Future-Proof Your Business Through Scenario Planning

The only thing that is certain in life, and in business, is uncertainty. By using scenario planning to future-proof your business, you can reduce this uncertainty to a more manageable level. Due to the Covid-19 pandemic, thousands of businesses have gone bankrupt. This has happened because they did not consider the impact the pandemic could have on their business. Unfortunately many business owners did not plan for one of the worst-case scenarios imaginable.

If we want our business not only to survive, but to grow and develop, we have to be able to work with uncertainty. We do this through scenario planning.

Scenario Planning provides us with the tools and techniques to future-proof our business. It allows us to plan for future challenges in a turbulent, uncertain, novel and ambiguous world (known as TUNA conditions).

When you adopt scenario planning as a way of thinking, you are able to handle uncertainty in a systematic and realistic manner. You can use the knowledge gained to achieve real competitive advantage in conditions of uncertainty.

Scenario planning is not just for big business; you can apply the tools and techniques in any business, or any organisation, regardless of size. You can also apply scenario planning in any life situation. In this post I am going to discuss a simple, but very powerful, scenario planning model. The model, developed by Illbury and Sunter integrates seamlessly into your strategic planning process.

What is a Scenario?

A scenario is a potential event or combination of events that could occur in the future. These events may have either a positive or a negative effect. A negative effect is a threat and a positive effect is an opportunity.

A scenario is simply a written description of possible actions or events that are expected to occur. Scenarios give us an idea of what could happen in the future.

They don’t provide us with the strategies to deal with uncertainties; they provide us with knowledge. There are multiple pathways into a future that is unknown. Scenarios provide us with knowledge we can use to take the right path.

What is Scenario Planning?

Scenario planning is a structured and systematic process. We use the process to analyse the future and develop a range of responses to future changes that have a plausible, or realistic, chance of occurring.

It is a process of analysing trends and making assumptions on what the future is likely to be, and how that future could impact your business. We don’t use scenario planning to predict the future, because that is really not possible. We use the tools and techniques to gain knowledge and understanding of what the future could be.

Scenario planning provides us with knowledge about the future which we can use to strengthen our ability to cope with uncertainty.

According to Rafael Ramirez, director of the Oxford University Scenarios Programme, and leading scenario planning expert:

“Scenario planning is about plausibility and not probability”

Scenario planning forces us to examine and understand futures that are plausible, believable, and have a good chance of happening. You cannot guarantee the future, you can only gain knowledge about what could happen in the future. You then use that knowledge to make decisions in the present. The actions we take today lay the foundations for what could happen in the future.

The main benefit of scenario planning – Future-proofing your business

The main benefit of scenario planning comes from providing us with real choices for action for future-proofing your business. It is a process that forces us to identify and evaluate uncertainty. By applying the tools and techniques of scenario planning we are able to identify what we can control, and more importantly, what we can’t control. Future-proofing is all about control.

Scenario planning is a process of thinking through the futures that could unfold, and how our organisational, and business environments could change in light of those futures. We then use this knowledge in the here and now to make more informed decisions bout the future.

When you do scenario planning properly, it becomes an established part of your organisational thinking and decision-making. Ideally, scenario planning is not just a one-off project. It is an iterative process that becomes integrated into your strategic thinking and business planning processes.

Three Environments

Every business or organisation exists in three environments simultaneously; an internal environment, a transactional environment and a contextual environment.

These three environments are actually interrelated and interconnected systems. In terms of systems thinking, an organisation is a system which operates within other systems.

Systems Thinking

A system is an organised collection of interrelated and interconnected elements and components which work together to form an integrated whole. Systems are made up of inputs, processes and outputs, and the outputs from one system are the inputs into another system. Systems are also capable of influencing their surrounding environments to a greater or lesser extent, depending on their purpose, and how they are designed.

A business, for example, is a system that is designed to produce, supply or deliver specific products or services. Every business has its own internal environment and also operates within an external environment that includes customers, suppliers and competitors. This external environment is known as the transactional environment, because a business transacts with customers and suppliers.

A third, larger macro environment, known as the contextual environment, surrounds the transactional environment. All organisations of the same type have similar transactional environments and exist in a contextual environment that is common to all. This means that all businesses of a similar type are affected by the same driving forces in the larger contextual environment.

An individual organisation can influence stakeholders in its own transactional environment, but is not able to influence the larger contextual environment. In order to survive, the individual organisation has to respond to and adapt to changes in its transactional environment, that are the caused by driving forces in the larger contextual environment.

1. Internal Environment

An organisation’s internal environment includes the people, systems, processes, procedures, individual and organisational competencies, values, vision, mission and reason for being.

All of these factors combine to make the organisation unique and allow it to interact with its transactional environment. We design an organisation to provide specific products and services, and as a result, we have total control over everything that happens within its internal environment.

2. Transactional Environment

We use the word ‘Transactional” to refer to the process of conducting business. A transaction specifically refers to the process of buying and selling, and as a result, an organisation’s transactional environment includes all of the elements related to the buying and selling of products and services. We typically include customers, suppliers, competitors, government regulators and investors as key elements in the transactional environment.

The organisation can influence its transactional environment, and we design our strategy to maximise that influence. In this way we future-proof our business against an uncertain future.

3. Contextual Environment

The contextual environment is the macro environment in which all organisations of the same type operate. The factors that make up the contextual environment are beyond any single organisation’s control. But, changes that occur in the contextual environment affect the transactional environment, which in turn, affect the organisation’s internal environment.

Typical factors in the contextual environment include: international financial systems, social values, social systems, technology, macroeconomic conditions, energy prices, international commerce, geopolitical trends, ecology and environmental issues, exchange rates, legislation and demographics. We should also include global pandemics as one of the key factors in the contextual environment. Global pandemics have significant influence the way we do business in our transactional environment.

Scenario planning focuses on identifying those factors in the contextual environment that drive change, and which impact on the organisation’s transactional environment.

Everything operates as a system. Systems exist within systems and the role of scenario planning is to identify and analyse those factors in the system that drive change. If we want to future-proof, we need an in-depth understanding of the factors in our contextual environment that have the greatest potential impact on our business.

Organisational Strategy

Strategy describes how the organisation interacts with its transactional environment. We define strategy as a general plan of action designed to achieve one or more long-term goals, or strategic objectives, under conditions of uncertainty.

Strategy, therefore, is a plan of action an organisation takes to interact with its transactional environment in response to the effect of changes in the contextual environment.

It is our perception of the business environment that drives our strategic thinking. The strategy we develop is essentially our responses to the perceived effect of change on our business environment due to driving forces in the wider contextual environment.

A simple Scenario Planning Model

We now come to a simple scenario planning model that I have used extensively over the years in both my consulting work and in my teaching. The model developed by Chantelle Illbury and Clem Sunter (The Mind of a Fox: Scenario Planning in Action), is based on two dimensions; certainty to uncertainty and absence of control to control. The model addresses the concept of control and uncertainty in four quadrants.

Quadrant 1: Things that are Certain and Beyond our Control

We start our scenario planning process in the first quadrant. This is located in the bottom right-hand corner of the model. This quadrant is called ‘The Rules of the Game’, and is bounded by certainty and absence of control.

Rules of the Game

In life, as well as in business, there are things that are certain, but which are out of our control. The first thing we need to do it is to understand the Rules of the Game. We need to understand what we know, and what we can control. The Rules of the Game, define the parameters or boundaries within which we operate.

Every sport has a set of rules which govern how the game is played. The rules are written down, they are certain, and they are known. Anyone playing the game has to know what the rules are before they can play. No-one is allowed to change the rules, except the governing body for the game. So the rules of the game are certain, and are out of our individual control. We have to abide with and play by the rules, whether we like them or not.

Business is a game that comes without a rulebook

Business has often been described as a game. But unlike sport, the rules of the game of business are not written down in a rule book. We need to know what those rules are. Unfortunately, the only way we can do that is through trial and error, and by making mistakes. Mistakes in business can be very costly.

If we want to be successful in business, we have identify the rules for the type of business and the industry we choose to operate in. Unfortunately, we often begin playing the game without taking the time and effort to try and understand the rules, or what equipment and resources we need to play the game successfully.

Rules are certain, and cannot be broken without incurring a penalty. The first rule of the game – know what game you are playing, and how to play it. Know what the parameters are within which you will operate; your boundaries; what you can control, and more importantly, know what you can’t control.

We can control the internal environment within our company. We can also control the transactional environment. This is where we have chosen to play the game. We have total control over what game we chose to play, and where we are going to play it; We just need to know the rules.

Quadrant 2: Things that are both Uncertain and Beyond our Control

Quadrant 2 in the bottom left-hand corner of the model, is bounded by uncertainty and absence of control. These are the things that are both uncertain and are totally out of our control. This quadrant is divided into two sections: a) Key Uncertainties and b) Scenarios.

2.1 Identifying Key Uncertainties

Uncertainty means threats and threats mean risks. The key uncertainties are those factors in the larger contextual environment which can impact on our transactional environment. If the factors have a negative effect, we classify them as threats and risks. If they have a positive effect, we classify them as opportunities.

Key uncertainties are also known as ‘driving forces’. These forces drive change. It is here we focus when doing scenario planning. We identify those factors in the wider contextual environment that have the greatest uncertainty and the greatest potential impact on our transactional environment. We rank these key uncertainties in terms of impact and importance.

Our key uncertainties drive the design of possible scenarios. We should, ideally, have no more than two or three key uncertainties. Any more than three will be difficult to manage.

2.2 Crafting Scenarios

A scenario describes the impact that changes in the contextual environment have on the transactional environment. Scenarios describe multiple pathways to an unknown future. A scenario is a written description of a plausible event which could occur in the future. When you write a scenario you should have a compelling title that conveys an image that can be clearly understood by all involved. A scenario should be based on a simple theme, and should be logically consistent.

You develop scenarios based on your key uncertainties. For each key uncertainty you develop a scenario around a moderately good outcome, a second scenario around a moderately bad outcome, and a third scenario for the outcome you expect to be the most reasonable and plausible.

By following this process, you develop three plans; A, B and C. These are your best, most realistic, and most pessimistic assessments of the future for each key uncertainty.

After you have identified the driving forces and your key uncertainties, and have crafted your scenarios, you can now move to the third quadrant: Generating Options.

Quadrant 3: Options – things that are Uncertain, but are Within our Control

In this quadrant, located in the top left-hand corner of the model, we deal with uncertainty and control. We generate options based on the the identified scenarios. Each scenario presents a number of threats or opportunities, and our goal in this part of the process is to eliminate or minimise threats and maximise or exploit opportunities.

Opportunities only become options when they fall under our control (Illbury and Sunter). Also, options are only effective if they can be implemented successfully. The goal is to generate as many options as possible through collaboration, teamwork and brainstorming. Once you have generated your options, you evaluate each option in terms of achievability and implementability.

The objective of this exercise is to move from uncertainty to control. You do this by generating options that are achievable and can be implemented.

Quadrant 4: Making Decisions – Things that are both Certain and Within our Control

Following on from developing options in quadrant 3, we can now make informed decisions about which of the options to implement, based on our analysis of the options available. We feed our chosen options into our strategic planning and decision-making processes. The options we generate from scenario planning provide the key inputs for developing the strategies and action plans that will future-proof our business.

You have complete control over how you decide your organisation is going to interact with your transactional environment. When you make decisions, it is important to know what futures are excluded and what futures are to be included in our strategic plan.

Scenario Planning in Action

There are eight steps you can follow to turn scenario planning into action.

1. Understand the rules of the game. Understand your internal systems and processes, and your transactional environment. Be very clear on what it is you want to achieve through scenario planning. Identify the questions or problems you or your organisation are facing. Understand what you know and can control, and what you can’t control.
2. Identify and list the key driving forces in your larger contextual or macro environment.
3. Analyse and rank the driving forces in terms of uncertainty and importance; identify the key uncertainties that will have most impact on your business. You should have no more than two or three key uncertainties.
4. Develop scenarios based on your key uncertainties. For each key uncertainty develop a scenario around a moderately good outcome, a moderately bad outcome and a plausible outcome. Ideally you should have no more than three scenarios for each key uncertainty.
5. Flesh out your scenarios. Give each scenario a name and write a short descriptive statement.
6. Assess the potential impacts of the different scenarios on your business. Select the scenario or scenarios that are the most plausible.
7. Generate options for each of the plausible scenarios through group collaboration, teamwork and brainstorming.
8. Evaluate your options and decide on the best option(s) to incorporate into your strategic plan.

Take action to future-proof your business through scenario planning

If you want to future-proof your business, and reduce the negative impact of uncertainty, you need to do scenario planning.

Scenario planning always starts with defining a very clear purpose and determining the exact intended outcome for the planning process. You need to be very clear on what it is you want to achieve. The focus issue is the question about the future or the problem your business is confronting. Know the Rules of the Game before you start playing.

The main objective of scenario planning is to inform your decision-making. Once you have evaluated the options arising out of each scenario, you can determine the most important strategy for you to follow. Scenario planning is not difficult if you follow the the eight steps listed above. Use the simple four-quadrant model as a guide.

Bibliography

Illbury, C. and Sunter, C., 2001, The Mind of a Fox: Scenario Planning in Action, Human & Rousseau/ Tafelberg.

Ramirez, R. and Lang, T., The Oxford Scenario Planning Approach in the era of COVID-19, online available from: https://www.sbs.ox.ac.uk/oxford-answers/oxford-scenario-planning-approach-era-covid-19, accessed 23rd November, 2020.