The greater the uncertainty, the greater the value of scenario planning

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I have been applying scenario planning with clients for the last decade across a variety of industries and environments, including the future of financial services, technology, capital markets, risk management, construction, Internet, Asia, and far more. As I wrote back in 1998 in an article on scenario planning in portfolio and risk management, “The greater the degree of uncertainty and unpredictability, the greater the value of using multiple scenarios rather than forecasts.”

[email protected] has just published an interesting discussion on Will a New Theory Help Firms to Manage in a ‘Flat’ World? (registration required), which looks at how executives can make sense of the rapidly changing environment. Paul Kleindorfer, a Wharton professor of operations and information management, made this very interesting comment:

In the past six months, there has been an upsurge in the number of companies coming through INSEAD [the European institute for management education] looking for assistance in scenario planning and scanning, or determining the signposts that suggest which scenario or scenarios should be the focus. Some companies — like Nestle, Unilever and Procter & Gamble — have been doing some scenario planning, but it’s been directed toward competition and technology. So these and other companies were completely blindsided by the recent increase in mineral oils — which was spurred by a law in Germany requiring power plants there to burn 10% bio-fuel by 2010 –and its impact on the vegetable oils and other ingredients they purchase for their products.

These sorts of commodity risks have escaped the scrutiny of many companies. Now they see a single government make a decision and it throws the profitability of an important ingredient out the window. So scenario planning and scanning, together with strategic modeling, intelligence and other issues, are really beginning to take on a much larger significance than before. It used to be about markets, technology and competitors, but now there’s a much richer texture.

Over the last decade I have certainly seen how the cycle of interest in scenario planning from major organizations has tracked the degree of perceived uncertainty in the business environment. The scope of the imponderable now, ranging from geopolitics to consumer behavior, overlaid on the necessity for long-term strategic thinking, means that scenario-based approaches are again on the rise. As suggested by Kleindorfer’s comments, I have seen many traditional consulting firms do scenario planning in such a reductionist manner that the scenarios cover only part of the scope of uncertainty, which entirely defeats the purpose. Today more than ever, there is massive value in engaging in scenario planning for long-term strategy development, in a way that really does uncover assumption and open out thinking across the organization.