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August 09, 2009

What is Scenario Planning and is it Useful for Small Businesses?

What is Scenario Planning and is it Useful for Small Businesses?

Steve King

Emergent Research

Summary

Scenario planning is a forecasting tool that helps managers and organizations better understand the trends driving the future competitive en

Scenario planning is a forecasting tool that helps managers and organizations better understand the trends driving the future competitive environment.  The first step in scenario planning is developing scenarios.  These are not predictions.  Instead, they are plausible and often provocative stories about how a series of trends could come together, interact and result in future outcomes.    

The purpose of scenarios is not to identify the most likely future – which is good because humans are bad at predicting the future.  The purpose is to create a series of potential alternative futures that capture a range of possibilities including good, bad, likely and unlikely events.

The act of developing and discussing future scenarios is meant to stretch our thinking and alert us to various threats and opportunities the future may hold.  They are also useful in prompting discussion and debate about the future forces that may impact industries and companies. 

Scenario planning has been around for a long time, but has lately gotten a lot of press and is getting much more popular.  This is likely due to today’s uncertain and highly complex business environment. 

Most small businesses don’t have the time or resources to hire professional futurists (yes, those folks do exist), or develop company specific scenarios.  But thanks to the Internet, there are a number of free, publicly available scenarios small businesses can use as conversation starters about the future. 

The accounting and consulting firm Deloitte describes four possible future scenarios in the latest issue of the Deloitte Review.  While broad, these scenarios provide a good starting point for thinking about the next couple of years. 

The key to scenario planning is to think through how the events in these scenarios could impact your industry and business.  For example, a post-recession inflation spike is quite possible due to global monetary easing and economic stimulus spending.  This would result in rapid price increases for most commodities and real estate.  What would this do to your industry and firm?

I’m not suggesting that small businesses should use formal planning processes that include scenario planning.  But informal use of future scenarios and trends to think about and discuss what may happen to your business over the next year or two can be very useful. 

Both Forbes and Slate have recent articles on scenario planning.