Framework library · Strategic planning
Scenario planning
Scenario planning does not predict. It takes the two forces that matter most to a decision and are least certain, crosses their extreme outcomes to make four distinct futures, and asks what the business would wish it had done in each. The useful outputs are the moves that pay off in every scenario and the early signs that show which future is arriving.
Use it when
- A decision will play out over five years or more and depends on things nobody can forecast, such as spectrum policy or handset adoption.
- The plan rests on a single forecast and you want to see what happens if it is wrong.
- Leaders hold different views of the future and argue past each other. Scenarios let each view be tested rather than voted on.
- You need early warning signs to watch, so the plan can change before the evidence is obvious to everyone.
Avoid it when
- The uncertainty is in a number, such as demand or cost, rather than in how the market will be structured. Use sensitivity analysis or a Monte Carlo simulation.
- The horizon is short and the main forces are known. A PESTLE and a plan with contingencies are enough.
- You plan to write a best, base and worst case. Those are one forecast with error bars, not different futures.
How to run it
Frame the decision and the horizon
"Where should we put capital for satellite service to ordinary handsets up to 2032?" The horizon must be long enough for the uncertainties to resolve.
List the driving forces
Everything outside your control that bears on the decision: regulation, technology, customers, competitors, the economy. A PESTLE is a good start.
Pick the two critical uncertainties
Of the forces with the most impact, choose the two least predictable and least connected to each other. Write the two extreme outcomes of each as A and B.
Write the four scenarios
Cross the two uncertainties to make four futures. Give each a short name and a few lines on what that world looks like and how it came about.
Test your options against each scenario
Ask what you would wish you had done in each. Moves that pay off in all four are safe to fund now; moves that pay off in one or two are bets.
Name the signposts
The early, observable signs that one scenario is arriving, and who will watch each one.
Work through it
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Mistakes to avoid
- Choosing two uncertainties that are really the same force, so two of the four scenarios cannot happen.
- Labelling one scenario as the expected future. Once one is the base case, the others are ignored.
- Writing scenarios that are all good or all bad for you. Each should be plausible, and at least one should be uncomfortable.
- Stopping at the stories. The value is in the moves that work everywhere and the signposts.
Where it comes from
Scenario thinking is usually traced to Herman Kahn's work at the RAND Corporation in the 1950s. Pierre Wack developed its use for corporate strategy at Royal Dutch Shell from the early 1970s and described the approach in two Harvard Business Review articles in 1985, "Scenarios: Uncharted Waters Ahead" and "Scenarios: Shooting the Rapids". Source.
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Further reading
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