Scenario Planning in Strategic Management: A Literature Review

Introduction

In Stephen Covey's 7 Habits of Highly Effective People, habit #2 for success is to begin with the end in mind (Covey, 1989). Nothing epitomizes this habit more than the job of the strategic manager. The strategic manager must be able to visualize the end product of their efforts long before those results are realized. Along this journey, there are many steps and many paths that can be taken, each of which will produce a different end result. Scenario planning is a key step in the ability to visualize the effects of one's actions.

This literature review explores research on the importance and process of scenario planning. It examines key research obtained in academic journals concerning scenario planning and its role in strategic management. It also explores turnaround management and the factors that affect the ability to reverse a declining business situation. In most cases, the research explored is recent; however, in some cases older research was included when it is considered pivotal to the theoretical foundations of the literature in this topic area.

What Is Scenario Planning?

The first task is to define what is meant by the term "scenario planning." Scenario planning arises from traditional forecasting tools and methods. Businesses are affected by both internal and external factors. Internal factors are the easiest to predict from the standpoint of strategic management — the manager has their pulse on the company and has a vast array of tools available for this purpose. However, external factors can often take them by surprise.

External factors include downturns in the market, shifts in consumer preferences, and other unpredictable customer behaviors. A good strategic manager always has an eye on competition and can factor this into the equation; however, competitors might occasionally pull an unexpected surprise. In some industries, weather or natural disaster may also play a role in business changes. Factors such as weather and human behavior are difficult to predict and can render traditional forecasting methods ineffective. This was the key reason for the development of scenario planning.

Scenario planning began with military strategy studies. It is fundamentally about "thinking the unthinkable" — considering as many possibilities as one can conceive and deciding on a plan should any of them come to pass. This principle was later adapted into business and led to the development of many different theories and processes for conducting scenario planning. Many people assume that scenario planning is about predicting the future, as its association with "forecasting" would suggest. In reality, scenario planning is about considering the possibilities that might lie ahead and making contingencies for them.

Scenario planning allows the business to act, rather than merely react, to situations. The result of scenario planning is the formulation of a set of distinct future possibilities, each of which carries a different effect on the company. Scenario planning often takes place in a brainstorming session among high-level executives; it is seldom the work of a single person. Scenario planning forces management to break out of their standard views and consider not what is or what has been, but what could be in the future. Managers must be able to open their minds, explore the sources of potential conflict, and recognize the signals that will indicate the beginning of an event so that contingencies can be activated before it is too late. These are the key elements of effective scenario planning.

Scenario planning involves the identification of variables and a set of outcomes based on those variables. Several important factors inform the scenario planning process. According to NetMBA (2010), they are as follows:

1. Determine the scope of planning and its time frame.

2. Develop a clear understanding of what will serve as a common departure point for each of the scenarios.

3. Identify the elements that are likely to occur and the driving forces behind each scenario.

4. Identify environmental factors and uncertainties that will affect each scenario. Sometimes this scope is wide and involves macro-environmental factors such as the economy or long-term climate predictions.

5. Prioritize the drivers of a scenario and determine which are most likely to affect the outcome.

6. Determine a set of values for each variable, ranging from extreme to slight. Improbable values are typically avoided.

7. Develop a matrix that allows for analysis of the interactions between certain variables.

8. The level of detail need not be exhaustive; it must only reflect a general idea. Writing a more detailed narrative can develop the scenario further, though generalizations in the scenario are more predictable than specifics. An event might occur without necessarily unfolding in the manner that was predicted.

9. The final step is to quantify the effect of the scenario on the organization and to devise strategies accordingly.

Business unit managers often do not take scenario planning seriously, preferring to stick with mainstream views and relying on traditional forecasting methods rather than "possibilities." Scenario planners can overcome this resistance by developing a scenario based on mainstream thinking and illustrating the costs and benefits of such an attitude. Any possibility, including the status quo, can be developed into a scenario.

The transportation industry is one area of business that uses scenario planning on a regular basis. As a result, the Federal Highway Administration has developed a scenario planning guidebook to help administrators follow effective and current methods. This guide serves as an excellent source for exploring scenario planning methodology that can be applied across many business situations.

According to the guidebook, effective scenario planning can be divided into six specific steps. The first is to determine the specific goals for scenario planning and to develop a set of analysis tools appropriate to the capabilities and scope of the organization. The second step is to assess the current situation — where the organization is and what resources it has available. In the third phase, the organization must clarify its identity and where it wants to go.

In Phase 4, planners must determine what the future could look like by listing factors that could affect various future possibilities and analyzing their operational effects. Phase 5 involves analyzing those effects in depth. The final phase involves determining how the agency or business will respond to each scenario should it come to pass (U.S. Department of Transportation, 2010). Although the guidebook applies these principles to the transportation industry, the six steps can be applied to any scenario planning process.

References

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Cares, J. & Miskel, J. (2007). Take your third move first. Harvard Business Review, 85(3), 20–21.

Caughron, J., & Mumford, M. (2008). Project planning: The effects of using formal planning techniques on creative problem-solving. Creativity and Innovation Management, 17(3), 204–215.

Chermack, T. & Kim, N. (2008). The effects of scenario planning on participant decision-making style. Human Resource Development Quarterly, 19(4), 351–372.

Covey, S. (1989). 7 habits of highly effective people. Fireside/Rockefeller Center.

Davies, F., Moutinho, L., & Hutcheson, G. (2005). Constructing a knowledge-based system to aid scenario-based strategic planning: An application to the European airline industry. Intelligent Systems in Accounting, Finance & Management, 13(2), 61–79.

Durbach, I. & Stewart, T. (2003). Integrating scenario planning and goal programming. Journal of Multi-Criteria Decision Analysis, 12(4–5), 261–271.

Karaevli, A. (2007). Performance consequences of new CEO "outsiderness": Moderating effects of pre- and post-succession contexts. Strategic Management Journal, 28(7), 681–706.

Montibeller, G., Gummer, H., & Tamidei, D. (2006). Combining scenario planning and multi-criteria decision analysis in practice. [Journal details as cited in source].

Morrow, J., Simon, D., & Hitt, M. et al. (2007). Creating value in the face of declining performance: Firm strategies and organizational recovery. Strategic Management Journal, 29(3), 271–283.

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NetMBA. (2010). Scenario planning. Retrieved December 15, 2010, from http://www.netmba.com/strategy/scenario/

Rachnatullah, C., Aye, L., & Fuller, R. (2007). Scenario planning for the electricity generation in Indonesia. Energy Policy, 35(4), 2352–2359.

Robbins, D. & Pearce, J. (2006). Turnaround: Retrenchment and recovery. Strategic Management Journal, 13(4), 287–309.

Sevaguru, N., & Samaun, M. (2009). Scenario planning approach to strategic management of small travel business in Malaysia. International Journal of Business and Management Science, 2(1), 61–77.

U.S. Department of Transportation. (2010). FHWA scenario planning guidebook. Federal Highway Administration. Retrieved December 15, 2010, from

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