Scenario planning is a valuable technique for leading your company in the face of an uncertain future.

© Dr. Terry J. van der Werff, CMC

In turbulent times, every CEO faces the question “How do I confidently steer our company through uncharted waters without the fear of shipwreck along the way?”

A valuable tool to help you navigate troubled waters is scenario planning.  Developed at the Rand Corporation for the military after World War II, it was adapted by Herman Kahn in the 1960’s as a business tool.  Its most prominent use was by Pierre Wack and Ted Newland at Royal Dutch/Shell in the 1970’s to examine the impact on oil prices of a number of potential scenarios.

Scenario planning answers “What if...?” questions that involve important issues and large external influences.  Unlike strategic planning which postulates a single anticipated future, scenario planning looks at alternative versions of the future.

The goal of scenario planning is to enrich management's thinking, perceptions of reality, and modes of decision making when addressing important issues in the face of uncertainties.

Scenario planning steps.  There is as much art as science in developing scenarios, but the process is an orderly one to describe, though a bit messier to execute!

First, specify the major issue or decision you are facing, for instance, siting of a new plant, entering into a global alliance, developing the company's grand strategy, or revamping product distribution channels.

Second, isolate the key drivers - those external forces affecting your company and industry.  Drivers fall into two categories.  Predetermined elements are relatively stable or predictable, e.g. demographics of the population.  Critical uncertainties are unstable or unpredictable, e.g. consumer tastes, government regulations, natural disasters, or new technologies or products (especially in the hands of competitors).

Third, select the two most important drivers.  Do not complicate scenarios by selecting too many drivers.  Restrict yourself to formulating three or four scenarios with sharply contrasting futures: (1) the baseline, business as usual, world as it is, surprise-free scenario; (2) the scenario which driver A alone dominates; (3) the scenario which driver B alone dominates; and (4) perhaps one with both drivers present.

Fourth, write a short internally consistent story of the future which highlights the key driver or drivers for each scenario.

Fifth, give each scenario a pithy name, e.g. High Road, Boom or Bust, Fortress Asia, or Lift Off.  Names help participants keep the scenarios separate, provide common language for discussion, and give the scenarios some permanence within the company outside of the formal process.

Sixth, within each scenario determine the implications for the issue or decision specified at the outset.  Be precise.

Seventh, with these implications in mind, discuss what your decision or business response should be. Remember that nothing you do is ever done in a vacuum.  How might the government react under each scenario?  Your clients or customers?  Your competitors?

Eighth, select indicators which suggest that a particular scenario is unfolding.  Since there is a bias towards eventual action, choose those indicators which will precipitate action when a particular threshold is reached.  Track and discuss these indicators regularly and update your scenarios accordingly.

Finally, usually at some future date, make those decisions in a timely manner that are appropriate for the particular future that does unfold.  Future reality, of course, is unlikely to be exactly in accord with any of your scenarios, but the flexible mindset developed during scenario planning enables you to react nimbly to events that do occur.  You don't choose amongst the scenarios.  Rather, you use them all to help form hypotheses about the world and to recognize which ones are operative at any given time.

Teamwork.  Developing scenarios is best done in a team setting.  After all, you want to draw on the collective wisdom of your staff to delineate the forces operating on your company and industry, to highlight the implications for you of these forces, and to tap the full range of their thoughts on appropriate responses to possible futures, none of which can be predicted with certainty.

Recap.  Scenarios are short internally consistent narratives of possible futures; they are not predictions.  Drivers are the key external forces affecting your business.  Drivers include both predetermined elements and critical uncertainties.  Write your scenarios around the two key drivers.  Name each scenario.  List the implications for each scenario. Determine your response to each scenario.  Select the indicators you will track to suggest whether that particular scenario is operative as time unfolds.  Finally, decide according to the future that does occur.

The value of scenario planning lies not in the answers, but in the discipline of thinking creatively about unusual situations.  Your objective is not to select the best or most probable scenario.  Indeed, scenario planning doesn't allow you to predict the future.  It simply allows you and your team to respond flexibly and promptly and to make better decisions when major events do occur, no matter what they are.