Scenario Analysis in Business
H O P P E R P E D I A ©
-Brian Hammons
June 14, 2010: 8,021 hits
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. Often the trend lines were generated by the accounting department, and lacked discussions of demographics, or qualitative differences in social conditions.
These simplistic guesses are surprisingly good most of the time, but fail to consider qualitative social changes that can affect a business or government. Scenarios focus on the joint effect of many factors. Scenario planning helps us understand how the various strands of a complex tapestry move if one or more threads are pulled. When you just list possible causes, as for instance in fault tree analysis, you may tend to discount any one factor in isolation. But when you explore the factors together, you realize that certain combinations could magnify each other’s impact or likelihood. For instance, an increased trade deficit may trigger an economic recession, which in turn creates unemployment and reduces domestic production. Schoemaker offers a strong managerial case for the use of scenario planning in business and had wide impact.[1]
Scenarios planning starts by dividing our knowledge into two broad domains: (1) things we believe we know something about and (2) elements we consider uncertain or unknowable. The first component – trends – casts the past forward, recognizing that our world possesses considerable momentum and continuity. For example, we can safely make assumptions about demographic shifts and, perhaps, substitution effects for certain new technologies. The second component – true uncertainties – involve indeterminable variables such as future interest rates, outcomes of political elections, rates of innovation, fads and fashions in markets, and so on. The art of scenario planning lies in blending the known and the unknown into a limited number of internally consistent views of the future that span a very wide range of possibilities.
Numerous organizations have applied scenario planning to a broad range of issues, from relatively simple, tactical decisions to the complex process of strategic planning and vision building.
