Scenario planning: Navigate uncertainty with confidence

Traditional planning is usually constructed on the assumption that tomorrow’s world will be much like today’s, and is usually based on a single course or scenario. In some cases, it incorporates sensitivity analysis structured around changing key variables.

But scenario planning is more than just a financial planning tool—it’s an integrated approach to dealing with uncertainty.

It’s about visualizing different representations of an organization’s future based on differing assumptions about the business environment and the forces driving the market. It’s about understanding the impact with the goal of creating higher levels of preparedness.

In this respect, scenario development is just as important as the final product.

Key benefits of scenario planning

Incorporating scenario planning into strategic and financial planning cycles brings several key benefits. It:

Embraces and structures uncertainty
Builds an understanding of the broader business environment across the organization – It’s not just the responsibility of finance. It requires input from key departments from the beginning to the end of the process.
Helps organizations think flexibly and creatively, allowing alternative views and new ideas to surface.
Makes key assumptions explicit and surfaces hidden risks – It forces organizations to articulate and test their critical business assumptions.
Shifts your business strategy from reactive to proactive, preparing teams to mitigate risks if the worst-case scenarios materialize and take advantage of positive opportunities that may arise.
Helps identify sure-fire strategic decisions to pursue and leads to the development of more thoughtful and resilient plans.

How to implement an effective scenario planning process

Scenario planning isn’t one-size-fits-all—it must be tailored to an organization’s specific needs, circumstances, teams, and the technology and resources they have available.

However, a solid approach generally follows a few key steps:

1) Determine your direction and long-term goals.

Many of us do strategic plans that cover the next 3-5 years. This is done before we enter into a new financial year, do the budget, or start carrying out rolling forecasts every month.

2) Bring the right stakeholders together

You need to decide who's going to be at the table with you. Which individuals need to participate in discussions about the scenarios and alternative futures that you want to design strategies for?

3) Identify the key drivers that could impact success

The risk team, strategy team, commercial team, and divisional leadership usually sit together and determine the key factors that impact the targets that you’ve set.

You need to consider the main drivers that will significantly alter the numbers and dynamics of your organization and what internal and external forces may change the factors that are important for them. For example, it could be the price of a raw material, competitors, fuel prices, energy costs, etc.

4) Discuss conditions, assumptions, and probabilities

Talk to your key stakeholders about the conditions your company is currently operating in and the conditions you think they'll need to operate in for the next three to five years.

Discuss your assumptions and the probabilities of what may happen, and agree on four or five scenarios that are worth dedicating time to.

5) Run and evaluate the impact of your scenarios

Once you've got your 4-5 scenarios, both positive and negative, run and evaluate the impact of each one. It doesn't matter which tool you use to do this, but the more powerful it is, the better. You’ll be able to run quicker, better scenarios, but remember, it's not about quantity; it's about quality.

You then need to analyze each scenario’s potential effects on things like P&L and cash flow to get a good understanding of the financial implications.

6) Identify early indicators and mitigation actions

You need to pinpoint the early signals that those scenarios are materializing. You then need to work with the broader team to figure out mitigation actions and exploitation strategies that preserve or deliver on your set direction and long-term strategy. What are you going to do if this scenario materializes? How are you going to react?

7) Monitor drivers

Once you’re happy with the indicators you’ve defined and you have a solid strategy in place, keep track of those scenarios and monitor the key drivers that you’ve identified. Doing this will give you the early signs that those scenarios are actually materializing. Refresh your scenarios, and then act accordingly.

What makes a useful scenario?

Not all scenarios are created equal. A useful scenario should be:

Relevant – It directly impacts the business and its strategic goals.
Plausible – Not extreme (e.g., an alien invasion) but grounded in reality.
Material – The impact must be significant enough to warrant planning.
Consistent – You should avoid mixing external factors that generate conflicting dynamics in your business. For example, if you’re looking at a recession scenario, you don't want to model entering into a new market or making a big investment at the same time.
Measurable – You need clear metrics that demonstrate a scenario is materializing.
Collaborative – It needs input from multiple departments, not just finance.
Iterative – It needs to be updated and refreshed regularly as circumstances change and new information comes in.
Informative – It needs to help the whole organization, so it should tell a clear story that guides decision-making.

Overcoming common challenges in scenario planning

Implementing scenario planning isn’t always easy. Here are some of the biggest challenges organizations face and how to overcome them:

Integration within the financial planning cycle

Scenario planning needs to become an integral part of how you do financial planning. At the same time you’re building your bottom-up financial projections, you need to start sitting with the relevant people you want to involve and think about the scenarios you want to build.

You want to have relevant conversations and arrive at outputs that connect to your strategy and financial planning cycle.

Leadership buy-in

Some executives resist scenario planning because they only want to hear that their targets are achievable. Therefore, you need to educate leadership on the value of preparedness, how potential scenarios may impact the business strategy, and what changes need to be put in place.

Culture and collaboration

You need to bring the right people into your scenario-planning process if you want to make a meaningful impact on your organizational strategy.

Resource constraints

Scenario planning takes time and effort, but investing in it upfront prevents costly mistakes later on.

Technology

While Excel can work, advanced tools can significantly improve the efficiency and accuracy of your scenarios.

At DS Smith, we’re working on enhancing our scenario planning capabilities by integrating new financial modeling tools to make the process faster and more robust.

Final thoughts

If you’re not already incorporating scenario planning into your strategic and financial planning cycle, now is the time to start. The world is unpredictable—markets shift, crises emerge, and new opportunities arise. Companies that proactively prepare for potential futures will always have a competitive edge over rivals that aren’t so agile.

This article is based on a presentation given by Cesar Gomez Nieto, Group Head of Financial Planning and Analysis at DS Smith, at our FP&A Summit, London in 2023. Catch up on this presentation, and others, using our OnDemand service. And for more exclusive content, check out your membership dashboard.

Scenario planning: How to navigate uncertainty with confidence