What is scenario planning?

Scenario planning is a strategic process in which businesses imagine a range of possible scenarios or events that could impact their operations. It involves outlining these possible situations and their effects, and determining how to prepare for and respond to them to ensure the business adapts and thrives. Scenario planning is sometimes used interchangeably with scenario analysis, but the latter is typically more data-driven. Scenario planning on the other hand, is broader and often forms part of a company’s overall risk management strategy.

Why is scenario planning important?

Over the past decade, the UK has experienced significant economic, social and political changes, many of which have created uncertainty for businesses. Events such as Brexit, six changes in Prime Minister, the Covid-19 pandemic, the passing of Queen Elizabeth II, the Cost-of-Living Crisis and a change in government have all had the potential to profoundly impact organisations.

The global Covid-19 pandemic, in particular, was a scenario many businesses could not have anticipated. While such crises are often considered ‘wild card’ events in scenario planning, preparing for a wide range of potential risks and opportunities – even those that seem unlikely – can help your company adapt more quickly to unexpected challenges.

What kind of scenarios can you plan for?

The scope of your company’s scenario planning can be as broad as necessary, covering personal, local, national or global events. Below are some examples of scenarios that could impact your business:

• Illness, injury, death or departure of a key partners (including any situation that impacts your own availability)
• Destruction of your business premises due to an accident, natural disaster or crime
• War, civil unrest or another national crisis
• Economic recession
• High inflation
• Lawsuits
• New laws or regulations that challenge the legality of your current operations
• An incident that harms your business’s reputation
• Arrival of new competitors
• New innovations or trends that threaten the need or demand for your products or services
• Issues with your supply chain or the cost of materials

Not all scenarios impact businesses negatively – planning for positive scenarios is equally important. For example, launching a product that goes viral or receiving significant media attention could lead to a sudden influx of customers. Scenario planning to handle increased demand can help you capitalise on these unexpected opportunities without letting your customers down.

Read more: Seven steps to creating your business contingency plan

Advantages of scenario planning

Implementing scenario planning in your business can offer many benefits. Below are a few of the potential advantages:

• Can prevent business closure or other significant challenges if a planned-for scenario occurs
• Provides an enhanced sense of security and stability
• Encourages flexibility and builds resilience
• Boosts creative thinking
• Creates a future-focused growth mindset
• Improves ability to forecast trends
• Fosters better communication between key partners, employees and even customers

Related: Ways to promote creativity and innovation in the workplace

Disadvantages and limitations

Scenario planning may not be right for all businesses and can have limitations, including:

• Gathering and analysing data and developing scenarios can be time- and resource-intensive.
• Even when carried out meticulously, scenario planning does not guarantee specific outcomes, and it’s not typically possible to plan for every possible event.
• Small businesses can lack the necessary resources, such as finances and personnel, to conduct thorough scenario planning.
• Inaccurate or poor-quality data or unreliable sources can lead to flawed outcomes and incorrect assumptions.
• For business owners prone to anxiety, scenario planning may add unnecessary stress.
• It may stifle creativity and reduce risk-taking, potentially hindering growth and innovation.

Types of scenario planning

Scenario planning can take many forms. The approach you choose typically depends on your business needs and goals. Let’s look at six common categories of scenario planning:

1. Quantitative scenarios

Quantitative scenario planning is a finance-focused process that uses numerical data and statistical models to predict best- and worst-case future outcomes. These scenarios often focus on measurable factors such as revenue, costs, trends and inflation. Commonly used in data-driven businesses, quantitative scenarios rely on access to reliable historical data and often employ tools like spreadsheets or specialised software.

2. Qualitative scenarios

These scenarios examine potential situations and outcomes based on narrative-style information. This could include expert opinions, partner experiences, employee or customer feedback, brainstorming or case studies. Qualitative scenario planning can be useful when quality data is lacking or when dealing with non-measurable factors like trends, market changes, new regulations or crisis events.

3. Normative scenarios

Normative scenarios are less about managing risks and more about goal-setting. This type of strategic planning involves setting your business objectives and desired outcomes, then working backwards to determine the steps you need to take to achieve them.

4. Operational scenarios

Operational scenario planning focuses on the short-term effects of specific events and their impact on your business’s day-to-day operations. Examples of potential events include supply chain issues, staffing challenges or equipment failures.

5. Strategic management scenarios

Strategic management scenarios – sometimes called alternative futures – focus on the environment in which consumers purchase goods and services. This involves making high-level decisions to guide the direction of your business and can be useful when your business is undergoing significant change, such as entering a new market, launching a product, scaling or downsizing. Key considerations include long-term trends, your market position and your competitors’ actions.

6. Probability based scenarios

Probability-based scenario planning deals with data and statistics to calculate the likelihood of future events. If you have limited resources, this type of scenario planning can help you focus on installing safeguards and contingency plans for the most likely events while directing fewer resources to the least likely ones.

Related: A complete guide to SWOT analysis for small businesses

Steps and best practices for scenario planning

To maximise the benefits of scenario planning, follow these steps and best practices:

• Work within a timeframe: Begin by setting a specific timeframe to assess potential events. This might involve looking at the likelihood of political change, economic upheaval, new technologies and changing consumer behaviour. Timeframes are particularly important for normative scenario planning, where you are setting business goals.
• Identify external factors: Determining the economic, political, environmental, social and regulatory environment helps lay a robust foundation for your scenario planning. Consider conducting a PESTLE analysis to guide this process.
• Determine key uncertainties or risks: Pinpoint uncertainties or risks that could impact your business. From here, look at best-case and worst-case scenarios and assess the likelihood of each one.
• Select and develop main scenarios: Use a combination of data, expert opinions and creative thinking to expand on the most realistic scenarios your business could face.
• Analyse potential impact and create strategies: Evaluate how each scenario may affect your operations, finances, supply chain, customers and other key areas. Then, outline actionable steps to take to mitigate risks and capitalise on any opportunities.
• Involve partners and staff:  Engage internal partners and where appropriate, external parties like suppliers or regular customers. This approach enhances transparency, fosters accountability and encourages the exchange of ideas to refine your scenarios.
• Leverage technology and expert advice: MS Excel is a classic tool for scenario planning. You can also invest in business analytics software or use scenario planning templates to streamline your process. If resources allow, consider hiring consultants or industry experts to share their analyses and opinions.

Understanding how scenario planning works can be beneficial to your business, even if you choose not to undertake it as a formal process. Simply having this knowledge can change how you approach business decisions and encourage you to consider a broader range of potential risks, opportunities and outcomes each time you’re implementing changes or new processes. Detailed scenario planning can offer even greater benefits and foster growth and longevity for your business.