Scenario planning: Benefits, steps, and examples

Scenario planning, sometimes referred to as ‘what-if planning’, has taken a leading role for finance teams. With a turbulent few years in the rear-view mirror and an unpredictable future on the horizon, finance teams are looking to predict what’s coming. It’s a way to be prepared for any outcome and protect your organization from potential hardships.

So, it’s important to understand the types of scenarios you can plan for, the steps to plan, and examples.

What is scenario planning?

Scenario planning, sometimes referred to as “what-if” planning, helps businesses prepare for a future possibility by exploring different outcomes based on potential variables. Rather than predicting the future, it empowers companies to navigate uncertainty and adapt to changing environments. In today’s fast paced world, where market conditions, regulations and technologies shift rapidly, scenario planning allows finance and operational leaders to model diverse situations, assess risks, and make informed decisions that ensure their business succeeds no matter what happens in the future.

Here’s an example of scenario planning. Let’s say the CFO of a manufacturing company wants to understand how limited staff will affect her product revenues. She can create two different scenarios (Scenario A and B) that consider how X number of products, produced at X selling price will affect her projected product revenues. With this insight, the CFO can evaluate different solutions for increasing revenues or decreasing costs

Who is responsible for scenario planning?

Senior leaders and decision-makers within an organization, like the CFO, CEO, and other executives, are typically responsible for scenario planning. In finance, the FP&A team often leads the charge, working alongside various department heads to assess risks and opportunities. Often, cross-functional teams can be involved depending on the type of planning, like operations and HR.

After identifying who leads scenario planning, it’s important to recognize that collaboration is the key to success. Various departments contribute insights based on their unique challenges and point of view. For example, a finance team may focus on budgeting under different economic conditions, while operations assess supply chain risks. This collaborative approach allows businesses to be agile and better equipped for uncertainties.

Why is scenario planning used?

Scenario planning is used to help organizations prepare for uncertainty by exploring a range of possible future outcomes. It allows businesses to test strategies against different variables like market shifts, economic changes, or other place in time events. By considering and testing multiple scenarios, business leaders can make informed decisions faster in the face of volatility or change.

Scenario planning vs. financial forecasting

While scenario planning and financial forecasting are similar in that they both involve anticipating future outcomes to inform business decisions. However, they do differ in approach.

As you’ve read so far, scenario planning explores multiple possible futures, allowing companies to prepare for any number of uncertainties or disruptive events. Financial forecasting focuses on predicting a likely future based on current and historical data, focusing on typical financial outputs like revenue and expenses.

The benefits of scenario planning

1. Improved information-based decision making: Scenario planning allows you to play out different future scenarios. So, when the market shifts, or interest rates spike, you understand the possibilities and what business levers to pull and why.
2. Risk management: Scenario planning helps identify potential threats and mitigate risks.
3. Increased agility: Prepare for the unexpected, so that when scenarios play out that you have modeled you are able to quickly adjust.
4. Enhanced long-term vision: Ensure your organization is ready to take on future challenges and future growth.

What are the main types of scenarios?

The main type of scenarios include: 

• Quantitative scenarios
• Operational scenarios
• Normative scenarios
• Strategic management scenarios
• Probability-based scenarios
• Interactive scenarios

Let’s look at each in more detail.

Quantitative scenarios

Quantitative scenarios are data-driven models that rely on a number that has been input, like financial metrics, market trends, or economic indicators. Quantitative scenarios allow businesses to make predictions about outcomes such as revenue growth or cost fluctuations by analyzing large amounts of data. This method of scenario planning is often led by FP&A teams, data analysts, or the finance department.

Operational scenarios

Operational scenarios focus on internal processes and workflows and explore the impact of changes in operations, such as new technology or staffing shifts. This type of scenario modeling helps businesses optimize efficiency and mitigate disruptions and is led by operations or supply chain leaders.

Normative scenarios

Normative scenarios are focused on specific goals and how to craft a pathway towards a desired future state. Normative scenarios often reflect ideal outcomes, guiding decision makers on the steps needed to achieve long-term goals. This type of scenario planning is done by senior leadership and strategic planning personnel.

Strategic management scenarios

Strategic management scenarios focus on long-term strategies and how various decisions impact the overall direction of the organization. Strategic management scenarios are used for high-level planning around competition, positioning, or business growth and is typically handled by the executive team.

Probability-based scenarios

Probability-based scenarios involve assigning likelihoods to different future scenarios. By using probabilities, businesses can assess risk and prioritize scenarios that are more likely to happen so they can get strategic and focus on high-impact strategies. Probability-based scenarios are usually conducted by risk management teams or FP&A teams. 

Interactive scenarios

Interactive scenarios involve ongoing adjustments based on feedback and real-time events. Interactive scenarios are dynamic and evolve as new information arises. This type of scenario modeling is useful for complex, rapidly changing environments like crisis management or political developments. Interactive scenarios typically involve cross-functional teams and external stakeholders.

What are the steps of the scenario planning process?

Step 1: Define objectives

Clearly identify your goals and objectives for scenario planning. This could involve addressing specific business challenges, anticipating market shifts, or preparing for potential disruptions. A clear concise objective helps guide you along the process.

Step 2: Gather data

Data is key, so collect both qualitative and quantitative data that is relevant to the goals and objectives which you just outlined. Market research, historical performance data, industry reports and trends, insights from subject matter experts. The data is foundational for your scenario planning.

Step 3: Identify key drivers

Determine what critical factors could impact your business. Drivers could include external (economic, regulatory) or internal (resource allocation, organizational structure). Understanding these drivers will help frame your scenario planning.

Step 4: Develop scenarios

Create plausible scenarios based on the identified drivers. Each scenario should depict future outcomes, but aim for a mix of optimistic, pessimistic and neutral scenarios.

Step 5: Analyze scenarios

Evaluate the implications of each scenario to your business. Consider the risks and opportunities that each scenario presents. It’s important to assess how these would align to your greater organizational goals.

Step 6: Formulate strategies

This step is where you able to create the playbook for future scenarios. Develop actionable strategies and contingency plans for each outlined scenario. The goal is to ensure your business can respond rapidly to anything that gets thrown at it.

Step 7: Monitor and update

Scenario planning is not a one-time exercise. Monitor internal and external variables and update scenarios accordingly and regularly revisit your original objectives and strategies.

Scenario planning examples

Headcount forecasting

Headcount forecasting is used to help businesses anticipate staffing needs based on future business scenarios. For example, companies could develop three different scenarios. Each scenario can help the company plan for recruitment, budget, training or restructuring:

1. Best case scenario: The company experiences rapid growth, and needs to hire 75 new employees to meet demands.
2. Moderate growth: The company needs to hire a modest number of new employees to meet demand.
3. Downturn scenario: The company faces a recession and needs to reduce headcount by a 10%.

Sales capacity planning

If an organization is looking to optimize its sales force to meet strategic goals, they can use scenario planning to understand sales capacity. Sales capacity planning allows the organization to determine how many sales representatives are needed to meet their revenue targets based on various scenarios. Key drivers to consider include market demand, sales cycles, and customer acquisition costs. Proactively planning allows organizations to align sales capacity with strategic goals.

Revenue planning

Revenue planning allows businesses to forecast income under various market conditions and ensure strategic readiness. Companies can develop scenarios that reflect potential futures, like different market conditions. For each scenario, businesses can build adaptive strategies that optimize pricing, marketing efforts, and resource allocation. Revenue planning allows businesses to maximize revenue opportunities and effectively navigate fluctuations in the market.

FAQs about scenario planning

What’s the difference between scenario planning and business continuity planning?

Scenario planning and business continuity are related but distinct concepts. Scenario planning focuses on preparing for various future possibilities. In contrast, business continuity planning ensures that critical business functions can continue during and after a disruption, such as a natural disaster, power outage, or other business failures. Business continuity planning involves creating plans and processes to minimize downtime and maintain operations. Business continuity planning also focuses on recovery strategies.

What is scenario planning used for?

Scenario planning is used to help organizations prepare for uncertainty by exploring a range of possible future outcomes. It allows businesses to test strategies against different variables like market shifts, economic changes, or other place in time events. By considering and testing multiple scenarios, business leaders can make informed decisions faster when faced with volatility or change.

How do you create scenarios?

To create scenarios, organizations need to identify key drivers influencing their environments, such as economic trends, regulatory changes, or other market disruptors.

How often should you update scenarios?

Scenarios should be updated regularly, especially in dynamic industries. A recommended review cadence is at least annually or after significant market occurrences.

In a rapidly changing business landscape, scenario planning has emerged as a vital tool for any organization looking to quickly adapt to emerging trends or changes. No matter your industry, the insights gained through scenario planning empower leaders to quickly adapt and ensure resilience against unforeseen challenges.

Ready to learn how Prophix can support your scenario planning?