How to Use Scenario Planning in Your Business?
A clever tool for strategic planning
Businesses that fail never plan! Among the many useful tools that businesses use for planning, scenario planning has gained much ground due to its ability to analyse a wider range of scenarios in the long term, this helps to avoid short-termism and tunnel vision when strategising.
Businesses use a wide variety of strategic tools to solve many problems, tools such as the balanced scorecard, the SWOT and PESTEL analysis, the Blue Ocean Strategy etc., all these tools as good as they are, only focus on a very short time span and at limited scenarios. With the rapid change in technology and the launch of disruptive business models such as Airbnb, Amazon and Whatsapp, businesses are now required to strategise for a longer time frame and for multiple scenarios regardless of how over the top they seem. Do you think Nokia planned for a complete disruption of their business model by Apple? what about Yahoo or Blockbuster? All these businesses failed to look far enough into the future at a wide enough range of scenarios to realise what their strategy should look like to cover all possible aspects that could become the demise of their business.
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Scenario planning is a tool that is widely being used by businesses to assess multiple scenarios that can impact a business while presenting them in a storytelling format to help visualise a wider range of possible futures using imagination and expertise.
What is Scenario Planning?
Scenario planning is the process of making predictions and assumptions about the future of your business by creating multiple reality-like scenarios. This process helps to examine how ever-changing business dynamics have the potential to affect your company in the long-run.
Scenario planning helps entrepreneurs identify and highlight situations that could occur due to the impact of your current decisions and other external factors, it enables you to to create different realistic scenarios along with a contingency plan to ensure all the scenarios are dealt with in the right manner.
Video: 7 Ways To Apply Scenario Planning
Scenario planning is important for controlling costs, avoiding disruptions, and preserving standing against competitors. Watch the video to learn more.
The Importance of Scenario Planning
This process may seem completely unnecessary, but you need to understand that a business can only thrive forward and stay in line with its future goals successfully if it is able to anticipate the challenges that may arise in the future, early on.
- Military-based institutions use scenario planning to devise policies and strategies to tackle any unanticipated threat. The threat can be either external or internal. Therefore, planning strategically holds grave significance as a single error can put the existence of the entire country at risk.
- Business owners and entrepreneurs develop scenarios about their target market based on their response to their product depending on a variety of factors. Entrepreneurs may simply decide to change their target market if they are able to anticipate negative responses and losses due to factors beyond their control.
Note: You might overlook the importance of scenario planning if your business is already performing well but failing to address the usefulness of scenario planning might cost you financially in the longer run.
Related: Uncertain political and economic conditions can cause huge losses for companies, read our guide to stay ahead of the competition during economic uncertainty.
How does Scenario Planning Work?
Scenario planning allows companies to identify and define critical uncertainties to help them derive answers in order to examine how each uncertainty impacts your business in the long run and what actions should be taken to overcome them.
Once you are able to identify and highlight key underlying uncertainties with each of the choices available, you should then move towards brainstorming to develop a wide range of scenarios whose likelihood you believe is reasonably high.
We advise you to begin by developing 4 case scenarios, initially. But how do you create a realistic scenario? Our business advisors have listed down 6 simple steps that will help you develop realistic scenarios to increase the effectiveness of your scenario planning process.
- Focus on What is Important for your Business
It’s very important to focus on the specifics when crafting scenarios in order to make smart decisions for a bright future. It is advisable to focus on the major problem first, instead of working on every possible trend that has the potential to impact your company. Whether it’s an alliance with other companies, disruption due to a natural disaster, shifting business location or targeting a new competitor, focus on the important aspects of any situation that raises uncertainties.
When you work on a scenario that is strictly restricted to the situation or decision that needs to be taken, you increase the effectiveness of the process by specifically planning according to the needs of the decision. You also save a considerable amount of time when adhering to the specifics as you won’t have to consider the factors that have the potential to impact your business in the long run.
- Identify the Major Driving Forces
You should identify those driving forces that can significantly impact your company in both the short and long term. Identifying major driving forces is key because these drivers have the capacity to disrupt the entire political, social and economic infrastructure. While some driving forces might be subject to natural, political, technological or societal changes, it’s very important to keep in mind that the business dynamics are continuously changing.
For your information, such drivers may fall into two categories: predetermined elements or critical uncertainties. The nature of predetermined elements is that they are stable or predictable, you can take the example of demographic shifts within a population. The second category consists of critical uncertainties which are relatively unstable and unpredictable, like government emergency measures, regulations, natural disasters, technological changes etc.
- Restrict your Focus on 4 Scenarios Initially
As we mentioned earlier, you should restrict yourself to working on four scenarios initially, this is in no way a rule but a recommendation. Let’s study the nature of these scenarios in detail.
- Your first scenario should be the baseline scenario, that is the actual world-as-it-is scenario. The first scenario is the one that’s going to help you in the comparison process.
- The second scenario should be dominated by a single driving force.
- The third scenario should let the second driver dominate the scenario.
- The fourth scenario should be inspired by both of the drivers which were incorporated in the second and third scenarios.
The reason behind building up such scenarios is that these point out different directions a business might head towards as a result of critical uncertainties calling for businesses to make key decisions. Not only this, but these scenarios also provide different insights on your business decisions and help the business see the impact of those decisions from various perspectives.
- Work out the Scenario Outline
You can make things easier by assigning a situational or a creative name to each scenario. Once the names have been assigned, you should now establish a timeframe and critically think about the future business circumstances by predicting and working on a short story of the future business landscape.
- Deriving Results
This is the part that requires the most attention. When you are done with the development of scenarios, identify and define the effects on the problem or decision that needs to be taken. You can eliminate any scenario which you believe is unrealistic. After you work out the implications, you should then have meetings and discussions with your business team to inspect and highlight the best responses to the situation.
By taking your key employees and relevant stakeholders on board, you not only increase the level of trust and confidence within the organization but also let the organization learn more about the changing business circumstances around the world and how they should actually respond to them.
- Craft Effective Strategies for Execution
Once the entire activity is complete, you should now focus on selecting or ranking the best scenarios instead of filtering just the best one out. It is advisable for you to utilize all of the implications resulting from each scenario to develop a better understanding. Study all the scenarios, once you are done work out your execution plan by crafting strategies that prove to be effective across most of the scenarios.
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Effective Tips for Scenario Planning
- One of the most common mistakes business owners make is to craft an execution strategy by adhering to one specific scenario. The primary purpose behind scenario planning is not to tackle a single situation or decision, but it is a technique to deal with a variety of situations that have significant potential to impact your business in the long run.
- As we have laid enough emphasis on long term planning, scenario planning shouldn’t be done keeping only the short term uncertainties and situations under consideration. Scenario planning inspires businesses to look at the bigger picture and strategize their position accordingly to ensure sustainability and success in the long run.
Clear House Accountants are professional Accountants in London, our team of highly trained Business Advisors and Strategic Planners will help you devise effective tax planning and business growth strategies.
Anam has a degree in accounting from the Prestigious St John’s University, and works as a senior director in Clear House.
Before working in Clear House, Anam worked in various commercial roles, the last one being the VP Operations for a prestigious business organisation,working on improving the organisation’s operational efficiency, growth and high level client management.
Anam manages clients ranging from software companies to large property developers and managers. Notably, she recently worked with a large property development company building large scale developments in London and the surrounding area.