Executive Summary
As the pace of change in economies around the world accelerates, many businesses struggle simply to keep up with market conditions, customer expectations, competitive threats, and supply and demand. Most company leadership teams cannot imagine how to understand and predict future outcomes for their businesses, which would provide valuable insights and a significant competitive advantage.
To gain market share and retain industry leadership, CEOs must see around corners with keen foresight into the opportunities and issues presented by emerging needs and market conditions. Rather than react and respond to opportunities or challenges as they present themselves, successful leaders anticipate first and then respond in a well prepared manner.
Scenario planning is an essential tool for leadership teams to assess future market conditions and the potential impact on their business and industry. By assessing potential business outcomes using scenario planning, executive teams will be empowered and better informed to proactively and strategically align future business planning with desired outcomes. Scenario planning provides significant actionable insight for a modest investment and is a capability that every company should implement.
CREO advises its clients to use scenario planning using the following outline to help guide leadership teams through the trend spotting process and to avoid common mistakes when engaging in scenario development:
- Relying on trends from only one origin or category – for example, believing that only technology trends matter
- Selecting the right trend timeline – neither too short nor too far into the future
- Defining the future that is perfect for your business, rather than the future that is likely to unfold
- Building only one scenario – as if there is only one possible future
Strategic Need to See Beyond
Most businesses today invest in efforts to understand and assess future industry trends, pro forma financial planning, brand strategy and contingency planning initiatives. Companies build 5-year, 3-year and annual plans that project revenue, costs, and profit across timelines into the future. These plans influence financial investment spending, R&D, HR recruitment and retention, and other important decisions. In many cases, plans are built with little understanding or investigation into what the future may hold. Rather, plans are built on assumptions about the future and projections based on past performance. While the past may be an indicator of future opportunities and performance, relying on the past to predict the future is risky, especially when markets are turbulent and rapid changes are occurring across global supply chains, international currency markets, in politics and other factors.
Why don’t companies invest more time and resources focusing on understanding the future? This is a question that has been considered for years. Companies that can adequately understand future conditions should be able to position themselves to win more market share and profits than competitors, and the cost of understanding potential future conditions is not high.
Let’s examine how companies can conduct a reasonable investigation into future scenario planning and what the potential benefits are so that more companies will consider engaging in scenario planning and acquire a better understanding of its benefits.
What is Scenario Planning?
The term scenario planning can sound a bit daunting. Scenarios are simply possible versions of the future. Scenarios and scenario planning embrace the idea that the future is not fully predictable, and that the future could consist of multiple variations. It is this variability that leads many companies to avoid developing scenarios and to take a “wait and response” approach to the future.
Honestly, the exact future in a specific point in time is unknowable. We cannot with any degree of certainty say exactly what will happen in a specific location, or specific industry, at a given point in time in the future, and the further we look into the future, the less likely our prediction is likely to be accurate. But this fact should not lead CEOs and executive teams to ignore the future; rather it should inform their thinking, planning and decision-making for their companies’ future. What they should hope to learn from scenario planning is what may happen, and how consistently certain events occur across potential scenarios, rather than to hope to predict what will happen.
There are several process steps to create future scenario possibilities:
- Establish a baseline. The future of a specific market, segment or product must be tied to a specific current state or baseline. It is important to agree on a baseline before defining a future scenario.
- Build a timeline. How far out is your leadership team willing to project your company’s future opportunities and challenges? Recognize that a timeline less than six to nine months is basically current state, and as you extend out your timeline, the future becomes more and more dynamic and more difficult to predict with accuracy. Most practitioners operate on a 5–7-year timeline horizon.
- Establish a future state, opportunity cost, and/or competitive threat scenario series. Rather than asking “what will the price for semiconductors be five years from today?”, ask a framing question about the market and the threat or opportunity that is of interest to your company.
- Gather and evaluate trends. CREO advises its clients using a PEST framework (Political, Economic, Societal, Technological) to help leadership teams evaluate several trends from different categories to avoid the mistake of becoming too focused on a single trend thread.
- Create a story based on the baseline, the timeframe and the trends identified. For example, from a given baseline about a market segment, and knowing which potential changes in the segment in 5 years you’d like to understand, gather geo-political, socio-economic, and technology trends data to l define what a future scenario might look like for your company and its competitive set.
- Identify the implications. Once you have a scenario created for a specific problem, timeframe and set of trends, review the implications to the market or opportunities that you are investigating and the impact they portend for your business in its current state.
- Repeat. Many companies involved in scenario planning create one scenario and stop. However, one significant change in one trend can shift a scenario rather dramatically. Consider the war in the Ukraine – if Ukraine falls or not or if Russia retreats or not. These outcomes will have significant impacts if your problem or opportunity is influenced by what happens in Ukraine. CREO highly recommends to its clients that several scenario planning exercises be undertaken to reveal common threads.
With a basic outline of scenario planning steps in place, let’s take a slightly deeper dive into each of these steps to illuminate what needs to happen for your efforts to be successful.
Baseline Definition
Defining a baseline, which defines a realistic perspective on the current state of the business and the competitive environment, is vital. From its experience, CREO has found that many leadership teams have very different perspectives about the current state of their business or industry, which clouds and influences bias of any future state. If the team cannot agree on their company’s current state, then any predicted future state should be called into question. You’ll need to take time to document the current state and reach agreement before moving into gathering trend data. If the trend spotting team or the management team who will review the results have different interpretations of the current state, it will be difficult to convince them of any findings about the future state.
Timeline Development
Conducting scenario planning means trying to understand market conditions, consumer sentiment and demand in some future period. This means that: (1) the period needs to be far enough into the future to ensure that the prediction is not simply the current state while recognizing that, (2) the period to be investigated isn’t so far into the future that the future is basically unknowable.
CREO assumes a rule of thumb to explore the future at least twice the length of your product or service development cycle. That is, if it currently takes your company a year to conceptualize, produce and launch a product or service, CREO recommends that the timeline is at least two years into the future. There are several reasons for this rule of thumb, one of which is that you must recognize that no matter what opportunity you foresee in the future, your company will still need to define ideas, convert them into products or services and launch them into the marketplace. There will still be a fixed amount of time necessary for you to respond to opportunities or needs.
The length of time you need to look into the future isn’t simply governed by your product development cycle. It is also influenced by the pace of change in key factors (technological, societal, political) as well as the intensity of competition and the threat of new competitor entrants. The biggest mistakes in choosing a timeframe are: (1) selecting a timeframe that is too short, often less than a year, without realizing that many of the factors in place can’t be changed in that timeframe, or (2) selecting a timeframe that is too distant – 10, 15 years or more – which hinders the ability to know enough to make reasonable assumptions.
Framing The Opportunity or Problem
As you begin your scenario planning work, it is helpful to stop and adequately frame the problem or opportunity you want to explore. Attempting to complete scenario planning, a general task which covers a lot of territory, for a poorly defined problem or opportunity, will result in gathering a lot of information. Lacking a definitive scope, however, will lead to a lot of work without good insights and with little benefit to executives.
Instead, recognize that scenario planning isn’t always an exact science, and therefore, the more tightly you can define the problem or opportunity you are hoping to address, the more likely you are to get good information to help you make decisions. This may require working through several iterations of a problem or opportunity statement to ensure everyone involved buys into what you are trying to do.
Trends
As noted, CREO uses the PEST framework to gather trends across several different industry sectors. Using PEST as a framework ensures that trends may be collected from a variety of origins and category sources. Too often, teams leading scenario planning initiatives will focus on only one trend – technology is often the selection, because technology trends are easy to observe, and their impacts are easy to understand. However, political and societal trends are equally as important. For example, a powerful societal trend that many overlook is the shift to an aging population. Older adults often have more wealth, but also have more healthcare needs and are less likely to work, all of which have significant impacts on a society.
Other models include PESTLE, which adds Legal and Environmental categories. Regardless of which framework you select, make sure you are pulling in trends from more than one source.
Here are a few important questions about trends:
What is a trend?
The question CREO often receives during the outset of a scenario planning assignment is: what is a trend? Our definition is: a trend is a change in a condition or factor that is important to some component of your business, that will continue to evolve and change, and have an impact on the way you operate.
Trends are different from fads. Fads, like the Pet Rock of our youth, are instantly interesting and die a quick death, whereas trends are longer lived and may be more subtle but have more impact on cultural conditions or industry markets.
The next most common question CREO receives is: where can we find trends?
What’s interesting is that trend information is all around us – in the news we watch or listen to, in magazines and websites we read, in financial analyst reports we consume. Anyone talking about change is potentially talking or writing about a trend. The fact that the U.S. is slowly aging is a trend that will certainly continue. The emergence of cryptocurrency is a trend that may continue. A shift to polar extremes in our political economy is a trend that is likely to continue for some time. These are trends that have been emerging and will continue until something else stops their evolution.
How do we assess trends?
An important question is: of the trends I record, which should I pay attention to, and how should I assess them? Some trends are more important to some institutions than others. An aging population is more interesting and has more impact on health care than to companies that make food products, although aging is an example of a trend that may cut across several industries. You should ask: is this a trend? If so, does it have an impact on my industry or market segment? If so, will it create threats or opportunities for my business?
Trends can be positive or negative. In this sense we mean that a trend is something that can be changing in what is viewed in a positive light (the rate of polio infections is falling) or in a negative light (the amount of rain falling in the western US is decreasing year on year). Both are trends, and they both have something to say about the future.
Analyzing Trends
The simplest and most direct way to analyze trends is the classic 2-by-2 matrix, where you can pit one trend against another. For example, you could place rainfall on one axis (increasing rainfall on the upper part of the axis, decreasing on the lower part of the axis) and you could place polio infections on the opposite axis (rates increasing on the right and decreasing on the left). This produces four possible scenarios – leave aside whether these two trends are the right ones to investigate.
We believe that the 2-by-2 matrix is too simplistic, and that trend analysis and synthesis requires more thought and more synthesis. The work to simultaneously combine two or more trends moves the work from a two-dimensional representation to three or four dimensions, and from a 2-by-2 matrix into a more descriptive story narrative. For example, we might select trends that indicate that polio infections are increasing, rainfall is decreasing in the western U.S., inflation is increasing, and the population of the U.S. is aging. Now, instead of creating a four-box matrix with two opposing trends, we need to combine these trends into some fashion of a narrative or story.
Creating Scenarios
Once you have agreed to a baseline or current state, a timeline, and an agreed set of trends, it is time to create several useful scenarios. The work begins by focusing on the current state or baseline and forecasting forward only the trends you’ve selected. If the three, four or five trends continue to change as they are changing now, how will the baseline change? What new opportunities or threats might emerge? What new segments may be created, or existing segments disappear? How do these changes affect your current business, and how competitors will view the market?
From our experience, CREO believes that the best way to do this is to tell a story, to place yourself in the future (dictated by your timeline) and in the market or industry or geography of your baseline, and to discuss the operating features and conditions of the market and competition based on the continued evolution of the trends you’ve selected.
As you tell the story of this specific scenario, you can define new opportunities and threats, new emerging markets or segments, the potential for new entrants and much more. It is the story of the scenario that allows you and your team to fully explore this potential future.
Note that in this approach you are not trying to create the ideal future or perfect future for your business, which is another common mistake many companies make. Rather, you are trying to understand the future that will unfold, and how your business will need to respond. Creating an ideal future is useful as one step in this process but your ideal future is often only viable for your company, and does not consider the realities of market shifts, consumer demands and competition, all of which are attempting to pull the opportunity toward their own ideal future.
Implications
In this activity, your team begins to reap a lot of the value of the work to date. As you uncover new opportunities, new threats, new segments and so on, you should begin to ask: what are the implications of this scenario to my business? What components or features of my business should remain the same? What components or features should change? What should we start doing now, or in the near future? What should we stop doing or abandon? What are the implications to my business about this specific scenario?
As your teams confront the market conditions and competition in a specific scenario, it is likely that the discussion will get interesting, because some of your most valuable products and services may be exposed as vulnerable to market shifts, yet their sponsors may be unwilling to recognize the threats or make changes. Exploring the viability of your business model and your products or services in a new and uncertain future market will create a lot of questions, some of which your leadership team may not want to address head on. Often, rather than call into question existing products or services that may be at risk in a new future, the leadership may call into question the trends that were selected or the scenario methodology. Which indicates that perhaps we’ve left out one key input to scenario planning – an agreement by the developers and consumers of the insight to take at face value what the scenarios tell you about the future, rather than debating how the scenario was constructed.
The implications and how they are codified and implemented are what will become one of the biggest benefits to conducting scenario planning.
Complete More Than One Scenario
Many companies, if they make it this far in the process, will settle for completing one scenario and will be eager to act on the findings. Creating one scenario is akin to entering a mansion and deciding what the rest of the house looks like by visiting a single room. There is a lot of added benefit from creating two or three scenarios built from different trends.
This approach overcomes the Goldilocks effect, where every trend you select is “just right”. The market does not care about your success, and some factors and trends may break your way, and some may work against you. Exploring several scenarios, some that work for you and some that work against your current implementations and goals, will help you understand what you may encounter.
Further, often the best discoveries are made when you find consistent threads across several different scenarios. If the same outcomes or needs arise across several scenarios built from different trends, then you can begin to believe that these common threads are likely to occur, whatever you think about the validity of the scenarios as a whole.
What’s In It for Me?
One of our favorite acronyms is WIIFM (what’s in it for me)? This is a question we should ask as we are building scenarios – what’s in it for us? What can we learn that will shape how we go to market, which opportunities we pursue and which we ignore, how we structure our business models and offerings, and so much more.
Several benefits emerge as a result from scenario planning, even if you don’t get the future described exactly correctly. First, your team gets better at spotting and understanding trends. Even if you fail to aggregate the trends into scenarios, simply spotting and understanding trends will help your business become more nimble and better able to adapt to market demands. Second, building scenarios will give you a chance to consider alternative futures.
In many instances with its clients, CREO has called this “practicing the future.” In some instances, events or milestones will emerge from the findings. These milestones are signaling that the scenario you’ve highlighted is likely to occur. In either case, working through several scenarios provides experience when some of the factors come to pass, even if they all don’t occur as expected.
Finally, working with scenarios can give you a jump on the competition. Whether it is the experience of spotting trends or identifying milestones or canaries in the coal mine that signal upcoming change, or the ability to develop realistic and highly probabilistic scenarios, doing this work makes your team smarter, more capable and more prepared for the emerging future.
The Costs
What’s always fascinating about trend spotting and scenario planning is that doing this work is relatively inexpensive, especially in light of the value it can create. Trends can easily be found in many public sources, often at little or no cost. The most significant cost is the time for senior team members to meet and develop scenarios, which is often a workshop that consumes at most a few days. The cost to develop scenarios is far less than a subscription to a major analyst firm and provides more specific and more timely benefits.
Summary
In summary, scenario planning, or “practicing your future” is a discipline that all companies should practice. In almost all cases, the benefits outweigh the costs and will thought out scenario planning may put your company in a better competitive position relative to your competition.
Jeffrey Phillips, Principal Consultant, in CREO’s Strategy Development & Insights practice helps companies “practice their future.”
