for the worst-case situation. Therefore, 19.1% of businesses favor scenario planning to achieve sustainable expansion.
Need for Scenario Planning:
Scenario planning is a technique that allows businesses to simulate possible future scenarios- in context with TUNA (Turbulence, Uncertainty, Novelty, Ambiguity). For example, a business could create a scenario in which its customers become dissatisfied with its products and stop buying them, causing the business to lose money. In this case, the business would want to make sure it has a plan in place to deal with such an eventuality.
Scenario planning is a mechanism that protects organizations from uncertainties and risks in changing business environments. It guides organizations to create plans at different points to improve decision-making and safeguard the entity against future uncertainties.
Scenario planning helps businesses prepare for these changes by allowing them to test their current operations and determine how best to respond to them. Scenario planning is an effective way of preparing for unexpected events.
“When running their companies in extremely volatile situations, management teams who can successfully predict and plan for the most likely conceivable scenarios have the best chance of being able to adjust to changing conditions faster than their competitors”, says Gary Hunter, Director of CompareGolfPrices.
By creating multiple scenarios and testing each one, businesses can ensure they are ready for whatever may come their way.
How Often Do Companies Review their Scenario Planning?
Scenario Planning is especially useful in situations where uncertainty and change threaten the business's viability. The focus on high-level plans that could take years to implement and more targeted and immediate scenarios that could help businesses make real-time decisions are critical to reap the benefits of scenario planning. One of the biggest challenges with scenario planning is that many companies do not do it often enough or consistently.
However, most companies conduct some form of periodic review and analysis of their planning process at least once a year. GoodFirms surveyed companies to learn how often they review their scenario, and 68.4% of organizations asserted reviewing their scenario planning once a year. Only 2.3% of companies review their scenario plans monthly. 14.5% organizations take a longer view for their scenario planning and review it after 5 years.
Scenario Planning Responsibilities:
Many organizations do not mandate scenario planning as a regular practice, but it is critical that scenario planning is in place and executed with rigor. To successfully execute scenario planning, there are a number of key individuals who must be involved from the start. There must be a clear definition of who should be responsible for scenario planning and what it entails. Ideally, this would include a CEO, Board of Management, senior-level employees, and stakeholders across the organization.
Once organizations have the right people around the table, they can begin to define realistic representations of possible events that could affect their business in the future.
Scenario planning can be performed at any level within an organization. However, it is important that scenario planning is performed at all levels of an organization because it will help prevent problems from occurring.
CEO and his/her subordinates are responsible for scenario planning in 61.5% of organizations
“Scenario planning is an important part of running a business as it helps in devising campaigns and strategies that would help in the growth of your business. For my business, whenever I come up with a new idea, I discuss it with some of my most talented employees, and together we come up with all the possible outcomes of that particular idea. It is best to do scenario planning with a mixed bunch of people as this would result in you reaching all kinds of different outcomes", says Sharafudhin Mangalad, CEO and founder of Edoxi Training Institute, Dubai.
32.1% of the organizations who participated in the survey indicated the Board of Management as responsible for scenario planning
The Board of Management is responsible for scenario planning in 32.1% of surveyed organizations. Scenario planning has been increasingly used as a way to help organizations plan ahead for various events, such as changes in legislation or global trends. With effective scenario planning, BOM aims to ensure the long-term viability of the business.
Only 3.8% of organizations have bestowed senior-level employees with the responsibility of scenario planning, and only 2.6% have a Scenario Planning Commission (working Independently) for the scenario planning task.
Scenario planning commission consisting of experts in forecasting, analysis, scenario building, and scenario planning can come up with more detailed, pinpointed, and plausible scenarios. However, this applies only if the experts in scenario planning methodology have also served in the same industry for years. Without experience in the industry, mere knowledge of scenario planning tools and methods will not bring concrete results. The Board of members are usually the people who have worked in the industry for many years and are highly knowledgeable about the situations that drive and affect the industry. However, it is not necessary that the board of members are well-versed in all modern scenario planning tools and techniques. Therefore, a combination of the scenario planning commission working in close collaboration with BOM and the CEO will bring the best results.
Methods of Scenario Planning
There are many different types of scenario planning methods. Some companies use scenario planning as a way to test their business models and concepts before they launch. Others use scenario planning to prepare for big changes in the market, such as shifts in regulations or technology. Others use scenario planning to prepare for unexpected events, such as natural disasters or cyber-attacks.
Depending upon the goals, nature of the organization, and industry, companies use different methods for their scenario planning. GoodFirms’ survey revealed that the Quantitative scenario planning method is the most widely used scenario planning method.
Quantitative method stands as the most adopted method for Scenario Planning - 71.3% of the surveyed respondents seem to be following this method.
Quantitative scenario planning is a collaborative method used to develop a forward-looking scenario plan. It involves the use of quantitative modeling to determine how the value of a company's assets and operations could change over time.(2) By using scenarios, the team can experiment with different future scenarios and identify the opportunities, risks, and constraints that affect business performance.
The goal is to create scenarios that accurately reflect the current market conditions, customer needs, and company strengths and project ideas for new products, services, or business models as part of an innovation process.
“Our annual business forecasts are also developed using quantitative scenarios. These models assume that key variables are known and that their relationships are fixed and outcomes can be predicted,” says Cody Crawford, Co-Founder at Low Offset.
Quantitative Scenario Planning Steps:
- Define the problem to solve: What is driving growth or decline? Are there opportunities for improvement?
- Identify assumptions: Define key expectations in terms of economic factors (growth rate, inflation rate, etc.), industry trends (competitive landscape), and operational variables (cost structure).
- Identify sources of uncertainty: Identify any factors that may have an impact on financial results (weather, regulations, etc.).
- Create a range of plausible outcomes: Map out the possible outcomes that could result from the current situation and define what would be required to achieve each one.
Strategic Management Plans
47.8% of surveyed organizations conduct scenario planning with the strategic management plan method
Strategic planning is the process of systematically and methodically determining what should be done. It is a tool that can be used to help companies make better decisions, plan for future challenges and grow their business. Goal setting, project management, resource allocation, budgeting, risk assessment, etc., are elements of strategic plans.
Every organization has a strategic vision, according to which it evaluates the business environment and develops numerous strategies for competition, sustainability, and profitability, among others. However, it is likely that changes in the business environment, including legal, global, political, and new customer trends, may impact the company's short- and long-term strategies.
Therefore, strategic management scenarios are used to test the strength of existing strategies, form new strategies, and give an organization a sense of ‘strategic intent.’ Strategic management scenarios comprise different combinations of macro-level forces of change that define an organization's operating environment.
For example, if the planning organization is a retailer, the scenarios will study consumer purchase tendencies. The corporation will imagine competition, changing customer tastes, and social trends beyond the company's control. During planning, the organization uses these scenarios to imagine how its products or services and business may evolve in the future in response to these scenarios. ‘What should they modify to satisfy customers?’ ‘How can the company differentiate its business?’ These narratives of hypothetical future events help organizations in strategic planning.
32.5% of surveyed organizations use the operational scenario method
Event-driven scenarios or operational scenarios are among the most popular types of scenario planning businesses carry out independently. Often confused with strategic management scenarios, they are unique. Event-driven scenarios fall between gaming and strategic management (or alternative futures) scenarios and have parts in common.(3)
Event-driven scenarios focus on the impact of a business-related event, action, or challenge. They may have strategic repercussions. Event-driven scenarios have near-term operational contexts but long-term strategic contexts.
An event-driven scenario could involve the merger of two rival firms or the promotion of a new technology-based product. What happens if another global pandemic hits the world is an event-driven simulation. This method aims to prepare the company to foresee, prevent, or react to an event. A few examples are: How will we react if something occurs to us? What will happen to our products?
Often, event-driven scenarios are directly linked to ‘real-world’ situations and have limited uncertainty ranges.
“Operational scenario planning is easy and effective. Even while it only influences strategy in the short term, the results pay for themselves. This allows our team to identify possible pitfalls and plan ahead on how we see fit to achieve tactical goals. Since it is a short-term plan, our team can be nimble in adapting to the immediate challenge. Because of this, our team is confident to approach a strategy boldly and avoid indecision, which might cost money when missed opportunities are missed”, says Jake Marmulstein, CEO at Groundbreaker.
4 Archetypes Method
32.1% of surveyed organizations deploy the 4 Archetypes method for scenario planning Developed by Jim Dator at the University of Hawaii, the 4 Archetypes method (also popularly known as 4 generic futures or incasting) consists of four steps:
- In the first step, the driving forces of change are identified. For example, developments in 5G could affect mobile development strategies.
- In the second step, a value is given to the force: Upwards or Downwards. In the case of 5G, we can say that developments are in the upward regime.
- In the third step, the behavior of forces is analyzed in the context of the four narratives: Continued Growth, Collapse, Discipline, and Transformation.
- Based on the analysis and interpretation of each driving force in the context of the four narratives, the final narrative is written along with supporting reports, references, projections, and speculations.
27.8% Businesses Use the Shell Method for Scenario Planning
The shell method is a technique used by scenario planners to explore different possible scenarios by creating a hypothetical situation that explores the potential outcomes and then lays out the steps for achieving them. The shell method is often used in conjunction with other scenario planning techniques, such as the spiral model, but it can also be used on its own.
The shell method has two main advantages:
- It helps businesses identify key factors that will shape their future
- It gives them a structure to follow when creating their scenarios
Our surveyees reported using the shell method in a variety of ways, including exploring different alternatives, presenting scenarios to decision-makers, and creating action plans. By keeping things simple and focused, they can quickly gain clarity on the elements that determine whether their business will succeed or fail.
Shell has also recently unveiled its New Lens scenario that focuses on how the world, including the energy systems, will look like in the future. The scenarios analyze the net zero emissions, economic growth amidst strain on cities, climate change, and human well-being.
2X2 Matrix Method
17.5% of Businesses reported using the 2X2 Matrix method for scenario planning
For scenario planning, managers create multiple detailed situations that may arise in the future and develop suitable response plans for them. One such tool used to develop scenarios is the 2X2 matrix.
This technique is used for collective scenario development. It employs the two drivers and two uncertainties for the subject under investigation. The drivers and uncertainties are projected on the X and Y axis. These axes serve as the foundation for potential scenarios. Since it guarantees that policy direction is durable across various contexts, the 2x2 matrix approach is frequently used for assessing medium- to long-term policies.(4)
“The matrix details the hypothetical best outcome, worst outcome, and things that can affect the scenario. The benefit of this scenario planning is that it helps me see all potential outcomes and not navigate the scenario blindly”, says Anthony Quint, CEO, Get on Stream.
Interactive Management (Game-based)
15.5% of companies use the interactive management method for scenario planning
Interactive management scenario planning employs gaming methods for preparing narratives. In this strategy, two teams or opponents (usually playing in separate rooms) adhere to a playbook that describes the starting conditions of the game - the scenario - and unexpected occurrences that arise throughout the game.
Each team acts and reacts to win the game. Moreover, these games are designed to examine several strategic, operational, or tactical concerns. This method is most common in marketing, corporate intelligence, and competition analysis. For example, a company intends to change its product distribution next year. It may build a set of games to evaluate the competition, customer, or government response before launching the new strategy. The game's outcome may encourage the firm to do things differently, restricting a competitor's response options.
14.5% Businesses trust the Normative scenario method for Scenario Planning
Normative scenarios, also known as target-seeking scenarios, can contribute substantially to policy designs in organizations. The purpose of normative scenario planning is to understand what could happen in the future under various situations. In addition, it can help companies identify opportunities, risks, and challenges by highlighting potential issues before they become problems. Normative scenario planning can be used in many ways: to assess risk, improve governance, plan for growth, or manage change.
Normative scenario planning is an approach to creating and managing scenarios that reflect an organization's current vision and key stakeholders. Normative scenarios can help decision-makers assess their organizations' risks, opportunities, and challenges and can provide valuable input into the planning process. They can also be used to test your assumptions about future conditions and outcomes.
In this approach, scenarios are developed one at a time from a set of core scenarios that represent an organization's vision for the future.
Other Types of Scenarios:
Fire cracker scenario planning tool
Firecracker scenario planning (FCSP) is a method of scenario planning involved in the rapid and iterative development of scenarios that capture the key trends and dynamics driving an organization's future. FCSP is based on the premise that complex systems are best understood through the exploration of a range of plausible futures. The goal of FCSP is to produce a comprehensive set of scenarios that help organizations understand potential future states and their implications for key stakeholders. The Firecracker framework showcases a radical shift of scenario construction.
La Prospective Scenario Plan
La Prospective scenario planning is a technique for imagining future events and their potential outcomes. Prospective scenario planning is often used as a tool for planning, but it can also be used as a tool for evaluating current circumstances and identifying opportunities or threats.
Unlike retrospectives, which are focused on the past and often involve participants reflecting on past experiences, prospective scenario planning involves imagining what the future might hold, taking into account all the information available at that time. It helps organizations to envision possible scenarios and to prepare for the possibility of changes in their environment.
Hybrid Scenario Planning
Hybrid scenario planning is a flexible technique that can be used to analyze and plan for any environmental change, including climate change, resource depletion, population growth, and more. Hybrid scenario planning involves multiple steps:
- Environmental analysis: A complete analysis of socio-economic aspects related to the environment, politics, etc., is undertaken.
- Strategic analysis: With a series of feedback rounds, loopholes in the initial analysis are found, and redundancies are identified.
- Structural analysis: Structural analysis is a critical component of scenario planning. It helps to identify and understand the critical elements that make up the business model, including its value proposition, customer segments, and key product or service offerings. It also helps to refine the scenarios as loopholes identified in the strategic analysis are present in the plan by identifying potential changes to these elements.
- Morphological analysis is a method of analyzing and categorizing the structural characteristics of scenarios.
- Construction and Validation: A feasible number of scenarios are evaluated for plausibility, and then less-likely scenarios are eliminated, and more desirable ones are validated.
“We use a variety of scenario planning methods, including Impact Mapping, Backcasting, and Scenario Trees. Impact mapping: a visual diagram that helps you identify and organize a scenario's potential positive and negative impacts on your business or organization. Backcasting: a technique for exploring the future by starting from the desired outcome and working backward to determine what steps need to be taken to achieve it. Scenario Trees: a branching diagram that shows how different scenarios might lead to different outcomes,” says Davin Joseph, Marketing Manager at My Enamel Pins.
“We use a variety of methods for scenario planning, including but not limited to trend analysis, SWOT analysis, risk assessment, and horizon scanning. By considering a broad range of potential future scenarios, we're able to develop contingency plans and strategize for the most likely scenarios while also preparing for less likely but still plausible outcomes”, says Luke Fitzpatrick, Marketing Officer, Drsono.com.
Benefits Achieved From the Scenario Planning Initiatives
Scenario planning involves imagining possible future events and then evaluating how they could affect our organization's goals, strategy, and operations. By assessing the potential impact of these events, we can better prepare for them and help ensure that our organization continues to be successful in the future. GoodFirms’ Survey captured some of the benefits of the scenario planning indicated by the respondents.
Minimum Supply Chain Disruptions
44.2% of C-suite executives claim that scenario planning has minimized supply chain issues
Many C-executives confirmed that there is no better approach than scenario planning for mitigating supply chain risks.
In times of uncertainty, a company will benefit from more clarity, quicker decision-making, and more confidence if it has a clear vision and a list of potential scenarios, each with a suggested strategy for mitigating the associated risks. Leaders in the supply chain can increase supply resilience and get visibility into the entire value chain as a result of scenario planning.
Optimal Operating Expenses
Scenario planning helped 31.1% of organizations in lowering their operating costs
Running what-if scenarios with potential outcomes like cost-cutting or demand shifts aids in creating several backup plans to deal with the potential financial, operational, and cash flow effects of multiple interruptions.
Besides that, a drop in revenue, delayed payments, the loss of a project or client, or an interruption in the supply chain can all lead to a cash flow crisis. That is just one example of how scenario planning may serve as an early warning system and help avoid potential issues. It is the greatest method for evaluating the circumstance and deciding the next steps.
Helps in Achieving a Balanced Headcount
According to 27.8% of business leaders, scenario planning enabled them to achieve a balanced headcount.
Nearly 28% of organizations have confirmed that they have used scenario planning to attain optimum headcount in recent years.
The HR Trends Report for 2021 by McLean & Co., research and advising businesses specializing in human resources, reveals that HR departments who developed scenario plans more than a year in advance were better prepared for 2020's volatility.(5)
Protects from Government Scrutiny
Scenario planning has shielded 18.9% of the world's businesses from regulatory scrutiny.
Almost every type of business faces public and regulatory scrutiny, from building and engineering enterprises to insurance and consulting organizations. When a company's failure would have far-reaching consequences for a sizable portion of the population, the government will demand that the company exercise greater caution in its operations. The government is more likely to trust businesses that have developed multiple, robust contingency plans. 18.9% of organizations believe scenario preparation shields them from government scrutiny.
Using scenario planning, 13.5 percent of global business firms increased their profit margins significantly
The proactive scenario planning strategy helps businesses anticipate and assume best- and worst-case scenarios. The effectiveness of this strategy is demonstrated by the fact that 13.5% of enterprises with an international presence have increased their profit margins.
11.8% of businesses reported improved revenues as a result of scenario modeling
Scenario planning gives investors a sneak preview of the anticipated returns and risks associated with future investment planning. Any business endeavor seeks to grow its revenue over time, so it is best to employ predictive analysis when choosing which investments to include in a portfolio. Scenario planning uses the tools that help businesses to determine the value and amount of potential profits and losses from an investment. The investors or the leaders base their strategies on these quantifiable and concrete data to attain a favorable outcome.
Scenario planning helps decision-makers to anticipate future challenges and opportunities and create strategies to achieve desired results. Other benefits include:
- Identifying the drivers of change in the environment: Scenario planning helps organizations identify the drivers of change, such as technological innovations, demographic changes, political events, economic trends, and other factors that might affect the business environment.
- Developing a flexible strategy: Scenario planning allows organizations to create flexible strategies to deal with different possible outcomes related to these changes. Strategies developed through scenario planning can be easily adjusted to respond to emerging realities in the future.
- Communicating effectively: Scenario planning is an effective communication tool for decision-makers to understand each other about the company’s strategy, the environment, and the implications of each scenario for future decisions.
- Identifying opportunities for improvement: By thinking about what could go wrong before it happens, businesses can identify areas where their organization can improve and make necessary improvements before it's too late. This approach allows them to avoid costly mistakes and keep their business running at maximum efficiency.
Situations Addressed in Scenario Planning Strategy
The key to effectively creating a scenario plan is identifying the areas where the organization will need to adapt to meet its goals. These areas may include product and service development, sales and marketing strategies, operations, financial management, and information technology. Once these areas have been identified, it will be easier for the business to build a set of plausible scenarios that can be tested.
In essence, scenario planning is about identifying the factors that could impact the business’s performance and then considering how these factors may play out in the future.
75.7% of organizations said their scenario planning addresses situations like data loss or data corruption
Today, businesses can't afford to have any data lost or corrupted. Data loss can also lead to legal action, monetary loss, business interruption, damaged trust, and tarnished public perception. For this reason, preventing data loss and corruption is a top priority for 75.7% of all businesses for scenario planning.
Scenario planning helps answer questions like what would happen if our company lost all of its data due to a cyberattack, server failure, data corruption, or theft.
62.7% of businesses mitigate insider threats using scenario planning
A current or former employee, independent contractor, or business partner is often considered an insider threat.
In a recent case, Marriott International UK was fined over $100 million for customers’ data leakage in 2019; employee negligence and poor monitoring reportedly were the causes.(6) That puts insider threats among the top critical concerns for businesses since they may lead to lawsuits and massive fines.
Post-incident reports can be used for the best scenario planning practices. Moreover, past events can help executives construct a playbook of use cases and improve incident management.
Supply Chain Disruption
61.2% of businesses say they use scenario planning to lessen the impact of supply chain interruptions
Over ten years, businesses in all sectors may expect to lose an average of 42% of their annual EBITDA due to supply chain disruptions.(7) The multiple factors of demand variability, risk-prone logistics, and concentrated productions, among others, increase supply chain vulnerabilities. That’s where scenario planning comes into play. According to the survey results, it minimizes the supply chain disruption risks for about 61% of the organizations.
To prevent themselves from a ransomware threat, 56.5% of international institutions use scenario planning
With ransomware threats at an all-time high, companies are left with their reactive response only. When businesses fall victim to ransomware, paying to restore critical data may seem like the last option. However, it does not assure that they will regain their sensitive information even after the payment.
Nonetheless, with scenario planning, organizations can best prepare to build resilience and have a robust prevention plan in case of cyberattacks. The survey found that 56.5% of surveyed global organizations take preventative measures against ransomware by creating scenario plans.
A pandemic crisis is considered in the scenario planning strategy of 39.9% of organizations
Several industries, like FMCG, hospitality, and airlines, to name a few, that depend on supply chains, logistics, and transportation for their operations, saw a complete shutdown during COVID-19. A lot of small and medium-sized firms simply disappeared. Therefore, it is impossible to overstate the significance of a response plan under such circumstances.
On the contrary, some businesses, such as local eCommerce businesses, took off well. Hence, scenario planning aids in building not only the worst-case scenario but also the best-case scenario to capitalize on the situation in the best possible way.
GoodFirms’ study revealed that every 4 out of 10 organizations plan a strategy for pandemic scenarios.
35.4% of businesses include employee strikes in their scenario planning process
Employee strikes are a significant worry for business continuity, where more than a third of businesses assume them when developing their scenario planning strategy. A company's reputation can be harmed by labor activities. Besides that, ‘strike’ scenarios are also helpful in financial preparedness because labor disputes can quickly result in financial losses. 35.4% develop scenarios including boycotts, key position resignations, financial repercussions, and public relations results.
To address the problem of staff attrition, 22.7% of global firms use scenario planning
The losses businesses endured during the pandemic were magnified by millions of people quitting their employment daily. Great resignation in the aftermath of the pandemic was real.(8) While many businesses suffered, the world saw a rise in the gig economy that helped start-ups to limit their operating expenses.
A significant benefit of scenario planning is to achieve appropriate headcounts under uncertain situations. Therefore, nearly 23% of enterprises choose scenario planning to address attrition issues.
21.8% of businesses address import/export restrictions in their scenario planning practices
In the last few decades, the world experienced unparalleled levels of globalization, but that is no longer the case. The US-China Trade War started even before the pandemic, followed by Brexit and the pandemic itself. Additionally, changes in global value chains because of technological advancements and the expansion of domestic supply chains put businesses into tight spots.
All these scenarios are warning signs that businesses should review their global operations strategy.
To be proactive, almost 22% of organizations have used scenario planning to get geared for risks associated with global trade.
16.8% of worldwide organizations have a scenario-planning strategy to mitigate potential reputational issues
Today, businesses operate in an economy where a large portion of market value originates from intangible assets like intellectual capital, brand equity, and goodwill. That brings reputational issues to the top concern in scenario planning for many organizations.
More than 15% of global companies prepare for positive and negative reputational issues using a scenario planning strategy.
Damage to a company's reputation might result when it doesn't live up to the expectations of its stakeholders and is consequently misunderstood. No matter the size or industry, it can critically impact any organization.
Using scenario planning, 14.7% of organizations prepare for changes in taxation regulations
For many industries, taxation regulations fall under critical uncertainty that may significantly affect the business's profitability and sustainability. If the government increases corporate taxes, it directly affects the market investments since they lower profits and, consequently, market returns for the investors. Over 14% of organizations use scenario planning to prepare for disruptive tax legislation changes.
13.9% of companies carry out scenario planning to address any plausible consumer outcry situations
Customer complaints are not uncommon, but small problems can quickly spiral out of control until they become a crisis. That makes it crucial for any organization to have a conflict resolution strategy because crises might occasionally be unavoidable. Scenario planning effectively prepares a business for proactively responding to crises.
Therefore, 13.9% of businesses prepare narratives of consumer uproar during their scenario preparation.
11.5% of companies develop scenarios to address situations like economic recessions
The consequences of the latest pandemic, geopolitical unrest, and economic challenges are staring the world in the face. Corporate executives need to be prepared for various economic situations, whether there are signs of recession or not. 11.5% of firms include the possibility of an economic downturn in their scenario preparation.
“Scenario planning allows businesses to prepare the human resources and financial capital that are required in the case of an emergency. Prepared companies are more likely to make it through economic downturns and unavoidable other setbacks”, says Brandon Perton, Owner- The Old School Game Vault.
10.8% of organizations create narratives and build a strategy for natural disasters
One out of every ten businesses surveyed in the poll acknowledged that they prepare for natural disasters. Simple contingency plans and warning flags are set up since they are extremely unlikely to occur, yet these organizations consider natural disasters in their scenario plans.
Political instability is taken into account by 7.5% of organizations during scenario planning
While it can be challenging to fully anticipate the future and account for every possibility in scenario planning, it is essential to identify the significant uncertainties for businesses. Political instability is a factor that 7.5% organizations believe is essential to take into account while developing scenario plans.
6.5% address climate change consequences while developing scenarios
Besides sustainable business obligations, most companies do not consider climate change a critical issue for the business. However, it may pose critical uncertainties for agricultural, fishing, and forestry businesses. 6.5% of businesses reported that their scenario plan addresses climate change-related uncertainties.
Wars and Terrorist Attacks
During the scenario planning process, 1.3% of companies consider wars, while 1.2% consider terrorist attacks
Even though very few businesses include conflicts in their scenario planning, the current geopolitical situation necessitates businesses to prepare for them. The Russia-Ukraine invasion is one example. Many global businesses suffered due to the conflict. Assessing the effects of such scenarios on the business is crucial during scenario planning. Unforeseen events like wars and terrorist attacks are taken into account while planning scenarios by 1.3% and 1.2% of businesses, respectively.
Scenario Planning Biases and Challenges
Scenario planning is undeniably powerful. However, it is essential to consider all the necessary data, uncertainties, and biases to make a sound decision after a scenario planning exercise.
“Since the planning process and the use of scenarios are not standardized, they can be difficult to implement and ensure everyone is on the same page. Also, there is a potential that the planning team can be too influenced by personal biases or desires”, says Dr. Staci Holweger, Founder and Dr. of Regenerative medicine at Lifepatches
The scenario planning survey 2022 by GoodFirms highlighted the most common types of biases faced by organizations worldwide.
Let us analyze the biases that can jeopardize the scenario planning exercise:
67.1% of businesses said they completely neglect low-probability scenarios
According to the survey, 67.1% of organizations do not include highly improbable occurrences in their scenario planning.
While many leaders overlook them, they may significantly impact the company's operations and profitability if not accounted for in scenario planning.
Strategists must consider the event's likelihood and its effects on the company. Also referred to as Black Swan events (Low Probability, High Impact) events, they devastate the firm when they occur.(9) The most recent pandemic is a good illustration. Nobody has ever envisaged a pandemic with such a worldwide impact that it cripples even the most prominent companies' supply chains and operations.
31.9% of businesses put too much emphasis on situations that are unlikely to happen
As stated previously, it is improper to disregard unusual occurrences and emphasize them more.
In scenario planning, it is essential to resist the urge to quickly model trends and uncertainties without first evaluating them qualitatively to put them in context and get a feel for how they might interact.
“Of course, scenario planning is ‘tricky’ to say the least. There are so many variables at play that it would be quite possible to get bogged down in scenario after scenario; you’ll quickly find that you’ve got so many scenarios in mind that the planning part of the equation may go out of the window entirely. Of course, it’s important to keep an eye on the key global trends and how these may impact the economic landscape of the future (think automation, for example), but it’s more important to identify the key trends/potential future trends in your own industry, those that are most pertinent to your business”, says Simon Bernath, CEO & Founder, Furnace Prices.
It is also advisable to analyze and rank trends using qualitative and quantitative methods and avoid focusing more on early predictions during scenario planning.
25.4% of businesses assume the future will look like the past.
One in four businesses counts on the future to be the same as the present.
This is a fallacy and can cost companies dearly. The best way to overcome this bias is to employ an experiential approach involving the top executives. That is because top-level executives are less likely to understand and act upon scenarios if they are not involved in their creation. Since they tend toward stability by nature, that perspective is more likely to prevail.
However, experiential scenario planning transforms abstract ideas about the unknown into stories about concrete realities.
As a business owner, I believe that scenario planning expands current thinking and avoids conformity of ideas. It allows the organization to broaden its thinking beyond its current reality. Scenario planning is immersive and experiential and can’t be a solely intellectual exercise. Many elements must be considered outside of the existing organization's history and memory, says Angus Chang, CEO
Thus, it helps the decision-makers to understand and accept the new realities in sensory, intellectual, rational, and emotional ways.
8.8% of businesses avoid scenario planning as they believe they are a well-structured organization with a distinctive advantage over their peers
Nearly 9% of businesses have this optimism bias (The tendency to be overly optimistic results from the delusion that nothing could go wrong) that they have a distinct advantage over their peers and thus skip scenario planning.
However, being overly optimistic has caused businesses to lose their key leaders or market opportunities to their competitors.
In today's VUCA (volatile, uncertain, complex, and ambiguous) world, it is strongly advised to combat overconfidence and excessive optimism. Leaders should evaluate the effects of unforeseen events and create strategic choices as a result. They should not, however, focus all their planning on one possibility at the expense of others.
3.5% of businesses do not allow open debate and free discussions for scenario planning
Sunflower management (the tendency to align views with the leader) or group thinking are the leading causes of social biases.(10)
Although the number of organizations that restrict free discussions is meager (3.5%), it is still the most common bias in the business world.
Without institutional support, the social bias of group thinking may make the previously discussed biases worse.
Top-level managers can help the business make more informed decisions in the face of uncertainty if they are honest about their own propensity for bias and foster a culture that encourages and tolerates others’ points of view.
“It is best to do scenario planning with a mixed bunch of people as this would result in you reaching all kinds of different outcomes”, says Sharafudhin Mangalad, CEO of Edoxi Training Institute.
The above biases may prevent organizations from reaping the benefits offered by scenario planning. Apart from the biases, there are other challenges in scenario planning, such as identifying and planning high-priority scenarios, deploying adequate resources for scenario planning tasks, etc. Scenario planning is a detailed and time-consuming process that requires enormous resource commitments and may sometimes offer diminishing or no benefits.
"On the other hand, scenario planning can be an extremely complex and time-consuming process, with even the largest companies with the most resources sometimes taking months to create their plans. And yet, after all that, it could just be a ‘waste of time- there’s no guarantee that any of the scenarios for which you are planning will actually transpire. Indeed, events move quickly too, and you may find that your scenario planning has been completely derailed by a change in circumstances; scenario planning has to be continually updated as the facts on the ground change. You can’t just make a plan and dust it off years later," Simon Bernath, CEO & Founder, Furnace Prices
Despite challenges, scenario planning is an inevitable and critical element of overall organizational strategies. Organizations that mitigate the challenges and eliminate the biases can expect many strategic benefits from their scenario plans.
“Scenario planning does have its challenges. It requires a lot of time and resources, and it isn’t always easy to get buy-in from stakeholders who aren’t convinced that this kind of work is worthwhile. But with careful planning and some persistence on your part, you should find that scenario planning starts paying off quickly—and continues paying dividends for years after," says Gauri Manglik, CEO and Co-Founder, Instrumentl
The most effective scenario planning approach is to create a list of likely events that might cause business disruptions, such as a major contract cancellation, a new product launch, policy changes, etc. After identifying these events, businesses need to consider how they might affect their organization and what actions they may need to take to respond appropriately. By considering both short-term and long-term impacts, organizations can prepare for potential disruptions and minimize their impact.
- ‘Uncertainty mitigation’ is the topmost scenario planning objective for 81.4% of organizations surveyed by GoodFirms.
- 57.5% of businesses state ‘accurate budget and resource allocation’ as a prime objective of their scenario planning initiatives.
- 44.1% say that ‘gaining competitive advantage’ is the main objective of their scenario planning goals.
- 34.2% of organizations do scenario planning for ‘better future forecasting’.
- ‘Enhanced decision-making’ is one of the objectives for scenario planning, say 33.6% of organizations
- 27.8% organizations attempt scenario planning to achieve the objective of ‘unhampered organizational performance’.
- ‘Continued growth’ is our objective for scenario planning, say, 19.1% of organizations.
- 68.4% of organizations asserted reviewing their scenario planning once a year.
- Only 2.3% of companies review their scenario plans monthly.
- 14.5% organizations take a longer view for their scenario planning and review it after 5 years.
- CEO and his/her subordinates are responsible for scenario planning in 61.5% of organizations
- In 32.1% of organizations, the Board of Management is responsible for scenario planning
- GoodFirms survey revealed that the Quantitative scenario planning method is the most widely used scenario planning method.
- 47.8% of surveyed organizations conduct scenario planning with the strategic management plan method
- 32.5% of surveyed organizations use the operational scenario method
- 32.1% organizations deploy 4 Archetypes method for scenario planning
- 44.2% of C-suite executives claim that scenario planning has minimized supply chain issues
- Scenario planning helped 31.1% of organizations in lowering their operating costs.
- According to 27.8% of business leaders, scenario planning enabled them to achieve a balanced headcount.
- 75.7% of organizations said their scenario planning addresses situations like data loss or data corruption
- 62.7% of businesses mitigate insider threats using scenario planning
- 61.2% of businesses say they use scenario planning to lessen the impact of supply chain interruptions.
- 67.1% of businesses said they completely neglect low-probability scenarios
- 31.9% of businesses put too much emphasis on situations that are unlikely to happen
- 25.4% of businesses assume the future will look like the past.
Futurizing your business is more important now than ever. It is all about thriving during uncertainty by tracing all underlying business models that can work well in different futuristic scenarios. This involves using your imagination to the fullest. “Neither past nor present, but the FUTURE has become the key to your existence today,” says Tom Meyers, a well-known author.
Scenario planning is an excellent tool for organizations to anticipate future challenges and opportunities and create strategies to achieve desired results. Scenario planning is used as a strategic management technique to identify risks, opportunities, and threats related to the business environment in the coming years. It helps companies plan for uncertain future circumstances by developing differently.
A scenario planning process enables an organization to create a collection of alternative scenarios that can be used to evaluate each possible future outcome. By creating, testing, and assessing these scenarios, a business can better understand how its operations may change in the face of different market conditions and customer behavior. It helps decision-makers to identify the drivers of change in the business environment, develop strategies to deal with different possible outcomes related to these changes, and create different narratives of future events.
We sincerely thank our Research Partners who participated in the survey.
The data is sourced from a survey of the selected group of 210 organizations.
The executives and key officials from these organizations were queried about their current scenario planning initiatives, strategies, methods, and processes. The queried organizations comprise 17.6% from the IT sector, 11.5% from financials and the banking sector, 9.3.% of surveyees are from the marketing/advertising/entertainment sector, and 8.2.% are comprised of online retailers and ecommerce businesses. Others are from the education sector, manufacturing industry, business/consultancy services, pharma, SaaS, IT, logistics, fashion, healthcare, finance, and more.
Company size and Scenario Planning