Scenario Planning Definition Process Examples

Scenario Planning Definition

Explanation

It is a particular kind of planning which helps businesses to deal with future difficulties. Proper planning is done considering the upcoming scenarios, and businesses lay plans accordingly. All future investment by the company depends on scenario planning. Extreme scenarios are hard to predict; some assumptions can be used to save from the impact.

Process of Scenario Planning

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Scenario Planning (wallstreetmojo.com)

There are several steps that management can follow to perform it.

Step #1 – Predict the drivers of future

Several drivers may affect society. In the early 90’s, technological growth started to boom. So like that, one should predict the next driver of the economy. It can be that a particular sector is about to boom, or a sector will lose its demand. Like this, an estimation needs to be done for the next driver in the economy.

Step #2 – Understanding the impact of drivers in your business

After predicting the future drivers, you will have to calculate the effect of that Driver on your business. Whether the next economic change will help you in your business or it will take a hit at your profit levels. Correct calculation of future drivers’ impact is crucial in scenario planning.

Step #3 – Gauging the effect of Future Scenario

Carry out a calculation that will help you understand the possible future effects of the predicted economic scenario. The possibilities may start from Best to Worst. This will help you to understand the maximum gain you can pull from the scenario if everything goes as per planning and the maximum loss you may incur if things don’t go as per plan.

Step #4 – Always test unfavorable outcomes even in case of positive Future Scenario

Management should always be prepared for an unprecedented outcome, and plans should always be placed if the estimation of positive future outcomes fails. It should always include the positive and negative impacts of a scenario. There are businesses from the past that believed so much in the positive Future Outcome that they didn’t see the competition and adverse change in the economic condition.

Example of Scenario Planning

Company XYZ is an Automobile manufacturing company. They have been in the business for 20 years. They did scenario analysis five years back and realized that there would be a time when crude would not be available in the future. So they started planning for this scenario and bought a battery manufacturing company three years back. They are spending a lot of money on Research and DevelopmentResearch And DevelopmentResearch and Development is an actual pre-planned investigation to gain new scientific or technical knowledge that can be converted into a scheme or formulation for manufacturing/supply/trading, resulting in a business advantage.read more to build a battery that will last 500 km with One Time Charge. The company estimated the change in the scenario for crude supply and planned its existence without crude.

How to use Scenario Planning?

It will help management develop an understanding of the possible scenarios in the future and their impact on the business. Strategies to deal with the scenario are part of the planning.

It should focus on a few most important scenarios as too many options complicate the process. There will be a huge cost involved in tackling all the scenarios effectively.

Scenario Planning vs. Forecasting

ForecastingForecastingTop forecasting methods include qualitative forecasting (Delphi method, market survey, executive opinion, sales force composite) and quantitative forecasting (time series and associative models).read more refers to the calculation of a company’s profitability in the future based on the current and historical data available for the company. It is a quantitative method of judging the future. So forecasting helps you estimate the company’s goal if all the conditions remain stable.

Scenario analysis considers different scenarios that may occur in the future and will affect profitability. In scenario analysis, judgment is involved, and everything is based on estimation. So scenario Analysis is more subjective.

Advantages

Scenario Planning helps management be prepared for business adversities that may occur due to shifts in the demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more, economic condition, political condition, etc. So it helps management to draw a plan to fight negative circumstances in the future.Budgeting is the most important part of any project. If any project may be affected by any change in the future scenario, then the required return from the project will also change. So it also helps in budgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time.read more decisions.Good planning helps to judge the performance of a manager. When a manager tackles the situation very comfortably, it shows the power of the manager’s scenario planning. So it helps a manager to improve their performance in the business.

Disadvantages

It estimates probable scenarios; it may or may not happen. So when a manager starts to depend too much on scenario planning and starts making all the decisions based on that, then a wrong estimation may hamper the business to a great extent.Scenario estimation should always change; the manager should perform proper updates on the scenario planning model at regular intervals.