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Strategist's Toolkit: Scenario Planning
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Business Strategy in Practice (Project-centered Course)
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Michael LenoxSenior Associate Dean and Chief Strategy Officer
Darden School of Business
Jared HarrisSamuel L. Slover Research Chair in Business Administration
Darden School of Business
>> I want to introduce the idea of scenario planning.
Now, this is a tool in your toolkit that helps you structure your thinking in
a certain way that might help you as you plan for the future of your business.
But like every other tool and
framework in your toolkit, it should be part of a larger strategic analysis.
So, you might be using this in conjunction with using some other tools and frameworks
as well, and utilizing the insights that arise out of all of these different tools.
Now, as with all the other tools,
we want to understand what is it that scenario planning does for us.
Why would we use it and what is it all about?
So, scenario planning is essentially a framework that helps you formulate
a strategy that is robust to different potential future scenarios.
So, in that sense, it's kind of an alternative to making
a single point forecast of the future, right?
And in that sense, it pushes the strategist
to step outside of one's particular assumptions about the future and
actually question them and think them through.
And it recognizes, this is a framework that helps you recognize,
that some predictions are uncertain.
And it might help us avoid groupthink around
all rallying around a single point prediction of the future and
betting our entire strategy on that particular outcome.
So, let's go through and discuss what the steps are in scenario planning.
The first step is to identify the key strategic issue and also to
identify the appropriate time frame over which you're thinking about the future.
So, the key strategic issue should be something that
is a really important decision and
that's going to have a large impact on your future as a business, right?
And it's useful to seek outside input, to talk to others within your organization.
You really want to gather as much data as you can as you sort of thinking through
what is the key problem we're sort of faced with, or what's the key challenge
that we want to try overcome, or what's the key decision we're trying to make
right now that might position us either well or poorly for the future.
And as you think about the timeframe, it's important to kind of get that right.
You don't want the timeframe to be so
distant that it's sort of hard to even imagine it.
But you also don't want it to be so immediate that you're basically just doing
budgeting and strategic planning for next year, right?
So, as you think about those things,
that's essentially the first step, to identify the key strategic issue and
timeframe on which you're going to build your analysis.
The next step is to identify the potential key trends and uncertainties
that are going to impact your potential future success as a business organization.
Now, trends are things that we can be relatively certain about.
They're usually built around things like population demographics or
things that are relatively uncontroversial as we sort of know that they're
going to move in a certain direction going into the future.
So, if there's expert consensus,
if you can see some data that's moving in a particular direction and it's not
really questionable, then that might indicate that that factor is a trend.
And the trends are things that, for
the purpose of scenario planning, we can sort of set aside for the moment.
What we're really focused on are the uncertainties.
These are things that the experts might not agree about.
We're not sure exactly what the future revenue model of our business industry
market segment is going to be, or whatever the case may be.
You're looking for
the key uncertainties that you don't really know how they're going to work out.
And it's important to prioritize those things.
You're really looking for the most important, the most fundamental,
uncertainties that could have the most dramatic impact on
the future success of your business.
So, that's the next step, is to identify those trends and
sort of set them aside, and identify through that process
the key uncertainties that you want to use to move on to the next step.
And that is to use those uncertainties to construct different scenarios.
It's oftentimes helpful to do this visually.
So, it might look something like this.
You might pick the two key uncertainties that you've identified,
and you might put them on the different axes of your little grid here.
So, on the vertical axes we've got Uncertainty WX, and
on the horizontal axes we've got Uncertainty YZ.
And the point is we don't know if the future is going to move more towards W
or X.
And we also don't know if it's going to move more towards Y or Z.
And, ideally, these uncertainties represent on each axis,
they represent a spectrum.
And so, you're sort of almost looking for the extremes.
What you're ideally trying to construct, or
in this case four scenarios that are as nearly mutually exclusive as they can be.
So, you're looking for
very different assumptions about how these uncertainties will play out.
And when you lay all that out on your grid like this,
you can see that you essentially construct four different scenarios, A, B, C and D.
And, again, ideally, these scenarios should be sort of
dramatically different from one another and
represent four different possible futures for your industry or market segment.
So, that's step three.
Step four is to then really spend some time brainstorming and
exercising your creativity to visualize those scenarios.
You want to get into the details.
Here, again, it might be useful to get outsiders perspective of
if the future works out in a certain quadrant that
realizes certain uncertainties, what would that future look like?
What would business be like in that particular scenario?
It might be helpful to sort of write stories or
construct hypothetical newspaper headlines for each of these four possible futures.
Give them a title.
Think about what scenario A is and what scenario D is, and
give them descriptive titles and think about them in sort of vivid detail.
This is the creative part of scenario planning that's helping you to kind of
think outside the box, to think differently than you may
have thought before about the potential futures that your business faces.
So, once you've done all that, then you want to move to step five.
And step five is to then examine the robustness of your strategy
across all of these different scenarios.
Is your particular strategic direction you're moving in,
is it robust across all of those scenarios?
Would you be a viable, successful organization in each of those futures?
Or does your current strategic direction sort of rely on
the future working out a certain way to be beneficial for you?
And if that's the case, this is what you're looking for.
You're looking for opportunities to sort of adjust and
potentially make some changes to your strategy that might make it more robust
across all these different scenarios.
Now, the scenarios that, different scenarios you've created with your grid,
of course, are based on two different uncertainties, and
there may be others that are important as well.
So, you might want to repeat this scenario planning process for several different
combinations of scenarios that might yield different insights.
And it's important to understand that, even after you done all this,
you might decide that you want to make the riskier strategic move of
moving in a direction that isn't robust across all those scenarios.
And it does really depend on realizing one particular future scenario.
And that's fine.
But if you do that, you want to recognize that that is a risk that you're taking.
And this framework will help you see that as a risk,
and you'll see what the vulnerabilities are.
So, this is scenario planning.
It's an opportunity for you to use a tool in conjunction with the other tools you're
using that might help you better visualize the range of possible futures that you
might be operating in in your industry or market segment.
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