4 Scenario planning and simulation 4.1 Scenario planning
When the business environment has a high degree of uncertainty due to complexity and/or rapid change, it may be impossible to predict a single picture of how the firm will be affected in the future.
Scenarios are detailed and plausible views of how the business environment might develop in the future based on groupings of key environmental influences and drivers of change about which there is a high degree of uncertainty.
Scenario planning involves the following steps.
1 Identify high-impact, high uncertainty factors in the environment
Relevant factors and driving forces could be identified through a strategic analysis framework such as the PEST analysis considered in paper F1. Once identified, factors need to be ranked according to importance and uncertainty.
For example, in the oil industry there may be a need to form a view of the business environment up to 25 years ahead and issues such as crude oil availability, price and economic conditions are critical.
2 For each factor, identify different possible futures.
For example, oil companies would consider the possible outcomes of elections in different countries and the attitudes of the possible governments to climate change, pollution and energy policy. Precision is not possible but developing a view of the future against which to evaluate and evolve strategies is important.
3 Cluster together different factors to identify various consistent future scenarios.
For example, two key factors may have been identified as:
(a) the threat of new entrants into the industry and
(b) new legislation that may reduce the industry potential for profit.
Clearly if new legislation is passed that reduces industry profit potential, then the likelihood of new entrants will fall.
4 ‘Writing the scenario’ – for the most important scenarios (usually limited to three), build a detailed analysis to identify and assess future implications.
The result of this detailed scenario construction should include:
- financial implications – anticipated net profits, cash flow, and net working capital for each of three versions of the future
- strategic implications – possible opportunities and risks
- assigning probabilities to key variables
- financial analysis, such as Monte Carlo simulation, discussed in section 4.2 below外语学习网
5 For each scenario identify and assess possible courses of action for the firm.
6 Monitor reality to see which scenario is unfolding.
7 Revise scenarios and strategic options as appropriate. |