Scenario Analysis is the practice of developing alternate outcomes to the primary endpoint envisioned for a new project or business venture. The purpose of the practice is to enable advance planning and decision making should events occur that put a project on a course where the outcome will deviate from the original plan.
The list of events which can cause this type of deviation is almost infinite but includes:
- Changes in the competitive landscape
- Changes in access to capital whether there more available, or less
- Regulatory actions
- The definition of high-value opportunities
- Product obsolescence
- Mis-management of the project
- Changes in the availability and cost of critical resources
- Continuing access to capable employees
One of the advantages of Scenario Analysis relates to the way in which projects are planned. This planning often takes place using assumptions based on current conditions, which can typically work well for project with short-durations but becomes more of an issue as timelines to completion get extended. It is in these extended projects where Scenario Analysis delivers value due to the fact that events which can affect a project grow exponentially over time.
Develop these alternative scenarios by:
- Building a detailed project plan and timeline
- Defining the key assumptions that will drive the project to completion – These can include assumptions on the general economy, capital levels, interest rates, political stability, etc.
- Taking these assumptions and imagining the impact on the project if they should change at various points along the project timeline. The most useful alternate scenarios result from using single changes as well as combining multiple impacts on the project.
- Start building alternative outcomes.
- Prioritize the new scenarios and then build responses to them.
Going through the practice of Scenario Analysis can both strengthen the original project plan and prove to be a great value should key factors in a project plan change.
In identifying trends, be careful to base your assessment on evidence rather than supposition. And make sure that trends are built on secure foundations. If it helps, remember the wild claims made during the dot-com boom at the end of the 20th century!
Also, remember that trends tend to be damped down by other factors. No revolution is instantaneous.
Peter Schwartz, one of the fathers of scenario thinking, mentions the following as plots of common scenarios:
- Evolution: All trends continue as expected. Things gently move toward a predictable end point.
- Revolution: A new factor fundamentally changes the situation.
- Cycles: What goes around comes around. Boom follows bust follows boom follows bust.
- Infinite Expansion: Exciting trends continue. Think of the computer industry in the 1950s.
- Lone Ranger: The triumph of the lone hero against the forces of inertia.
- My Generation: Changes in culture and demographics affect the situation.
Scenario planning is a useful way of challenging the assumptions you naturally tend to make about the situation in which your plans will come to fruition. By building a few alternative scenarios, you can foresee more unknowns that may come to pass, and therefore you will be able to plan measures to counteract or mitigate their impact.