Strategic planning and forecasting tend to use projections of past events to develop future plans. These 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 the environment, 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, (von Oetinger, 2004).
Major corporations such as Shell and General Electric redefined scenario planning in the 1970s to meet specific company needs. These companies realized that traditional planning, which is based on forecasts, was becoming strategically dangerous as they moved out of the relatively stable 1950s and 1960s. Traditional planning assumes that tomorrow's business world will be quite like yesterday's.
Scenario planning simply defined means creating a variety of possible future scenarios. Firms can then respond in one of two ways. First, firms may examine each scenario and determine whether the organization's current strategy would help them survive and succeed in those situations. Or, firms can examine a desired future state and see what they must do to get to that point. The purpose of this planning is to try to understand how the underlying dynamics of an industry can and how the organization could best respond to a change that could happen or to make a desired situation occur. The organization identifies certain events that could change the industry's structure and studies the present and future driving forces that might come into play that could cause such events. Scenario planning is effective for large organizations and small organizations alike. The organizations that utilize the plan the best are the ones that make scenarios relevant to long-term needs, which may require a more focused approach. The ultimate purpose of this method seems to be the same for large and small organizations: to analyze the consequences of present actions and decisions; to identify and avoiding problems before they occur; to identify the present consequences of future events; and to envision aspects of possible or desired futures.
Scenario planning is different from other forms of strategic planning, such as forecasts and trend analysis. Scenario planning, in fact, uses both of these techniques, but also identifies how these can be upset and thus cause different outcomes. Some scenarios may seem nonsensical or highly improbable, but actually help organizations deal with major changes. Levi-Strauss uses the method to analyze the impact of everything from cotton deregulation to the total worldwide extinction of cotton. Similarly, businesses in energy intensive industries like trucking or airlines could benefit from considering what would happen to their business and how should they respond if gas prices were to reach $2.50 or $3.00 per gallon.
Scenario planning helps organizations understand that business decisions are not just about submitting numbers and creating budgets, but about recognizing a wider context of events that might happen. Scenarios are created around uncertainties in the business or its environment. The goal is to move from one predicted outcome to understanding how multiple uncertainties will impact an organization. Although every organization is different, success is higher when the company's strategy is correlated to changes in the environment, which can create opportunities for prepared organizations while creating threats to those less prepared.
In creating a scenario plan, these driving forces can be categorized into external and internal factors. External factors could include: market forces, which shape the needs and behaviors of consumers and suppliers; cost forces, which depend on the economics of the business; government forces, which are out of the hands of individual organizations but set the rules of the game; and, most importantly, competitive forces and uncertain strategic considerations. The need to match or beat competitors can determine the opportunities and threats of an organization. Internal factors could include planning for turnover of critical top managers, responding to major accidents, or significant changes in stock prices.
One pitfall of scenario planning is that organizations tend to make scenarios too broad or too narrow. When scenarios are too broad, people tend to dismiss them because they feel the scenarios are unrealistic or highly improbable. When they are too narrow, scenarios are usually minor variations of the existing strategy or the same theme.
There are many different approaches firms can use to develop meaningful scenarios. Schnaars and Ziamou suggest the following:
After scenarios are created, strategies are developed by first determining the direction in which the organization should (or wants to) be going. The group then decides on the events that support this vision and the outcomes the organization wants for this event. This is sometimes difficult because the world is rapidly changing, and one designs his or her organization to deal with the change. Scenario planning is a valuable tool for an organization because it gathers the clues a company has and puts them together in different ways to allow people to think about them without making judgments.
Why should organizations implement scenario planning as opposed to other planning techniques? First, the company can use the method as an approach to risk management. The method attempts to answer questions like, "How do we come up with a strategy that's possible in a wide range of different futures?" The organization can also use the method to upset the rules that everybody understands, to create new rules of competition. Scenario development causes firms to deviate from a linear projection of past business practices 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.
Scenario planning is effective when used properly by managers with good business judgment; it is not a substitute for business judgment. The process does not help an organization become better than they might be ordinarily, but helps utilize professional judgment across a wider range of alternatives.
Revised by Joe Thomas
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