Why your business should engage in scenario planning
Your business doesn’t exist in a vacuum. Outside economic shocks, be they widespread like the Covid-19 pandemic, specific to your industry, or even just to your business, are becoming more common in an increasingly volatile world. Scenario planning, the act of anticipating a sudden change in circumstances, and creating a plan to overcome and even thrive, is a necessary task for your business.
In this article we’ll answer the following questions:
- What is scenario planning?
- What are the differences between scenarios and forecasts?
- What are the different types of scenario planning?
- How do you conduct a scenario plan?
What is scenario planning?
Scenario planning is a tool used by an organisation to anticipate future circumstances and make flexible long-term plans. This strategic analysis is designed to eliminate overly dramatic predictions, be they positive or negative.
The process of scenario planning begins with identifying drivers of change. For example, what will happen to your business if there is a major economic shock, like the Covid-19 pandemic or the cost of living crisis? Or, what would happen should your office need to shut for major repair works?
Once they are identified, the planner will describe all possible outcomes for each scenario. The company then will have an idea of what the future may hold based on these outcomes.
It’s important to note that scenario planning isn’t just about planning for negative outcomes. Businesses can and should make provisions for a sudden uptick in fortune. If a new product or service suddenly exceeds expectations, how will you hire more staff? What if the economy suddenly rebounds after a period of recession? Planning for the positive will allow you to take decisive steps that can accelerate growth even further.
Scenarios vs. forecasts
Scenarios and forecasts are not the same. The main difference is that a forecast is made on the assumption that the future can be predicted, whereas, scenario planning assumes that it can’t predict the future.
Indeed, a forecast can be used as a baseline in your scenario planning. If the business expects to bring in £X amount of revenue, what changes should you under, or over, deliver.
What are the different types of scenario planning?
Scenario planning can be divided into the following categories-
Quantitative Scenario: These scenarios provide information about financial models, wherein both positive and negative outcomes of the model are presented. Annual business models are made using the quantitative scenario.
It uses two assumptions-
- Key variables are known
- Relationship among key variables is fixed
Operational Scenario: It shows how an event will impact the company instantly. This will be integral to finding a new short-term strategy should the reality of your business change profoundly.
Normative Scenarios: Normative scenarios provide the preferable future or the result that a firm would like to achieve. It is concerned with a statement of goals and shows how your company will likely operate in future.
Strategic Management Scenarios: It provides a broad view of the business environment in which your company operates. It is not concerned with the company or the industry. It is the most difficult scenario because planners have to take a worldwide view of things.
What are the advantages of scenario planning?
Scenario planning helps to be better prepared for future uncertainties. Since all the possible circumstances and plans of action in each case are determined in advance, it helps your company overcome crisis. They can take effective and efficient decisions in the event of any crisis. Here are some of the advantages:
Agility Creation: Scenario planning makes a business capable of adapting quickly to any change in circumstances. Since all the possible outcomes and responses are known in advance, your company can react to any situation rapidly and accurately.
Business Growth: Scenario planning helps to predict the opportunity. It aims to predict a broader and more accurate picture of your company’s future.
It can also predict the possible threats to the business. By knowing the possible, an effective plan can be developed to deal with them.
Since both opportunities and threats to business are predicted in advance, scenario planning can give you a competitive edge.
Determining profitability: Scenario planning can predict the profitability of the product. This information provides the company with the opportunity to experiment with different product mixes. Information about product, customer and channel combination plays a key role in critical decision making.
Early warning signals: Since scenario planning can predict the business risk such as a decrease in sales, and loss of a project or client, it acts as an early warning signal. It helps to avoid the dramatic effects of a threat.
Increasing investor trust: You can use scenario planning to make the roadmap for your company. You can present such an analysis to your investors. Scenarios can be used to explain important decisions to investors. In this way, you will gain the trust of your investors.
- Improves quality of policies, plans and programmes
- Develops a sense of participation in employees
- Provides rigidity and creativity in organisational activities
How do you conduct a scenario plan?
Given below is the brief process of scenario planning
- Decide the time and duration of the analysis
- Identify the interest and influence of stakeholders
- Identify environmental factors
- Determine major uncertainties
- Develop preliminary scenario
- Monitor trends to build scenario further
- Conduct further research on trends and uncertainties
- Come to a decision based on the scenario
The idea of planning for the worst, or maybe taking that big shot on a new project, may seem time-consuming, but it is worthwhile.
The important thing to remember is, what seems a small factor in the here and now, can be a business critical issue five years down the line. You must be prepared.
Trusted partners are out there to help. At Pennyhills, we can look at your business’s performance, identify key risks and potential growth areas, and help you get a better understanding of where your business is headed. Get in touch today, to plan for your business’s future.