Scenario Planning

Planning in a Turbulent Environment

Managers typically deploy what is known as scenario planning in order to cope with environmental turbulence and uncertainty.

Scenario planning (sometimes called contingency planning) is the creation of alternative, hypothetical but equally likely future conditions. It involves looking at current trends and discontinuities and visualizing future possibilities.

Scenarios create alternative combinations of different factors to give a total picture of the environment and the firm.

Rather than looking only at history and thinking about what has been, managers think about what could be. The events that cause the most damage to companies are those that no one even conceived of.

With scenario planning, managers look at trends and discontinuities and imagine possible alternative futures to build a framework within which unexpected future events can be managed.

Generally, organizations develop a best case scenario (the occurrence of events that are favorable to the firm), a worst case scenario (the occurrence of unfavorable events) and some middle ground alternatives.

Organizations can be disrupted by any number of events. A survey by the Chartered Management InstituteOpens in new window and the Business Continuity InstituteOpens in new window found that some of the top events for which managers might need scenario plans include:

  • extreme weather,
  • loss of IT systems,
  • loss of key employees,
  • loss of access to offices or plants,
  • failure of communications systems, and
  • supply chain disruptions.

Scenarios are like stories that offer alternative vivid pictures of what the future will be like and how managers will respond.

Typically, two or five scenarios are developed for each set of factors, ranging from the most optimistic to the most pessimistic view.

For example, if the United States became involved in a military operation in Syria, leaders could create four broad scenarios of what might happen as they did for Libya a few years ago—two that are positive for the United States and two that could have highly troublesome consequences—and develop plans for how to respond.

Similarly, in businesses and other organizations, scenario planning forces managers to rehearse mentally what they would do if their best-laid plans collapse.

Royal Dutch ShellOpens in new window has long used scenario planning and has been preparing for a world in which oil prices continue to decrease.

Scenario planning has helped steer Shell’s strategy of moving toward producing fuel for electricity, such as natural gas and renewable sources, and focusing on keeping its costs low.

Now, take the case of Jet BlueOpens in new window, which failed to respond to a crisis in an appropriate manner, since it did not put any contingency plans in place at the time when the disasters took place.

Jet BlueOpens in new window achieved success initially as an airline by bringing back humanity to air travel by moving closer to the hearts of employees and customers through intelligent moves.

But, the airline was humiliated by its inability to cope with a February 2007 snowstorm during which at least one plane notoriously sat on a runway for 10 hours; the company took days to recover canceling a thousand flights (A Murray, ‘Jet Blue: Now just another airline in a lousy business’ The Wall Street Journal, 21st Feb, 2007). Likewise, Coca-ColaOpens in new window suffered a major crisis in Europe because it failed to respond quickly to reports of “foul-smelling”.

The value of scenario planning is that it helps managers develop contingency plans for what they might do given different outcomes.

Scenarios are meant to expand the range of future possibilities managers should consider and prepare forStephen Millett, author of Managing the Future

In today’s tumultuous world, traditional planning can’t help managers cope with the many shifting and complex variables that might affect their organizations. Lyndon Bird, technical development director at the Business Continuity Institute, emphasizes that broad plans are the answer.

In a turbulent and interconnected world he says, businesses “are going to be interrupted by something and they are probably not going to be able to predict what will happen except that they’ve got to be able to deal with the consequences.”

Managers, of course, can’t predict the future, but they can rehearse a framework within which future events can be managed. Some managers use published global scenarios, such as debt problems in Europe, a slowdown in Asia, or global warming to analyze patterns and driving forces that might affect their industry as a starting point for scenario planning.

This abbreviated scenario thinking can give managers a head start on asking “What if …?” leading to increased understanding even before any scenarios are written.

See Also:
    Research data for this work have been adapted from the manual:
  1. Managerial Accounting: Tools for Business Decision Making By Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso