Scenario Analysis: A Powerful Way to Thrive in a Volatile World
Organisations know they need to be agile to succeed in the increasingly uncertain future, but the countless ways things could play out make it too easy to get lost in the woods. Scenario analysis is one of the best methods to address this and thrive.
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In today’s unpredictable and uncertain world, it’s easy to agree that organisational strategy and decision-making need to be agile and resilient, but how to successfully navigate ahead when everything is in a state of constant change? Scenario analysis can be of transformative help in this.
Every organisation assumes a future and bases its strategy on it. But the time for single-future thinking is over. Aligning your plans with existing trends does not take into account the complexity of our current reality: trends can abruptly change course or collide, not to mention the potential of disruptive events that can upend entire industries or segments of society. Think, for instance, what the pandemic did to e-commerce or the healthcare sector.
The pain is already felt by organisational leadership. According to Gartner, three-quarters of corporate strategy leaders say significant pivots to strategic plans now happen more frequently.
But while the need to be better prepared is acute, the countless number of ways things could play out makes it too easy to get lost in the woods. Scenario analysis, or scenario planning, is one of the best ways to address this: to map the terrain, learn about the potential paths that lie ahead, and calibrate your compass accordingly.
WHAT IS SCENARIO ANALYSIS?
Scenarios are coherent, detailed narratives describing a set of different plausible futures. They should be well-founded yet also speculative and imaginative. Each scenario should be relevant to your organisation and significantly impact it.
Scenario analysis is the creation, consideration, and comparison of these different scenarios. Separate from forecasting that focuses on a single future, scenario analysis considers ‘what-ifs’ and diverse ways the future could take shape. For example, if urbanisation screeches to a halt due to improved network connectivity and reduced quality of life in cities, how will that alter the path for, say, rural development or the automotive industry?
BENEFITS OF SCENARIO ANALYSIS FOR ORGANISATIONS
Of course, none of the scenarios imagined today will come to pass just as described. The value of scenario planning for your organisation is that it creates an in-built flexibility, agility, and ability to identify new opportunities as well as risks. In practice, for example:
Scenario analysis re-orientates organisational thinking, broadening the horizon beyond the short-term thinking that tends to prevail in times of turmoil.
The quality of strategic discussions improves, and your organisation’s assumed or ‘official’ future is challenged, leading to more informed decision-making.
Strategy can be stress-tested to be successful in several potential futures, not just one. And besides the overarching strategy, all teams from finance to marketing and product dev to R&D can use the same insights to fine-tune their plans.
The active process of scenario planning can increase engagement within your organisation, fostering collaboration and bridge-building as people explore alternative futures. Instead of feeling overwhelmed by risks and change, they are empowered to embrace uncertainty in a positive, proactive, and creative way.
MAKE IT STICK WITH REGULARITY AND THE RIGHT TOOLS
As with all foresight, a systematic approach is key to success. Scenario analysis should be an ongoing process, ideally conducted at least once a year. This ensures both that the wisdom gained will keep informing strategy and planning, and also that the vision does not become static yet again. When the terrain changes, maps need updating.
Using the right tools helps make the process systematic. A popular, easy-to-use scenario planning example is the Axes of Uncertainty, which results in four quick scenarios describing alternative futures in a 2x2 matrix. With step-by-step instructions, you can start mapping the potential paths ahead for your organisation right away.
For those who want to dive in deeper and build fully-fledged scenario narratives that examine how several change drivers may evolve in detail, the Futures Table method might be more suitable. With this tool, you can examine the possible future paths of the trends on your radar as well as the different ways these trends may interact with each other, which will provide you with in-depth future images that you can utilise when building future strategies.
These two disciplines play distinct yet complementary roles in strategic decision-making, both essential for success in today's volatile environment.