Nearly 40 years after Royal Dutch Shell first commercialised its use to enable a better understanding of its business at the time of major oil price shocks, scenario planning has become an integral part of the risk management toolkit in many companies. Among our respondents, 72% say that they currently use scenario planning, while a further 19% say that they plan to do so in future.
"Scenario planning helps companies to develop a more complete map of possibilities so that they are able to pick up weak signals on the periphery," says Richard Pascale, an associate fellow at University of Oxford's Saïd Business School. "It's a very helpful exercise to stretch executives beyond the dimensions that they normally focus on and to push them to become more nimble in their response to weak signals as they start to move to the centre."
But despite its widespread adoption, companies take different approaches to aligning scenario planning with their overall strategy. While 20% of respondents say that it plays a vital role in helping them to formulate and adapt their strategy in uncertain times, a larger proportion—46 %—see it merely as a useful input, rather than an integral part of the process. A further 18% see it as an interesting thought exercise but not something that has a major bearing on their strategy.
This assessment may suggest that companies are not making best use of their scenario planning exercises, but Dr Hugh G Courtney, professor of the practice of strategy at the University of Maryland, argues that companies do not need to align their scenarios with every decision. "Scenario plans don't necessarily need to inform the big strategic decisions on the day, but they do begin to frame the longer-term opportunities and threats that companies might face," he explains. "They start to lay the groundwork for the investment paths that companies might need to explore."
While undoubtedly a useful input to the strategy process, scenario planning also carries its own risks. If executives see it as a way of predicting the future, or to validate particular strategies, then it can lead companies down the wrong course.
"If you approach scenario planning as a means to select the most optimal strategy based on the probabilities you ascribe to different scenarios, then it's useless at best and probably very dangerous because you are almost certain to be wrong," says Freek Vermeulen, associate professor of strategy at London Business School. "You're better off not doing scenario planning at all than doing it dogmatically." Rather than be seen as a way to predict the future, scenario planning should be considered as a way to equip the company for multiple possible outcomes.
"Even though you may not be describing an event which is going to happen, you are actually thinking about the processes of contingency planning," says Michael Denison, research director at Control Risks Group. "So the content may not be quite right but you're instilling a mindset which means that something is not going to take you completely by surprise."
