Scenario planning is a tool that can be used to forecast large scale societal changes and determine appropriate organizational responses to those changes. It was developed by the United States military in the 1960′s and was adopted by large corporations in the 1970′s. Shell Oil’s use of scenario planning to deal with the energy crisis of the 1970′s is probably the most famous corporate example. By using scenario planning to predict changes in the energy market, Shell was able to out-maneuver its competitors and stay profitable during the first major challenge to their market.
In recent years, the full-blown scenario planning process has fallen out of favor with large corporations. However, I have seen simpler adaptations of the tools of scenario planning applied successfully in the nonprofit sector. As I explained in What is Adaptive Capacity?, scenario planning can be used as a way of building up an organization’s ability to respond to external changes. Also, I’ve begun to use a version of the process in my personal planning. Let’s dive into the mechanics of scenario planning and see if it may be a good tool for you.
What is Traditional Scenario Planning?
The scenario planning entry at Wikipedia gives a fairly long and detailed description of the traditional scenario planning process, so for the purposes of this post, I’ll just summarize the main steps of the process. Some of this part of the post was inspired by Lawrence Wilkinson’s article in Wired from a few years back.
- Identify the driving forces of change in your industry. For most markets these driving forces include things like demographics, consumer preference, technological developments, and regulatory environments.
- Choose the uncertainties within your list of driving forces. There are some things, such as demographic changes, that can be forecasted pretty accurately. However, other elements, such as what the regulatory environment might be depending on who is elected as the next president, are more uncertain. Out of your list of driving forces, select the two variables that are most uncertain and also the most critical to your business planning.
- Create an “Axis of Uncertainty” with the two variables from the previous step acting as the X and Y axes of a simple four quadrant matrix. I’ve constructed an example matrix based on the very simple scenario of planning an outing. In this scenario, I don’t know the weather forecast and I don’t know if the museum I might go to will be open or closed. The matrix looks like this:
The museum is closed.
The museum is open.
The museum is closed.
The museum is open.
- Create scenarios based on the four quadrants. As you can see from my matrix, having the variables laid out on a grid facilitates decision making. If it is raining, but the museum is closed, I’ll have to find another indoor activity. If it’s raining and the museum is open – well, I’ll probably go to the museum! You get the idea.
- Monitor trends and respond as needed. Now that you’ve set scenarios, you know what data points you or your company need to monitor in order to make choices about possible actions. For example, I would probably need to check the Weather Channel or look out my window to figure out if it will rain or not. By staying aware of changing conditions, I’m better equipped to decide which scenario is most likely to play out and which choice of action I should take.
A Streamlined Process That Can Help You
The example I gave above for the traditional scenario planning process is quite simple. However, for an organization with several confounding factors, this process can become very complex very quickly. One of the criticisms of traditional scenario planning process is that it can become so complex that it becomes useless at the time of decision making. Fortunately, I have seen small nonprofit organizations use a much simpler version of scenario planning that creates greater organizational flexibility and responsiveness without hiring a 6-figure consultant. Maybe this process is more appropriate for your organization.
- Gather Your Data. This step is similar to the first step in the traditional process. Identify the major change drivers for your industry and gather any data you can find on projected changes to those drivers for the next few years.
- Gather Your Team. Get everyone in the same room or on the same conference call. You’ll need your most informed and creative people.
- Tell Stories. Incorporating the data that you’ve collected, create some plausible stories of your organization’s world in the near future. Try to mix positive and negative changes, because that’s generally the way things work out.
- Construct Responses to the Stories. Use your best “What If?” skills to brainstorm plausible responses to the stories that you have built. Be as specific as possible while staying true to your organizational values and core competencies.
The best thing about using a more streamlined version of scenario planning is that you can apply it on an individual level as well. In the 4-Hour Workweek, Tim Ferris recommends a process he calls fear-setting. This process involves imagining the worst possible scenarios that could happen if you make the decision to pursue a different lifestyle. After you’ve constructed the stories, figure your way out of them. As he writes in the book, no problem is insurmountable and most are a lot less serious than we start out thinking. I may detail this process more in a future post.
Have you used scenario planning in your work or personal life? What do you think of it as a tool? Share your experiences in the comments section.