Scenario Planning and Forecasting

 

Scenario Planning Concepts

Scenario planning is a group exercise to help identify opportunities for the future. It involves developing detailed scenarios for the opportunities of interest.   The results of Scenario planning are used as strategic plan input when exploring future innovations that could exist 10 years or more from now.  The scenario planning process steps are summarized below (Wade, 2012; Indeed, 2022):

1. Frame the challenge by identifying the key topic.
2. Gather information on factors that potentially affect the key topic.
3. Identify driving forces that impact future business for the key topic.
4. Define critical uncertainties associated with the topic.
5. Generate the scenarios and associated strategies for potential futures.
6. Evaluate potential opportunities and impacts of each scenario.
7. Refine the scenarios and create storylines for each scenario.
8. Use scenario analysis results to make decisions about how the business needs to adjust.
9. Update policies and strategies to align with the decisions made.

The Scenario Planning process provides a solid understanding of possible solutions and associated potential business outcomes and impacts (Beale, 2023).   This knowledge enables “intelligent bets” on the strategy for the future to be made by decision-makers.  

Traditional Forecasting Concepts

Forecasting is the practice of predicting the future based on analysis of past and present events using historical data (Schmidt, n.d.). It is used as a decision-making tool to help businesses cope with future uncertainty. Businesses use forecasting as a planning tool.  The steps involved in forecasting include (Beale, 2023):

• Establish the forecast baseline by identifying the current state of the business or industry.
• Estimate the future business or industry operations.
• Review previous and current forecast data to determine trends.
• Use the forecast data to make strategic business decisions that affect future business operations.

Two methods for forecasting are: 1) the qualitative method which uses expert judgments, and 2) the quantitative method which is based on data and mathematical processes. 

Qualitative forecasting models rely on expert opinion and are used to develop short-term forecasts. Examples of qualitative forecasting models include interviews, on-site visits, market research, polls, and surveys (Tuovila, 2023). Quantitative methods apply statistical models to data to generate forecasts (Tuovila, 2023).

Forecasting is a planning technique that enables businesses to strategize the next steps, address uncertainties that exist, and create budgets to align with future business plans.  The success of a company depends on how well it can forecast and adapt business operations and strategy (Rohrbeck & Kum, 2018).  

Comparing Scenario Planning and Traditional Forecasting

Scenario planning and forecasting methods share some common activities, that when performed, enable data-based strategy and decision-making:

• Utilizes past and current data to identify trends and the effects of past events
• Uses trends data results to strategize for the future
• Predicts the future based on analysis of past and present events 

Both methods may take significant time, effort, and money investment to analyze past and current data and perform the analysis.

One difference between the two methods is that scenario planning must be performed continuously since factors that impact the scenarios and plans change.  Forecasting can be performed at any time, but not necessarily continuously.  Another difference is that forecasting assumes that the future will be like the past, so only one “future” is explored (Indeed, 2022).  Scenario planning may offer an advantage in this area regarding innovation cultivation since “multiple futures” are explored. 

One disadvantage of the forecasting method is that it presents a “best guess” since the future is unknown (Tuovila, 2023), however, we sometimes use the prediction as an expectation.   For example, stocks may experience a sell-off when quarterly reports indicate that the earnings missed the analysts' forecasted value (Johnston, 2019).

References

Beale, M. (2023, May 15). Scenario Planning: Developing Pictures of The Future. Itonics. https://www.itonics-innovation.com/blog/scenario-planning-developing-pictures-of-the-future#:~:text=Scenario%20planning%20is%20a%20strategic%20tool%20commonly%20used,appropriately%2C%20evaluate%20innovation%20opportunities%20and%20inform%20proactive%20responses.

Indeed (2022, March 20). Scenario Planning: Strategy, Steps and Practical Examples. https://www.indeed.com/career-advice/career-development/scenario-planning

John Galt (2019, May 22). 3 Advantages and 3 Disadvantages of Forecasting. https://johngalt.com/learn/blog/3-advantages-disadvantages-of-forecasting

Johnston, M. (2019, June 25). These Stocks are Getting Crushed for Missing Profit Forecasts. Investopedia. https://www.investopedia.com/these-stocks-are-getting-crushed-for-missing-profit-forecasts-4685638

Rohrbeck, R., & Kum, M. E. (2018). Corporate foresight and its impact on firm performance: A longitudinal analysis. Technological Forecasting and Social Change, 129, 105–116.

Tuovila, A. (2023, May 27). Forecasting: What It Is, How It’s Used in Business and Investing. Investopedia. https://www.investopedia.com/terms/f/forecasting.asp