Scenario planning is anything but a synonym for extrapolative forecasting. Instead, it focuses on the uncertainty inherent in the future and helps make the most of it.
The business environment, as we approach the end of the 20th century, is predictable only in its unpredictability. Managers, whose job it is to plan for this unpredictable future, have responded to the challenge in one of two ways: They continue to "plan" in the same way they always have--using "a Master Plan," which is usually a rigid, long-range exercise based on rosy assumptions about the number. Or, they entirely abandon their efforts to address the future and concentrate on putting out fires on a day-by-day basis.
The most fundamental yet most consistently ignored aspect of the future is its unknowability. The future has not yet occurred. However, when most managers take the time to plan at all, they continue to ignore the unknown and extrapolate the future from the known--from what has happened in the past. This mechanistic approach assumes that businesses are governed by unchanging "equations" where the "variables" don't really vary at all. It ignores the fact that reality has a tendency not only to change the values of the relevant "variables," but to change the very "equations" on which the variables are organized and the business is based.
Could Johns Manville or Dow Corning have avoided bankruptcy by planning for the possibility of disastrous product liability claims in an increasingly litigious environment? Could Wang or IBM have planned for a fundamental change in the marketplace due to the shift of leverage from hardware to software as a result of increasingly powerful and affordable equipment? Of course, no approach can assure that these shifts would have been adequately foreseen, but only a course that starts with potential shifts in the outside environment will even stand a chance.
Few managers will he blamed for failing to anticipate massive, large-scale changes in their markets, the odd John Akers aside. There are, however, those who have made a commitment to take the uncertainty inherent in the future explicitly into account. But how might this be done? How can a rational manager address a future full of terrifying uncertainty?
From the Outside Looking In
Scenario-based strategic planning, unlike many management tools currently in vogue, is an "outside-in" approach. Many businesses have done their best to squeeze costs out of their operations and to retool their internal business processes to accomplish tasks currently mandated by the market. After achieving this goal, however, managers have realized that the external environment is prone to sudden shifts which are difficult or impossible to forecast and that these shifts may render their internal efforts suddenly irrelevant. Scenario planning provides a set of tools managers can use to imagine the threats and opportunities the future will inevitably bring. As a general rule, scenarios ought to be employed by businesses whose external environments are prone to fundamental or sudden change and whose anticipation of these changes is of vital strategic importance. These conditions, of course, are beginning to apply with increasing urgency to more and more businesses throughout the world.
Scenarios start with the assumption that much of the future is strictly unknowable and that even the most elementary assumptions must he questioned if an honest estimate of the possible variability of the future is to be obtained. Rather than beginning with certain first principles and attempting to "evolve" possible future worlds by applying accepted logic, scenario-based planning starts by assuming particular end states. This cuts through many of the hidden assumptions managers make about how the world works and about what is and is not possible.
To arrive at these end states, managers must generate business "drivers," or external factors over which they have little or no influence and which are likely to affect the future of the business in question. …