Scenario planning is the practice of imagining possible future realities (scenarios), the risks and opportunities each scenario presents, and planning what you can do to control and exploit them. It is an essential part of planning and leadership for many large firms and common practice in the financial sector. It is not, however, common practice in most small to mid-market firms.
The shock of Covid-19 and the global lockdown has served as a reminder that we can never really predict the future, even in a stable economy. It’s why many organisations have been using scenario planning to improve outcomes for many years.
To quote former US President Dwight D Eisenhower:
“Plans are useless, but planning is indispensable.”
Scenario planners know that even if none of the scenarios they plan for become a reality, the process of planning and thinking through what might happen will help them make better, more informed business decisions in the present.
Planning for a post-Coronavirus future
What risks and opportunities might the pandemic present?
Macro risks include (but are not limited to) a drop in GDP and an increase in inflation and unemployment. Opportunities will emerge in new and rapidly expanding industries and markets.
On a micro level, risks include returning to work, employee health problems, and changes to markets and consumer interests. On the other hand, competitors might go out of business, presenting an opportunity to capture a larger market share.
"Risks and opportunities are a part of everyday life and business."
Risks and opportunities are a part of everyday life and business. But Covid-19 has increased both the number and magnitude. With so many risks and opportunities to control, it’s even harder than normal to plan and prepare for the future, which is where scenario planning can help.
How to get started with scenario planning
It’s common for larger organisations to employ an internal team of analysts to conduct scenario planning or outsource it to one of the big consultancies.
Alternatively, and especially if you’re new to scenario planning, it may make sense to keep it simple and implement quickly.
To help you do that, we asked Ariane Chapelle, an economist and risk management expert and Managing Director of Chapelle Consulting to demystify the process.
Identify your critical objectives
Scenario planning doesn’t have to be complicated. Arianne recommends beginning the process by answering the following questions:
- What is your mission, purpose and vision?
- What are your critical objectives?
- Why do you want to achieve these objectives?
Once you know where you want your business to be, you can work backwards and identify what might halt (risks) and accelerate (opportunities) your progress in different scenarios.
Even though you might be fighting to survive, consider setting objectives for different time frames, including the short-term. BCG Henderson Institute recommends three time frames: 2-3 months, the subsequent 12-18 months, and ‘the future.’
What makes you most uncomfortable?
Next, Ariane recommends identifying the 2-3 scenarios, events or future possibilities that make you most uncomfortable.
Why? Risk is inherent in everyday life. You probably have controls already in place for 95% of the bad things that could happen.
For example, we all face the risk of being run over, but we control it by looking both ways when we cross the road.
The 2-3 things that make you the most uncomfortable are probably the things that you don’t have controls in place for.
To bring this to life, consider the worries of business leaders in the hospitality industry. What happens if, following a spike in Covid-19 infections, a second lockdown is instructed by the government and there is no furlough scheme in place?
What can they do to mitigate a risk like this? What measures can be put in place to soften the blow?
The leaders may work out that protecting against this scenario costs more than the risk of it happening and choose not to put anything in place. Far better to have worked that out ahead of time than in the heat of the moment, though.
The most dangerous risk (and biggest opportunity) of all
If you put a frog in boiling water, it jumps out. If you put a frog in cool water and increase the temperature gradually, it doesn’t realise what’s happening, so it ends up on a plate.
Covid-19 changed the world practically overnight. It had a very obvious and dramatic impact. But risk isn’t always a one-off event. Like a frog, you’re less likely to notice (and control) a risk that develops gradually.
"The future can be very bright indeed."
But this also presents a big opportunity, because the gradual risks and opportunities are also those which your competitors are unlikely to recognise. If you use the scenario planning process to control and exploit them, the future can be very bright indeed.
So, what future possibility is making you most uncomfortable right now?
Perhaps your business is well placed to deal with the impact of lockdown and social distancing. The bigger worry for you is the reported threat of a 10-20% fall in the global economy.
How does your business cope with such a reduced market?
Clearly there would be a big role for finance to play. HR too. How will the marketing plan need to be adapted? What role will sales have if this plays out?
By running this scenario through each department a list of activities and associated costs will become apparent. (In scenario planning these are often referred to as “controls” or “measures”).
For more gradual, boiling-frog like scenarios, “Key Risk Indicators” - metrics that indicate the growing or decreasing chance of a scenario happening - can be identified and put-in-place to alert you to future problems or opportunities.
Scenario planning is an essential function of many larger businesses but it is seldom done in small to mid sized firms. That is a pity, as it can uncover opportunities for growth, inform investments and provide leaders with peace-of-mind.
Images via Adobe Stock (by BullRun) and Pixabay