Nobody can predict the ways in which a market may move and what the best course of action is to future-proof your business. So how do we arm ourselves with the right skill sets or competencies to manoeuvre through market changes? I suppose that the point or role of a strategist is to have a degree of foresight – to predict the eventualities and best prepare the organisation to succeed in all possible climates. 

Well, the last sentence seems like a stretch, how do you prepare an organisation for ALL possible climates? Short answer: you can’t, but what you can do is forecast which will be the most likely scenarios to occur and where the opportunities lie. So, may I present to you, the application of scenario planning – an underleveraged tool in strategy.

What is scenario planning?

Scenario planning is a forecasting methodology used to inform strategy by anticipating the skills and competencies required by businesses to navigate possible outcomes in market development in order to succeed. 

It is a structured way of analysing both the trends and uncertainties in the changing market as part of an effective strategy-building process. The aim: as the markets develop you are prepared for the future-come-present climate. 

Why is the scenario planning framework effective?

Any decision-maker within an organisation will be considering where the growth opportunities & threats lie in the near and distant future. So if we are trying to ‘predict’ the future state of the market, how best can we move from making a guess to more of an informed decision-making strategy? 

This is where the application of frameworks like the one explored in this article should be within the strategists’ toolkit. After analysing the market, with respect to your business and its placement, we should have texture to inform our possible eventualities, mitigating the amount of guesswork to build out our growth plans. 

In essence, the scenario planning framework gives structure to identifying the potential market outcomes and serves as a tool in shaping strategy. 

How does scenario planning work? Step by step.

Before we begin, understand and acknowledge this – market uncertainties will most likely always be present, so accept it.

The point of this framework is to address a core truth in strategy and that is, that there will always be future uncertainty (at least for a while anyway – who knows how advanced predictive modelling can get, but if I were to guess I believe we will always face this truth). 

What this framework enables is a structured and informed approach to theorise the likely market scenarios and how we can best equip ourselves to win.

1. Identify your area of focus.

Relying on previous analysis looking at both external and internal factors we will be refining what our decided area of focus will be.

This will serve as an anchor through this initiative as the exercise will be exploring eventualities we want to ensure it remains structured. This stage will form the foundations of the scenario planning which will in turn inform our strategy.  

2. Uncertainties a) generate b) order c) prioritise.

Next, we explore the plausible uncertainties in the market and the key factors within our organisation relevant to what we are investigating. 

We will be looking at the relationship between market developments and our business infrastructure. This could involve anything from changes in market growth rate over a period of time or disruption in the supply chain due to external factors and the effect on our pricing model or how exposed we are to bottlenecks from our suppliers. 

The best approach is to assemble a team to uncover blindspots and bring a range of critical thinkers into this process.

a. Generate – Looking at key factors in and outside our organisation based on the focal area decided from stage 1 we would form two groupings – External & internal factors and list out uncertainties.

b. Order – This will be in part a refinement process of a. We will have generated a list of both internal and external factors and now we strip down.

c. Prioritise – From the now stripped-down list we will decide upon the priorities with the greatest exposure resulting in two critical conditions. 

All three phases will require the expertise of the executive team from generation right through to prioritisation, keeping the firm in agreement on what’s important.

3. From the 2 critical conditions, build out a matrix.

We will be building out scenarios and how they impact the functions of our business, so it becomes important to limit what conditions we focus on. From the two decided we will build a 2×2 matrix producing 4 quadrants or 4 scenarios.

Eg. The two uncertainties:

• • • • Market growth rate
      • Output in production

Within the matrix we will consider 4 outcomes:

Scenario A: High – High

Scenario B: High – Low

Scenario C: Low – High

Scenario D: Low – Low

4. Identify the skills and competencies needed to succeed in each scenario.

Each of the quadrants from generated matrix will represent a market environment. We would want to consider what the market will look like in the given scenarios and what it means to participate in each and to succeed. The type of questions the executive team should be asking includes the likes of:

• • What product or service do we need to offer in these four future markets?
  • What would our pricing model look like in each of these four future markets?
  • What would our channel strategy be in these four future markets?
  • What would sales and marketing look like?
  • What would alliances and acquisitions look like? 
  • What would our core business be? 
  • Why would that be our core business?

An example

Sticking with the example above we may face a climate where there is a high market growth rate and high output in production. We would then want to consider the implications that has for our business, will this encourage new entrants into the market facing saturation? Will this mean your competitors will ramp up their marketing and sales strategy to leverage optimal conditions? Could it lead to a cost war? Or what if there is a low growth rate in the industry but high production – what might this mean for production?

When we examine what the decided market uncertainties are and explore what it means we then cross-examine across functions and weigh how well prepared we are for the discussed conditions. 

If we spot in all four scenarios a recurring theme emerges opposed to just one in isolation, it might be worth considering your exposure. This then comes down to a risk/return scenario and by this point, if you have nested the executive team throughout this process – an all round and better decision can be formed on whether to take action. 

5. Strategy development. 

Once you have explored the 4 scenarios related to your key area of focus, look for common themes and your business exposure to these outcomes. Are there changes to what skills required to navigate the outcome of the explored scenarios?

If there is a conclusion drawn in all four scenarios which the current state of the business wouldn’t be able to handle a stress test, it may be worth building out the internal structure to suit those conditions

What do you need in order to create an effective scenario plan?

In order to effectively build out scenario plans, you would need context to inform your hypothesis and the more informed your hypothesis the more effective your scenario planning will be. This is quite a crucial point as with any strategy you build – the foundations are key (look up the 1 in 60 rule). 

An important pre-phase of building out an effective scenario plan involves analysis. Pestle analysis plays a key role in looking at the key external factors but remember, this becomes redundant if you have not effectively taken stock of the state of the business in question and how it relates. Context plays a key role but it is important to nest your business analysis within. 

Lastly, you need the right team. The executive team will play a key role, particularly in the phases – to identify the key uncertainties and listing out the needed skills, team and competencies to meet the projected scenarios.

Closing thoughts.

Scenario planning is a tool which offers a structured approach to forecasting market environments from the collective experience and expertise of the executive team guided by data. The output can play a key contributing factor to the business development strategy. Although this isn’t a standalone or an exhaustive means to build a strategy, it certainly has a key contributing factor with weight to it. 

Applying structure to future planning can be difficult and in order to integrate this tool effectively, it would be built on a bedrock of analysis frameworks. 

There isn’t a set standard to what analysis frameworks should inform the scenario planning but it is advised to use frameworks that allow you to analyse external factors such as PESTLE or DESTEP and for internal factors frameworks such as SWOT or the 5 forces, however, this is to the discretion of the stakeholder(s) leading the initiative.