Profit Frog is the leading FP&A software specifically designed for small businesses. Our 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.
What is scenario planning?
Scenario planning was pioneered by the US military. It is a way to model potential futures and plan accordingly. Scenario planning allows you to see how different variables would affect your business. Scenario planning involves asking the following two questions.
- What could potentially occur? This is the scenario itself.
- What would be the impact on my business if it did occur? This often involves looking at “best case,” “most likely,” and “worst case” outcomes.
Based on the insights gained from modeling alternate scenarios, you can create a plan to navigate them and steer your company to greater profitability and away from financial ruin.
While you may have limited control over many external factors affecting your business, you don’t need to be helpless.
As a key part of corporate strategy execution, scenario planning allows a scenario team to see how different variables might affect a company.
Example:
You could model the impact to your profitability if you raise prices by 10%, or if your cost of goods sold increases by 15%. You could model the impact on your business of an economic downturn, a pandemic, or rising interest rates.
The best scenario planning software
Scenario planning software is a performance management tool, a way to model alternative futures and plan accordingly. During scenario planning sessions, executives will ask a series of “what if” questions and explore alternative futures. When done with the right tools (hint, hint: Profit Frog), scenario planning can illuminate critical uncertainties and help you chart a course to maximum profitability—regardless of what happens in your external environment.
Our scenario planning software lets you model a range of possible outcomes and impacts. Then you can steer your company toward best-case scenarios while being ready for worst-case ones.
- Learn how to tackle resource management and when to back down from an investment
- Be strategically and financially prepared for a worst-case scenario and mitigate its potential impact
- Identify the focal issue and turn it into gain
- Recognize and seize amazing opportunities
- Gain confidence in your decision-making skills by preparing for things you can’t control
- 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
Types of scenario planning
Traditionally, there are four main types of scenario planning and forecasting. For the average small business, an understanding and mastery of all four is unnecessary.
Profit Frog blends the most valuable aspects of each scenario planning type to allow business owners to easily and decisively navigate uncertainty.
- 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 the end goal rather than how to achieve it.
- 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.
- 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 potential outcomes of a certain decision and how they can influence the business.
- 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.
What is strategic planning?
Strategic planning assumes a known future outcome and strategizes how to get there. Strategic planning is used to guide a business in creating, establishing, and committing to a future outcome.
Strategic planning includes:
- Goals
- Strategies
- Objectives
- Activities
Like scenario planning, strategic planning is designed to look into the future. But the process, goals, and outputs are completely different. In other words, strategic planning is a more static process and is disrupted by variability, whereas scenario planning is designed to navigate variability.
Types of strategic planning
Strategic planning has many different types, from informal to formal. Let’s take a look at the 8 most common types:
- SWOT Analysis
- OKRs (Objectives and Key Results)
- PEST Model
- Porter’s Five Forces
- VRIO Framework
- Gap Planning
- Balanced Scorecard (BSC)
- Blue Ocean Strategy
The scenario planning process vs the strategic planning process
Scenario planning and strategic planning have different processes and objectives.
The scenario planning process
Scenario planning is the discipline of identifying potential disruptions and opportunities before they occur—and being prepared for them.
Having a set of scenarios helps key decision-makers vet competing decisions and arrive at the optimal one.
The scenario planning process involves the following steps:
- Identify scenarios you would like to model
- Input actuals (business data) into Profit Frog
- Adjust variables (cost, pricing, economic conditions, or whatever you’re modeling) dynamically to see how they influence profitability
- Create a business plan based on insights gained, and update it dynamically as conditions change
The strategic planning process
Strategic planning processes focus on four crucial variables during the decision-making process:
- Threats
- Weaknesses
- Opportunities
- Strengths
When implementing strategic thinking, you should start by discussing these key questions:
- Who are we?
- Why do we exist?
- Who do we help?
- How do we behave?
- What are our missions, visions, and values?
Having the answer to these questions is a critical building block when developing multiple strategic plans.
These are the components that every strategic plan provides:
- Identifying the purpose of your business and creating a mission statement.
- Creating general goals for the organization to accomplish the mission.
- Establishing specific action steps that will be implemented in each goal.
- Evaluating and updating the plan on a regular basis.
Core differences in approach
As you can see, strategic plans focus on identity, continuity, and purpose, while scenario plans focus on disruption, variability, and the unknown. Each serves a different purpose.
- Scenario planning helps increase antifragility and optimizes thriving in uncertainty.
- Strategic planning optimizes resources for a known outcome and a predictable future.
Since business involves a mix of stability and volatility, both disciplines can be useful. We find that the average small business benefits more from scenario planning, probably because small businesses deal with greater volatility than large enterprises—and are more likely to be swamped by unforeseen changes.
Scenario planning FAQ
What are scenario planning tools?
Scenario planning tools are software programs—either spreadsheets such as Excel, or online applications—that allow one to model plausible scenarios and forecast best-case and worst-case outcomes.
What are the 5 steps of the scenario planning process?
Traditionally, the 5 steps of the scenario planning process looked like the following (Profit Frog simplifies these):
- Identify trends or decisions needing to be made
- Come up with future scenarios involving those trends or decisions
- Develop a scenario planning template
- Develop multiple scenarios
- Evaluate and organize scenarios
With Profit Frog, the process is simpler:
- Identify scenarios you want to model
- Input actuals (data about your business) into Profit Frog
- Adjust variables (costs, pricing, or other drivers of profit) dynamically to see how they influence scenarios
- Create a business plan and update it dynamically as conditions change
What is a scenario matrix?
A scenario matrix is a scenario planning framework or template that uses a quadrant-based layout to forecast different scenarios. It is useful for back-of-the-napkin decision-making but lacks the driving force and robustness of a tool such as Profit Frog.
How to create a scenario planning project?
Here’s the fastest, most efficient way for small businesses to create one or more scenario plans:
- Identify basic scenarios you want to model
- Input actuals (data about your business) into Profit Frog
- Adjust variables (costs, pricing, or other drivers of profit) dynamically to see how they influence scenarios
- Create a business plan and update it dynamically as conditions change
Scenario planning project example:
A scenario is a situation or sequence of events. We are modeling different sequences or series of events to see what will happen to a business, based on a set of assumptions in each scenario.
Say, for example, you sell cold-pressed juices and other wellness products through various e-commerce channels. You are deciding the next step for our business, and you want to model three different scenarios before deciding how to proceed forward. The scenarios are:
- Expanding from e-commerce to selling in retail stores such as Walmart, Kroger, Whole Foods, and Trader Joe’s
- Adding a new product line of nutritional juices to be sold within existing e-commerce channels
- Opening your own retail store to sell your current products
A good scenario planning template–or scenario planning tool such as Profit Frog–will allow you to model all three of these decisions. Not only will you be able to model all three decisions, but you’ll be able to model each under a variety of potential scenarios and improve your current strategies:
- Which has the better outcome if labor costs increase significantly? Or if there is a labor shortage?
- Which has the better outcome if prices of raw materials increase significantly?
- Which has the better outcome if commercial real estate prices drop?
Why do small businesses need scenario planning?
The need for developing scenarios has never been greater than it is today. Just look at the current reality of the world we live in:
- Global pandemic (COVID-19)
- Global conflicts
- Health crisis (monkeypox)
- Energy crisis
- Record inflation
- Supply chain issues
- Climate change
The only downside to scenario planning, traditionally speaking, is companies have needed a scenario team—which makes the practice prohibitively expensive for small businesses. Profit Frog makes scenario planning easy for small business owners; you could say we’re democratizing the scenario planning process.
What is business continuity planning?
Business continuity planning (BCP) is a type of contingency planning that focuses on preventing and recovering from major disruptions such as the death (or unexpected departure) of a key executive, a terrorist attack, or some other dramatic event. BCP ensures that the company can resume normal functionality as quickly as possible in a disastrous scenario.
What is strategic foresight?
Strategic foresight, also referred to as strategic options, involves collecting and analyzing information about a company’s future operating environment. As such, it’s closely related to scenario planning.
Are scenario planning and strategic planning the same?
No, these two processes are different in orientation and result.
- 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, whereas scenario planning is designed to navigate variability.
What are strategic planning frameworks?
A scenario planning framework is a tool or structure that gives form to your scenario planning exercises. A software solution can provide a framework, as can a conceptual process or set of steps. Any structure to follow can be considered a framework.
Profit Frog provides the framework you need for your scenario modeling activities—and it’s baked right into our software so you don’t even need to think about it.
