9.1 Scenario-based forecasting

How to use and do scenario planning (Scenario Planning Matrix)

Análisis Competitivo y Estrategia

CTE | COORDINACIÓN DE TECNOLOGÍA EDUCATIVA

Contemplate as you prepare to plan scenarios

Provide break-even analysis

Model with basic scenarios

Assemble the right team

Get the right data

Key Steps in Scenario Planning

Step 4

Build a nimble response strategy

Step 3

Create a Scenario Planning Matrix to develop multiple scenarios, but keep it simple

Step 2

Identify critical triggers even in the midst of uncertainty

Step 1

Define the parameters for the scenario planning and the work approach

Step 1: Define the parameters for the scenario planning and the work approach

Avoid doing this:

• Avoid developing scenarios without defining the issues first.
• Don’t develop too many scenarios – three is a good starting point. Beginning with your best guess at how business will go, add one scenario for things going better and another for things going worse. A good starting point is 50% for best guess, then 25% for things going better and 25% for things going worse.
• Do not attempt to develop the perfect scenario – more detail does not mean more accuracy.
• Avoid becoming fixated on any one scenario.
• Don’t hold on to a scenario after it has ceased to be relevant.

Do this:

• Secure commitments from senior management or owners, select team members and organize scenarios around key issues to be addressed and evaluated.
• Define assumptions clearly, establish relationships between drivers and limit the number of scenarios created.
• Make sure each scenario presents a logical view of the future.
• Focus on material differences between scenarios.
• Indicate KPIs, and refresh scenarios and update assumptions on a regular basis.

Step 2: Identify critical triggers even in the midst of uncertainty

• When faced with a crisis, finance leaders quickly establish guidelines for how the organization should respond by developing multiple scenarios.
• These scenarios are built on a set of assumptions around events that affect the survival of the organization and should trigger a series of actions.
• In times of crisis, companies need to combine historical data with plausible outcomes to determine ramifications for each part of the organization.
• Scenario plans can give leaders breathing room to slow down and assess economic, political and environmental factors.
• These prioritized factors are a critical part of crisis scenarios.

Step 3: Create a Scenario Planning Matrix to develop multiple scenarios, but keep it simple

• When building multiple scenarios, it’s easy for finance teams to feel overwhelmed by the range of potential outcomes.
• How can anyone properly plan for so many possibilities? Simply put, you can’t. That’s why it’s best to keep it simple.
• Focus on two to three major uncertainties and build scenarios from there. Finance leaders need to prioritize and develop perspectives about each of the scenarios to help the company navigate.
• Scenario Planning Matrix:

Step 4: Build a nimble response strategy

• Each scenario should contain enough detail to assess the likelihood of the success or failure of different strategic options.
• Once this is all in place, finance leaders can create a framework that helps the executive team make decisions.
• Any decisions made need to be monitored in real-time so the team can be nimble in its ongoing response.

Bibliography

• Ali, R. & Luther, D. (May 14th, 2020). Scenario planning: strategy, steps and practical examples. Retrieved from https://www.netsuite.com/portal/business-benchmark-brainyard/industries/articles/cfo-central/scenario-planning.shtml
• Drucker, R.F. (1974). Management: Tasks, Responsibilities, Practices (p. 104). New York, NY: Harper & Row.
• Hofer, C.W. and Schendel, D. (1978). Strategy Formulation: Analytical Concepts (p. 4). St. Paul, MN: West Publishing.
• Johnson, G., Scholes, K. and Whittington, R. (2008). Exploring Corporate Strategy (8th edn). Harlow, FT Prentice Hall.