An effective scenario planning process provides CEOs with the insights, clarity and confidence to make the right strategic decisions for their company’s growth.
Follow these five steps to make it happen:
1) Invest the time to make it happen
Good scenario planning doesn’t happen by accident. The siren call of day-to-day business challenges can be hard to resist, and our brains aren’t wired to switch easily between short-term responsive decision making and long-term strategic thinking. But where focus lands, action follows. As CEO, you need to be deliberate about investing time to look into the future.
We’re not talking here about looking just a few months ahead. Ideally, the CEO planning horizon extends from twelve months out to five years. Why? Because at this timeframe, we can quieten the noise of the everyday and concentrate instead on the bigger picture. The further ahead we see risks and opportunities, the longer we have to prepare the business to make the most of whatever is coming.
It’s important to book time for these sessions in the calendar. Plan to get out of the office. Find a place that puts you in a creative and perceptive frame of mind. Set yourself up with whatever materials help you think better. Invite the key members of your team, including external advisors who can bring a different perspective.
2) Identify a range of scenario stories
Nobody knows for sure what’s going to happen in the future. For most businesses, there are many possibilities. So, the task here is to map out a series of scenario stories, each one based around a different set of assumptions. Make sure to consider both good and bad possibilities.
There are two ways to approach this step … ‘today into the future’ and ‘the future back to today’. We find that working both directions triggers more creative thinking. We’re looking for a small number of scenario stories for more in-depth analysis. How many? Start small to keep it manageable - ideally three and no more than five.
Today into the future begins with today’s business and then considers what could change, e.g. gaining or losing customers, competitors or staff, doing more or less of current activities, starting new initiatives, stopping existing ones. The questions here often start with ‘what would happen if …’. Start by looking at the coming twelve months, then repeat the process for the next twelve and so on.
The future back to today begins with a series of visions of where you want the business to end up and then steps back to today. Questions here start with ‘what would it take to achieve …’. Document these goals and then work backwards, identifying key milestones that need to be met along the way. You might need to iterate these pathways a few times to make sure they’re realistic - it’s a great sanity check.
3) Model the impact of each scenario story
To better analyse each of the scenario stories, we need to model the financial impact they would have on the business.
Take care not to simplify this modelling process. It might be tempting to increase every sales number by say five percent, but that’s not scenario modelling, it’s just ‘fun with maths’. Good modelling goes deeper, often into specific business drivers - things like headcount, tonnes and hours. You can then model how changes in these drivers will affect the business.
By definition, most (and perhaps all) of the scenario stories you have mapped and modelled will not arise. Even so, this step is essential because understanding the impact of the different scenarios leads directly to the next and most important step … the game plan for how you will respond.
4) Game Plan responses to each scenario story
If you have followed all of the steps so far, you have reviewed a whole range of business possibilities, expanded a few into scenario stories and then modelled the financial, business and operational impact of each.
Now it’s time to game plan your response. With the time and space to think clearly, you can work through the detailed insights from each scenario story and decide how you will respond at each stage … ahead of time.
Questions in this step start with ‘if XYZ scenario starts to emerge, what should we do?’. The best game plans identify trigger points, define action plans and set out who is responsible for making things happen.
Having identified the trigger points of each scenario, you can work out the best metrics to monitor … effectively building an early warning system for the business.
5) Build a Reality Review process
Scenario planning is never a one-off exercise. The world keeps on changing and your plans need to keep on evolving too. The Reality Review process is the key to this evolution. It strengthens the team’s planning and forecasting muscle, as well as their ability to respond to an increasing number of scenarios.
The Reality Review examines what actually happened and asks the following questions:
- What did we think was going to happen?
- What did happen?
- If 1 and 2 are different, why didn’t we see it coming?
- How can we improve our planning or early warning systems?
- What (if any) assumptions need to change in our planning?
Choose how often reviews should happen and book them into the calendar. It could be every three, six or even twelve months. The right frequency depends on the pace of change facing the business, both internal and external. Faster growth and more rapid change means more frequent reviews.
A well-developed scenario planning process is the key to helping CEOs reduce the guesswork and make great decisions in the face of uncertainty.