7 Ways to Apply Scenario Planning
Whenever you face high uncertainty, you need to be creative as you navigate uncharted waters. But you also need a prepared mind. This is where scenario planning can really help. As explained step-by-step in my previous column, you need to identify your top external uncertainties, and then weave these into three or four plausible stories about how the future might unfold in different directions.
In this column, we focus on what to do with your scenarios, once you have some good ones. But first make sure your scenarios are indeed relevant, by answering the following questions:
- Does your current strategy implicitly or explicitly “bet” on the occurrence of one of the various scenarios you developed?
- Would you change your strategy if you knew for sure that another scenario was in fact going to happen (as opposed to the one assumed)?
- Do the scenarios challenge some commonly held assumptions in your company or industry; do they stimulate deep dialog?
- Do your scenarios surface new risks that you need to protect against better or new opportunities that thus far were overlooked?
- Do the scenarios point you toward important early warning signals that you need to monitor so that you can see around the corner?
The more you said yes to the above, the better your scenarios are. So, suppose you got at least three yes answers, how do you now connect the scenarios with upcoming decisions or perhaps your overall strategy and business vision? Based on numerous scenario projects with clients around the world, they can serve the following important purposes:
1. Stress-testing your strategy
Many organizations use scenario planning to test the robustness of their current strategic plans against a wide range of alternative scenarios. It is the equivalent of putting an airplane wing in a wind tunnel to see at what point it fails as pressure builds up. Stress-testing helps companies minimize potential negative consequences and be better positioned to seize opportunities.
2. Platform for innovation
Companies on the move often use scenario analysis to expand their geographic footprint, explore adjacent markets, invest in new technologies, or reach beyond their industry boundaries. Because multiple scenarios force them to consider a wider range of futures, they may see many new opportunities on the horizon.
3. Go deep
Don’t think of scenario planning as just a corporate activity conducted by futurists and staff people. Savvy organizations translate and adapt the scenarios to multiple levels to connect with those managing functional and business strategies. For example, how will the scenarios impact talent management, IT requirements, financial (budgeting) processes, or legal requirements?
4. Monitoring key uncertainties
Organizations in fast moving market often use scenarios to monitor early warning signals in the external environment. This lets them see sooner than rivals which way the wind will be blowing. Good monitoring requires systematically scanning leading indicators plus the ability to link key signals to tactical or strategic adjustments of the plan.
5. Rebalancing your options portfolio
Smart organizations have developed a portfolio of projects that can be adjusted whenever the tide turns. They follow a stage-gate process that starts with small investments that are later scaled up or dropped as needed. As with your personal investment asset allocation, you need to rebalance your options portfolio in business whenever the world changes on you.
6. Creating organizational agility
Agility requires that your strategic intent is flexibly combined with a portfolio of actions that will make your strategy happen. Some initiatives in this portfolio will prove robust across scenarios; others will be highly scenario dependent and therefore fragile. For the fragile ones, you need to be vigilant in monitoring key uncertainties and then acting on key signals in a timely way. This requires adaptive leadership as well as a good strategic radar.
7. Stakeholder management
Once the key elements of scenario based thinking are in place, an agile organization will use various tools to manage its key stakeholders strategically. This means sharing your views, discussing trade-offs and building support for key strategic initiatives. Use your scenarios to explain your strategic choices and build support inside your company and well beyond.
PAUL SCHOEMAKER | Research Director, Wharton School
Paul J. H. Schoemaker is the founder and chairman of Decision Strategies International. A speaker, professor, and entrepreneur, Schoemaker is research director at the Mack Institute for Innovation Management at Wharton, where he teaches strategic decision making. His latest book is Winning the Long Game: How Strategic Leaders Shape the Future.