Scenario Planning vs Traditional Forecasting

 

We live in a world of change, and most of the organizations traditionally leaned on strategic planning. However, the rapid rate of change in the business environment due to operational, social, economic, technology, political, and leadership factors influenced organizations to shift to a simplified planning approach. The famous strategy consulting groups McKinsey and Boston Consulting Group was quick to adapt to the scenario planning approach, which is more of a participative process to the strategy with core features of diverse thinking and dialogue, enabling organizations to identify disruptive signals and address them proactively (Chermack, 2011). RAND Corporation was instrumental in pioneering the technique called “future-now thinking” in the late 1960s. Scenario planning has many definitions over the years with a common theme – it is a robust tool to plan potential future possibilities or a ‘range of alternative futures or scenarios’ (Wade, 2012), taking into consideration the environmental factors that might impact the decision-making process over a period of time. In other words, scenario planning is considered a tool that can reveal opportunities that might develop in the future and how the organizations can leverage that knowledge to adapt and make better decisions in the present.

The scenario planning follows a process that includes identifying the exemplary scenario to focus on and then how it would impact the future and early factors that are likely to lead to an overall strategy for the organization to deal with the scenario that is likely to be encountered. And the plans should be customized to a given situation or business context, and the strategy can either be developed based on a given set of scenarios or scenarios can be constructed after a strategy has been agreed upon.

Advantages of scenario planning include a) both qualitative and quantitative aspects are taken into consideration, b) allows the stakeholders across the board to validate their assumptions, c) fosters an environment of strategic thinking and allows to reevaluate current decisions based on the new information gathered d) enables to identify ‘weak signals’ including technological gaps and creates space to include them in long-range planning for the organization, e) promotes coordination and collaboration across teams facilitating cohesive decision-making process ((Mietzner & Reger, 2005).

Dis-advantages of scenario planning consists of a) the process is time-consuming, b) requires subject matter expertise to be involved in the scenario planning exercise and choosing the right personnel to contribute might become challenging for organizations, c) at times it becomes cumbersome to take into account multiple scenarios while the planning sessions (Mietzner & Reger, 2005).

Traditional forecasting is based on the quantitative exploration of historical data to predict the future. It relies on the ability to recognize data patterns with a logical and analytical approach. Many quantitative techniques enable organizations and practitioners to predict the future based on facts observed in quantitative information. Temporal data is vital to predicting the future by monitoring trends and patterns observed in the historical data, which can be anything from sales, performance, stock market, rainfall, etc. One should take into account key principles of forecasting, which includes a) acknowledging forecasts are not perfect and susceptible to the margin of error, b) forecasts tend to be more reliable for groups than individual items, c) short term forecasts are better than long term forecasts, d) data quality should be robust, e) beware of outliers, f) forecast accuracy needs to be monitored to evaluate performance.

The advantages of traditional forecasting methodologies are it is simple to construct and interpret the results based on quantitative facts. The disadvantages are a) most organizations do not have the right technology or expertise to leverage the tools and methodologies b) forecasting processes also rely on qualitative aspects along with the quantitative facts and need human intervention to interpret the quantitative findings taking into account causal business scenarios that might have impacted specific predictions, c) forecasting errors can be detrimental to organizations.

 

References

Chermack, T. J. (2011). Scenario Planning in Organizations: How to Create, Use, and Assess Scenarios (Illustrated ed.). Berrett-Koehler Publishers.

Mietzner, D., & Reger, G. (2005). Advantages and disadvantages of scenario approach for strategic foresight. International Journal of Technology Intelligence and Planning, 1(2), 220. https://doi.org/10.1504/ijtip.2005.006516

Wade, W. (2012). Scenario planning: A field guide to the future (1st ed.). Wiley.