By Emil Bjerg, journalist and editor
In the article series on how to strategize in an unpredictable future, we’ve reached scenario planning. This article explores how organizations can reap the benefits while also addressing the common disappointments associated with this approach.
Scenario planning can enable organizations to craft strategies that account for unforeseen factors, guiding informed decision-making. The approach involves pinpointing potential scenarios based on current and potential trends and developments. From that, businesses can formulate adaptive strategies to address shifts – and thereby be at the forefront when change occurs.
McKinsey argues, that “the approach should be a natural complement to other ways of developing strategy—especially when executives are as concerned about geopolitical dynamics as many are today.” The Copenhagen Institute for Future Studies claims that “Organisations with a culture of strategic foresight perform far better than those who do not apply futures thinking on a regular basis.”
At the same time, scenario planning is a method that has often disappointed and failed to deliver. This article explores the challenges behind scenario planning and how to reap the benefits from this approach, including examples of fruitful applications. We’ll return to how to avoid the classic pitfalls of scenario planning after walking through how to sketch scenarios and use them to your organization’s advantage.
Different approaches to scenario planning
Working with scenario planning starts with identifying possible scenarios. As Adobe writes, there are different ways to identify scenarios. It is generally recommended to focus on two to three major uncertainties or themes and build scenarios around them. It’s essential to keep scenarios relatively simple to avoid being overwhelmed by the range of potential outcomes. It’s also great to keep in mind that scenario planning is less about trying to make predictions of the future than it’s about exploring plausible futures.
Some of the approaches to map scenarios are:
- Independent Themed Scenarios: This strategy involves examining individual change categories, such as technological or market shifts, to create potential future scenarios within each category. This could take its point of departure in the megatrends we’ve previously covered. Here, go for the categories of change most relevant for your organization.
- Arrayed Scenarios: Arrayed scenarios are a quantitative approach where teams plan for variations in a specific criterion, like the price of gasoline, across different scenarios. This is a great approach for data-heavy organizations.
- Optimistic vs. Pessimistic vs. Best Guess Scenarios: Here, teams develop optimistic scenarios by identifying possible improvements, pessimistic scenarios by brainstorming potential challenges, and best guess scenarios by projecting current trends into the future.
No matter what approach to scenarios an organization choose, working together across teams and involving different levels of the organization is a great way to connect a number of different possible futures.
After identifying scenarios
After identifying scenarios, it’s all about applying them to your organization. If X happens, how does it affect our organization, and what can we do about it? That often brings a good opportunity to get out of a ‘business as usual’ mindset, and into a mode of identifying future potentials.
Scenario planning and working with the future can quickly become abstract and intangible, so let’s take an example.
A fictive example of scenario planning
Background: A company – let’s call it InnovateTech – specializes in smart home devices and assesses how future technological shifts could impact its business. In this fictive scenario planning, the company applies the independent themed approach, working with 1) AI, 2) data privacy regulations, and 3) market saturation and competition.
- Scenario 1: Rapid Advancement in AI: AI technology evolves quickly, increasing demand for AI-integrated smart home devices. For this potential development, InnovateTech plans to invest heavily in AI research and development and consider partnerships with AI technology leaders.
- Scenario 2: Increased Data Privacy Regulations: New global regulations significantly restrict data usage. Here, InnovateTech strategizes to be ready to adapt its products to be compliant while maintaining functionality, which might involve investing in new, privacy-focused technologies.
- Scenario 3: Market Saturation and Competition: The market for smart home devices becomes saturated, and competition intensifies. For this scenario, InnovateTech explores diversifying its product line or identifying niche markets to maintain its market position.
It looks easy enough when put into neat little examples. But, scenario planning in practice can be challenging for several reasons.
Challenges in scenario planning
McKinsey writes that scenario planning’s underperformance is often due to a lack of experience – organizations need to practice it regularly to maintain the necessary skills. Experienced managers might delegate it to less experienced staff, while newcomers might overly focus on minor details in the scenarios rather than on critical uncertainties. A great approach is to include newcomers, who often have original takes on the exercise but have staff more experienced with the approach facilitate.
Additionally, cognitive biases, such as ignoring unlikely potential events or overconfidence, can also hinder effective scenario planning. Let’s delve deeper into how to avoid letting bias distort scenario planning.
Countering Availability Bias in Scenario Planning
Scenario planning, as we know, starts with gathering scenarios to understand potential strategic problems and identify trends and disruptions. Here, the risk of availability bias is high, as it’s easy to focus on readily accessible information, often leading to blind spots. McKinsey suggests to expand the focus to include global technological, economic, demographic, and cultural trends helps generate more insightful, counterintuitive ideas.
Overcoming Stability Bias
When crafting scenarios, participants should try to avoid the natural tendency to expect the future to mirror the past. Identifying smaller changes in the present and addressing their potential future impact can help overcome stability bias.
Addressing Probability Neglect
In scenario planning, attention shifts to evaluating and prioritizing trends based on uncertainty and potential impact. It’s crucial to avoid over-scrutinizing and overemphasizing low-probability events, known as probability neglect. A qualitative assessment of the importance of trends and uncertainties is, McKinsey argues, essential before any quantitative modeling.
We’ll end the article sharing McKinsey’s do’s and don’ts when it comes to bias in scenario planning.