Traditional forecasting techniques often fail to predict significant changes in the firm's external environment, especially when the change is rapid and turbulent or when information is limited. Consequently, important opportunities and serious threats may be overlooked and the very survival of the firm may be at stake. Scenario planning is a tool specifically designed to deal with major, uncertain shifts in the firm's environment.
Scenarios are carefully crafted stories about the future embodying a wide variety of ideas and integrating them in a way that is communicable and useful. Scenarios help us link the uncertainties we hold about the future to the decisions we must make today.
Scenario planning has its roots in military strategy studies. Herman Kahn was an early founder of scenario-based planning in his work related to the possible scenarios associated with thermonuclear war ("thinking the unthinkable"). Scenario planning was transformed into a business tool in the late 1960's and early 1970's, most notably by Pierre Wack who developed the scenario planning system used by Royal Dutch/Shell. As a result of these efforts, Shell was prepared to deal with the oil shock that occurred in late 1973 and greatly improved its competitive position in the industry during the oil crisis and the oil glut that followed
The scenario planning method works by understanding the nature and impact of the most uncertain and important driving forces affecting the future. It is a group process which encourages knowledge exchange and development of mutual deeper understanding of central issues important to the future of your business. The goal is to craft a number of diverging stories by extrapolating uncertain and heavily influencing driving forces. The stories together with the work getting there has the dual purpose of increasing the knowledge of the business environment and widen both the receiver's and participant's perception of possible future events. The method is most widely used as a strategic management tool, but it is also used for enabling group discussion about a common future.
Scenario Matrix
Typically, the scenario planning process is as follows:
· identify people who will contribute a wide range of perspectives
· Comprehensive interviews/workshop about how participants see big shifts coming in society, economics, politics, technology, etc.
· cluster or group these views into connected patterns
· group draws a list of priorities (the best ideas)
· sketch out rough pictures of the future based on these priorities (stories, rough scenarios)
· further work out to detailed impact scenarios (determine in what way each scenario will affect the corporation)
· identify early warning signals (things that are indicative for a particular scenario to unfold)
· monitor, evaluate and review scenarios
Some of the benefits of scenario planning include:
* Managers are forced to break out of their standard world view, exposing blind spots that might otherwise be overlooked in the generally accepted forecast.
* Decision-makers are better able to recognize a scenario in its early stages, should it actually be the one that unfolds.
* Managers are better able to understand the source of disagreements that often occur when they are envisioning different scenarios without realizing it.
Some traps to avoid in Scenario Planning:
1) treating scenarios as forecasts
2) constructing scenarios based on too simplistic a difference, such as optimistic and pessimistic
3) failing to make scenario global enough in scope
4) failing to focus scenarios in areas of potential impact on the business
5) treating scenarios as an informational or instructional tool rather than for participative learning / strategy formation
6) not having an adequate process for engaging executive teams in the scenario planning process
7) failing to put enough imaginative stimulus into the scenario design
Sources
1. http://www.netmba.com/strategy/scenario/
2. http://www.valuebasedmanagement.net/methods_scenario_planning.html
3. http://en.wikipedia.org/wiki/Scenario_planning
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