Scenario Planning

Abstract

This note reviews the purposes, methods, and uses of scenario planning for strategic decision making under uncertainty.

Excerpt

UVA-BP-0501

SCENARIO PLANNING

Scenario planning offers a way to have a group conversation about a decision whose success depends on an uncertain future. It operates on the principle that, for some decisions, thinking in terms of multiple possible futures, or scenarios, is more effective than relying on single-point forecasts of the future. Decisions influenced by multiple sources of uncertainty—where a high-consequence, low-probability event might significantly influence the outcome—are well suited for scenario planning. Well-crafted scenarios create a “wind tunnel” for designing strategies that are robust across the most important and most uncertain environmental variables and responsive enough to anticipate and adapt to the realization of future events.

In general, scenario planning is a process of constructing a range of plausible futures to use as a backdrop for discussing strategies. The process begins by selecting the relevant decision or focal issue and the future time horizon for considering the issue. The next step is a data-gathering effort intended to identify the predetermined environmental factors, or trends, as well as the critical uncertainties. Predeterminers are factors such as demographic trends that may be certain within the relevant time frame, while uncertainties are environmental factors that will have the biggest influence on the success of the decision and whose outcome is uncertain. The most important and most uncertain of the factors are used to generate multiple scenarios of the future. These futures are distinct from one another and are not intended to be treated as specific point forecasts. The scenario-planning session itself is a discussion of the focal issue's relevant strategic choices within the context of each scenario. The insights that arise from that discussion enable sound, strategic decision making.

Scenario planning had its genesis in military war games and gained public awareness after World War II. Shell Group Planning began using scenarios in the 1960s, under the leadership of Pierre Wack, considered the father of scenario planning in business. Scenario planning gained prominence in corporate circles after Shell utilized the methodology in the 1970s to examine such questions as the possibility that oil prices and consumption might not always increase. At the time, simply considering the possibility that oil prices and consumption might not always increase required a serious jolt to any major oil producer's assumptions. The scenarios that the Shell Planning Group created enabled the company to shift investments from the expansion of production capacity to upgrading refinery output, years ahead of its competitors. As the planning group observed signpost events in October 1973 in the Middle East, it interpreted them as a signal to Shell that the crisis scenario was happening. Shell enacted strategic plans, crafted during the scenario-planning process, that led to Shell's superior performance as compared with the other oil majors.

The Risks of Using Single-Point Forecasts

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Keywords: scenario planning, strategy under uncertainty