What is Scenario Planning?
Scenario Planning is the process of systematically exploring future “what if?” circumstances and their consequences, such as economic downturns or natural disasters. The goal is to anticipate or even mitigate adverse events that might negatively impact a plan or organization’s ability to achieve its objectives. Scenario planning can also help an organization manage risks by identifying possible actions it could take should a particular scenario occur. Bearing in mind that the future is always uncertain, companies will often use a variety of forecasting methods, from historical trends to qualitative judgmental analysis, in order to generate multiple scenarios for each critical issue.
In finance, scenario planning aims to increase awareness of both external and internal factors that can affect company performance. In this article, we will examine financial scenario planning from a practitioner’s point of view. The analysis and analysis supporting the scenario planning will be along the three main dimensions of internal management (financial management), external economic conditions (market environment) and risk (regulation) (see Figure 1).
The discipline of scenario planning has existed in its current form for approximately 20 years, although different names have been used over that period. At one time the discipline was called “Foresight”, which can be traced back to a presentation by Foresight’s Dana Mitchell in 1984. (This same title is also used in Europe). At another time, the discipline was termed “Futures” (or “forecasting”) which was popularized by Kouzes and Posner in the early 1980’s through their Canadian Futures magazine.
Objective of Scenario Planning
The objective of scenario planning is to ask “what if?” questions in order to encourage discussion and debate about potential scenarios. The process aims to help organizations develop contingency plans in advance for each scenario that might occur in the future, based on uncertainty about future issues. By engaging key individuals (e.g., top management) through brainstorming, asking questions and testing arguments, creative thinking can be stimulated to come up with multiple scenarios that are better than one person could imagine alone. In addition, organization participants can discuss the various scenarios and develop a risk analysis of how each scenario might play out. If the scenario planning results in a list of contingency plans that appears realistic from an external political, economic or regulatory perspective, it may discourage potential threats and may even prevent a negative outcome if a company is prepared to deal with them.
Many scenario planning exercises have proven to be ineffective at achieving their objectives. Scenario planning is most successful when participants “put their heads together” versus relying on statistical modeling tools or mathematical formulas that don’t offer realistic alternatives or help participants consider multiple viewpoints. This is why scenario planning is an ideal tool for communicating with stakeholders (e.g., executives, employees).
Usefulness of Scenario Planning for Firms
Scenario planning allows companies to explore and think about what will happen if certain events occur, like an economic downturn. It can also help explore decisions such as whether or not they should purchase stocks or bonds during a particular time, or whether or not they should make a large acquisition; this would help them better prepare to react to various scenarios and mitigate risk.
Scenario planning can also help a company that is expanding to different countries. They would be able to explore the possible outcomes of each potential scenario and then be prepared for that particular scenario when it occurs.
To create a good scenario, you have to plan out the various outcomes that could occur for each of your scenarios. You then have to think about what would happen in that situation and how you would respond.
Issues with Scenario Planning
There are a few challenges that companies face when working with scenario planning. The first is that it can be a very time consuming process. When creating a scenario, each step must be well thought out and thoroughly explained, which takes a lot of time. Another challenge is that it is hard to predict what will happen in the future. This makes it difficult to create accurate scenarios about the future because you do not know what will actually be occurring at all times.
While Scenario Analysis has its drawbacks, there is a benefit to scenario planning that outweighs the challenges. Having a good strategy for your company allows them to react to and react appropriately during any situation. It also helps organizations become more flexible and adaptable, which makes them better able to adjust their strategy as different scenarios arise. It is important to note that scenario planning can be done for multiple purposes, such as both long-term and short-term planning as well as global and domestic ones. To begin with, companies should take a strategic view of how they want their business to operate in the future, rather than thinking about individual markets at a particular time. This will help facilitate scenario planning within your company going forward. Since a major drawback of scenario analysis is the time it consumes, firms can hire Freelance Scenario Analysis Consultants from Fintalent, the hiring and collaboration platform for tier-1 M&A and Strategy Professionals. While Consultants from Fintalent carry out this planning,, the business can deploy its personnel to other areas and save considerable time.