Scenario-planning: the crystal ball of the digital era

Taking precautions is part and parcel of human behaviour. In the course of a single day, we ask ourselves dozens of what-if questions. What if it rains? What if I get injured on my trip to Asia? What if my wife wants a divorce? Or, to include a more positive scenario, what if my great uncle leaves his house to me?

 

Companies must take precautions too, and also ensure they are ready to take advantage of new opportunities – in business, these processes have fancy names such as risk management, what-if analysis and scenario planning. The point of considering what setbacks and disruptions the future may bring is to make the company more resilient and maintain business continuity.

 

The popularity of scenario-planning has had its ebbs and flows. As a risk mitigation tool, it typically gains popularity in the wake of societal and economic shocks that undermine people’s and businesses’ sense of security and predictability.

 

Between 2000 and 2001, the percentage of companies that used scenario planning increased from 35 to 70 per cent as a kneejerk response to 9/11. The 2008 financial crisis, which took the world by surprise, was another event which once more pushed it to the forefront.

 

As the pandemic has gradually receded, we now live in a volatile era where black swan events alternate with economic and geopolitical disruptions of far-reaching consequences. Little wonder that strategies such as scenario planning and what-if analysis have once again become oft-repeated expressions in business discourse.

 

What-if analysis and scenario planning

 

While what-if analysis and scenario planning are terms that are often used interchangeably, they can also be seen as two consecutive stages of the same process.

 

A what-if analysis allows businesses to model different scenarios and change certain variables in the model to see how these changes impact outcomes. According to this approach, what-if analysis explores the impact of factors that are beyond the business’s control, including natural disasters, geopolitical conflicts, health crises or macroeconomic trends. 

 

Once the impact of a future event on the business operation is identified, scenario planning is leveraged to create contingency plans that can enable the business to reach its performance targets despite potential adverse effects.

 

Microsoft offers two dedicated what-if analysis tools: Data Table, designed for simpler formulas; and Scenarios, for more complex models with greater variables. Meanwhile, Excel offers an integrated hands-on third tool, Goal Seek, which can help planners work backwards by calculating what variables need to be changed to meet their target.

 

The range of Microsoft’s tools already suggest that what-if analysis is an umbrella term that covers anything from the simplest questions of business planning, such as how different percentages of price increase will affect business revenue, to the most sophisticated modelling with a level of complexity unmanageable by the human mind.

 

It is the latter that businesses can use to prepare for future market eventualities. If done well, what-if analysis can work as a crystal ball that shows an array of alternative futures which the business can prepare for, so that it can take in its stride what others perceive as a shock.

 

The devil is in the data

 

However, being data-driven, what-if tools are only as good as the data fed into them, which means that those who leverage these tools for planning must navigate the same pitfalls as users of any other systems whose lifeblood is data.

 

If the input is incomplete, inaccurate or unvalidated, the output will be of little value. Biases, both personal and organisational, can also skew outcomes, including overemphasis on likely outcomes at the expense of less likely ones, which can cause much bigger disruptions than the ones that are already in the air.

 

For best results, all the relevant variables must be included and formulas must be clear and concise, as well as accurately represent the relationships between variables and the final result. Failure to consider external factors that have material impact on outcomes can defeat the purpose of the what-if analysis too.

 

The increasingly prevailing new approach to digitally enabled monitoring, which turns annual reviews into continuous exercises, applies to analysing future changes and disruptions too. To be effective, what-if analysis should be more an iterative process than a yearly snapshot.

 

Spreadsheet and platform solutions

 

Although Excel solutions remain the handiest tools for simple use cases, they can have their limitations. Dedicated platforms can handle larger data sets efficiently and better integrate data from multiple sources.

 

Moreover, they offer the full gamut of capabilities, including dynamic dashboards, interactive visualisations and real-time collaboration and sharing features – and, most importantly, the ability to automate more repetitive tasks.

 

Whether spreadsheet or platform-based, however, what-if analysis tools are indispensable for any company with an ambition to surf the waves of volatility rather than getting swallowed up by them. 

 

There are several business areas where they can be employed effectively. What-if analysis is now a must-have in a supply chain that has been fraught with an endless parade of major disruptions since the Covid pandemic, a sector where professionals hope to be better prepared for future crises than they were for previous ones.

 

Project managers can use them to identify potential setbacks, enabling them to prepare contingency plans that they can keep up their sleeves for when difficulties arise.

 

Financial planning is another area that can benefit from the tools, a sector gambling on an inflationary global market where new tariffs imposed by the unpredictable Trump administration currently in charge of the US eat into bottom lines spring up by the day. 

 

Similarly, decision-making centring on strategic questions such as the choice between building technology in-house and buying it, or hiring staff versus outsourcing certain functions, has also become much more precarious. Enabling both financial and strategic decision-making with what-if analysis can take the edge off many types of unpredictable business environment.

 

One thing that anyone harnessing the power of what-if analysis must remember, though, is that this exercise is only half the story. It’s not enough to know what the future may bring; there must also be a contingency plan drawn up that will help the business cope when the time comes.

 

After all, unlike crystal balls, scenario planning is not about giving in to fate, but managing the future to your own advantage.