Scenario Planning

According to Coates (2000), the term scenario was originally coined to describe the setting of a feature film. Although the definition has since evolved to encompass a few additional dimensions, futurists are most concerned with its meaning as an imagined series of events that are typically infused with intricate details and possibilities. The following discussion introduces the concept of scenario planning and distinguishes it from traditional forecasting measures. Attention is given to the key components of each approach and both the advantages and disadvantages are highlighted. Concluding remarks focus on how scenario planning and forecasting can be considered not as competing techniques, but rather as complimentary methods.

Varum and Melo (2010) explained that scenario planning finds its roots in the military strategies that surfaced in the days following World War II. The intellectual theorist Herman Kahn then applied these ideas to the context of public policy and, from there, they continued to grow in popularity as businesses embraced the appeal. The key element of scenario planning is the acknowledgement that the world consists of a mix uncertainties and predetermined events. Given this realization, thinkers, planners, managers, and directors alike can construct various hypotheticals to ruminate on the potential trajectories that they may face (Varum & Melo, 2010). Coates (2000) noted that these constructed scenarios generally fall into one of two camps. The first type involves scenarios that assume a future condition has occurred and aims to stimulate thought about the policies and responses that could be developed because of the situation. The second type assumes that both the condition and the response have been established and thus allows for a review of the potential consequences that are associated with the adoption of that policy (Coates, 2000).

Amer, Daim, and Jetter (2013) articulated the differences between scenario planning and traditional forecasting methods, explaining that forecasting is based on the idea of continuing trends. As such, measures of forecasting assume that the trajectories of the recent past will extend into the future. Scenario planning, in contrast, separates the past from the future and considers the unexpected, yet plausible, events that might come to fruition (Amer, Daim, & Jetter, 2013).

At a general level, Schoemaker (2004) noted that traditional forecasting is most appropriate when there is a low degree of uncertainty, meaning that substantive knowledge is available about the target endpoint. If a low uncertainty situation is of low complexity, meaning that the number of involved variables is small and/or the associated variables are not too interrelated, traditional point estimates work well. If the low uncertainty situation has high complexity, traditional deterministic models can be applied. Schoemaker (2004) also noted that traditional forecasting can even incorporate confidence intervals to the point estimates for times of low complexity but higher levels of uncertainty. However, when both the complexity and uncertainty of the situation are high, scenario planning should be applied. Schoemaker (1991) expanded on the conditions favorable for the application of scenario planning, raising eight distinct reasons to motivate its use: (a) when the uncertainty of the situation is high, especially when compared to the available predictive abilities; (b) when too many unexpected events have caused an issue in the past; (c) when the industry is undergoing significant change; (d) when current lines of strategic thought are too routine and not innovative enough; (e) when the situation is charged with a medley of strong and reasonable opinions; (f) when there is desire for a common framework; (g) when there are not enough new opportunities being established; and (h) when the direct competitors are relying on scenario planning.

In addition to the situation-specific details just discussed, a choice between traditional forecasting and scenario planning should also weigh the pros and cons of each. Amer et al. (2013) highlighted that forecasting requires less resources, so it can be an efficient approach for identifying the most probable future of a stable environment. In contrast, scenario planning is more flexible and innovative, although it does require more time and expert opinions. Varum & Melo (2010) also stated that scenario planning can help overcome common decision-making errors which are typically tunnel vision and stubborn overconfidence.

Recognizing the unique benefits of each, Derbyshire and Giovannetti (2017) proposed an approach that blends scenario planning and forecasting in a complementary fashion. Their hybrid model considers both past trends and unexpected trajectories and equally weights them both. Then, trends that are expected to discontinue are separated from the bunch and analyzed to assess the factors that would lead to their discontinuation. Such an approach allows places emphasis on the future-affecting factors so that the nature, speed, and magnitude of changing trends can be better understood.

References

Amer, M., Daim, T. U., & Jetter, A. (2013). A review of scenario planning. Futures, 46, 23-40. https://doi.org/10.1016/j.futures.2012.10.003

Coates, J. F. (2000). Scenario planning. Technological Forecasting and Social Change, 65(1), . https://doi.org/10.1016/s0040-1625(99)00084-0

Derbyshire, J., & Giovannetti, E. (2017). Understanding the failure to understand New Product Development failures: Mitigating the uncertainty associated with innovating new products by combining scenario planning and forecasting. Technological Forecasting and Social Change, 125, 334-344. https://doi.org/10.1016/j.techfore.2017.02.007

Schoemaker, P. J. H. (1991). When and how to use scenario planning: A heuristic approach with illustration. Journal of Forecasting, 10(6), 549-564. https://doi.org/10.1002/for.3980100602

Schoemaker, P. J. H. (2004). Forecasting and scenario planning: The challenges of uncertainty and complexity. In D. J. Koehler & N. Harvey (Eds.), Blackwell Handbook of Judgement and Decision Making, 274-296. https://doi.org/ 10.1002/9780470752937.ch14

Varum, C. A., & Melo, C. (2010). Directions in scenario planning literature – A review of the past decades. Futures, 42(4), 355-369. https://doi.org/10.1016/j.futures.2009.11.021