Note: This post applies to both (a) business planning and the firm’s flexibility to change as needed and (b) personal planning and YOUR flexibility to change as necessary. In either case, we must be able to adapt to an uncertain future.
Scenario planning involves planning for the future by understanding that different marketplace outcomes may occur in response to any strategy and that each possible marketplace outcome must be planned for to avoid the worst case scenario.
Here’s a simple example: Suppose that a major soda company introduces a new non-carbonated cola beverage into the marketplace. These are just a few scenarios that are possible:
- The sales of the new beverage meet expectations and do not cannibalize the sales of other company products. Overall company revenues and profit rise.
- The sales of the new beverage meet expectations, but slightly cannibalize the sales of other company products. Overall company revenues and profits rise slightly.
- The sales of the new beverage meet expectations, but greatly cannibalize the sales of other company products. Overall company revenues stay the same, and profits fall somewhat due to the investment in the new item.
- The sales of the new beverage do not meet expectations and do not cannibalize the sales of other company products. Overall company revenues rise very little, and profits fall a lot due to the investment in the new item.
The premise of scenario planning is to anticipate the possibility of each of these outcomes occurring and have in place a pre-planned framework (contingency plan) to deal with each scenario.
Recently, Shardul Phadnis, Chris Caplice, and Yossi Sheffi wrote an article for the MIT Soan Management Review titled “How Scenario Planning Influences Strategic Decisions.” The authors reached three major conclusions:
- “The use of multiple scenarios is not necessarily an antidote for overconfidence. One should not assume that simply using multiple scenarios to evaluate a long-range decision will help alleviate the negative effects of decision makers’ overconfidence in their own judgment.”
- “Scenarios influence judgment — and their content matters. More than half the judgments in our studies changed after single-scenario evaluations. Scenario users became more favorable of investing in an element — either by increasing confidence in their original recommendation to invest, decreasing confidence in their original recommendation to not invest, or changing their recommendation to favor the investment — when they found the element useful in a scenario.”
- “The use of multiple scenarios can nudge executives towards more flexible strategies. Executives often choose strategies optimized for a particular environment. While such strategies may perform well in the environment envisioned at the time of their implementation, they may not be easily adaptable to new opportunities or in response to unexpected threats. Under such circumstances, evaluating strategic decisions using multiple scenarios can help executives appreciate the importance of choosing more flexible assets or approaches — even if doing so is not the most optimal choice for present-day conditions.”
Click the image to access the article.