Scenario planning is an important part of enterprise resource planning and is one way business leaders attempt to manage risk. Business environments are dynamic and challenging to predict. External forces also place management in a position where having various plans is necessary. In order for strategic plans to be created, it is important that the various scenarios impacting the business be analyzed.
In this FAQ we will cover what scenario planning is, the process of scenario planning, why it is important, how it is used in conjunction with strategic planning, and the types of scenario-based plans.
What is Scenario Planning?
Scenario planning is the process of making assumptions about different possibilities that could materialize and have an impact on the business in the future. Various plans are then created to respond to each of the possible scenarios. Scenario planning is unique in that it falls under aspects of strategic planning and risk management as it attempts to mitigate material impacts to the business by working to anticipate events that might have adverse effects.
One of the unique aspects of scenario planning is that it is not limited to use in the finance profession. In fact, farmers use scenario planning to predict the outcomes of harvest. It is one way that they attempt to forecast future sales but also to identify potential future investments.
The Scenario Planning Process
Scenario-based planning begins by analyzing the current environment. This applies to all applications of scenario analysis, whether it is related to a specific business or if it is being performed by government entities. The current landscape is surveyed and the relevant business drivers are extrapolated.
Once the existing landscape of the entity is fully understood, it is then projected and forecasted and a set of internal and external forces that exert influence on the entity are identified and examined to produce a set of plausible future realities or scenarios.
Part of this process might include creating a set of indicators that help to identify if a specific scenario is likely to occur or not. These indicators can then be used as alarms to help alert relevant personnel that the scenario has escalated and is increasingly more likely to occur. This helps planners respond accordingly and helps the entity to position itself to achieve the next most desirable outcome under the new circumstances.
The next step is to create a set of relevant policies, projects, or initiatives that are aimed at achieving the preferred scenario. A preferred scenario is always identified, but the reality is, each plan is geared towards achieving the most desirable outcome under the unique circumstances of each specific scenario.
Why Is Scenario Planning Important?
There exists a natural need for businesses and other institutions to be prepared for the unknown. The process of creating the assumptions behind scenario planning is beneficial in and of itself. For example, the United States military performs routine scenario analysis in which they attempt to predict the proper responses, use, and location of force.
Scenario-based planning is usually used in conjunction with larger strategic plans. Therefore it is a major and critical aspect of creating a routine strategic plan which every business should have and be following. Analyzing each scenario is typically accompanied by a likelihood of occurrence which helps management assess certain risks and helps to prioritize operating demands.
The process of scenario-based planning helps managers allocate and retain, if necessary, resources in response to the likelihood of each scenario. For example, if the most likely scenario is a large spike in sales volume because of a new product, the business will have a basis for resource planning in a way that will enable it to accommodate the increase in demand.
Types Of Scenario Based Plans
While scenario planning does not necessarily have different types, there are some common terms used in its practical application that help describe each scenario.
This term is used to describe the most likely, or status quo, case. Typically, the term base case refers to the most preferred case but in practice, it is used to describe the most likely scenario to occur. One thing to note is that the term base case is sometimes adjusted to reflect a new scenario once it has been adopted as the most likely to occur.
As the name implies this is the best possible outcome or best case scenario that can be achieved.
Again, as the name implies this is the worst possible outcome or worst-case scenario that can occur.
This term involves all cases that are explored and considered to be possible. This type of scenario-based plan might or might not be the best or worst case, but rather just one of any possible number of scenarios.
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