Strategic planning and forecasting tend to use projections of past events to develop future plans. Such approaches rely on historical data and assume a continuation of past business practices and environmental stability. Scenarios are used to develop plans for significant changes in products, personnel, or processes for which data are limited and uncertain. The premise is that the best way to prepare for radically different situations is to think through various events that could occur and consider alternatives for responding to those situations if they should happen.
One early application of this technique was a 1968 forecast for the Royal Dutch Shell Group that foresaw the 1973 OPEC oil price rise. By thinking through this possibility, Shell executives were able to respond more rapidly than their competitors. This allowed Shell to move from its position as the eighth-largest oil producer to the second-largest in two years time. Businesses in energy intensive industries like trucking or airlines could benefit by considering what would happen and how should they respond if gas prices were to reach extremely high levels.
Scenarios typically look at potential situations from one of two perspectives. Some firms approach scenario development by looking at possible chain reactions resulting from a possible change. For example, new medical technology could raise average life expectancies beyond 100 years. In this case, one might ask what the impact would be on labor markets, health care, retirement programs, and housing. In other words, how would the change in average life expectancy change business?
An alternative approach is to look at a desired future state and proceed backward to consider the precursor developments that would be necessary to achieve the desired state. Firms could look at what changes in immunology, surgery, and drug development would be necessary to make it possible for life expectancies to reach 100. The question becomes what could the business do to make this possibility a reality?
There are many different approaches firms can use to develop meaningful scenarios. In their 2001 article, "The Essentials of Scenario Writing," Steven Schnaars and Paschalina Ziamou suggested the following:
Firms can use scenarios to develop a variety of strategies. Some firms strive to develop strategies that perform equally well across all scenarios, while others try to develop strategies that would work well in response to each possible scenario. A third approach is to develop a strategy to postpone commitment and keep options open as long as possible.
Scenario development allows firms to deviate from a linear projection of past business practices. This is accomplished by developing potential situations that question traditional assumptions about the firm's relevant industry, processes, markets, and people that may make it necessary to significantly alter the current strategy. Great strategists are more attuned to their environment and notice small changes in it before their less attentive counterparts. Scenario analysis allows firms to recognize some of these possible changes before their competitors and plan responses accordingly.
Mitchell, Donald W., and Carol Bruckner Coles. "Establishing a Continuing Business Model Innovation Process." Journal of Business Strategy 25, no. 3 (2004): 39–49.
Mitroff, Ian I. Crisis Leadership: Planning for the Unthinkable. Hoboken, NJ: Wiley, 2004.
Nutt, Paul C. "Expanding the Search for Alternatives During Strategic Decision-Making." Academy of Management Executive 18, no. 4 (2004): 13–28.
Roney, Curtis W. "Planning for Strategic Contingencies." Business Horizons 46, no. 2 (2003): 35–42.
Schnaars, Steven, and Paschalina Ziamou. "The Essentials Of Scenario Writing." Business Horizons 44, no. 4 (2001): 25–31.
von Oetinger, Bolko. "A Plea for Uncertainty: Everybody Complains about Uncertainty, but It Might Be a Good Thing." Journal of Business Strategy 25, no. 1 (2004): 57–59.