Have you ever been in the room when someone suggested doing scenario analysis? Did you see everyone in the room cringe at the thought?
I have, and I felt pity for the person who made the suggestion.
Most likely, everyone in that room has gone through the endless “what if” scenario analysis that takes 4 or 5 hours and ends without any solid conclusions.
But if done correctly, scenario analysis can be extremely effective in its support of decision-making.
Personally, I prefer to use the term “scenario planning” instead of “scenario analysis” for the simple reason that “scenario analysis” sounds painful and very computer-driven. On the other hand, scenario planning is human-based and sounds like the effort and results will be useful for the participants and the final audience.
At its core, scenario planning is a “creative and structured process to guide deliberate thinking about risk,” as defined by Aries de Geus in his book The Living Company. De Geus, as the corporate planning coordinator at the Royal Dutch/Shell companies, used scenario planning and described its effectiveness in this Harvard Business Review article…from 1988!
So, with all that being said, how can scenario planning support decision-making?
1. Tests and validates assumptions being made as part of the planning process
When corporate planning occurs, whether called strategic planning, annual planning or something else, management believes that a certain set of assumptions will become true. How many times has management stated an assumption as fact? But what if they are wrong?
2. Provides management with the tools to proactively prepare
Risk management activities are supported with scenario planning, which looks at possible events. While most people inherently want to say the most positive event will occur, proactively preparing for events is always better than being reactive. Being proactive rather than reactive is a key difference between traditional risk management and ERM.
3. Encourages innovation
Scenario planning helps people to think outside of their comfort zone, taking next steps to a big innovative moment. Sometimes that innovation is triggered by the proactive preparation. An organization that is constantly innovating is a step ahead of its competitors.
4. Gives the organization a competitive advantage
Being prepared and innovative are two enormous parts of a competitive advantage. What company would not want that?
Management improves its way of making decisions simply by using scenario planning. It will take time for this way of thinking to take hold, but it stands to reap immeasurable benefits in both the short- and long-term.
After all, de Geus believes that scenario planning is the reason there are companies that last for 200 and 300 years. From the same Harvard Business Review article,
Sociologists and psychologists tell us it is pain that makes people and living systems change. And certainly corporations have their share of painful crises, the recent spate of takeovers and takeover threats conspicuously among them. But crisis management—pain management—is a dangerous way to manage for change.
Once in a crisis, everyone in the organization feels the pain. The need for change is clear. The problem is that you usually have little time and few options. The deeper into the crisis you are, the fewer options remain. Crisis management, by necessity, becomes autocratic management. The positive characteristic of a crisis is that the decisions are quick. The other side of that coin is that the implementation is rarely good; many companies fail to survive.
The challenge, therefore, is to recognize and react to environmental change before the pain of a crisis. Not surprisingly, this is what the long-lived companies in our study were so well able to do.
All these companies had a striking capacity to institutionalize change. They never stood still. Moreover, they seemed to recognize that they had internal strengths that could be developed as environmental conditions changed.
Don’t you want your organization to be around for 300+ years? Embedding scenario planning into management’s decision-making processes will help make that happen.
Are you already using scenario planning? What kind of results have you seen?
Please comment below or join the conversation on LinkedIn.
And if your enterprise risk management program is not delivering the value you need to maintain a competitive advantage, contact me to discuss how you can get a tailored action plan to help integrate scenario planning into your decision-making process and achieve your ERM and organizational goals.