Scenario Planning vs. Forecasting

 

Forecasting is an activity to predict probable future outcomes (Koehler, 2007). Businesses forecast regularly. Shareholders and investors expect publicly traded businesses to provide forecasts quarterly. Those forecasts generally cover short-term projections for coming quarters through a fiscal year and possibly into the following fiscal year. Corporate executives also include longer-term projections that are characterized strategically rather than providing hard estimates (called guidance). Forecasting is critical for managing a healthy business and attracting investment. 

Forecasts are not limited to business. Any probability statement about future trends would be a forecast. The idea that forecasts are predictions means that the focus is on future events. The uncertainty of the unknown future introduces the concept of probability. Scenario planning provides the mechanism to address various uncertainties (Koehler, 2007; Tidd & Bessant, 2020), and different scenario planning approaches suggest methods for representing the uncertainties to plan for the future. For example, Wade advocates a PEST model to view scenarios ten years in the future, in which possible factors are determined by impact and level of uncertainty (GLOBIS Insights, 2023). Top intersecting factors are graphed against each other, with extremes governing the axis. The resulting quadrants define four scenarios, which later steps in the process further refine. 

In contrast to GLOBIS Insights (2023), Baxter advocates a STEEP approach to scenario planning that covers six-year predictions (TEDx, 2019). The difference between PEST and STEEP is how each method categorizes trends. PEST is political, economic, societal, and technological. STEEP adds an environmental category for organizing factors. Other scenario planning recommendations add Legal and ethical categories, resulting in PESTLE and STEEPLE. Baxter covered two interesting differences. The first is the process of limiting the analysis to six-year scenarios. The second was the concept that the best opportunities have already passed. The idea is that undeveloped future concepts do not offer solid scenarios. It is better to plan scenarios using actual, materialized concepts that a business may have intentionally not employed previously or were not previously predicted. 

Wade provided a clear ten-step process but only covered the middle five steps (GLOBIS Insights, 2023). The earlier steps and later steps are preparatory and reporting, respectively. The core steps in the scenario planning process begin by identifying the critical uncertainties. Those are graphed as mentioned, where lower impact factors are placed in the lower half of the graph. The top part of the graph is further divided into the top left quadrant, representing the high-impact factors with less uncertainty. The top right quadrant lists the high uncertainty factors (with high impact). The goal is to select two intersecting factors from the top right quadrant. 

The next step in the PEST process (GLOBIS Insights, 2023) is to graph the two factors on x-y axes that run from the extreme negative to the extreme positive possibility. For example, for a political factor where new regulation is predicted, the negative condition would be a new regulation, and the positive end of that axis would be no new regulation (either there is a new regulation or there is no new regulation). The scenarios become the quadrants of the second graph, and the key issues are identified for each of the four scenarios as the next step in the process. The final step covered by Wade addresses how the key issues in each scenario might be overcome. One standard technique in business for that part of the analysis is SWOT, where the company lists and evaluates relevant strengths, weaknesses, opportunities, and threats.

References

GLOBIS Insights. (2023, July 28). Scenario planning: Thinking differently about future innovation [Video]. YouTube. https://youtu.be/y-CccEPJJ7k

Koehler, D. J. (2007). Blackwell handbook of judgment and decision making. John Wiley & Sons, Incorporated.

TEDx. (2019, June 21). Scenario planning - the future of work and place | Oliver Baxter | TEDxALC [Video]. YouTube. https://youtu.be/XAFGRGm2WxY

Tidd, J., & Bessant, J. R. (2020). Managing innovation: Integrating technological, market and organizational change, enhanced edition (7th ed.). Wiley Global Education US.