How can you effectively conduct scenario planning exercises?

1 Define the scope and purpose

Before you start creating scenarios, you need to define the scope and purpose of your exercise. What are the key questions you want to answer? What are the main drivers of uncertainty that affect your financial projections? How far ahead do you want to look? How detailed do you want your scenarios to be? These questions will help you narrow down the focus and scope of your exercise and align it with your strategic objectives and stakeholder expectations.

2 Identify and prioritize the critical uncertainties

Next, you need to identify and prioritize the critical uncertainties that could have a significant impact on your financial outcomes. These could be external factors, such as market conditions, customer behavior, regulatory changes, or technological disruptions, or internal factors, such as operational efficiency, innovation, or organizational culture. You can use various tools and methods, such as PESTEL analysis, SWOT analysis, brainstorming, or expert interviews, to generate a list of potential uncertainties and rank them according to their likelihood and impact.

3 Develop and test plausible scenarios

Based on the critical uncertainties, you can develop and test plausible scenarios that represent different combinations of possible outcomes. A common approach is to create a matrix with two axes, each representing a high-impact uncertainty, and plot four scenarios at the corners of the matrix. For example, you could use revenue growth and cost efficiency as the two axes and create scenarios such as high growth-high efficiency, high growth-low efficiency, low growth-high efficiency, and low growth-low efficiency. You can then flesh out each scenario with more details, such as assumptions, drivers, indicators, and implications, and test them for consistency, relevance, and robustness.

4 Conduct sensitivity analysis and assess implications

Once you have developed your scenarios, you can conduct sensitivity analysis to measure how changes in key variables affect your financial performance under each scenario. You can use various techniques, such as what-if analysis, break-even analysis, or Monte Carlo simulation, to quantify the effects of uncertainty on your financial metrics, such as revenue, profit, cash flow, or return on investment. You can also assess the implications of each scenario for your risk profile, strategic options, and competitive advantage, and identify the potential opportunities and threats that each scenario poses.

5 Communicate and update your scenarios

Finally, you need to communicate and update your scenarios to inform and influence your decision making and planning processes. You can use various formats and channels, such as reports, dashboards, presentations, or workshops, to share your scenarios with your relevant stakeholders, such as senior management, board members, investors, or business partners. You should also monitor the changes in the external and internal environment that could affect your scenarios and update them accordingly to reflect the latest information and insights.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?