Scenario Analysis

Wouldn’t business be simple if you could only accurately predict the future? Of course it would. Deep down, that is what everyone who works in a business-related field is trying to do – predict the future in order to make the right decisions to be positioned for success.

Scenario Analysis

If you knew what the market was going to look like in a few months or a few years, you could place your company in the perfect spot to reap great financial rewards. While that kind of perfect vision into the future isn’t going to be possible anytime soon, you can use the Scenario Analysis tool to make your best guess as to the future of your specific market.

There are five steps in to the scenario analysis process:

Step One – Defining the Problem

This seems to always be where things get started in business. Before you can make plans and devise strategies to move forward, you need to know exactly what the problem is that you are trying to solve.

Defining the Problem

Business is really just a string of problems and solutions, and the companies who can come to the solutions in the shortest amount of time will usually come out on top in the end.

What problem is it that you can solve with your product or service? Is this a problem faced by a large number of people, or only a small group? Once you have a clear definition of the problem that you are setting out to solve, you will have a much better idea of how you can best locate, attract, and serve your customers.

Step Two – Gathering Data

Information is the key to good decision making. If you don’t have data to back up the choices you are making, you are actually just guessing at what the market will hold for your and your business. Take the time and effort to do detailed analysis of the current state of the market and any threats or opportunities that will affect that market moving forward. With a better picture of how the market as a whole is going to move, you can then decide how your product or service will fit within that market in the years to come.

Gathering Data

The past tends to be the best predictor of the future, so looking back at the way your specific market has developed previously – or, looking at other, similar markets – is one of the best tools you will have available for data collection. Understanding how long products tend to remain in the market, and how long they are able to hold on to a top position, will be a great help toward the goal of projecting future developments in this business space.

Step Three – Separate Certainties from Uncertainties

Not all of your projections are going to come with the same degree of confidence. You will have some points that you identify as things that you feel are certain to happen, while other predictions will be based in fact but also based somewhat on ‘gut’ instinct. In this step of the scenario analysis, you are going to separate out the points that you feel are certain from those that seem uncertain in nature.

Separate Certainties from Uncertainties

Once you have separated out your projections into these two categories, step back and take a big picture look at your lists. Are the predictions in the ‘certain’ category the most important ones to your business, or are they most incidental? In this way, you can evaluate how confident you are in the choices that you are making for your business. If most of the important predictions you are making about the future fall into the uncertain category, you will have to proceed with care and plenty of caution.

Step Four – Develop Scenarios

In this step, you are going to take the uncertainties from the list you created in the previous step and put them to the test. Since you are uncertain of these outcomes, you are going to create multiple scenarios that will allow you to think about what your business would look like if each were to come true. For example, if the market has a whole is in good health, what will that likely mean for your business? Or, if the market is struggling, how will that affect your company? Play out a variety of different scenarios and you will start to get a good idea of the risk you may be taking on should you choose to proceed with your plans. Take some time to work through a number of scenarios, but only follow this process on the points that you would consider important. If there are some incidental points on your list that won’t have much of an effect on business as a whole, you don’t need to bother with the scenario process.

Step Five – Use the Scenarios in Your Planning

This is where you put to use the information and ideas that you have developed while using this model. Now that you have some scenarios created based on your various predictions and projections, you can alter your business planning as necessary.

Use the Scenarios in Your Planning

For instance, you can adjust your planning to avoid the parts of the business that would seem to be the riskiest, while increasing your commitment to the parts of the company that seem like more of a ‘sure thing’. There is always going to be risk in business, of course, but tweaking your planning based on the scenarios you envision will hopefully limit your exposure to that risk.

No business owner or manager can perfectly see into the future – that is a goal that simply isn’t attainable. However, if you are willing to sit down and spend some time developing a number of scenarios that relate to how your business will perform under a number of market conditions, you can make choices that reduce the risks you are taking. In the end, it is all about positioning your organization for the best possible chance at success, and scenario analysis can help you do just that.

You can read more about Scenario Analysis in our free eBook ‘Top 5 Strategy Development Tools’. Download it now for your PC, Mac, laptop, tablet, Kindle, eBook reader or Smartphone.

Key Points

  • Scenario analysis is a 5-step process of analyzing possible future events by considering alternative possible outcomes.
  • Step 1) Define the Problem – Before you can make plans and devise strategies to move forward, you need to know exactly what the problem is that you are trying to solve.
  • Step 2) Gather Data – Take the time and effort to do detailed analysis of the current state of the market and any threats or opportunities that will affect that market moving forward.
  • Step 3) Separate Certainties from Uncertainties – Separate the points that you feel are certain from those that seem uncertain in nature.
  • Step 4) Develop Scenarios – Go through this process on the points that you would consider important, ignoring incidental points on your list that won’t have much of an effect on business as a whole.
  • Step 5) Use the Scenarios in Your Planning – Now that you have some scenarios created based on your various predictions and projections, you can alter your business planning as necessary.
  • This process does not try to show one exact picture of the future but presents several alternative future developments.
  • It is useful to generate a combination of an optimistic, a pessimistic, and a most likely scenario.

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