In a perfect world, it’s easy to plan for the best-case scenario. However, we are living in unprecedented times, and the best-case scenario is rarely the reality. Roadblocks arise, industry trends shift, or unexpected opportunities catapult a business forward.
What happens if your business doesn’t hit revenue targets? What if it receives a round of funding? Or what if another global pandemic strikes? Businesses are expected to know how to navigate these uncharted waters. However, that can only be done through proper preparation.
Does your company have a best-case scenario mentality or are they planning for reality? As we have all learned from the past few years, planning for the unexpected is the new normal. By preparing for the future, organizations will better be able to course-correct as needed.
While companies cannot predict what’s to come, they can still plan for the unexpected. This can be done through strategic scenario planning.
In this article, we're diving into the ins and outs of the different types of scenario planning so your team can continue to grow and excel no matter what the future holds.
What Is Scenario Planning?
Scenario planning is the process of making assumptions about the future and predicting how your business will be affected. By preparing for what could happen, you will better be able to react and respond to forthcoming obstacles. This process gives organizations the power to go from reactive to proactive in their strategic planning initiatives.
Simply put, scenario planning allows organizations to plan for the future with multiple outcomes. For an organization to achieve this level of preparation, it must be able to identify the potential circumstances and their corresponding outcomes. These circumstances can be both positive and negative or lead to a variety of responses. However, the main purpose is to better prepare business leaders of an organization to make the right decisions to continue to support an organization’s growth.
How Does Scenario Planning Work?
As the name suggests, scenario planning is all about outlining different business scenarios and uncovering an organization’s possible responses. By raising awareness of the plausible scenarios, leaders are better able to react as needed.
There are four basic steps when it comes to the scenario planning development process. These steps include:
- Identify the main drivers
- Identify critical uncertainties
- Develop possible scenarios
- Discuss potential pathways forward
Once these steps have been completed, senior management can brainstorm together to discuss how their organization may change or evolve in the future. This kind of strategic thinking allows finance teams to quickly adapt and identify the potential impact of any potential scenario.
Why Is Scenario Planning Important?
We know that practicing scenario planning allows leaders to stay agile in an ever-evolving environment. However, what are the other advantages that come with a scenario plan?
Finance teams that prepare for different scenarios are more likely to have a competitive advantage. Let’s take a moment to think about what happened during COVID-19. No one could expect that our economy would swing to a sudden halt. That's a scenario that companies would have never seen coming. However, the organizations that quickly adapted to this massive shift were the ones that were able to survive.
Aside from mitigating risks and improving agility, scenario planning also allows senior management to make more strategic decisions for their organization. By having a clear scenario planning framework, leaders within an organization have greater insight when it comes time to create their financial forecasts.
What Are the Different Types of Scenario Planning?
Finance teams have several methods of putting this principle into practice. The fundamental types of scenario planning include:
- Quantitative scenarios
- Operational scenarios
- Normative scenarios
- Strategic management scenarios
Quantitative scenarios include best-case and worst-case scenario planning model outputs. When it comes to this type of scenario plan, finance teams are able to quickly adapt models by changing minimal factors. By assuming key variables and corresponding relationships, finance teams can easily create financial forecasts and budgets as needed.
Operational scenarios, or event-based scenario planning, are some of the most widely used scenario planning models used by finance teams today. This model reviews the immediate impact of a specific event and how an organization will respond to it.
Normative scenarios, also known as prescriptive scenarios, are used to predict a company’s most desired outcome. Normative scenarios help an organization shine light on how it would like its business to operate in the future. Once it has a clear vision of its end goal, it can then work backward to identify the pathway to get there.
Strategic Management Scenarios
Instead of focusing on the actual company, strategic management scenarios strive to paint a picture of the overall environment in which the organization operates. When it comes to this type of scenario planning, professionals shift their focus from more minor issues to greater challenges that may affect their organization.
How to Turn Scenarios Into Strategy
So now that you know what strategic scenario analysis is, it's time to bring these ideas to life.
When you first start implementing a scenario planning strategy, keep it simple. One of the biggest mistakes finance teams make when conducting scenario modeling is overcomplicating the process. Of course, there are endless scenarios that could play out. Instead, focus on the most relevant or realistic cases that would apply to your specific organization. By focusing on two to three different scenarios, your team will better be able to prepare for these specific cases during the planning process.
When fleshing out the alternative scenarios, include the different stages for each outcome. Have a clear idea of the average case, best case, and worst-case scenario. Not only will this provide greater insight into the plausible scenarios, but it also provides a more consistent framework for future planning.
How the Finance Function Can Support Scenario Planning
In times of uncertainty, companies have no choice but to stay agile. When building models and budgets, unexpected circumstances such as economic shifts, emerging opportunities, or even global pandemics can arise. In order for organizations to steadily push forward, they must stay on their toes and adjust as needed.
By having more strategic foresight when conducting financial forecasting and planning, teams can reduce risks and align on organizational objectives. In addition, by following best practices and implementing the right tools, financial analysts can use scenario planning to drive valuable insights and be more strategic in their everyday work.
To equip your team with the right resources, you need to go with a strategic finance solution that supports quick scenario analysis and can uncover the potential impact of any possible outcome.