The Importance of Scenario Analysis and Scenario Planning

Why are the business planning tactics of scenario planning and scenario analysis so important in today’s business environment?

Because scenario planning and scenario analysis can help you strengthen your business decision making abilities; it can also help to sharpen your corporate strategic thinking.

While scenario planning in business is becoming more popular; it has been used in military organizations or operations for a number of years. What is scenario planning? It is a method of preparing for unplanned events.

What is scenario analysis? It is the analysis of the scenarios you plan and execute. Out of scenario analysis should come lessons learned and action plans for your business.

As a small business owner, you will (hopefully) have prepared your small business plan for the next year; maybe even for the next three, four, five or more years. You will also have planned your business strategy, built your strategic plan, and considered your future business exit strategy. Make sure you include scenario planning and analysis as part of that plan. What scenario planning can do for you is help you understand and prepare (as best as possible) for unplanned events, such as:

• Your largest customer closes its doors. How do you manage the impact on your business?
• The price of oil quadruples. How do you manage the impact on your costs, and on prices?
• A power failure in your building results in two days offline for your online business. How do you manage that event?
• And so on.

The power of scenario planning is that it enables you to look at your business from a variety of perspectives. While it is unlikely that you will be able to accurately predict the future (of what scenario might actually occur), by planning and preparing for a variety of scenarios, your scenario analysis will help you learn how managing (and how to manage) is necessary during unplanned events: who you need, what you need, why you need it, when you need it, and where you need it.

Here is an example of an unexpected business crisis that affected a number of businesses in different ways; if those businesses had practiced some scenario planning - the impact on their business would likely have been minimized.

I live in Vancouver, British Columbia (in Canada). In the Summer of 2008, the city’s business center power grid failed due to an underground fire. The power failure affected approximately 2000 city customers; the business cost to those organizations has been estimated at $36 million.

• One of the businesses affected was a website hosting company - they did have a back up plan (a business continuity plan in case of disaster) and pulled out a generator that was water cooled. Unfortunately 20 minutes after it started up, it shut down. The Vancouver fire fighters were drawing water to fight the fire ... the lack of water pressure available for the generator resulted in it overheating and shutting down.

  Could scenario planning have helped this issue? The likely answer is yes; it could have, and should have predicted that in the case of fire there might not be enough water supply.

• Could scenario planning and scenario analysis have helped the hydro/electric company? Yes, if it would have taken the lessons learned from the plan and invested in backup power supplies.

• Could scenario planning have helped the small businesses affected? Yes, for some of them.

  For example, some of the effected businesses were restaurants. Their fresh and frozen foods ended up being thrown away because they could not keep the food frozen or chilled. In the analysis of their scenario plan, they might have predicted a similar scenario and built an alliance with a grocery or restaurant business outside of their power grid reach. Then trucked the frozen (not fresh - too late) products to the other business for storage.

• Hotels were also affected. Guests had not heat,
  air conditioning, usable toilets, elevators, food, and lights.

  Should the hotels have generators onsite for emergency situations? A number of companies were affected by data centers and servers going down. Should there have been an emergency backup plan

How to do a scenario plan?

1. Focus on a rather specific scenario: e.g. impact of the digital age on manufacturers;
2. Review PEST (acronym for Political, Environmental, Social, Technological) driving forces for that scenario;
3. Define the scenario you are creating (e.g. the impact of the digital age on PRINT manufacturers);
4. How can you prepare to manage that scenario?
5. What are the implications of that scenario (a shrinking market for print, more competition, lower prices, as print moves into the mature/declining life-cycle phase)?
6. What are the indicators of that scenario (e.g. for the impact of the digital age on manufacturers, a shrinking of print advertising budgets as some advertising dollars are moved to the internet)?

After the scenario planning, you must do the scenario analysis.

To plan is not enough. Analysis of what might work and what doesn’t work; who is critical to your success; what alliances you might need to build; what back up business operations plans you might need to plan; lessons learned; an action plan … these are only some of the outcomes that need to come from your scenario analysis.

Scenario planning helps you prepare for the unexpected; and by planning for the unexpected you can learn how to survive and grow your business through both bad and good times.

However, in your business environment be sure to predict a number of different scenarios and thoroughly plan out how you will handle them. Each scenario needs to be quite different than the other, and you should try to approach the solution to each one differently (if it makes sense) as well. This will enable you to practice your responses and practice your decision making skills and problem solving techniques.

In addition to your scenario planning, ensure that your business plan outline includes a business continuity plan. Having a continuity plan in place will enable your business to continue on with minimum disruption.

Scenario planning and scenario analysis will better prepare you to deal with the unexpected. Being better prepared, having run through a number of scenarios and your business' possible responses to each scenario, strengthens your organization and makes it better able to survive and better able to deal with managing change. Remember that it isn't enough to plan; you must execute your plan.

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