Expand the range of possible futures you can see without drifting into science fiction.
At the end of this (eventfully) hectic year, when the world is filled with uncertain developments and complex dynamics, people and organizations strive to answer: what to do next?
How can you improve the internal flexibility of your company to respond to environmental uncertainty and prepare better for the possibility of another crisis? How can you reorient your company’s policies according to the future context of a post-crisis world? Managers will be much better prepared to mitigate threats and take advantage of the unexpected opportunities that emerge if they can broaden their imaginations to see a wider variety of potential futures.
We now prompt you to take the long view, not only preparing for 2021, but beyond that. Not only to think about how your company can go through the pandemic period, but also how your company will exist in the changing business landscape after that. Sometimes, people and organizations are so trained to think from one business quarter to another that they don’t stop to reflect on how the future could be beyond that. Now, how can you do this?
An answer that we will give for you to do this: scenario planning.
“Among the many tools a manager can use for strategic planning, scenario planning stands out for its ability to capture a whole range of possibilities in rich detail.”
– Paul J. H. Schoemaker
3 Ways How Scenario Planning is Different From the Rest
To start, scenario planning is an instrument to create foresight (uncertain long-term futures) in a structured manner. Through scenario planning, we illustrate alternative future states from different perspectives. What makes scenario planning different from other famous planning methods like contingency planning, sensitivity analysis, and computer simulations?
In his article, Schoemaker, a renowned academic in strategic management, explained three reasons for this:
- Scenarios examine the collective effect of multiple uncertainties while contingency planning only studies one uncertainty.
- With scenarios, we modify multiple variables at the same time without keeping the others constant. This is the opposite of a sensitivity analysis where we look into the effect of a change in one variable, ceteris paribus.
- Unlike a simulation model that focuses on objective analyses, scenarios include subjective interpretations of the patterns and clusters of possible outcomes a computer simulation might generate. They also include elements (such as new laws or innovations) that cannot be formally modelled.
In brief, the scenario planning aims to capture both the richness and range of future possibilities, encouraging decision-makers to consider changes that they would otherwise neglect.
Why Use Scenario Planning?
Identifying basic trends and uncertainties help you against the two common errors in decision-making: overconfidence and a tunnel vision. This is a tool that you can use to expand the range of possible futures you can see while preventing you from drifting into science fiction. It helps to structure collective thought and challenge prevailing mindsets. In the end, you should be able to evaluate your company’s strategies and form new ones.
Before we start… understand the pitfalls in thinking about the future.
Do NOT confuse a scenario (a way of foreseeing the future) with reality. Think of it as anticipation rather than knowledge creation. This quote by Johannes Gabriel, the director of the Institute for Applied Foresight Intelligence, explains it best:
“To think about the future in a scientific way we have to accept that we cannot know the future. Not knowing the future means to know that some parts of the puzzle are and will always be missing. That does not mean that we do not know anything about the future.”
So before doing a scenario planning, acknowledge that the world is complex. We are anticipating the future but there is a possibility of change.
9 Simple Steps to Do Scenario Planning
Below we explain the 9 steps in how to do a scenario planning adopted from Schoemaker’s framework written for the MIT Sloan Management Review:
1. Gather the right team
Scenario planning is a structured group process where you engage with people that have different views so gather a team that fits this purpose. You can also invite outsiders such as key customers, suppliers, consultants and regulators into the process because scenario planning is about anticipating potential futures, not creating strategies to deal with them.
2. Set a time frame and scope of analysis
The scope of analysis can be a geographic area, your company’s products, markets, and many more. It helps to ask “what do I wish I had known then that I know now” and look at the (unstructured) concerns or anxieties of your management team to start the process.
3. Determine the important stakeholders
These stakeholders would have an interest in the issue and/or be affected by them. Once you have identified them, note their current roles, interests, power position, who could influence them and ask how these have changed over time and why.
4. Identify basic trends
What trends affect the issues you identified in step two? These can be political, economic and societal trends amongst others. Explain each trend and how/why they influence your company. Creating a diagram is helpful here to identify whether the trends’ impact on your company is positive, negative, or uncertain.
Note that everyone in the group must agree that the identified trends will continue within the time frame. Trends with disagreements in this aspect belong in step 5 below.
5. Identify key uncertainties
This includes events with uncertain outcomes that can affect the issues you are concerned with. After identifying them, determine their possible outcomes.
6. Create initial scenario ‘themes’
By this step, you have the main ingredients for scenario planning: trends and uncertainties. Now you can find initial themes by 1) putting positive elements in one group and all negatives in another or 2) select the top two uncertainties and cross them (according to Schoemaker, this approach makes the most sense if some uncertainties are more important than others). This diagram can aid you to do the second step:
Don’t go beyond 6 scenarios. Remember that the purpose of scenario planning is not to cover all possibilities but to circumscribe them. Also, title each scenario to make them easy to follow and remember.
7. Ensure consistency and plausibility: refine your scenarios
Check if the scenario themes you came up with have internal inconsistencies. Schoemaker advised to ask the following three questions and make sure they have the desired answers:
- Are the trends compatible within the chosen time frame? (Should be) Yes.
- Do the scenarios combine outcomes of uncertainties that indeed go together? No.
- Are the major stakeholders placed in positions they do not like and can change? No.
After checking for these questions, go back and see if your scenarios need any additional research then complete them.
8. Develop quantitative models
Evaluate if certain interactions should be formalized with a quantitative model. For example, Royal Dutch Shell established a model that balances oil prices, inflation, GNP growth, taxes, oil inventories and interest rates.
9. Progress toward ‘decision’ scenarios
Assess whether or not the scenarios and any quantitative models that you have addressed the real issues that your company faces. Do these scenarios spur creativity in your company or enable you to test your strategies? In Schoemaker’s words, “If yes, you are done. If not, repeat the steps and refocus your scenarios the way an artist judges the balance and focal point in a painting.”
What You Should Look Out For
The “Good Scenario” Check
This checklist assesses whether your scenarios are good to go:
- Diverse – Scenario planning is about anticipating different possible futures so it should cover a wide range of possibilities and highlight competing perspectives. The process should not just result in ‘scenario A: X happens and scenario B: X does not happen’.
- Highly plausible – The scenario is not that absurd, but not that obvious either.
- Useful – They should help make better decisions for the future. Ensure this by posing the right questions at the start. The useful scenarios are usually the ones that seem too good to be true or make people uncomfortable.
Is scenario planning a solely creative process? No.
Scenario planning is a highly analytical process because good arguments and sharp reasoning are needed to explain why your scenario is plausible. That is why we had the internal consistency check in step 7. It is also advised to come to be aware of your cognitive biases throughout the whole process.
Scenario planning is not a project with a solid beginning and end.
Instead, think of it as an ongoing conversation that occurs in an organization. As you already know, circumstances always change so it is necessary to iterate your scenarios from time to time.
The ability of an organization to have a sharp sense of their environment and its changes to plan for potential futures can be a prominent source of competitive advantage. As we go into 2021, utilize scenario planning to make your organization fit for the future. If you wait until the pandemic has passed to start thinking about a strategic plan, it will be too late.
“Now, when other companies are in the state of crisis management, it is the best time for your company to think long-term and think strategically so that once the economy has recovered (post-pandemic), your company would be much more prepared than competitors.”
– Liana Lim Hinch, Indonesia Lead at Foresight Intelligence
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