Scenario Building and Contingency Planning

Scenario Building

Nothing is more obvious than the unpredictability of the future.  Experience, has shown us that no single forecast can be totally relied upon.

One way to understand different futures within the planning process is to develop scenarios, and then design the strategy so that it has enough flexibility to accommodate whatever future occurs.

In other words, by developing multiple scenarios of the shape of things to come, an organisation can make a better strategic response to the future environment.

The prime aim of scenarios and scenario building is to enable decision-makers to detect and explore all or as many as possible, alternative futures so as to clarify present actions and subsequent consequences.  They should, thus, be prevented from making strategic decisions before they have done some strategic thinking!

The purpose of scenario building is to:

  • Augment understanding by helping to see what possible futures might look like, how they might come about, and why this might happen.
  • Produce new decisions by forcing fresh ideas to surface.
  • Reframe existing decisions by providing a new context within which they are taken.
  • Identify contingent strategies by exploring what an organisation might do if certain circumstances arise.

Steps in Scenario Building

Step 1 – Task identification and analysis

The first step of any scenario building process is to identify the focal issue in question or the specific decision that has to be made.

Step 2 – Key decision factor appraisal

The next step is specifying the key factors influencing the success or failure of the decision identified in step one.  Some common examples:

q  Market size, growth and volatility

q  Competing value offerings or substitutes resulting from new technology

q  Long-range economic conditions and price trends

q  Anticipated government regulation

q  Technology availability and capacity

Step 3 – Driving forces

The third step involves listing and exploring the driving forces of change in the environment that influence these key factors.  (From our Analysis and Evaluation section)

Step 4 – Ranking of the key decision factors

Ranking of the key decision factors and the driving forces of change on the basis of two criteria:

(i)                 the degree of importance for the success of the focal issue or key decision identified in step one.

(ii)               the degree of uncertainty surrounding those factors or trends.

Step 5 – Identifying alternative scenarios

This step is, the heart of the scenario building process.  It is at this stage where intuition, insight and creativity play the greatest role.

Contingency Planning

A basic premise of good strategic management is that firms try to plan ways to deal with unfavourable and favourable events before they occur. Too many organisations prepare contingency plans just for unfavourable events; this is a mistake, because both minimising threats and capitalising on opportunities can improve a firm’s competitive position.

Regardless of how carefully strategies are formulated, implemented, and evaluated, unforeseen events can make a strategy obsolete. To minimise the impact of potential threats, organisations should develop contingency plans as part of the strategy-evaluation process.

Contingency plans can be defined as alternative plans that can be put into effect if certain key events do not occur as expected.

Contingency planning involves the following:

  • Identify both beneficial and unfavourable events that could possibly derail the strategy or strategies.
  • Specify trigger points. Calculate about when contingent events are likely to occur. Determine early warning signals for key contingent events. Monitor the early warning signals.
  • Assess the impact of each contingent event. Estimate the potential benefit or harm of each contingent event.
  • Ensure that contingency plans are compatible with current strategy and are economically feasible.
  • Have an end game plan – and if necessary an exit strategy
  • Assess the counter impact of each contingency plan. That is, estimate how much each contingency plan will capitalise on or cancel out its associated contingent event.
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