The global financial crisis has increased the complexity and uncertainty of the environments in which companies must make decisions. This explains the increased use of scenario planning (or scenario learning), since the technique is especially well suited to these conditions. When it’s not feasible to forecast one probable future, scenario exercises help executives anticipate various future scenarios and develop strategic responses to each of them. This article draws on several Wharton experts to explain the benefits of scenario planning, how to go about it, and how to make it effective.
Scenario thinking started taking hold in business in the 1970s, as a structured way to develop foresight. It promised to help decision makers understand new growth areas, anticipate risks, spot opportunities, and create a long-term vision. The Wharton experts say that some companies have been able to use scenario planning to develop a competitive advantage by thinking about possible future outcomes, and then establishing monitoring mechanisms to give early warning signs of which scenario is starting to unfold. This helps companies using the technique to reduce surprises, become more robust, and anticipate and act on major emerging opportunities and challenges before competitors.
Paul Schoemaker explains three strategic postures that may be taken by managing who face profound uncertainties. The third of these involves developing scenarios rather than predictions. This implies abandoning the ideal of “heroic leadership” based on a leader pointing the way ahead without any uncertainty. He says it is now better to “embrace uncertainty and examine it in detail to discover where the hidden opportunities lurk”. This is especially true in capital intensive industries, where companies are locked into expensive projects for years, greatly reducing their strategic options.
Although many companies are at least a little familiar with scenario planning, many fail to practice it in a consistent or productive way. The Wharton experts explain some of the shortcomings found in the practice, and how to do better. For instance, it’s important to “involve senior management directly and actively in open, long-term oriented discussions”, and to have the right mix of people in the discussion so that a genuinely diverse range of viewpoints is included. The article concludes by sketching out the essentials of the process, starting with identifying the central question, then the driving forces and systemic changes, then critical uncertainties—the driving forces that are both extremely important and highly uncertain. Scenarios should be enlivened using story-telling techniques, and finally used as input to strategy decision-making process.