Based on mathematical and statistical principles, scenario analysis provides a process to estimate shifts in the value of a portfolio, based on the occurrence of different situations, referred to as scenarios, following the principles of "what if" analysis. These assessments can be used to examine the amount of risk present within a given investment as related to a variety of potential events, ranging from highly probable to highly improbable. Depending on the results of the analysis, an investor can determine if the level of risk present falls within his comfort zone.
Consequently, important opportunities and serious threats may be overlooked and the very survival of the firm may be at stake. Scenario planning has its roots in military strategy studies. Herman Kahn was an early founder of scenario-based planning in his work related to the possible scenarios associated with thermonuclear war "thinking the unthinkable".
As a result of these efforts, Shell was prepared to deal with the oil shock that occurred in late and greatly improved its competitive position in the industry during the oil crisis and the oil glut that followed.
Scenario planning is not about predicting the future. Rather, it attempts to describe what is possible. The result of a scenario analysis is a group of distinct futures, all of which are plausible.
The challenge then is how to deal with each of the possible scenarios. Scenario planning often takes place in a workshop setting of high level executives, technical experts, and industry leaders. The idea is to bring together a wide range of perspectives in order to consider scenarios other than the widely accepted forecasts.
The scenario development process should include interviews with managers who later will formulate and implement strategies based on the scenario analysis - without their input the scenarios may leave out important details and not lead to action if they do not address issues important to those who will implement the strategy.
Some of the benefits of scenario planning include: Managers are forced to break out of their standard world view, exposing blind spots that might otherwise be overlooked in the generally accepted forecast.
Decision-makers are better able to recognize a scenario in its early stages, should it actually be the one that unfolds. Managers are better able to understand the source of disagreements that often occur when they are envisioning different scenarios without realizing it.
The Scenario Planning Process The following outlines the sequence of actions that may constitute the process of scenario planning. Specify the scope of the planning and its time frame.
For the present situation, develop a clear understanding that will serve as the common departure point for each of the scenarios. Identify predetermined elements that are virtually certain to occur and that will be driving forces. Identify the critical uncertainties in the environmental variables.
If the scope of the analysis is wide, these may be in the macro-environment, for example, political, economic, social, and technological factors as in PEST.
Identify the more important drivers. One technique for doing so is as follows. Assign each environmental variable two numerical ratings: Multiply these ratings together to arrive at a number that specifies the significance of each environmental factor. For example, consider the extreme case in which a variable had a very large range such that it might be rated a 10 on a scale of 1 to 10 for variation, but in which the variable had very little impact on the firm so that the strength of impact rating would be a 1.
Multiplying the two together would yield 10 out of a possiblerevealing that the variable is not highly critical. After performing this calculation for all of the variables, identify the two having the highest significance.
Consider a few possible values for each variable, ranging between extremes while avoiding highly improbable values. To analyze the interaction between the variables, develop a matrix of scenarios using the two most important variables and their possible values.
Each cell in the matrix then represents a single scenario.Scenario analysis is all about alternative worlds and parallel universes and may include black swans, but stops short of meteor strikes. Confused? Read on and we’ll find out what’s going on together. The name itself is a good place to start.
An introduction to scenario planning. Strategic The result of a scenario analysis is a group of distinct futures, all of which are plausible. The challenge then is how to deal with each of the possible scenarios.
The Scenario Planning Process. Scenario planning, also called scenario thinking or scenario analysis, is a strategic planning method that some organizations use to make flexible long-term mtb15.com is in large part an adaptation and generalization of classic methods used by military intelligence..
The original method was that a group of analysts would generate . Originally scenario analysis was to add more flexibility to strategic business planning, here are some other reasons why you need it.
Overall, the process of the scenario analysis is quite straightforward. Traditional ideas of scenario analysis have stayed the same since the s and the new ideas about scenario analysis have grown from.
Jan 08, · Scenario Planning and Strategic Forecasting. My specialty is multiple scenarios, or scenario planning, as it is best known. The Process. The scenario planning process .
Scenario Planning – a primer ^Scenarios are the most powerful vehicles I know for challenging our mental models about the world and lifting the blinkers that limit our creativity and resourcefulness” Peter Schwartz The Strategic Foresight method that is most widely taught in Business and Management.