Scenario Planning Manages Uncertainty

Executives use Scenario Planning to Manage Uncertainty

Now more than ever, boards and executives use scenario planning to manage future uncertainty. There was a time when annual planning was systemic and leadership teams could forecast revenue with confidence and execute bold decisions with ease. Executives across the globe agree the business environment has changed forever.

What is Scenario Planning? 

Scenario planning is a tool for analysing and understanding the potential impacts of an identified threat or vulnerability to organisations. It allows leadership teams to explore options, opportunities and approaches for minimising the potential likelihood and the negative impact.

Executives use scenario planning to understand the level of planning and readiness required to manage the risk and assist in raising awareness of the risk and potential opportunities. Scenario-based planning can also be used for those ‘extreme risks’ assessed to have a major or significant consequence, of which we have limited understanding, irrespective of the likelihood.

These are often risks that are too expensive to mitigate, or are a result of multiple risks escalating, compounding or converging in an unlikely way.

Extreme events usually require a significant or coordinated response capability across the organisation and with external parties. This is particularly important where the consequences of these risks may include significant business impact, intense political, media or community interest and/or the potential loss of confidence from key stakeholders.

Scenario Planning Manages Future Uncertainty

Scenario planning can provide a significant competitive advantage. When Executives and boards think through situations and document possible plans for various scenarios in advance, they can react quickly and decisively when disruptions occur. This is how leading organisations successfully adapt to unforeseen events even in the midst of a crisis.[1]

Executives and boards also use scenario planning as a framework to make non-emergency decisions. Applying the rigor of scenario planning enables leaders to achieve clearer insight into plans, budgets and forecasts. In a single planning session, it’s easy to gain a clearer picture of key drivers for business growth and the potential impact of future events.[2]

Scenario planning helps a broad range of stakeholders:

  • Understand their operating environment.
  • Share information.
  • Challenge assumptions.
  • Consider the future.
  • Assess strategic options.

Information is better evaluated within a scenario framework as it provides a context for making decisions and reaching consensus on key issues or opportunities and developing a plan of action.

Critical Thinking Underpins Scenario Planning

Scenario planning creates a dynamic and interactive learning environment for developing critical thinking skills. Its value and application as a mainstream business activity is increasing.

Critical thinking capabilities can be measured and taught, provided the right frameworks and tools are in place. Many leaders have already honed their critical thinking skills and demonstrate these behaviours intuitively. The opportunity is to build up the skills across a broader group of people and enable critical thinking behaviours during daily operations.

“Critical thinking occurs within particular environments and is not necessarily confined to particular people. If you create the right environment, you get the right kind of thinking.”

John Valastro, former Business Transformation Leader, Qantas.

Scenario Planning Builds Organisational Resilience

Leading organisations use scenario-based planning and associated tools to help develop their leaders and to improve their overall level of business resilience.

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.

But it’s more than just a way to recognise and mitigate risk or plan for growth situations. Scenario planning is also about visualising different representations of an organisation’s future, based on assumptions about the forces driving the market. Some good and some bad.

The Scenario Planning Process in Eight Steps

  1. Set boundaries for the planning activity. Identify scenario outcomes and the agenda and key areas of concern or opportunity.
  2. Identify specific stakeholders. Identify key stakeholders and decision-makers and can be involved in the scenario activity who can look at the internal and external environment.
  3. Collect data. Systematically examine the organisation’s internal data and external environment to improve understanding of the structure of key forces driving change.
  4. Identify future trends. Synthesise information about possible future events into three or four alternative scenarios or outcomes.
  5. Identify the ‘main issue’. The preceding steps should generate intelligence that reveals your organisation’s critical uncertainties and current opportunities.
  6. Build and extrapolate scenarios. Develop narratives about the scenarios to make the stories relevant and compelling to decision-makers.
  7. Develop action plans for those scenarios. Develop contingency plans to allow leaders to stress-test their thinking.
  8. Communicate the outcomes with key stakeholders. Use scenarios and action plans to help decision-makers review or validate their strategic thinking.[3]

With the help of a facilitator, a minimum of three scenarios are frequently generated for scenario planning exercises and a six-month horizon is normally employed. These scenarios are then ranked based on perceived certainties and potential impact.[4]

Scenario-Based Training and Exercising at Westpac

Westpac Banking Corporation has an ongoing program of scenario-based training and exercising that occurs at various levels across the organisation, including the Executive Leadership Team. All scenarios follow a standard development process that involves collaboration and input from subject matter experts within the business.

The scenarios are focused on the threats and opportunities the business area is facing in relation to market, political and regional challenges. The development of the scenarios allows a diverse group of stakeholders to gain insight into the challenges and opportunities prior to a scenario planning exercise.

Westpac executives come together in a closed loop learning environment—that may include business partners—in a way that allows them to have engaging, open and robust discussions. Using a series of scenarios, they challenge preconceptions and uncover blind spots. The outcome of these activities is always a deeper understanding by the business of the challenges and opportunities they face from a broad group of stakeholders.

The tools provided to Westpac’s teams are used across the organisation intentionally at all levels. They aim to enhance critical thinking capabilities as an ongoing investment into building the organisation’s resilience.

Scenario Planning Accelerates Team Learning

One strategy to accelerate team learning is to increase the intensity of the scenario experience through a ‘breaking news’ media piece. The media story is constructed around a particular event or convergence of events at a time selected, into the future. This approach allows a large number of people to be briefed very quickly with a high degree of realism.

Focusing the team on a particular set of ‘extreme’ circumstances allows team members to consider impacts across all the key areas of the business in a structured and efficient way. This puts pressure on the teams to make decisions in a short timeframe by considering ‘most likely’ and ‘worst-case’ scenarios, as well as seeking the opportunities.

Scenario Planning Improves Financial Performance

Studies have shown scenario planning improves decision-making, can help diagnose strategic inertia and identify opportunities for innovation. In today’s fast-changing business environment, organisations need to make flexible mid-term plans and while also keeping an eye on future trends and the impact on their competitiveness.[5]

Leading organisations also use scenario-based planning and associated tools to help develop their leaders and to improve their overall level of business resilience.

Scenario planning is the process of managing the future. By simulating several informed, plausible and imagined alternative future environments, leaders can evaluate how their decisions may play out. This planning process has the potential to change current thinking, improve decision-making, enhance organisational learning and boost performance.[6]

To learn more about our Research in this area, visit: Using Scenario Planning to Build Capacity or join our upcoming Critical Thinking Lab.

References
[1] NetSuite. 2022. Scenario Planning: Strategy, Steps and Practical Examples | NetSuite. [ONLINE] Available at: https://www.netsuite.com/portal/business-benchmark-brainyard/industries/articles/cfo-central/scenario-planning.shtml. [Accessed 20 May 2022].
[2] Ibid, NetSuite. 2022.
[3] Sarpong, D., 2015. ”Scenario planning: ‘ways of knowing’, methodologies and shifting conceptual landscape.” International Journal of Foresight and Innovation Policy, Vol. 10, Nos. 2/3/4, pp 75-87.
[4] Ibid, Sarpong, D., 2015.
[5] Ibid, Sarpong, D., 2015.
[6] Ibid, Sarpong, D., 2015.

About Janellis

Janellis is a Management Consulting firm specialising in helping organisations execute their strategy and build resilience.  This is done through three key practice areas of Project Delivery, Capability Uplift and Organisational Resilience.

Janellis helps organisations build resilience and deliver complex programs by uplifting capabilities in areas such as team-based critical thinking.  Uplifting critical thinking skills relies on experiential and ‘learning by doing’ activities using scenarios.  In response to COVID, Janellis has combined online learning and experiential learning through our Digital War Rooms and Virtual Labs.  Our Master Facilitators enable experiential learning both in real-time and online using virtual tools where teams put into practice our tools and frameworks.