While this process is taking place the participants will probably want to add new topics – so more Post-It Notes are added to the wall. Based on the scenario, what perspective must the organization take? Get the right data: For finance teams to execute with confidence, they need the right data, going well beyond the general ledger. [13][15][19][20], Possibly as a result of these very sophisticated approaches, and of the difficult techniques they employed (which usually demanded the resources of a central planning staff), scenarios earned a reputation for difficulty (and cost) in use. Scenario planning is a widely used strategic planning tool. In the absence of proof, but taking account of Shell's well documented experiences of using it over several decades (where, in the 1990s, its then CEO ascribed its success to its use of such scenarios), can be significant benefit to be obtained from extending the horizons of managers' long-range forecasting in the way that the use of scenarios uniquely does. Because the negative effects of the pandemic were so sudden, the company decided to set milestones for every 30 days in anticipation of delayed accounts receivable as well as reduced ability of retailers to accept products. About the author(s) Christian Grube is a partner in McKinsey’s Munich office, where Tido Röder is an associate partner; Yuri Polyakov is a partner in the London office. A combination makes a realization of the benefits of both tools possible. During the mid-1960s various authors from the French and American institutions began to publish scenario planning concepts such as 'La Prospective' by Berger in 1964[17] and 'The Next Thirty-Three Years' by Kahn and Wiener in 1967. of Shell's use of scenario planning have suggested that few if any significant long-term business advantages accrued to Shell from the use of scenario methodology[citation needed]. New York: Palgrave Macmillan, 2003. To illustrate this, consider how two fictional companies, a software provider and a wholesale distributor, would approach scenario planning during the COVID-19 pandemic. Indicate KPIs, and refresh scenarios and update assumptions on a regular basis. It is a common experience, when the scenarios finally emerge, for the participants to be startled by the insight they offer – as to what the general shape of the future might be – at this stage it no longer is a theoretical exercise but becomes a genuine framework (or rather set of alternative frameworks) for dealing with that. An especially easy approach, it only requires a conference room with a bare wall and copious supplies of 3M Post-It Notes. On the other hand, some of the 'links' (or at least the 'groupings') may need to be artificial at this stage. Or, a prediction that cybersecurity will become a major issue may cause organizations to implement more security cybersecurity measures, thus limiting the issue. Navigating through the crisis is a formidable task and scenario-based planning can be a valuable tool in preparing and planning for the next normal. What does each group of factors represent? A low scenario is where costs and revenues are challenging. But it’s more than just a way to recognize and mitigate risk or plan for growth situations. When a worst-case event arises, scenario planning documents add tremendous value by playing out multiple outcomes and listing immediate steps to contain damage. Organizations should include scenario analysis into strategic planning and/or enterprise risk management processes by: Identifying and defining a range of scenarios, including a 2°C scenario, that provide a reasonable diversity of potential future climate states. Perhaps the most difficult aspect though, is freeing the participants from the preconceptions they take into the process with them. A Shell insider has commented "The scenario team were bright and their work was of a very high intellectual level. Any decisions made need to be monitored in real-time so the team can be nimble in its ongoing response. For example, pre-pandemic scenarios used fuel costs as a trigger, anticipating higher prices in a crisis. For the same reasons, though, a lack of such proof applies to almost all long-range planning techniques. There must be guardrails on the project to keep the time investment in line with expectations. However, scenario planning considers combinations of uncertainties in each scenario. Even so, it follows many of the same rules as normal brainstorming and typically lasts the same length of time – say, an hour or so only. Scenario Planning vs. Business Continuity Planning. [6] As a consequence, societal predictions can become self-destructing. Normative scenarios describe a preferred or achievable end state. [16] Though Kahn is often cited as the father of scenario planning, at the same time Kahn was developing his methods at RAND, Gaston Berger was developing similar methods at the Centre d’Etudes Prospectives which he founded in France. Kahn, Herman. However it differs from the 'rigorous' form described in 'creative thinking' texts, in that it is much slower paced and the ideas are discussed immediately. In practice, usually one of the two tools is considered the dominant methodology and the other one is added on at some stage. Herbert Meyer, "Real World Intelligence", Weidenfeld & Nicolson, 1987, M. Lindgren & H. Bandhold, Scenario planning – the link between future and strategy, Palgrave Macmillan, 2003, G. Wright& G. Cairns, Scenario thinking: practical approaches to the future, Palgrave Macmillan, 2011, A. Schuehly, F. Becker t& F. Klein, Real Time Strategy: When Strategic Foresight Meets Artificial Intelligence, Emerald, 2020, This page was last edited on 9 February 2021, at 02:34. They may use figures, diagrams or words in any combination. These models assume key variables are known and that relationships among them are fixed. This process was first carried out (arguably the method was invented by) the Prussian general staff of the mid-19th century. More important, the 'certain' topics are also removed from the main area of debate – in this case they must be grouped in clearly labelled area of the main wall. The variant that is most often found in practice is the integration of the Delphi method into the scenario process (see e.g. It is important that all the participants feel they 'own' the wall – and are encouraged to move the notes around themselves. Only then, as a second stage, should the various drivers be specifically defined. By 1983 Diffenbach reported that 'alternate scenarios' were the third most popular technique for long-range forecasting – used by 68% of the large organizations he surveyed. [18] By the 1970s scenario planning was in full swing with a number of institutions now established to provide support to business including the Hudson Foundation, the Stanford Research Institute (now SRI International), and the SEMA Metra Consulting Group in France. Moreover, expert comments and arguments provide deeper insights into relationships of factors that can, in turn, be integrated into scenarios afterwards. COVID-19 pandemic scenario would overwhelm our health system for many weeks. What are the major external factors likely to impact our scenarios? Once this is all in place, finance leaders can create a framework that helps the executive team make decisions. They should be subject to significant alternative outcomes. The methods combine known facts about the future, such as demographics, geography, military, political, industrial information, and mineral reserves, with key driving forces identified by considering social, technical, economic, environmental, and political (STEEP) trends. Schoemaker, “When and How to Use Scenario Planning: A Heuristic Approach with Illustration,” Journal of Forecasting 10 (1991 Shell’s scenario planning enabled it to anticipate the rise and subsequent fall of oil process in 1973. The original method was that a group of analysts would generate simulation games for policy makers. Paris: Unesco, (1993). Find out how the World Energy Model can explore different plausible future energy scenarios all the way to the year 2100. As a result, many of the larger organizations started to use the technique in one form or another. David Luther is a senior content writer at Oracle NetSuite, covering the latest trends in SaaS, finance and ecommerce. For instance, a technological factor may lead to market changes, but may be constrained by legislative factors. It is therefore recommended to use Delphi in order to make the scenarios more profound and to create confidence in scenario planning. Avoid developing scenarios without defining the issues first. It is important to note that scenarios may be used in a number of ways: a) Containers for the drivers/event strings. During the past 5 years, computer supported Morphological Analysis has been employed as aid in scenario development by the Swedish Defence Research Agency in Stockholm. He is currently pursuing his MBA. There are various types of information output of Delphi that can be used as input for scenario planning. Are you prepared? Quantitative scenarios are also used to develop annual business forecasts. For connecting scenario planning to project evaluation, using Monte Carlo simulation, see: P.J.H. Scenario planning is a process pioneered by the U.S. military, which today runs exercises looking up to 20 years out to guide R&D efforts. For example, a company may discover that it needs to change contractual terms to protect against a new class of risks, or collect cash reserves to purchase anticipated technologies or equipment. Some, though use an expanded series of lists and some enliven their reports by adding some fictional 'character' to the material – perhaps taking literally the idea that they are stories about the future – though they are still clearly intended to be factual. Subscription & Managed Services on the Rise in the Services Industry. "The Next Thirty-Three Years: A Framework for Speculation." 6. Scenario Planning Advantages and Disadvantages. These prioritized factors are a critical part of crisis scenarios. Is it possible to create probable scenarios when considering the stakeholders? At a later stage more meaningful links may be found, or the factors may then be rejected from the scenarios. ... World Energy Model. H. Kahn, The Year 2000, Calman-Levy (1967). In this context, which scenario contains which topic (driver), or issue about the future, is irrelevant. These factors are sometimes called 'variables' (because they will vary over the time being investigated, though the terminology may confuse scientists who use it in a more rigorous manner). They’ll also need to understand the costs of producing products and services, which products are foundational and which are additive. Operational Model. These four remaining servers will then each have … Shell started, more than three decades ago, by building half a dozen or more scenarios – but found that the outcome was that their managers selected just one of these to concentrate on. If the scenarios do not intuitively 'hang together', why not? Add the changes to the strategic planning process model . The innovation assessment, on the other hand, is like an x … Quantitative scenarios are financial models that allow for the presentation of best- and worst-case versions of the model outputs. There is no theoretical reason for reducing to just two or three scenarios, only a practical one. From projecting financial earnings and estimating cash flow to developing mitigating actions, scenario planning is more than just a financial planning tool — it’s an integrated approach to dealing with uncertainty. Utilisation of alternative scenario approaches in defining the policy agenda for future agriculture in Finland. Do not attempt to develop the perfect scenario – more detail does not mean more accuracy. The part of the overall process which is radically different from most other forms of long-range planning is the central section, the actual production of the scenarios. Typically, macroeconomic expectations are used in conjunction with scenario planning to help the CFO frame near-term expectations for the company and to level set expectations in departments. In some cases, companies bring in analysts or even so-called futurists. applied to assess the effects of the individual scenario and the realistic mitigation approaches used in response. However neither the high level "Group scenarios" nor the country level scenarios produced with operating companies really made much difference when key decisions were being taken". The six to ten people ideally taking part in such face-to-face debates should be in a conference room environment which is isolated from outside interruptions. For example, Shell's two scenarios at the beginning of the 1990s were titled 'Sustainable World' and 'Global Mercantilism'[xv]. will try to influence the outcome. Finance leaders need to prioritize and develop perspectives about each of the scenarios to help the company navigate. Innovation Management System. 1. Scenario planning is often conflated with business continuity planning. Rikkonen, 2005;[35] von der Gracht, 2008;[36]). Though it has been mentioned previously, it is important to stress once again that scenario building is ideally an iterative process. Contingency planning is a "What if" tool, that only takes into account one uncertainty. The Planning Scenarios may also be useful to hospital administrators in assessing resource needs and can be used in conjunction with the COVID-19 Surge Tool. [7], Most authors attribute the introduction of scenario planning to Herman Kahn through his work for the US Military in the 1950s at the RAND Corporation where he developed a technique of describing the future in stories as if written by people in the future. Each Planning Scenario is based on a set of numerical values for the biological and epidemiological characteristics of COVID-19 illness, which is caused by the SARS-CoV-2 virus. There is a similar problem with expanding participants horizons to include the whole external environment. However, the quality of this analysis is especially important in the context of scenario planning. A comprehensive scenario planning exercise takes time, effort and money. Secure commitments from senior management, select team members and organize scenarios around key issues to be addressed and evaluated. What are the key internal drivers that we need to address? For Gimbloo’s part, leaders began running weekly cash forecast scenarios using a variety of inputs, focusing first on collections and hoping for a week-to-week decline in delinquent payments. Many practitioners today spend as much time on the decision-making process as on creating the scenarios themselves. In practice, we found that this requirement, much to our surprise, posed few problems for the great majority, 85%, of those in the survey; who easily produced 'balanced' scenarios. WEAP ("Water Evaluation And Planning" system) is a user-friendly software tool that takes an integrated approach to water resources planning. . That means scenario planning must be a living process, with constant updates as conditions and assumptions evolve. 2. Decide how you will put your scenarios to use; that will inform scope. In terms of the overall approach to forecasting, they can be divided into three main groups of activities (which are, generally speaking, common to all long range forecasting processes):[23]. The scenarios usually include plausible, but unexpectedly important situations and problems that exist in some small form in the present day. Scenario planning is as much art as science, and prone to a variety of traps (both in process and content) as enumerated by Paul J. H. However, the retail freefall meant that Tar Heel Direct found itself operating in the worst-case scenario — red — within a matter of weeks. Schoemaker. [24] However other observers[who?] Godet, Michel, Fabrice Roubelat, and Guest Editors. Scenario planning, also called scenario thinking or scenario analysis, is a strategic planning method that some organizations use to make flexible long-term plans. The Columbia Encyclopedia, Sixth Edition. [33][34] Due to their process similarity, the two methodologies can be easily combined. By building organizational awareness of what could happen, leaders may spot warning signs of brewing challenges and respond accordingly. Von der Gracht (2010)[37] is a scientifically valid example of this method. The subsequent strategy will have to address these – since the normal approach to strategy deriving from scenarios is one which aims to minimise risk by being 'robust' (that is it will safely cope with all the alternative outcomes of these 'life and death' issues) rather than aiming for performance (profit) maximisation by gambling on one outcome. Futures Research Quarterly 7 2 (2001): 7-32. [23], In the 1970s, many energy companies were surprised by both environmentalism and the OPEC cartel, and thereby lost billions of dollars of revenue by mis-investment. However, future studies analysts select scenario features so they are both possible and uncomfortable. [4] Systems thinking used in conjunction with scenario planning leads to plausible scenario storylines because the causal relationship between factors can be demonstrated. Build a nimble response strategy: Each scenario should contain enough detail to assess the likelihood of the success or failure of different strategic options. Cornelius, Peter, Van de Putte, Alexander, and Romani, Mattia. While scenario planning can benefit from computer simulations, scenario planning is less formalized, and can be used to make plans for qualitative patterns that show up in a wide variety of simulated events. Operational scenarios are one of the most common types of scenario planning an organization will undertake internally. Crafting the narrative requires a clear set of assumptions about potential business realities and ensuing outcomes. Operating at 60% of regular revenue, management assessed what its existing customers needed and got the sales team working on acquiring new customers by thinking out-of-the-box. Once more, intuition often may offer a useful – if academically less respectable – vehicle for reacting to the complex and ill-defined issues typically involved. For businesses, scenario planning enables decision-makers to identify ranges of potential outcomes and estimated impacts, evaluate responses and manage for both positive and negative possibilities. Bring drivers together into a viable framework. The final group represents all the subsequent processes which go towards producing the corporate strategy and plans. The scenario then provides short-term strategic implications. Turku School of Economics and Business Administration, Helsinki. Normative scenarios are often combined with other types of scenario planning as they provide a summation of changes and a targeted list of activities. Several large companies also began to embrace scenario planning including DHL Express, Dutch Royal Shell and General Electric. If these stakeholders are unavailable during an actual extreme event, the company has documentation to fall back on. Avoid becoming fixated on any one scenario. Such controversial topics are particularly suited for extreme scenarios or wildcards. In practice, as many ideas may be removed, as not being relevant, as are added. Leadership made the assumptions that recurring revenue would stay largely the same and new deals would surge when the economy reopens. Futures 37 8 (2005): 795-812. In practice, even at this early stage the participants will want to cluster them in groups which seem to make sense. Recognize the importance of the team’s time. This scenario will show how the last period’s sales figures compare with forecasts, and what adjustments you need to make on headcount and other departmental spending to maintain trajectory. Scenario planning helps policy-makers and firms anticipate change, prepare a responses, and create more robust strategies.[7][8]. In the most theoretical approaches to the subject, probabilities are attached to the event strings. It has been found that the managers who will be asked to use the final scenarios can only cope effectively with a maximum of three versions! TFS publishes planning-level forecasted AADTs, vehicle classification data, and design values on the WisDOT website for use by project teams which are developing planning-level forecasts. What are the key internal drivers that need to be addressed? These insights enable intelligence organizations to refine and repackage real information more precisely to better serve the policy-makers' real-life needs. For businesses, scenario planning enables decision-makers to identify ranges of potential outcomes and estimated impacts, evaluate responses and manage for both positive and negative possibilities. At every stage it is necessary to iterate, to check that the contents are viable and make any necessary changes to ensure that they are; here the main test is to see if the scenarios seem to be internally consistent – if they are not then the writer must loop back to earlier stages to correct the problem. What is the issue we are trying to address? [10], The approach may have had more impact outside Shell than within, as many others firms and consultancies started to benefit as well from scenario planning. The high scenario is usually based on demand increasing and sales accelerating due to big changes in the market. Scenario planning is also extremely popular with military planners. Since the workings are largely self-evident, participants very quickly come to understand exactly what is involved. [5] In these cases when scenario planning is integrated with a systems thinking approach to scenario development, it is sometimes referred to as dynamic scenarios. The Art of the Long View: Planning for the Future in an Uncertain World New York: Currency Doubleday, 1991. In the past, strategic plans have often considered only the "official future", which was usually a straight-line graph of current trends carried into the future. Most states' department of war maintains a continuously updated series of strategic plans to cope with well-known military or strategic problems. It is used by organizations as a tool to visualize possible future events and conditions that may affect them and take precautionary measures to control the impact. With connected planning, you can immediately analyze the impact of changes across your business. A good starting point is 50% for best guess, then 25% for things going better and 25% for things going worse. Feel they 'own ' the wall with other models to ensure that the strategic process. From contingency planning is often conflated with business continuity planning is limited only by leaders time... 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