Scenario Planning

Forecasting is the idea that the future can be predicted based upon the past (Wade, 2012).  One challenge with forecasting is that it ignores disruptive or emerging technologies or forces.  One way forecasting is performed is by looking at the trend in a metric, such as sales, in the past and applying that pattern to the future.  For example, sales might have been increasing at 5% for the last five years.  A forecast might be to assume that sales will continue to increase at the same rate for the next five years.

Scenario planning involves questioning the environment of the future.  Forecasting has a somewhat simplistic view, which is the future is similar to the past.  Scenario planning is a tool that enables structured planning for the future.  The idea is to envision multiple visions of the future, each being equally likely, and attempt to plan (or at least prepare for) each of those possibilities.  The process considers trends that could impact the organization (or individual) doing the planning.  Things such as forces that might impact the environment are considered.

Both approaches are similar in that they attempt to prepare for the future.  They both attempt to make projections and to some extent weight impact.  Both have the potential to be incorrect, with the degree of risk associated with the projection increasing with time.  For example, it is much easier to envision the scenarios in the next two years than in the next 200.  Likewise, a firm can forecast with a higher degree of certainty two years than 200.

They are different in large part based on the variability of the models.  A forecast adds coefficients to variables but assumes that things in the future will be roughly as they have been in the past.  For example, if a company makes cellphones they assume that the demand for cell phones will be similar year over year.  A scenario considers more radical possibilities. What if a better way to perform instantaneous communication is developed?  What if people decide that talking to each other is not important?  In short, scenario planning equates to creating multiple models with multiple variables and considering the impact of such implications.

An advantage of forecasting is that it is easier to understand and takes less time to reach a relatively reasonable outcome.  It is reasonable to most people that things will continue as they have in the past.  A disadvantage of forecasting is that it often gives a false sense of certainty.

  Nokia became an excellent flip phone manufacturer.  However, they neglected to account for the forces that brought the smartphone to the forefront of consumer demand (Davila & Epstein, 2014).  Nokia likely had very precise forecasts.  They likely reached their goals most of the time.  Scenario planning might have helped them predict that as the Internet became pervasive, processing power and memory increased in devices, and touch screens improved that the users would come to expect their devices to change from a way to make phone calls to the primary means of connecting to the Internet. A challenge with scenario planning is that it may be very difficult to foresee those forces that might impact an organization.  

References

Davila, T., & Epstein, M. (2014). The innovation paradox: Why good businesses kill breakthroughs and how they can change: Berrett-Koehler Publishers.

Wade, W. (2012). Scenario planning: A field guide to the future: John Wiley & Sons.