Scenario planning, scenario thinking, scenario analysis, scenario prediction and the scenario method all describe a strategic planning method that some organizations use to make flexible long-term plans. It is in large part an adaptation and generalization of classic methods used by military intelligence. In the most common application of the method, analysts generate simulation games for policy makers. The method combines known facts, such as demographics, geography and mineral reserves, with military, political, and industrial information, and key driving forces identified by a PEST analysis or one of its variants, which consider social, technical, economic, environmental, and political aspects of an organisation's business environment. In business applications, the emphasis on understanding the behavior of opponents has been reduced while more attention is now paid to changes in the natural environment. At Royal Dutch Shell for example, scenario planning has been described as changing mindsets about the exogenous part of the world prior to formulating specific strategies. Scenario planning may involve aspects of systems thinking, specifically the recognition that many factors may combine in complex ways to create sometimes surprising futures (due to non-linear feedback loops). The method also allows the inclusion of factors that are difficult to formalize, such as novel insights about the future, deep shifts in values, and unprecedented regulations or inventions. Systems thinking used in conjunction with scenario planning leads to plausible scenario storylines because the causal relationship between factors can be demonstrated. These cases, in which scenario planning is integrated with a systems thinking approach to scenario development, are sometimes referred to as "dynamic scenarios". Critics of using a subjective and heuristic methodology to deal with uncertainty and complexity argue that the technique has not been examined rigorously, nor influenced sufficiently by scientific evidence. They caution against using such methods to "predict" based on what can be described as arbitrary themes and "forecasting techniques". A challenge and a strength of scenario-building is that "predictors are part of the social context about which they are trying to make a prediction and may influence that context in the process". As a consequence, societal predictions can become self-destructing. For example, a scenario in which a large percentage of a population will become HIV infected based on existing trends may cause more people to avoid risky behavior and thus reduce the HIV infection rate, invalidating the forecast (which might have remained correct if it had not been publicly known). Or, a prediction that cybersecurity will become a major issue may cause organizations to implement more secure cybersecurity measures, thus limiting the issue.
Principle
Crafting scenarios Combinations and permutations of fact and related social changes are called "scenarios". Scenarios usually include plausible, but unexpectedly important, situations and problems that exist in some nascent form in the present day. Any particular scenario is unlikely. However, futures studies analysts select scenario features so they are both possible and uncomfortable. Scenario planning helps policy-makers and firms anticipate change, prepare responses, and create more robust strategies.
Wargames Analysts design wargames so that policy makers have flexibility and freedom to adapt their simulated organisations.
Applications
Business In the past, strategic plans have often considered only the "official future", which was usually a straight-line graph of current trends carried into the future. Often the trend lines were generated by the accounting department, and lacked discussions of demographics, or qualitative differences in social conditions. These simplistic guesses are surprisingly good most of the time, but fail to consider qualitative social changes that can affect a business or government. Paul J. H. Schoemaker offers a managerial case for the use of scenario planning in business. The approach may have had more impact outside Shell than within, as many others firms and consultancies started utilizing scenario planning. Scenario planning is prone to a variety of traps (both in process and content) as enumerated by Paul J. H. Schoemaker. More recently scenario planning has been discussed as a tool to improve the strategic agility, by cognitively preparing not only multiple scenarios but also multiple consistent strategies.
Finance
In economics and finance, a financial institution might use scenario analysis to forecast several possible scenarios for the economy (e.g. rapid growth, moderate growth, slow growth) and for financial returns (for bonds, stocks, cash, etc.) in each of those scenarios. It might consider sub-sets of each of the possibilities. It might further seek to determine correlations and assign probabilities to the scenarios (and sub-sets if any). Then it will be in a position to consider how to distribute assets between asset types (i.e. asset allocation); the institution can also calculate the scenario-weighted expected return (which figure will indicate the overall attractiveness of the financial environment). It may also perform stress testing, using adverse scenarios. It can be difficult to foresee what the future holds (e.g. the actual future outcome may be entirely unexpected), i.e. to foresee what the scenarios are, and to assign probabilities to them; and this is true of the general forecasts never mind the implied financial market returns. The outcomes can be modeled mathematically/statistically e.g. taking account of possible variability within single scenarios as well as possible relationships between scenarios. In general, one should take care when assigning probabilities to different scenarios as this could invite a tendency to consider only the scenario with the highest probability.
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