Scenario planning and forecasting can help ensure your business is better prepared to respond and adapt to future challenges. Here’s what you need to know.
Truly predicting the future and the challenges we will face is impossible – coronavirus (Covid-19) has made that more apparent than ever before. However, businesses that have planned for future scenarios will be better prepared to respond and adapt in a fast-changing environment. Scenario planning and forecasting are techniques that business leaders and decision-makers can use to plan and prepare for mitigating downsides and exploiting upsides in an uncertain future.
Developed by military strategist Herman Kahn in the 1950s, scenario planning was adopted by businesses in later years – including by global oil company Royal Dutch Shell.
In the Harvard Business Review article “Living in the futures”, authors Angela Wilkinson and Roland Kupers note that the style of scenario planning adopted by Shell was not about predicting the future: “Its value lies in how scenarios are embedded in – and provide vital links between – organisational processes such as strategy making, innovation, risk management, public affairs, and leadership development.
It has helped break the habit, ingrained in most corporate planning, of assuming that the future will look much like the present. As unthreatening stories, scenarios enable Shell executives to open their minds to previously inconceivable or imperceptible developments.”
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Rehearsing and imagining
“A scenario is a potential future that can be imagined or rehearsed today,” says Andy Booth, chartered accountant and trainer at iCount. “For example, if we consider the current Covid-19 pandemic, we can think about what the world might look like in November this year. There are many different scenarios we can see in the future.”
Scenario planning is a risk management tool that can help to ensure businesses are not caught off-guard. It involves looking at the big picture and imagining what our different futures might be. Scenario planning enables the visualisation of multiple potential futures instead of just one possible future. An organisation is then able to develop practical business strategies for these future scenarios.
“When the actual future materialises, we’re not surprised by it because we’ve rehearsed it – we imagined it,” Booth explains. “With scenario planning we look at what the overall future might look like. So, for example, there might be a positive future in which everyone comes out of lockdown desperate to spend money – that would be one scenario that the future might hold. Or there might be an alternative scenario where the temptation for people to spend money is massively reduced – so another future might be despite the fact that Covid-19 has subsided, the economy doesn’t pick up as well as people hope for.”
Scenario forecasting sits within scenario planning. Scenario forecasting is thinking about how those futures will affect us financially – how we can mitigate downsides and exploit upsides in an uncertain future.
Rehearse for potential situations
“Don’t wait to be taken by surprise,” says Booth. “Rehearse the things that might happen. Financial planning is crucial.” Booth notes that how far ahead you should plan and forecast depends on your organisation.
Jo Wilkinson MAAT uses scenario forecasting in her role as finance director at North Brewing Group.
“Look at how much revenue you think a certain set of assumptions will generate and then what margins you can apply to that revenue,” she explains. With North Brewing Group operating in the retail sector, Wilkinson notes that one of the main costs is wages. So when forecasting, she makes sure to cost out different rotas and what size team might be needed, and what that looks like financially.
Booth outlines four steps for scenario planning:
- Identify the driving force of uncertainty, for example Covid-19 or Brexit.
- Identify two critical uncertainty pairs affected by the driving force. For example, if your driving force is Covid-19, two uncertainty factors could be customer demand and recovery time frame. Customer demand after the lockdown could be high or low, and the recovery time frame could be fast or slow.
- Draw a 2×2 matrix with four scenarios based on your uncertainty factors.
- Define the implications for your business based on all four scenarios. In this example, a “cloudy day” imagines a future where there is quick recovery from Covid-19 and businesses are able to reopen promptly, but there is weak demand for what you are selling, because people do not want to spend money. The “jungle survival” scenario imagines slow recovery from Covid-19 and weak demand – this is the worst-case scenario. The “rushing bulls” scenario imagines quick recovery from Covid-19 and strong demand. The “conquest” scenario imagines slow recovery from Covid-19, but strong demand for what you are selling.
There are many benefits to scenario planning and forecasting, but like any management technique there are no guarantees. “Critics of scenario planning will say, ‘you spend all this time rehearsing multiple futures, when only one of those futures will be the actual one – what a waste of time’. And time is money, so there is a cost to that,” Booth notes.
There are many different uncertainty pairs that could make up your scenarios. Consequently, with the seemingly limitless scenarios that are possible, it would be difficult to rehearse every future.
The content team are the owners of AAT Comment.