Great Business Ideas: Scenario planning

Great Small Business Ideas to Start: Scenario planning

Scenario planning enables organizations to rehearse the future, to walk the battlefield before battle commences so that they are better prepared. Scenarios are not about predicting future events. Their value lies in helping businesses understand the forces that are shaping the future. They challenge our assumptions.

The idea

In the 1960s, Pierre Wack, Royal Dutch/Shell’s head of group planning, asked executives to imagine tomorrow. This promoted sophisticated and responsive strategic thinking about the current situation, by enabling them to detect and understand changes.

Pierre Wack wanted to know whether there were other factors in the supply of oil, besides technical availability, that might be uncertain in the future. He listed stakeholders and questioned the position of governments in oil-producing countries: would they continue increasing production year on year? By exploring the possible changes to government policy, it became apparent that these governments were unlikely to remain amenable to Shell’s activities.

Many oil-producing countries did not need an increase in income. They had the upper hand, and the overwhelming logic for the oil- producing countries was to reduce supply, increase prices, and conserve their reserves.

When the 1973 Arab–Israeli War limited the supply of oil, prices rose fivefold. Fortunately for Shell, Wack’s scenario work meant Shell was better prepared than its competitors to adapt to the new situation—saving billions of dollars, it climbed from seventh to second place in the industry’s profitability league table. It knew which governments to lobby, how to approach them, where to diversify, and what action to take with each OPEC member.

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Scenario planning enables leaders to manage uncertainty and risk. Above all, scenarios help firms to understand the dynamics of the business environment, recognize new opportunities, assess strategic options, and take long-term decisions.

In practice

  • Scenarios are not predictions: they are used to understand the forces shaping the future. What matters is not knowing exactly what the future will look like, but understanding the general direction in which it is moving—and why.
  • Plan and structure the scenario process: for example, by agreeing who will be involved.
  • Discuss possible futures (usually by working back from a possible view of the future).
  • Develop the scenarios in greater detail.
  • Analyze the scenarios: why they might occur, what you would do if they did.
  • U se the scenarios to shape decisions and priorities.