How scenario planning can give your company the edge

29 July 2015 Kieron Johnson

The unrelenting pace of business in an uncertain economy means that having one plan is like using an analogue television on a digital frequency. It’s behind the times. You need to have a plan B. It won’t hurt to have a plan C, either. Scenario planning is the way to go.

What better use of your time than to consider what your company’s future may look like under different conditions? We call this ‘scenario planning.’

TL, DR: Scenario planning is a powerful business tool for understanding and appreciating uncertain times and developing a strategy to fit. The process of creating plausible future scenarios can be difficult and time-consuming, but it’ll help you to ask the right questions and prepare for most eventualities so your business is unlikely to be caught unawares.

With its origins in wartime conditions, having different scenarios in mind is a powerful risk management tool in a strategist’s armoury. But its application isn’t limited to combat. Scenario planning can be used within a business context to envisage different futures and devise plans for what the business can achieve within each set of circumstances.

We reckon you’d be hard-pushed to name a single company that doesn’t want to gain a competitive edge over its rivals. Here’s how you can play your trump card to become the leader of the pack.

The Art of War

Don’t worry. You won’t need to reprise the role of Neo in The Matrix for this one.  The two critical uncertainties you’ve highlighted will form axes on a matrix with four quadrants of future uncertainty. You’ll end up with four different situations (scenarios) you can use to make strategic decisions law montgomery.

Creating scenarios isn’t a science, it’s an art form.

Scenario planning made its name in the thick of it: World War II. (Perhaps that’s where the expression “planning with military precision” comes from?)

It can be used by all businesses – great and small – to help them compartmentalise what they know (or can discover) about the potential environment they’ll be working in, say, five years from now.

As they’re not intended to be forecasts, scenario planning often involves a number of different perspectives of the future. The ‘perfect’ scenarios are prepared with key decisions in mind, such as whether to start a business or launch a product or service.

The driving forces relevant to these decisions may be demography, import costs (of competing products), advances in tech and so on, all of which fall under the acronym PEST:

  • Political.
  • Economic.
  • Sociological.
  • Technological.

Shell (part I)

At the turn of the 1970s, scenario planning was adapted for industry.

Royal Dutch Shell (the Anglo-Dutch multinational oil and gas company we know simply as ‘Shell’) used it to plan for the future when faced with an uncertain oil price. More on this later.

Many companies have since adopted scenario planning to improve their strategic decision-making, investment decisions and steer their thinking about competitive ‘power moves.’

Shell (part II)

For scenario planning that’ll knock your competitors’ socks off, you need look no further than Shell’s example in various sectors throughout the years.

Oil shock

In 1973, Arab oil-producing countries subjected Western governments to an oil embargo.

Crude oil prices rose more than fourfold – from $2.50 per barrel to $11. This new high price curbed Western economic activity, which created a stock market slump and an increase in unemployment.

Shell’s pioneering scenario planning allowed the company to predict and, to some degree, prepare for this shock, which allowed it to recover more quickly than its competitors.

Shell’s scenarios have not only benefitted itself. They have been a source of global inspiration, too:

1. Post-apartheid South Africa

Shell’s scenario planning motivated meetings between politicians, business leaders and other figures to consider the future of a post-apartheid South Africa.

The oil giant specifically compiled four scenarios for the country – from 1992 to 2002.

2. Aids crisis response

With United Nations (UN) stats estimating that there were 1.8 million people newly-infected by AIDS in sub-Saharan Africa in 2009 alone, the UN adopted Shell’s approach to scenario planning to create three versions of alternate futures exploring the consequences of different governmental actions.

The UN credited these scenarios with guiding the hand of the leaders’ response to the epidemic and helping them determine which response would create the most desirable outcome for Africa and the rest of the world by 2025.

Over to you

Here are six steps to replicate Shell’s success in scenario planning:

1. Get to the point

on target

Define the scope and timeframe for the focal point (usually a significant business decision with long-term consequences) and any concerns relating to it.

2. Double the doubt

As per the iconic lyrics of the Doris Day song, Que Sera Sera, “The future’s not ours to see.”

Uncertain future events that are out of your control include exchange rates, product or service demand, political instability, regulation, etc. You should aim to identify the two future events – ‘critical uncertainties’ – that will have the biggest impact on your business over time.

3. Enter the matrix (small ‘m’)

scenarios

Don’t worry. You won’t need to reprise the role of Neo in The Matrix for this one.

The two critical uncertainties you’ve highlighted will form axes on a matrix with four quadrants of future uncertainty. You’ll end up with four different situations (scenarios) you can use to make strategic decisions.

4. Play the name game

Give each scenario a catchy, memorable name tag that will enter your firm’s lexicon (for example, ‘Operation Groundhog Day’) and write a narrative for each, stretching the bounds of your imagination (without going Back To The Future zany).

5. Consider your options

The-Thinker

Use the scenarios to consider your firm’s opportunities and threats and develop alternative strategies if necessary.

6. Raise a red flag

Carefully selected early warning signs highlighting the emergence of one scenario can give your company a head start on the competition. Examples abound, but include:

  • Legislative changes.
  • Pending lawsuits.
  • Shifts in commodity prices.

Scenario planning won’t provide your business with all the answers, but it’ll help you to ask better questions and expect the unexpected, which makes it a very potent weapon when waging war against your competitors.