Are there any drawbacks to using scenario planning and modeling for decisionmaking? Let’s assess the advantages and disadvantages of scenario planning methodologies.
What is a Business Scenario?
A business scenario is a thorough description of a business problem or issue. The scenario could be describing a current situation, or a hypothetical one. For purposes of strategic management and planning, a business owner is typically modeling a hypothetical future scenario.
Scenario building is the process of constructing a complete picture of a business scenario as it relates to the various components and drivers of profitability.
What is Scenario Planning?
Scenario planning is a way to model potential futures and plan accordingly. It allows you to see how different variables would affect your business. For example, you could model the impact to your profitability if you raise prices by 8%, or if your cost of goods sold increases by 14%. You could model the impact to your business of an economic downturn, a pandemic, or rising interest rates.
Based on the forecasts of modeling multiple scenarios, you can create a plan to navigate them.
Advantages of Scenario Planning
Scenario planning helps you navigate your company to more profitable avenues. It also helps to mitigate risk: by identifying the biggest threats to future profitability, you can proactively implement strategies to de-risk your company.
- Learn where to allocate your resources and when to back down from an investment
- Be strategically and financially prepared for a worst-case scenario and mitigate its potential impact
- Identify positive and negative profitability factors in your business operations
- Identify key issues and turn them into gain
- Recognize and seize amazing opportunities
- Learn how to mitigate the risk to your business of environmental factors outside your control
- Speed up the planning process while making better decisions
- Gain confidence in your decision-making skills
- Be ready for disruptive change and take advantage of it rather than being blindsided by it
- Have your business strategy be proactive rather than reactive
Disadvantages of Scenario Planning
The biggest disadvantage of scenario planning has traditionally been the time and resources it consumes. Before the advent of scenario planning tools, modeling different hypotheticals took a tremendous amount of time.
Modeling scenarios in Microsoft Excel, for example—even with a good scenario planning template—is a daunting process for all but the most proficient Excel users.
These days, a wealth of scenario planning software tools have made the process more achievable for regular folks.
Profit Frog’s scenario planning software is targeted to small businesses. We strip away a lot of the complexity that some of our competitors include—many of them focus on serving funded startups with complicated CAP tables and shareholders—and give Main Street businesses exactly the features they need…and none that they don’t.
Get started with your free Profit Frog trial today!
Scenario Planning Examples
Here are some examples of scenario planning in use.
Royal Dutch Shell
Shell has been using scenario planning since the 1970s. The company’s scenario team has been able to successfully model global trends and plan against them.
Shell’s set of scenarios have helped the company anticipate and adapt global business operations to the oil shocks of the 1970s, the collapse of European communism, the Great Recession of 2008, and other volatility. Here are a few Shell scenarios:
- The Sky scenario: imagining meeting the climate goals of the 2015 Paris Agreement and the changes that would need to occur to mitigate climate change
- Rethinking the 2020s: 3 scenarios that explore the long-term ramifications of the COVID-19 pandemic
- Digitalization: exploring how digital technologies might continue to change the world as we know it
Shell’s executive leadership has benefited tremendously from their investment into scenario planning. With a strategic foresight gained from knowing their strategic options and the key factors driving them, Shell has been able to develop contingency plans for an uncertain future. This has helped them with investor relations, and cost management—not to mention positioning the company to capitalize on global business trends rather than getting sideswiped by them.
A Profit Frog Scenario Planning Case Study
Kenton Landscaping has been growing steadily for the past year and has plateaued in their small city. They want to expand and are considering the following options:
- Commute to other cities and offer services there
- Sign a lease in a new city for a permanent base there
- Focus on more high-margin services
Using Profit Frog, Kenton leadership builds scenarios for the three variables as follows:
Commuting will increase gross revenues by 20% while increasing gas expenditures by $8,000 per month and payroll expenses by $5,000. Net profits decline even though revenues increase.
New Building Lease
As with commuting, leasing a building in a new city will increase revenues by 20%. Payroll will increase by $5,000—again, the same number as for the commuting scenario. Lease and utilities for the new building will cost $4,500. Profit margins increase from 6.5% to 8% and net profit increases by nearly $3,000.
Profit Frog shows Kenton that their highest-margin service is cleanups in the spring and fall. Increasing cleanups makes sense.
New Building and Cleanups
Profit Frog’s scenario planning project clearly reveals that the best course for Kenton Landscaping is to lease the building in the new city while investing $1,000 per month in marketing cleanups. Total profits go up by more than $6,000 per month and profit margins increase from 6.5% to 10%.
Scenario Planning Types
Traditionally, there are four main approaches to scenario planning. For the average small business, an understanding and mastery of all four is not necessary. Profit Frog blends the most useful aspects of each scenario planning type to allow business owners to easily and decisively navigate uncertainty.
Here are the four traditional types of scenario planning:
- Normative scenarios describe an achievable, most preferred, end state. This type of planning is geared towards goals on how the company would like to operate long-term. Normative scenarios are usually combined with other types of scenario planning, as they focus on what the end goal is rather than how to achieve it.
- Operational scenarios are the most common form of scenario planning. They focus on the immediate impact of a specific event and provide short-term strategies. Operational scenarios look at all likely outcomes of a certain decision and how they can influence the business.
- Quantitative scenarios look at scenario planning through the lens of financial modeling. These scenarios examine the potential financial implications of best-case, worst-case, and any other scenario that may arise.
- Strategic management scenarios examine your company’s environment. They look at the broad picture, including the economy in your area and how your customers are likely to think and behave.
With Profit Frog, you don’t need extensive knowledge on the scenario planning process to get the benefits. Simply follow the prompts in our software and model different scenarios for your company.
Scenario Planning vs Strategic Planning
Strategic planning and scenario planning share a lot in common, but differ in the following respects:
Strategic planning assumes a known future outcome and strategizes how to get there
Scenario planning assumes a dynamic, chaotic future and helps you plot the course to maximum profitability through all the unknowns
In other words, strategic planning is a more static process and is disrupted by variability, where scenario planning is designed to navigate variability.
Profit Frog’s scenario analysis is designed to be dynamically updated as conditions change. This sort of dynamic planning is much more effective and actionable than many static planning models.
Using Scenario Planning Tools
There are many powerful tools for scenario planning. The most traditional—and least user-friendly for novices—is Microsoft Excel. In recent years, a number of scenario planning software solutions have emerged.
Profit Frog offers a simple yet powerful scenario planning tool targeted to owners of small businesses. We allow you to model multiple scenarios and adjust variables dynamically. Using Profit Frog, you can peer into the future and see the impact of different hypotheticals on your business. You can then map a business plan, and adjust it in real time as conditions change, by updating the variables in your Profit Frog dashboard.
Scenario Planning FAQ
What is a scenario planning template?
A scenario planning template is a framework or model that facilitates the process of scenario planning. Such a template could be as simple as a matrix drawn on a piece of paper with X and Y axes. Or it could be purely conceptual. Or it could be specific to a given piece of software, such as Microsoft Excel.
Profit Frog offers a scenario planning framework that is easy to use for the average small business owner.
What is scenario modeling?
Scenario modeling refers to financial modeling according to specific scenarios. For example, you determine how much you’re likely to profit in a particular scenario in the future based on its probability and the impact it can have on your business. Profit Frog helps you do this easily and with no scenario modeling experience.
How to use scenario planning in situations caused by the Covid-19 pandemic?
In a world remade by the pandemic, every business needs to invest in financial, strategic, and operational scenario planning. Profit Frog’s helps you model profitability across all types of scenarios, including disruptions caused by pandemic, supply chain issues, or other events.
What are the differences between scenario planning and continuity planning?
Business continuity planning is a part of corporate strategy and is often conflated with scenario planning. However, while scenario planning aims to envision scenarios that may occur, continuity planning focuses on whether the business is prepared for a disaster (an earthquake, fire, or flood, for example). Scenario planning and scenario development can be an important component of business continuity planning.
What is the history of scenario planning?
Scenario planning got its start in the military, which used it to imagine different “war games” and their outcomes. In the aftermath of WWII, scenario planning began to infiltrate the civilian and corporate world.
Herman Kahn was a systems theorist and pioneer of scenario analysis who popularized the term “scenario” in the 1960s. Kahn founded a scenario-based think tank, the Hudson Institute, in 1961. Hudson initially prioritized defense-related scenario planning and its theories of nuclear deterrence and escalation were influential within the Kennedy administration. Hudson then began to focus on scenario planning in economics; Kahn successfully predicted Japan’s economic rise.
Pierre Wack, a disciple of Herman Kahn, implemented scenario planning exercises in Royal Dutch Shell in the 1970s. Wack’s biography, Foundations of Scenario Planning: the Story of Pierre Wack, is a terrific overview of the history of the discipline. Other writers, such as Guido Reger, Dana Mietzner, and Mats Lindgren, have written influential books on the topic of scenario planning as well.
Today, scenario planning is one of the major driving forces behind enterprise FP&A. Management consultants, business guides, and top executives use it to guide their innovation strategy, technology planning, and other decision making.
In 2022, Profit Frog emerged to make scenario planning available and accessible to the average Main Street business owner. Our tool is intuitive, easy to navigate, and does not require an MBA or degree in economics.
Our solution provided everyday entrepreneurs with critical decision making intelligence to navigate an uncertain world and optimize profitability. More and more owners of small businesses are recognizing the importance of scenario planning to steer their companies.