4 dangerous pitfalls of scenario planning – and how to avoid them
This is a guest post from Henrik Sköld. He currently manages the CI function at the Swedish Post and Telecom Authority.
As we all know, many industries today are characterized by rapid changes in the business environment, due to e.g. technological development, changing consumer behaviour or regulatory decisions. At the same time, almost all organisations need to plan quite far ahead in the future (though “far ahead” means different things in different industries). This provides a great challenge, since the long-term future contains major uncertainty.
Thankfully, there is a great tool in the CI toolbox for this – scenario planning. Pioneered by Shell and others in the 1970s, today a broad range of companies, NGOs, governments etc. use scenario planning to plan for the long term.
In this post I’m not going to focus on the basic steps of scenario planning (though I will provide a crash course in the next paragraph), but instead present a few of the most common pitfalls – and how to avoid them.
So, here’s the crash course in scenario planning. Start by defining a focal issue, such as “what will the European market for financial services aimed at SMEs look like in 2023”. Then, list all factors you can think of in the business environment affecting this issue. Sort the factors in two categories – the ones where you think you can forecast the development, and the more uncertain ones. Among the uncertainties, identify those with the highest impact on the issue. Try to define possible outcomes for these uncertainties, such as “low adoption vs. high adoption”, “fragmented vs. non-fragmented” etc. Choose two of these to form two orthogonal axes of a scenario matrix, thus creating four different scenarios. Develop each of the scenarios by describing what the market would look like in that scenario. Test and/or develop your strategy taking all four scenarios into account.
Now, let’s move on to the pitfalls.
First, it is surprisingly common that you do a scenario project, develop four different scenarios, all equally plausible, and then someone gets frustrated by the fact that we still don’t know what will happen in the future and says: “OK, let’s choose one scenario”. No, let’s not … we recently came to the conclusion that they are equally plausible, didn’t we? Instead, we have to deal with the full range of scenarios and try to find a robust strategy which will stand the test of all scenarios, or at least alternative strategies, to handle all of them should they arise.
The second pitfall is a special case of “paralysis by analysis”. When it comes to scenario planning, I call it “the quest for the perfect scenario matrix”. As outlined in the crash course above, usually you try to find two important uncertainties to create a scenario matrix. There is a risk of getting stuck here, endlessly trying new combinations of uncertainties. The solution? Check if your scenarios are plausible, interesting and relevant to the issue at hand. If you can give an affirmative answer to this, the scenario matrix provides solid ground for continued work.
The third one is overestimating your own impact. Though it is a relevant strategic question: “we like this scenario best, how can we make it happen?” it is dangerous to put your faith in your ability to influence the industry development. In parallel, you need strategies to deal with the other scenarios.
Finally, we have a second version of paralysis by analysis – getting too confused by the fact that we have several plausible, yet completely different, scenarios and deciding that the best strategy is to “wait and see”. Well, in some cases it is, but more often, doing something is better than doing nothing. And if we decide to wait and see, it should be based on a thorough analysis and not a reaction to a confusing future.
After all, the future is by definition confusing, since it hasn’t happened yet. This also means that there is plenty of room for us as individuals and organisations to create great opportunities in that very future. And to help us do that, scenario planning is a very valuable tool.