Scenario Analysis

Abstract

Scenario Analysis or Scenario Planning is a tool for project, programme and portfolio uncertainty management.

Since its origin in war games and refinement by shell the mid twentieth century, scenario analysis or scenario planning has developed from a fairly qualitative methodology with close ties to game theory, to a more qualitative tool. (Roxburgh, 2009) In the same period, scenario planning has possibly also become increasingly important, in an era where innovation and disruption has had everyone looking for the next way to flip over the table in the ever-changing market. (Amer, 2012) It is in the same instance that scenario planning becomes most valuable, enabling organisations to prepare for whatever the future might bring, thus not merely offering a better chance of surviving potential dramatic changes by mitigating risks, but in some cases also take advantage of said changes.

Scenario planning will help putting the process at hand into perspective, and enable to set success criteria for the end date (if project) instead of now (Tonnquist, 2009). It aggregates various projections of technical and non-technical factors into a consolidated overview of plausible futures, thus allowing for broader as well as more profound consideration of the future environments that may emerge. (Ford, 2012) Scenario planning should not be mistaken for forecasts. Forecasting assumes that the future will look like the recent past, making it suitable for near future planning, but on longer terms chances are, that the surrounding environment has changed. Thus scenario planning is helpful when regarding long term planning. (Future Freight Flows MIT, 2011) Realising how misleading predictions based on straight-line extrapolations from the past are, scenario planning can aid identifying and adapting to aspects changing in the surrounding environment, by regarding a wide range of disciplines, including; economy, psychology, politics and demographics. The usage grew in the 1970’ies with the dramatic volatility of the oil prices woke up organisations that have lived off forecasts since the forties (an unusually smooth economic period) along with a growing belief in the non-rational side of human nature. The attractiveness of the method increased further to 70 % of companies using it (Bain & Company) in the aftermath of the 9/11 and the unstable global view. It is supposedly even due to scenario planning performed by New York Board of Trade in the 90’ies, that a third trading floor was established a few years before the attack, ensure that it could keep going. (Economist, 2008)

None of the above is rocket science. Why, then, don’t people routinely create robust sets of scenarios, create contingency plans for each of them, watch to see which scenario is emerging, and live by it? Scenarios are in fact harder than they look—harder to conceptualize, harder to build, and uncomfortably rich in shortcomings. A good one takes time to build, and so a whole set takes a correspondingly larger investment of time and energy. Scenarios will not provide all of the answers, but they help executives ask better questions and prepare for the unexpected. And that makes them a very valuable tool indeed.

-Roxburgh, 2009