Scenarios in Strategic Planning: Full Guide with Examples

Scenario planning helps organizations increase business resilience and prepare for future challenges. Learn how to formulate different types of scenarios and align them with overall strategy. 

What is Scenario Planning?

Scenario planning is a disciplined way to formulate strategic hypotheses in the context of existing driving forces and their uncertainties.

It helps to:

• Better prepare organization for the new challenges, and
• Increase general business resilience – the organization’s ability to better adapt to the ever-changing environment.

The Role of Scenarios in Strategic Planning and Risk Management

Any strategy is based on hypotheses and scenarios. What value does scenario planning add to strategic planning?

With scenario planning, we are trying to get a broader picture of the hypotheses by extrapolating the existing driving forces and creating plausible scenarios.

From the viewpoint of the strategic planning process, scenario planning can be used in the strategy formulation step¹ (step 2) together with other frameworks that help generate strategic hypotheses.

The same broad picture of hypotheses helps to understand the risk landscape better. Diverse scenarios and simulations via wargaming² help to create more detailed risk models and risk mitigation plans.

Could We Be Better Prepared for Covid-19 with Scenario Planning?

Have a look at the PESTEL analysis article published right before Covid-19 became a pandemic. Some of the mentioned trends were:

• Political stability
• Economic growth, inflation rates, exchange rates
• Workspace and lifestyle changes
• Climate changes, natural disasters

There was no “Covid-19” mentioned (although at that time, there were some serious warnings coming from Asian countries). Still, with those general trends in mind, any organization could start scenario planning by asking a number of “what if…?” questions:

• What if the political regime changes in the country we are working with? What would be early signs of this? What could be our mitigation strategy?
• What if the inflation rate rises? What financial indicators could predict this? How would it affect our financial sustainability?
• What if our best talents prefer to work from home to achieve a better work/life balance? How would we communicate? How would we measure their performance?
• What if a natural disaster happens tomorrow? What is our business continuity plan?

With scenario planning based on the findings of PESTEL analysis, it looks like we could have scenarios for around 30% of the challenges that we faced during the pandemic and afterwards.

The Steps of Scenario Planning

Here is a three-step approach to scenario planning by the BSC Designer team:

• Step 1. Breakdown Driving Forces into Uncertainties
• Step 2. Formulate scenarios and classify them into three groups
• Step 3. Formulate response plans and quantify scenarios

Step 1. Breakdown Driving Forces into the Uncertainties

Identify the driving forces for your organization by using:

• PESTEL analysis to analyze the external environment
• Five Forces to analyze the competitive landscape

The global driving forces need to be broken down into more specific uncertainties relevant for your organization. Let’s use our PESTEL template to practice it with some driving forces.

Driving Force: Climate Change

In the latest IPCC’s Assessment Report³, several climate change scenarios were presented. In essence, the report discusses different warming scenarios depending on the decarbonisation efforts.

Two initiatives and one risk factor ('Heat waves') aligned with the driving force 'Climate change'. Source: PESTEL Analysis Template.

The mentioned scenarios will have a direct impact on the energy industry. For other industries, a complex idea of climate change needs to be decomposed into specific consequences relevant to specific regions and business environments.

A starting point would be to look at the Global Change Research Program or the web of European Commission, where some specific consequences of climate change are outlined:

• Extreme weather,
• Heat waves,
• Forest fires,
• Flooding,
• Droughts,
• Increasing ocean acidity.

Beyond the obvious impact on agriculture, climate change will affect:

• Energy,
• Supply chain,
• Air quality
• Water quality, and
• Health.

With these ideas in mind, instead of focusing on climate change in general, your team can focus on a few uncertainties that are most relevant for your region or industry.

Alignment with Sendai Framework

The Sendai Framework for Disaster Risk Reduction⁴ was adopted by 187 countries. Designed for national governments and local authorities, it also stresses the need to incentive businesses to invest in risk reduction and business continuity planning.

Re-Use Risk Model

The adoption of the Sendai Framework by city or regional authorities includes risk assessment (see Priority 1: “Understanding Disaster Risk”). Organizations can update their risk models to incorporate the risks addressed by the local implementation of the Sendai Framework.

Align Scenario Planning

The Sendai Framework encourages authorities to incentivise sectors of business to align their scenario planning with resilience building (see Priority 2: “Strengthening Disaster Risk Governance to Manage Disaster Risk”).

The alignment can be affected:

• At the governance level,
• Through specific risk reduction initiatives, or
• By aligning with “Build Back Better” recovery programs.

Driving Force: Remote Work

Remote work is here to stay⁵. In 2021, we saw that:

• 40+ countries introduced special visas for digital nomads
• Many countries introduced new legislation to regulate remote work
• Most countries, for example, Spain, focused their legislation on domestic remote work

A broad driving force 'Remote employment' is aligned with driving force 'Workspace and lifestyle changes'. Source: PESTEL Analysis Template.

What are the future challenges of remote work? According to the KPMG report ⁶, one of the emerging trends is the cross-border remote working arrangements.

• Allowing an employee to work from home is not the same as offering the same person to work from another country.

Is this uncertainty relevant for your organization? In our case (we are a team of remote specialists), the broad driving force “remote work” can be projected into a specific uncertainty of “cross-border remote work.”

Driving Force: Cybersecurity Threats

Cybersecurity is another emerging trend. How can we break down this broad driving force into something more specific?

The threat 'Ransomware attacks' is aligned with the 'Cybersecurity' driving force detected by PESTEL analysis. Source: PESTEL Analysis Template.

Here are the typical cybersecurity threats we discussed in the previous article:

• Cyberattacks
• Ransomware
• Insider threats
• Data loss
• Data corruption

Depending on the data flows in your organization and underlying IT infrastructure, you can pick a few relevant uncertainties. For example, a ransomware threat looks relevant for any organization.

Ransomware is still a very broad uncertainty. For example, its more specific projection could be the uncertainty associated with cloud deployments being the target⁷ of ransomware attacks.

Step 2. Formulate and Classify Scenarios

Once the general threats are projected into uncertainties, we need to better formulate the scenarios and agree on how to manage them.

Describe Scenarios as Stories

Shell was one of the pioneers in the large-scale application of scenario planning for business. There are many things we can learn from them, and probably the most important one is that possible scenarios formulated as stories work better. Those scenarios are easier to explain and immediately capture the attention of your team.

Besides formulating basic scenario as:

Ransomware attack on our cloud deployment

think about the story that stands behind this scenario:

“One day, you are trying to login into your online account, and it returns a strange error… Your customers start sending you reports about problems with the service. You are on the phone with IT specialists, but they say that it looks like they don’t have access to … ”

Scenarios in the form of stories are much easier to “sell” to the key stakeholders.

Three Types of Scenarios

Scenarios vary in their urgency and probability. We classify scenarios into three categories:

One scenario might fit all three categories. For example, ransomware attack:

• The scenario is obviously related to the business continuity
• The best practices for prevention of ransomware attacks will be an excellent strategic hypothesis for existing cybersecurity strategy, so it fits the second category as well
• Certain parts of ransomware scenarios should be monitored – the new policies of the law enforcement authorities as well as new scenarios of the attacks – the monitoring category

Step 3. Formulate the Response Plan and Quantify Scenarios

Different types of scenarios require different ways to formulate response plans and quantify them. Below, you will find our suggestions for:

• Business continuity scenarios
• High-priority scenarios
• Scenarios for monitoring

Formulating Business Continuity Scenarios

Disaster recovery or business continuity planning focuses on scenarios that might affect critical functions of the organization. The potential threats, in this case, are rapidly developing natural disasters, cyberattacks, resource outages, etc.

We explored business continuity management in detail in another article. Below, I share some general ideas.

Business Impact Analysis

Business continuity planning starts with business impact analysis. In simple words, we need to identify disruptions that could possibly affect our organization, identify the key operations affected by those threats, as well as critical recovery time.

The specific threats, in this case, depend on the nature of your business. A common starting point are:

• Cybersecurity risks
• Natural disasters
• Terrorist attacks

Your team can quantify the threats according to their:

• Probability
• Impact
• Early warning time
• Duration
• Overall risk priority

Business Continuity Strategies

Once the threat is described, we need to define several plans:

We are now prepared for a case of a risk event occurring. Additionally, we can discuss how to prevent such events or minimize their impact.

Quantification of Business Continuity: Readiness Indicators

Compared to other types of scenarios, the business continuity scenarios typically occur immediately or with a short early warning period. While there are no specific early sign indicators, there are certainly some leading factors that predict the readiness of your organization for a scenario.

The risk of ransomware attacks is quantified by the 'IT infrastructure complexity' metric; additional details can be explained in the aligned 'Business continuity plan' and 'Recovery plan'. Source: PESTEL Analysis Template.

For example, we discussed some of the leading indicators in the article about cybersecurity:

• IT infrastructure complexity
• Data scheme complexity
• Automation

By quantifying these leading factors, we can define the readiness indicator for the business continuity scenario.

Quantification of Business Continuity: Lagging Indicators

Additionally, we can quantify recovery plans with some lagging indicators. For example, for a cybersecurity attack, we can track:

• Time to recover from backups
• Time to restore the transactions lost between the last backup and attack
• Estimation of direct and indirect loss

These metrics will help your team to better prioritize their efforts.

Wargaming and Gap Analysis

Compared to other types of scenarios, business continuity scenarios involve fewer uncertainties. The nature of such scenarios is better studied. For example, we might not know where and when the next hurricane will hit, but we know what a hurricane is, what kind of damages are expected, and what we can do to minimize damages.

The business continuity plan can be tested via simulations of the scenarios or wargaming, where the rules of the “game,” as well as expected outcomes, are defined.

For example, what if your company becomes a victim of a ransomware attack? What data can be effectively restored from a backup? Run the simulation of attack to find the gaps and improve weak points.

After testing the scenarios, we will have additional data for the readiness indicator.

You can find more specific examples for managing business continuity scenarios in the article dedicated to the topic.

 

Formulating High-Priority Scenarios

High-priority scenarios don’t have such a dramatic impact on critical business operations like business continuity scenarios, but they might significantly affect the execution of existing strategy.

Strategic Hypothesis

Our goal is to align a high-priority scenario with existing strategy. To do this, we convert scenarios into a strategic hypothesis.

For example, one of the actionable aspects of remote work driving force is the need to access the performance of the remotely working team because the existing ways to track the performance might not work well on scale.

Let’s use the CEO scorecard template available in BSC Designer to illustrate the alignment steps. In the Learning Perspective, there is a goal formulated as Build and maintain an engaged team.

The shift to result-based performance assessment is a good hypothesis to test for this goal.

The hypothesis 'Shift to result-based performance assessment' is formulated for the 'Build and maintain engaged team'. Source: CEO Scorecard.

Quantification of the Hypothesis: Impact Indicators

Typically, the high-priority scenarios already have some kind of impact on business performance. In our example, we can quantify the existing impact of the remote work scenario with these indicators;

• % of employees working remotely
• % of tasks completed on “time, in full” (compared to in office tasks)
• Mismatch between reported performance and actual performance

Plausible scenario, driving force and uncertainty in the description field of the hypothesis. Source: CEO Scorecard.

Additionally, we can find some process-related indicators. For example:

• % of remote team evaluated according to the new standard

Formulating Scenarios for Monitoring

The Cross-border remote work scenario that we discussed above sounds like something that we can see in the near future. We can map it in a separate scorecard with plausible scenarios.

Possible Response Plan

To define the possible way the scenario will be developed, we can speculate on the worst/best cases of developing an uncertainty and put it on scale. For example:

• Worst case: new legislation makes cross-border remote working illegal
• Best case: new legislation for cross-border remote work is accepted in many countries and provides detailed guidance

In this example, the legal landscape can be changed, so we formulate response plans for this scenario:

• Legal consultation according to the current legislation
• Update business systems to ensure cross-border clauses are added to the agreements
• Ensure compliance from the viewpoint of cybersecurity and data privacy (for example, by using the dedicated compliance scorecard)
• Educate the HR team

Quantification: Early Sign Indicators

In contrast to high-priority scenarios, most likely, we won’t find the impact indicators, as there is no impact yet. We can speculate about the possible impact, but it might be too early.

In this case, we can track the qualitative or quantitative early sign indicator. For example, we can look at the projects for new legislation that addresses specifically cross-border remote working.

An example of the early sign indicator ('The number of keyword-specific news on the topic') aligned with the 'Employment laws' trend. Source: PESTEL Analysis Template.

Quantifying the existence and the progress of such projects directly might be time-consuming, so instead, we can find a proxy metric. Typically, the new legislation is widely announced and discussed in the press. We can quantify the number of publications with certain keywords. For example, if I search Google for “cross border remote work,” now I get just 63 results in the News section and 4460 results in classical search. There are some publications by reputable sources like PWC that confirm that the trend exists, but still, there is no sign of specific legislation coming soon.

We can use The number of keyword-specific news on the topic as an early sign indicator for the scenario. This indicator is not bias-free, but it gives us a good estimation.

Changing the Priority of Scenario

What should we do with a scenario when an early sign indicator shows that things have started changing?

Depending on the scale of changes, we have two options:

• For evolutionary changes, add the scenario as a strategic hypothesis to the current strategy, like we did for high-priority scenarios before, or
• For disruptive changes, create a dedicated strategy scorecard focused exclusively on the hypotheses of this scenario, like we did for Covid-19.

Another possibility is that with time, the scenarios lose their relevance. For example, with transition to sustainable energy and distributed energy production, some energy-related scenarios will no longer make sense. In this case, we stop monitoring and archive them.

What’s our Resilience Level Now?

We started with a promise that scenario planning increases business resilience. A logical question would be:

What is our current level of business resilience?

Quantifying resilience, in general, doesn’t make sense. If we do so, we will find out how resilient organization is to the past challenges.

Talking about resilience, we are interested in understanding the readiness of the organization for the future challenges. We can make a reasonable assumption:

Having a diverse picture of the existing driving forces and investing time in discussing scenarios based on those driving forces increases the organization’s resilience

What’s next?

Give scenario planning a try! Reformulating a known saying… the best time to start scenario analysis was a few years ago, then the second-best time is now.

What's next?

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