Like most businesses, you likely have determined financial targets to measure your company’s profitability along with a plan of action for how to achieve these goals.
However, have you planned for unforeseen events that could pose a risk to your success?
This is where scenario planning steps come in—the projection technique using scenario planning analysis you likely already incorporate into your long-term planning.
This process has been created to look for adaptable solutions to unavoidable circumstances that can negatively impact your financial health.
The scenario planning process identifies potential outcomes and visualizes both risks and opportunities that come along with these possible events. And the good thing is, it has various available templates and formalized frameworks.
💡 Key Takeaways:
- Start by identifying your key business issue, question, or decision.
- Pinpoint your internal and external factors.
- Keep your factors and scenarios simple. Narrow your list of determinants to the most critical in order to compile and focus on the 3-5 most probable scenarios.
The 4 Steps of the Scenario Planning Process
Scenario planning is key for forecasting and strategic planning, addressing various uncertainties that can exist within a business environment and how to respond to them. Utilizing this tool can help you respond quickly to changes in the market, crises and other unforeseen issues.
The following are the typical steps you would take in the scenario planning process:
1. Determine Your Key Business Decision
The very first step in the scenario planning process is to identify your key business issue, question or decision that you will be evaluating. For example, you may want to take a look at how market trends might affect your bottom line or the financial risks that may come with future business investment.
2. Identify Internal and External Factors That Can Affect Your Key Decision
Every key decision made by you will have both internal and external factors that will impact its outcome. This is where you need to pinpoint what drives your business operations, which can include your suppliers, customers, competitors, employees, shareholders and government regulations among others.
These important factors each have a specific role they play in your business and can impede operations in different ways. For example, if a supplier is late with a shipment and your entire manufacturing process is held up because of it, how does this affect your key decision? Completing a comprehensive assessment of these factors will allow you to prepare for every possible event.
3. Outline Your Strategy for Each Potential Scenario
This step in the scenario planning process focuses on mapping out each scenario from your list from its beginning to its logical end. If a critical determinant goes one way or the other, how will you respond? What are the steps that you will take? How does this determinant impact the project? How does it impact your overall business? Keep asking yourself these types of questions in order to tell the entire story of your most probable scenarios.
From there, you will be able to create response strategies if one of these scenarios should occur. This is where scenario planning and analysis tools can help.
4. Identify the Early Indicators of Each Scenario
The final step in the scenario planning process is to identify each probable scenario’s earliest signs. Doing so will provide you with valuable insight into the future, allowing you to quickly pivot when a potential scenario occurs.
How To Make the Scenario Planning Process More Effective
There are things you can do to make the traditional scenario planning steps even more effective. Let’s take a look at how you can enhance the scenario planning process in times like these, where uncertainty is heightened.
1. Keep Your Scenarios Simple
While you may be able to come up with a list of dozens—or even hundreds—of internal and external factors that have the potential to disrupt your key decision’s outcome, understanding the most critical determinants will prevent you from getting overwhelmed.
Narrow down your list of determinants in order to compile the most probable scenarios. Focusing on three to five scenarios will provide you with the most reliable predictions that your team can use for the next step in the scenario planning process.
2. Utilize a Multi-Dimensional Scope
In a modern business environment, you have to stay agile in order to be able to respond to any uncertainties that may arise. That’s why it is crucial that your scenario planning process be performed on all levels of your organization. Such a comprehensive analysis will allow for strategic information to cascade down your business's operations in a timely manner, ultimately ensuring all stakeholders can respond quickly to whatever scenario occurs.
It also ensures that if a change is made within one vertical of the business, the corresponding determinant can be adjusted so key stakeholders and decision-makers can better understand the overall impact of this change on the forecast. Consequently, this will lead to an overall more accurate scenario planning process.
Integrate Scenario Planning Tools Into Your Process
The traditional scenario planning process, filled with human errors and tedious data entry, was not efficient or nimble. Thankfully, there are scenario planning tools available that easily integrate into existing processes and platforms such as Excel.
Vena’s Scenario Analysis Software enables you to aggregate live data into a singular accessible dashboard, with real-time updates as new data becomes available. You can more easily analyze the impact of changes to your key decisions such as revenue, headcount, cash flow—and more—in just a few minutes.
Moving Beyond Traditional Forecasting With Effective Scenario Planning
Long forecasting periods and lengthy lists of uncertainties make traditional forecasting methods slow and outdated. In modern businesses, there are so many uncertainties beyond our control, which means that we need scenario planning processes that can keep pace. Leveraging the best practices and tools for scenario planning will enable you to make informed business decisions in a proactive manner.