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5 challenges for effective scenario planning

Introduction: Scenario planning taking center stage

The term scenario planning was first popularized by Herman Kahn and was used to imagine what could happen in the event of a nuclear war, a future without precedent. The concept was subsequently applied successfully by the corporate world from the 1970s, Shell, being a company who featured more than others. Today, in the aftermath of COVID-19, the world is faced with significant changes that will have a defined impact on the conduct of future business. Examples include climate change, sustainable living, resource scarcity, rising inequality, relevance of education models, fragility of finance systems, pace of technology advances and pandemics. In such a complex and uncertain environment, the use of scenario planning becomes necessary rather than optional.

The differences that exist between strategic planning and scenario planning

Where today’s performance is a result of decisions made in the past, tomorrow’s performance will be a result of decisions taken today about events yet to unfold. In this respect both strategic planning and scenario planning are similar in that they deal with the future.

 

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Therefore, with an increased rate of change in the business environment and heightened challenges in making confident predictions, scenario planning is the better solution to help deliver useful plans. Its primary objective is to highlight the actions required to confront a particular scenario. It prepares the organization today for the very different environment of tomorrow and helps organizations become more resilient.

5 challenges associated with scenario planning

  • It demands different skills and responsibilities. Teams should be very perceptive to the outside environment, be able to think critically and have the power to make decisions and act. It can be a challenge to compose the right team or group for this exercise.
  • The development of relevant scenarios is a mix of both creative and analytical skill. Imagination is required along with the core ability to model scenario outcomes. The latter is enabled by a significant improvement in analytical tools, especially stochastic tools. Imagination is more of a challenge since conjuring up mental models of how things should be is strenuous.
  • Scenario planning is about learning. This requires learning by accommodation rather than assimilation. In other words, team members need to have an open mind to look for insights and connections that do not fit the existing experience. This, again, is easier said than done when an organization is under operational pressure to deliver in the short-term.
  • A scenario has to be relevant, plausible and materially different to the current path on which the business is tracking. It cannot be a fantasy, but it also cannot be a simple sensitivity to the existing plan since this will not force the necessary discussion to create fundamental organization change. The challenge here is finding ways to avoid making scenarios overly complicated.
  • The process of scenario planning, unlike other planning approaches, has to be immersive and experiential. It cannot just be an intellectual exercise. In fact, there needs to be consideration of many elements outside of the existing organization’s history and memory. This helps to create fictional representations of what a scenario would look like for all relevant stakeholders. The challenge here is finding the skills and time required.

Summary: Scenario planning is one way to make organizations more resilient

FP&A can play a positive role in becoming an enabler and a trusted advisor to the business by working closely with the leadership teams to overcome some of the challenges mentioned. If done well, scenario planning can lead to an ingrained imagination where organizations learn what can help them manage change continuously and exist in harmony with an ever-changing environment.

This creates an organization that is far more resilient than before and allows it to thrive in the long term. Unfortunately, scenario planning as a result of these challenges is often seen as a luxury where the costs outweigh the tangible benefits to an organization’s decision-making process. In the current uncertain business environment, that is a missed opportunity.

Ready to learn more?

To discover more about how Unit4 FP&A can help your organization create a working process for scenario planning, check out our dedicated product pages here or click here to book a live demo.

Picture Amrish Shah

Amrish Shah

Amrish Shah, FP&A professional and author at FP&A Trends

Amrish Shah is a senior finance leader with 20+ years of financial management experience in international organisations including Unilever, O'Neill Group, Staples, Royal Wessanen, Kao, EndemolShine.

A qualified management accountant with CIMA, Amrish has held both staff and line roles managing teams of up to 40 people and has a clear belief in the value of finance at both strategic and operational levels to the organisation.