“The task is not so much to see what no one has yet seen; but to think what nobody has yet thought, about that which everybody sees.” Erwin Schrödinger (yes, the guy with the cat)
Risk is inherent to any business decision.
Toyota took a risk on hybrid cars long before it was cool. BP placed a massive bet on Russia. Only one of these things panned out, but they do have one thing in common: the challenge of uncertainty.
Massive investments require massive planning. Still, it can take years to learn if a decision was fantastic or a complete bust.
Why?
Because the key factors that influence success are often beyond your control — that’s why we call them uncertainties.
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However thorough your research, it can neither reveal nor mitigate the risks associated with the most common drivers of change: policy and legislation trends, economic and societal trends, technological developments, environmental trends and policies.
These are critical uncertainties: you have very little control over whether they happen or not. Scenario planning is the strategic approach to making friends with uncertainty and preparing for an unforeseeable future.
Embrace Uncertainty Instead of Recoiling from It
[More on navigating uncertainty here]
Expectations are in our nature: we expect things to turn out a certain way. More problematically, we usually have a single outcome in mind. The probability of things turning out exactly as we expect them to is infinitesimal.
This is where scenario planning comes into play: by laying out more than one possible outcome, you can identify the driving forces of change and prepare for a broader range of possible outcomes.
By embracing uncertainty, you open up your thinking. By laying out more than one scenario, you surface risks that you wouldn’t have otherwise considered.
Theoretical risk experimentation allows you to gain the experience and skills you need to combat the real thing.
The Basics of Scenario Planning
Scenario planning brings the future into the present and empowers you to experiment with it without real consequences. One of the most common fallacies is mistaking it for predicting the future.
Its goal is not to predict whether something will come to pass but to empower you to visualize various futures and prepare for whatever tomorrow may bring. Scenario planning helps you build a more robust future and a more resilient development strategy.
Let’s dig into how you can build helpful scenarios.
Choose Your Focus Wisely
There is an infinite number of potential outcomes and potential stories about the future. You cannot analyze all of them. So start by choosing one or two important questions to answer.
Let’s take the automotive industry as an example: to build scenarios that are relevant to your strategic issues, start with pertinent questions about its future. If you’re thinking about investing in traditional, fossil-fuel-powered engines, rather than electric ones, two questions come to mind:
- A broad question like what is the future of the automotive industry?
- A narrower question like should we switch to electric cars now?
Identify Driving Forces
To answer the questions above, you need to know what are the driving forces that may influence the future of the automotive industry. Ultimately, every scenario is a story describing how the future may unfold depending how certain interrelated forces influence it.
Before you put strategic issues under the microscope of short-term budgeting, they need to go through the macroscope of geopolitics, societal pressure, and policy first.
Some of the driving forces that can influence the demand for gas versus electric cars are:
- Societal pressure
- Market globalization
- Inter-fuel competition
- Energy supply and demand
Map Your Uncertainties
Start by asking a simple question: “What could change in the next 5 to 15 years to influence the demand for electric versus gas cars?”
A few answers you can consider:
- Changes in national laws, regulations, and policy: more laws and policies favoring electric cars over gas cars or vice versa.
- Environmental trends: will legislators continue to enforce strict rules against traffic-related pollution? What about the society: will the citizens continue to care about their carbon footprint?
- Technology developments: will new technologies that influence the production of electric/gas cars emerge? Which is more likely to gain a head start?
Of course, you will have an expectation for each of these driving forces. The key to insightful scenario planning is to not let those expectations influence the stories you weave. Remember — these are uncertainties, you can not predict them, nor should you try.
Even when you can clearly see the balance shifting towards one outcome or another, keep in mind that a single global event (like a pandemic or a war in Eastern Europe) can change entire markets overnight.
Building Your Scenarios
It is now time to truly embrace those uncertainties. For every uncertainty, build two scenarios, one for the negative outcome and one for the positive one.
The matrix above helps you tie them together. Some positive outcomes in one scenario may prompt negative outcomes in another.
For instance, if policy makers continue to push forward legislation that favors electric cars, this is a negative outcome for a gas car manufacturer. However, environmentally-friendly laws usually come with an economic burden, which, in turn, may lead to societal unrest and a trend reversal: the citizens who are unhappy about the increasing costs of green energy will go back to buying gas cars.
Once you have built your initial scenario framework, you can weave an infinite number of potential futures around them. This is why I recommend sticking to 3-5 scenarios that revolve around your focal question.
The more scenarios you weave, the farther you will stray from relevance and from gathering strategic insights.
A final word of caution: scenario planning is by no means a perfect solution to risk mitigation. Just like any other tool in your arsenal, it has its limitations. Next week, we’ll explore those limitations and the biases that prevent us from sizing up the future and making better strategic decisions.
In the meantime, if you’re interested in seeing how to use scenario planning in personal matters as well and why it’s important to do it, you can read this article.
That’s it from me today. See you next week!
Here to make you think,
Adriana
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