Scenarios and systematic planning are ways for a business to prepare for new situations and risks, but they are not widely used. At least not yet. They have a strong background in the military, where scenario tools and exercises are a very basic part of the preparation and training.
Analyzing scenarios
Big data, data analytics and AI, are relevant to analyze scenarios, but conducting proper data-based scenario planning in businesses is not yet typical. Many companies just hope things go as they hope. Especially a systematic approach to collecting data and being prepared is missing.
Basically, scenario planning means tools and methods to prepare for different situations and then be able to react rapidly and make calculated decisions. I wrote earlier that we have factors and scenarios we can or cannot know. But even if we cannot know all possible things, we can still prepare for unknown factors.
Lessons from military and motorsport
The military has always been at the forefront of making scenario analysis. It is one of the main tasks of military organizations during peace times and war times. Most recently, we have seen many scenario analyses, for example, for the Ukraine war and a possible war over Taiwan. Some of these focus on top-level events and global affairs (who supports who), but some tools go to a much deeper level to analyze the battlefield’s weapons, equipment, and situations (e.g. predictive analytics for the battlefield).
A well-known example of data-oriented scenario planning is how Formula-1 teams prepare for a race. They collect a lot of data from testing, practices and simulators, and then they calculate thousands of scenarios. There can be accidents, rain, and technical problems, and you must make fast decisions, like calling a driver to the pit to take a new set of tires when a safety car comes to the circuit. You have time for this decision from a few seconds to half a minute. The F1 teams know they cannot succeed without collecting data and being prepared for different situations. That’s why they collect a lot of data and have dozens of people to calculate scenarios.
Many businesses ignore it
At the same time, we see a lot of businesses that basically hope things go to plan, and they don’t prepare for internal or external changes. Most recently, geopolitics have caused many companies surprises when they were unprepared for problems in Russia or complexities in China.
I know a company that calculates scenarios for real estate prices. Its founder once told me how they made simulation and scenario calculations for a bank and its real estate investments. They were literally taken out of a meeting where they were going to tell the results. The management group was not willing to see results that indicated they had a very high real estate risk in their balance sheet. A couple of years later, the valuations went down, the bank encountered serious problems and was finally acquired by another bank.
The WEF has listed many global risks for businesses, but each business has more local, industry-specific and internal risk factors. The most typical preparation certain companies do is to hedge raw materials, fuel and foreign currency prices. But we have also seen many stories of how this can go wrong if it is not done properly.
Human nature is to react to a risk that has already been exposed. For example, an airline starts to hedge for fuel prices after the prices have increased. Then they fix the prices to a higher level and get caught when prices go down. It is similar to when people become excited to buy shares even after the prices have increased.
A systematic approach is key
Some companies do something about risk and consider certain scenarios, but quite often, these are random activities, e.g. applying a discussion after a competitor decreases prices. Other refer to consultants about risks with a new investment, and sometimes even a risk scenario workshop with a consulting firm. The problem is that it is not systematic work.
In a systematic approach, you need to:
- List scenarios that are opportunities (yes, this is not only about risks but also situations you can win big if you can act at the right time) and risks. We cannot know everything that can happen, but we can also set some action plans and responsibilities for totally unexpected situations.
- Collect data that helps react to different situations and better identify new situations early enough (e.g. changing prices, geopolitical changes, competitor’s activities).
- Calculate action plans for different scenarios based on actual and simulated data. You must know its impact on your business, customers, and competitors. Ad hoc reactions can easily take you in the wrong direction if you haven’t calculated facts.
Each individual business should consider what is necessary
Those are just some examples of actions, but each individual business should consider what is necessary. For example, a two-person corner shop and a billion-dollar international business have totally different resources to generate scenarios. But smart entrepreneurs make some systematic scenarios work in their heads, even for one-man businesses and small startups.
The key is to make this work systematic, not just random discussions, expensive consulting workshops or buying individual reports. Some companies even have a culture where it is not good to talk about risks or negative scenarios, e.g., what will happen if a new technology makes our products obsolete, if there is a coup in an important manufacturing country or if our products become too expensive for the market. It is always important in business to be optimistic and target success, but longer-term success typically requires you to know the facts and are prepared to act wisely in different situations.
How to start
Data is the key to many things and especially for scenario work. Collecting facts and data that help understand your business, why it is successful, has some issues, and what can happen internally and externally is fundamental. It is also important to be practical.
You don’t always need expensive consultants and IT tools to make it. In all your key functions, you must take a systematic approach to collect and analyze facts and make an action plan to react fast enough. It can mean buying external data (e.g. raw material pricing data, economic forecasts, real estate price forecasts, geopolitical risk scores, inflation forecasts), but you also need to find internally a systematic way to utilize all information and be ready to act when necessary.
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