Scenario planning

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Scenario planning, also called scenario thinking or scenario analysis, is a strategic planning method that some organizations use to make flexible long-term plans. It is in large part an adaptation and generalization of classic methods used by military intelligence.[1]

The original method was that a group of analysts would generate simulation games for policy makers. The methods combine known facts about the future, such as demographics, geography, military, political, industrial information, and mineral reserves, with key driving forces identified by considering social, technical, economic, environmental, and political (STEEP) trends.

In business applications, the emphasis on understanding the behavior of opponents was reduced (shifting more toward a game against nature). At Royal Dutch/Shell for example, scenario planning was viewed as changing mindsets about the exogenous part of the world, prior to formulating specific strategies.[2][3]

Scenario planning may involve aspects of systems thinking, specifically the recognition that many factors may combine in complex ways to create sometime surprising futures (due to non-linear feedback loops). The method also allows the inclusion of factors that are difficult to formalize, such as novel insights about the future, deep shifts in values, unprecedented regulations or inventions.[4] Systems thinking used in conjunction with scenario planning leads to plausible scenario storylines because the causal relationship between factors can be demonstrated.[5] In these cases when scenario planning is integrated with a systems thinking approach to scenario development, it is sometimes referred to as dynamic scenarios.

Critics of using a subjective and heuristic methodology to deal with uncertainty and complexity argue that the technique has not been examined rigorously, nor influenced sufficiently by scientific evidence. They caution against using such methods to "predict" based on what can be described as arbitrary themes and "forecasting techniques".

Another challenge of scenario-building is that "predictors are part of the social context about which they are trying to make a prediction and may influence that context in the process".[6] As a consequence, societal predictions can become self-destructing. For example, a scenario in which a large percentage of a population will become HIV infected based on existing trends may cause more people to avoid risky behavior and thus reduce the HIV infection rate, invalidating the forecast (which might have remained correct if it had not been publicly known). Or, a prediction that cybersecurity will become a major issue may cause organizations to implement more security cybersecurity measures, thus limiting the issue.[6]

Crafting scenarios[edit]

These combinations and permutations of fact and related social changes are called "scenarios". The scenarios usually include plausible, but unexpectedly important situations and problems that exist in some small form in the present day. Any particular scenario is unlikely. However, future studies analysts select scenario features so they are both possible and uncomfortable. Scenario planning helps policy-makers and firms anticipate change, prepare a responses, and create more robust strategies.[7][8]

Scenario planning helps a firm anticipate the impact of different scenarios and identify weaknesses. When anticipated years in advance, those weaknesses can be avoided or their impacts reduced more effectively than when similar real-life problems are considered under the duress of an emergency. For example, a company may discover that it needs to change contractual terms to protect against a new class of risks, or collect cash reserves to purchase anticipated technologies or equipment. Flexible business continuity plans with "PREsponse protocols" can help cope with similar operational problems and deliver measurable future value.

Zero-sum game scenarios[edit]

Strategic military intelligence organizations also construct scenarios. The methods and organizations are almost identical, except that scenario planning is applied to a wider variety of problems than merely military and political problems.

As in military intelligence, the chief challenge of scenario planning is to find out the real needs of policy-makers, when policy-makers may not themselves know what they need to know, or may not know how to describe the information that they really want.

Good analysts design wargames so that policy makers have great flexibility and freedom to adapt their simulated organisations.[9] Then these simulated organizations are "stressed" by the scenarios as a game plays out. Usually, particular groups of facts become more clearly important. These insights enable intelligence organizations to refine and repackage real information more precisely to better serve the policy-makers' real-life needs. Usually the games' simulated time runs hundreds of times faster than real life, so policy-makers experience several years of policy decisions, and their simulated effects, in less than a day.

This chief value of scenario planning is that it allows policy-makers to make and learn from mistakes without risking career-limiting failures in real life. Further, policymakers can make these mistakes in a safe, unthreatening, game-like environment, while responding to a wide variety of concretely presented situations based on facts. This is an opportunity to "rehearse the future", an opportunity that does not present itself in day-to-day operations where every action and decision counts.

How military scenario planning or scenario thinking is done[edit]

  1. Decide on the key question to be answered by the analysis. By doing this, it is possible to assess whether scenario planning is preferred over the other methods. If the question is based on small changes or a very small number of elements, other more formalized methods may be more useful.
  2. Set the time and scope of the analysis. Take into consideration how quickly changes have happened in the past, and try to assess to what degree it is possible to predict common trends in demographics, product life cycles. A usual timeframe can be five to 10 years.
  3. Identify major stakeholders. Decide who will be affected and have an interest in the possible outcomes. Identify their current interests, whether and why these interests have changed over time in the past.
  4. Map basic trends and driving forces. This includes industry, economic, political, technological, legal, and societal trends. Assess to what degree these trends will affect your research question. Describe each trend, how and why it will affect the organisation. In this step of the process, brainstorming is commonly used, where all trends that can be thought of are presented before they are assessed, to capture possible group thinking and tunnel vision.
  5. Find key uncertainties. Map the driving forces on two axes, assessing each force on an uncertain/(relatively) predictable and important/unimportant scale. All driving forces that are considered unimportant are discarded. Important driving forces that are relatively predictable (ex. demographics) can be included in any scenario, so the scenarios should not be based on these. This leaves you with a number of important and unpredictable driving forces. At this point, it is also useful to assess whether any linkages between driving forces exist, and rule out any "impossible" scenarios (ex. full employment and zero inflation).
  6. Check for the possibility to group the linked forces and if possible, reduce the forces to the two most important. (To allow the scenarios to be presented in a neat xy-diagram)
  7. Identify the extremes of the possible outcomes of the two driving forces and check the dimensions for consistency and plausibility. Three key points should be assessed:
    1. Time frame: are the trends compatible within the time frame in question?
    2. Internal consistency: do the forces describe uncertainties that can construct probable scenarios.
    3. Vs the stakeholders: are any stakeholders currently in disequilibrium compared to their preferred situation, and will this evolve the scenario? Is it possible to create probable scenarios when considering the stakeholders? This is most important when creating macro-scenarios where governments, large organisations et al. will try to influence the outcome.
  8. Define the scenarios, plotting them on a grid if possible. Usually, two to four scenarios are constructed. The current situation does not need to be in the middle of the diagram (inflation may already be low), and possible scenarios may keep one (or more) of the forces relatively constant, especially if using three or more driving forces. One approach can be to create all positive elements into one scenario and all negative elements (relative to the current situation) in another scenario, then refining these. In the end, try to avoid pure best-case and worst-case scenarios.
  9. Write out the scenarios. Narrate what has happened and what the reasons can be for the proposed situation. Try to include good reasons why the changes have occurred as this helps the further analysis. Finally, give each scenario a descriptive (and catchy) name to ease later reference.
  10. Assess the scenarios. Are they relevant for the goal? Are they internally consistent? Are they archetypical? Do they represent relatively stable outcome situations?
  11. Identify research needs. Based on the scenarios, assess where more information is needed. Where needed, obtain more information on the motivations of stakeholders, possible innovations that may occur in the industry and so on.
  12. Develop quantitative methods. If possible, develop models to help quantify consequences of the various scenarios, such as growth rate, cash flow etc. This step does of course require a significant amount of work compared to the others, and may be left out in back-of-the-envelope-analyses.
  13. Converge towards decision scenarios. Retrace the steps above in an iterative process until you reach scenarios which address the fundamental issues facing the organization. Try to assess upsides and downsides of the possible scenarios.

In military applications[edit]

Scenario planning is also extremely popular with military planners. Most states' department of war maintains a continuously updated series of strategic plans to cope with well-known military or strategic problems. These plans are almost always based on scenarios, and often the plans and scenarios are kept up-to-date by war games, sometimes played out with real troops. This process was first carried out (arguably the method was invented by) the Prussian general staff of the mid-19th century.

Development of scenario analysis in business organizations[edit]

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