Think of scenario planning as the ‘what ifs’ of your finance operation. Cover your bases and you’ll be well-equipped to handle just about anything. Preparing for potential problems makes you agile enough to deal with them before they cause a cash crisis, significantly reducing business risk.
With the help of scenario planning software, organizations can create sharper analysis and actionable insights while building a forward-looking strategy. And by putting data at the heart of your decisions, you can quickly adapt to a range of market conditions.
To get started, here’s a breakdown of the entire scenario planning process in 8 easy steps:
Step 1: Identify the focal issue
The very first step is about building a clear agenda, and that begins with identifying what an individual or organization is going to focus on. Scenario planning has to be relevant to your business, its customers and markets, so focal issues are often very specific:
- Should you invest in a certain type of technology?
- Should you move forward with company acquisition?
- Should you launch a new product overseas?
There may be times when the question is more open-ended, such as whether uncontrollable circumstances could disrupt your strategy, or whether certain international markets could change in the future.
In addition to defining issues, decisions and variables at this early stage, set the scope and agree on an appropriate time horizon for the scenarios.
Step 2: Consider key factors in the environment
After establishing your main focal issue, you will need to think about all the driving forces in your local environment and business space that could affect it.
This is similar to environmental analysis; a systematic assessment of information about your organization’s external pushes and pulls. Many of the key factors will be obvious to you, such as the things in your business plan. Examples include customer demand, competitor analysis, suppliers, and technology.
You will also need to examine major threats, evolving market trends, as well as any other market-related obstacles.
Once you have a list of all the key factors, start to flesh out the details and begin the ‘what if?’ process. Let’s take competitors as an example:
- What if there is a new market challenger that significantly advances its market share?
- What if new entrants raise the bar with disruptive technology?
Step 3: Next think about bigger forces at work
When you’ve reviewed all the factors within your space, it’s time to look at the bigger picture. Moving outside of your business plan, study everything that’s going on in the world that may impact you.
These are the geopolitical, economic, social and technological forces at play. Is there a war going on? Is your target market in the midst of political change or tension? Are there shifts in migration patterns or cultural barriers to be aware of? Strategic plans that overlook these factors often fail.
Even things like currency fluctuations, environmental issues and global health issues can affect your business. The recent pandemic is testament to that, and businesses have been forced to quickly adapt. With scenario planning, companies can be ready, resilient and prime for recovery, whatever the outcome.
But it’s not all doom and gloom. By asking the ‘what if?’ question, you can look for new opportunities too. For instance, many businesses have used the pandemic to fast-track transformation and have discovered new ways to connect with their audience through digital channels.
Step 4: Decide on what’s critical
While steps two and three require imagination and creativity to brainstorm a range of scenarios, this stage requires methodical thinking, based on knowledge and experience.
Change your approach from a divergent process to a convergent process of prioritization, and rank driving forces based on their impact, predictability and importance to the focal issue.
A good way to do this is to cast votes within your scenario planning team and cluster closely related items together. Then form a shortlist of critical uncertainties that are considered priority.
Step 5: Create your scenario matrix
By this point, you’ll have drilled down into the most important scenarios. But deciding which ones are worth developing further is the challenge. Narrow down your possible outcomes into just a handful.
The key is to focus on two critical uncertainties at a time. These will serve as the axes of a 2-by-2 matrix. From this matrix, you can then build four different scenario logics.
Step 6: Dive deeper into scenarios
With a scenario matrix in place, you can now fully flesh out the different scenarios. This step requires an element of storytelling, which can be difficult when there’s a large committee. Your aim should be to combine the creative thoughts and ideas from multiple stakeholders into one clear narrative.
There are many ways of doing this, but a structured approach is most beneficial. Group workshops can help to generate plot elements, and one idea for developing content is to get everyone to write out newspaper headlines that indicate possible futures. It can then take weeks or months to build these headlines into draft narratives.
Step 7: Determine implications and options
From the narrative building phase, there should be further collaboration to discuss the implications of each scenario.
Plan a second meeting or workshop, and work together to run each scenario to its conclusion. By looking at the implications, you can then find the right strategic options to move forward.
Consider the pre-determined elements and associated options that can help in every scenario. These are often born from aspects that are easy to predict, such as demographics. The rule of thumb is to work on as much as you can within the realms of predictability.
Step 8: Look at early indicators
The last and final step of the scenario planning process is to determine leading indicators. The very first signs of change should be documented and reviewed, as these can quickly transition you from scenario to strategy. Make this your end goal with scenario planning, and let data lead you in the right direction.
Remember, early indicators can take different data forms. It could be the initial shift in consumer trends, led by a small group or a rising digital generation. It could be the breaking of a global news story, leaked by whistleblowers. Or it could be a new report revealing vital stats on new advancements in technology.
Sometimes, indicators can be political in nature, such as the inauguration of a new leader, or some new legislation in a trading country. By keeping an eye on these indicators, you can build your case for which scenarios are unfolding early on, giving you time to respond to change with speed and agility.
In such an uncertain time, where the pandemic has forced companies to adapt or perish, early indicators in scenario planning allow for recalibration before the cash position is compromised. For finance leaders, this is all part of the continuous planning process, which is vital to building a roadmap for a post-COVID future.
With pressure to align business strategies with the new normal, an agile mindset and advanced scenario planning tools are more valuable than ever.