Scenario Planning

Thinking about the future requires a delicate balance. Spend too much time on predictions and forecasts, and you can look silly when it all unravels. Ignore it completely, and you’ll be caught off guard and unprepared, especially when competitors anticipate changes better than you.

So where can the balance be found? Without a crystal ball, is it still worth peering into the future from time to time? How can we describe our conditional views of the unknowable future?

We can find the balance by focusing our efforts on a known capability: the effective management of risks. We want to spend just enough time anticipating the unknowable future, so that we can identify and mitigate risks better than our competition.

A relevant technique is scenario planning, a concept that has been used in business circles for decades, but has gotten a bad rap in recent years. With this, we will emphasize the value of “planning that creates scenarios” over “creating plans from scenarios,” a subtle but important distinction.

We can use scenarios to isolate different possible futures that could unfold, captured as stories. The story should focus on events and happenings that could occur in the outside world, not the events or happenings that could occur within the organization doing the planning. It presents an opportunity to do some collective “sense-making” of the environment in which you operate, while, at the same time, acknowledging that our ability to make sense of things is riddled with uncertainty.

Whether you are in a corporate leadership position, a functional leader, a product leader, or a project leader, you can study the things that are outside your control, and capture some stories about how those things might evolve. Best done in a group setting (e.g. a leadership team), it offers a chance to pull core beliefs about “how the world works” out of people’s heads, and onto a page, where different perspectives and experiences can weave better stories.

When this is done BEFORE making strategic choices, a leadership team can get grounded on their “outside view” before tackling choices to construct an “inside view”. Together, they can work to fill in each other’s blind spots and challenge bias (e.g. availability bias, stability bias, overconfidence bias, etc.) together. 

‍

‍

When scenario planning focuses on collecting these beliefs (drawn from individual sense-making) and driving a dialog across a group accountable for driving success in that environment, then it builds a solid foundation for strategy work.

A good approach to building a set of scenarios can be found in “The Great Transition” by James Martin (1995). He introduces scenario planning as a part of  “strategic visioning”, that is, a starting point for making strategic changes to address a specific challenge.

His steps (copied below, with added commentary) offer a repeatable practice for building and communicating scenarios:

1. Clarify the decision to be made‍

Establish the purpose of the scenarios. What are the key issues or decisions? Identify the “Official Future” vision of the enterprise which may need to be challenged.

Generically speaking, the “decision to be made” is just “Do we need to revisit and change our strategy and investments?” The status quo is built based on an “official future”, and scenario planning is a way to explore the alternative possible futures.

The “official future” is the straight line graph of current trends stretched into the future, that is usually the basis for the current vision and strategy. It captures how the organization currently thinks the future will unfold. 

2. Identify the key factors and trends which affect the decision

‍List the key factors influencing success or failure. List the driving trends in the macro-environment that affects the key factors. What will decision makers need to know when making key choices?

Factors will be context specific, and also will depend on how the purpose was framed in the first step. The key is to refer to the success criteria for this context in the organization, and start to list the areas that are external, and where trends can have a significant influence on performance. Examples of factors include:

• Technology trends
• Industry structure
• Macro-economic conditions
• Shifting user preferences 
• Changing buyer habits

3. Rank the key factors by uncertainty and importance

‍Rank the key factors by importance. Rank the key factors by uncertainty. Identify key factors and trends that are both important and uncertain.

‍Before the exploration of future trends begins, it is important to clarify where an exploration will offer the biggest bang for the buck. Factors that are known to influence our strategic choices that are (1) most critical, and (2) highly uncertain should drive the creative step of scenario identification. After a list of 10-20 factors has been collected, put them on these two axes to expose an upper right quadrant of factors that should help focus the next steps.

‍

‍

4. Create 3 or 4 scenarios

Create a small number of scenarios in which the important key factors evolve differently. Carefully choose the names of the scenarios: one scenario is usually the “Official Future”. The others are substantially different. Flesh out the detail of the scenarios.

This is the creative step, where the group builds up stories around different possible futures, in which the critical factors land on different outcomes. Each scenario is given a narrative structure and an “easy-to-remember” name. The best scenarios for study are both possible (realistic) and a bit uncomfortable (not ideal for our current strategy). Each scenario can be explored as a distinct possibility of how the future will unfold. Instead of trying to forecast which scenario is most likely, the group should ask, “What would it take for this scenario to be true?” This line of questioning avoids cases where people will defend their vision over others’ and keeps the activity grounded with a learning mindset.

5. Rehearse decision making with the scenarios

‍Rehearse with key managers what decisions would be made in each scenario. Is that corporate strategy robust in all scenarios? What changes need to be made? How would the different scenarios affect corporate actions?

Scenarios are evaluated to update the “official future” that will be baked into the 1-2 year vision. Optionally, leaders can also rehearse their responses to each hypothetical scenario, to rehearse decision making, and refine their decision architecture. <link to TUP Decision Rehearsals>

6. Identify changes needed in the current mental model

‍What do the scenarios reveal about managers’ mental models? What needs to be changed? How could the strategy be made more robust? What actions are needed if the Official Future shows signs of not happening as planned?

When opinions about the state-of, and impact-of, the external environment on the internal context are captured and expressed as beliefs (i.e. “we believe that…”), it acknowledges the uncertainty in the opinion. When these beliefs are tracked, they can be systemically assessed and challenged as the uncertainty drops and more is learned. When beliefs are captured (or updated) during scenario planning, it gives leaders a chance to learn from each other, and find new ways to drive exploration into the most critical areas of uncertainty.

7. Identify and communicate what should be learned from the scenarios

‍What are the lessons of the scenarios? What should be learned? How can this be communicated to managers? Are changes needed in systems or processes?

‍The purpose of the exercise is to determine the potential impact of each scenario, and assess weaknesses in the current strategy (e.g. SWOT analysis) and assess risk to current plans. When the overall balance of these carried-risks is deemed unacceptable, then changes are needed.The risks uncovered via the scenarios become the rationale for driving change. They do not point the direction of change (that comes next), but they establish that the status quo is no longer acceptable.

8. Identify scenario early warning symptoms

‍Identify signs that a scenario is likely to happen. Establish a monitoring scheme that detects the early-warning symptoms.

After the “official future” has been updated, the 1-2 year vision can be adjusted accordingly. Then the alternative scenarios get mined for risks, since they represent other possible futures and the current vision will either look robust or brittle in the face of these other futures. Finally, the beliefs carrying the most uncertainty can be augmented with trip-wires, to force a revisit when (and if) specific conditions change. This can introduce a forcing function for belief challenging <link>, and maybe trigger another round of scenario planning.

‍

____________________________

‍

Note that this approach to scenario planning stops short of building strategic responses to the scenario. It just captures them as plausible stories requiring consideration. Another kind of scenario planning explores variations on internal resource allocations (i.e. “what-if scenarios”), and those are a different game altogether. They strive to optimize a portfolio of investment options: a misguided desire to for “perfect” resource allocation, in place of continuous discovery to reduce uncertainty. Fake certainty as a stand-in for the real thing.

In the end, scenario planning as described here can be a repeatable practice that helps leadership teams learn to better navigate the murky waters of uncertainty, and strengthen their ability to identify risks. It won’t produce a definitive forecast with “most likely” and “least likely” limits marked, but it will produce a dialog that can start with “I don’t know”... then yield a coherent set of foundational beliefs (“we believe…”) that sets a solid base for what’s next: setting strategic direction for change.