Scenario planning for strategizing in times of uncertainty

Warren Buffett once said, “In the business world, the rearview mirror is always clearer than the windshield.” It is clear that building on the experiences of the past is much easier than trying to guess the future. But managers are now faced with the challenge of estimating the impact of this crisis on their organizations and taking response measures, but no one knows for sure what is coming.

Society faces new events every day, some of which are predictable and some of which are unpredictable. Organizations must also deal with these circumstances that involve making decisions under a high degree of uncertainty, although we can all agree that it should be based more on data and analysis than on intuition and hunches.

But how do you create data that helps predict what’s going to happen? There is a tool that can make it easier for organizations to prepare for their future, and to make better decisions in the short and long term. It’s all about scenario planning.

What is scenario planning?

Scenario planning focuses on developing insights for the future. It is a method with which organizations can form an idea of the possible and different scenarios in the future and how these may affect their strategic objectives. It allows companies to develop their strategies, products, or services and adapt them when necessary considering that we live in an ever-changing world. The aim is not to make accurate forecasts, but to explore possibilities about what could happen in the future. Each scenario should contain sufficient detail to assess the likelihood of success or failure of the different policy options. Will there be enough demand? Will distribution be affected? What competition can we anticipate? Will our product be affected by technologies? In this way, organizations can be prepared to address the best strategy in each case, forcing themselves to consider their future in an effective and structured way.

 

What is the process for creating the scenarios?

Since its introduction by Herman Kahn in the 1950s for the U.S. Army, different models have been developed, I present the one developed by Peter Schwartz in 2010.

  1. Identify the central issue

    The process begins with the identification of a central theme or issue, which the organization is facing. It can be something very specific or broader. For example, how does technology affect us? What decisions do we need to make to be relevant in the long run?

  1. Identify the driving forces

    Driving forces represent how the environment and trends influence the central issue. These are the usual types of considerations in a business plan: economic (consumption, production, globalization), socio-political, demographic, cultural, technological, environmental determinants, etc.

  1. Classify critical uncertainties

    The identified driving forces are classified according to their degree of uncertainty and importance in relation to the central issue. The two most important and uncertain drivers will define the most divergent and relevant future conditions that will be included in the final proposal.

  1. Select Scenario Logic

    Once all the votes have been counted prioritizing the critical uncertainties, we will focus on the top 2 to serve as the axes of a 2-by-2 matrix. Four quadrants (scenario logics) are then generated from the concepts of each axis. Logic is then defined by exploring the interactions of the most uncertain and important determinants in a way that creates alternative frameworks, each of which represents a divergent but plausible scenario.

  1. Creating the Story of the Scenarios

    A good scenario is a story in itself, to obtain it it will be necessary to combine the creativity of the entire team and distill it to obtain a single narrative in a very clear way, supported by the set of schemes developed so far. Each scenario is developed by exploring the implications of alternative trajectories on the central issue under the established parameters defined by the interactions between the main driving forces.

  1. Selecting Indicators

    A set of indicators will be selected to assess the impact of future developments around the central issue. The metric involves detecting specific measures to determine each condition.

  1. Assess impacts

    Using the selected indicators, the way in which the central issue is affected in each scenario will be assessed.

  1. Evaluate Alternative Strategies

    The main purpose of the scenarios is to facilitate strategic decision-making. Once each of the scenarios and their impacts have been described, it is possible to rehearse what would be done in each case. The most appropriate strategy will begin to be implemented according to the conclusions reached, but leaving the door open to a change of strategy if, once implemented, the first measurement recommends it.

The 21st century has been a time of rapid change and great uncertainty, with marked economic cycles, political movements, trade wars, and increasingly ubiquitous technologies. Change is the only thing that prevails, so managers should integrate scenario planning as part of their efforts to develop the future of their businesses.

 

Carlos Puig Falcó

CEO of Branward

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