What is Scenario Planning? (A How-To Guide and Tips)

By Indeed Editorial Team

Updated November 16, 2022

Published November 30, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Those who want to develop long-term plans for companies may show an interest in scenario planning. These plans consider how decisions impact the organization and help you plan solutions for potential obstacles. By knowing about scenario plans, you can increase profits and promote resource allocation. In this article, we discuss scenario plans, provide you with information about the benefits of those plans, discuss the types of scenarios, and discuss how to conduct a scenario analysis.

What is scenario planning?

Scenario planning refers to the strategic planning of organizations that help those companies develop long-term plans. These scenarios consider the possible consequences of various decisions and how plans can affect organizations. Companies conduct analyses to plan for potential risks. This helps them decide alternative plans to generate different outcomes.

Related: How to Conduct a Risk Assessment (Tips and Definition)

What are the benefits of scenario plans?

Scenario plans help companies better prepare for the future and plan accordingly. Unlike traditional planning, scenario plans help organizations best respond to change. This method can help a company allow for a new set of ideas when planning for the future. Scenario plans and forecasting help look to the future and use past quantitative data to make predictions. Unlike forecasting, scenario plans also look at qualitative data and trend analyses. This makes it more subjective compared to forecasting, which is fact-based and objective.

Another difference between the two is that forecasting assumes the future is similar to what has occurred so far, but scenario plans assume what could possibly happen. Scenario plans are a more flexible approach and provide multiple futures, whereas forecasting only provides one. Some other benefits of scenario plans include:

  • Optimizing the allocation of resources: You can optimize resources by identifying areas of improvement and potential risks in your plans. You can both evaluate and re-evaluate resources when planning scenarios.

  • Decreasing costs for production: By considering potential outcomes and plans, you can also reduce the costs of production by developing forecasts.

  • Improving product quality: Scenario plans help you establish stronger product quality by identifying issues with product quality.

  • Identifying and avoiding issues: This helps you overcome obstacles earlier production processes and scenario plans.

  • Evaluating the consequences: The action of evaluating consequences associated with particular scenarios.

  • Thinking critically: You can think critically about how potential scenarios impact businesses.

Types of scenario plans

Here are types of scenario plans to consider:

Quantitative scenarios

The quantitative scenario approach looks at the best and worst case of a financial model by altering variables, assuming that key variables identified have fixed relationships. These scenarios depend on models and simulations. They provide the advantage of providing both transparent and cohesive assumptions through equations and the input of models.

Operational scenarios

Operational, or event-driven, scenarios look at the short-term effects a circumstance may have on an organization. An operational scenario describes a sequence of events that includes the interaction between services, productions, and the surrounding environment. These scenarios also include the interaction between products and their components.

Normative scenarios

Normative scenarios are a goal-oriented type of scenario plans often used to help organizations reach their desired operation. These scenarios also describe the future and provide you with an argument for particular issues. You can use normative scenarios for a wide range of issues.

Strategic management scenarios

Strategic management scenarios, otherwise called alternative futures, focus on the environment where consumers buy their products. These scenarios are stories that provide little information about companies or industries. Instead, they consider the environment of the products consumed. Some companies hire analysts to determine strategic management scenarios.

Probability-based scenarios

Probability-based scenarios review trends to determine the likelihood an event may occur. Probability scenarios, otherwise called probabilistic scenarios, provide more realism to uncertainties. Professionals who navigate these scenarios incorporate forecasts and projections, incorporate them into the future.

Interactive scenarios

Interactive scenarios describe the interaction with select variables or parties in a competitive "gaming" atmosphere. Professionals in this field describe the actions of customers and how they access content. To develop an interactive scenario, you typically require a topic, key discussion points, production, design and media.

How to perform a scenario analysis

Here are the steps required to complete a scenario plan:

1. Choose a timeframe

To perform your scenario analysis, first set a timeframe for your evaluation. For instance, a professional can choose to review a scenario from five years before because they want their sunglass company to increase its profits over the span of five years. Professionals reflect on the conditions of particular timeframes to determine the changes that occurred in the past and how to predict future changes. They can list all the changes to occur in the past five years and how they predict potential trends.

2. Identify motivations

Next, determine what big shifts are likely to occur in a society that may impact your company. To do this, conduct an environmental analysis or PESTLE analysis to look at factors such as governmental policies. For example, some companies may identify social trends that impact retail markets.

3. Find your critical uncertainties

When you develop your plans for scenarios, you may want to review our list of driving factors. From here, you can select two critical uncertainties that have a large impact on the business. You can then consider the extremes of every uncertainty. For example, some companies consider a lack of materials to be a critical uncertainty. When conducting a scenario plan, you determine the extremes associated with those material uncertainties.

4. Develop a scenario

Create a graph with your first critical uncertainty on the x-axis and your second critical uncertainty on the y-axis. Each end of the graph represents a different extreme of uncertainty, creating four separate scenarios. For example, some graphs include competitors on the y-axis and disposable income on the x-axis.

5. Evaluate a scenario

After creating scenarios, you may want to communicate with your team to determine the implications of various scenarios. You can try to determine the current organizational scenario, along with what direction you can move toward in your designated timeframe. Once you have a general idea of the future of your organization, consider what preparations you can make to deal with the upcoming scenario.

6. Update policies and strategies accordingly

Make adjustments to your current policies and strategies based on the evaluation of your scenario. Your scenarios can help you make decisions based on the direction your company appears to be going. By looking at your future scenario, you can plan how your business may need to adjust.

Related: What is Differentiation Strategy? (With Benefits and Tips)

Tips for completing a scenario analysis successfully:

Use this advice to help you successfully complete your scenario analysis:

Plan for scenarios

When developing your scenario plans, consider how many you want to plan, along with the diversity of your plans. For example, you can consider both high-risk and low-risk scenarios to develop a more holistic understanding of your risks.

Look for diverse feedback

To get different perspectives on your scenarios, you may want to obtain feedback from a variety of individuals, both inside and outside your company. When you have diverse feedback to help make decisions, you discover potential obstacles from a range of perspectives. This also helps you discover solutions for those obstacles.

Related: How to Give Feedback Constructively in the Workplace

Conduct planning regularly

Companies typically conduct frequent scenario plans to accommodate changes to the company environment. This helps you remain updated and aware of potential issues. You can also use scenario plans to consider market changes over time. By conducting regular plans for scenarios, you can identify potential career advancement opportunities and how advancement in production equipment can contribute to the organization.

Related: What Is an Internal Analysis and How to Conduct One

Example of a scenario analysis

Here's an example of scenario planning and analysis:

Samantha is a personal trainer with a large online presence on social media. Her social media account helps her earn profits through advertisements with partner companies. Since she's doing well with gaining new followers, Samantha wants to conduct a scenario analysis to maintain her growth over the next two years. She examines her driving factors and comes up with uncertainties like the potential to work out at home and the health of the economy.

Samantha develops a scenario by charting these uncertainties. On the y-axis, she lists a high interest in working out at home and a low interest in working out at home. For her x-axis, she lists a poor economy on one end and a healthy economy on the other end. Since Samantha observes that the economy's currently in a recession and more people tend to work out at gyms, rather than home, she notes that this is her current scenario. After conducting her analysis, she adjusts her marketing strategies to appeal to those looking to save money and avoid gym fees.

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