Risk management

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Scenario Analysis – Exploring different futures

The future is impossible to predict reliably. Even with good instincts, the outcomes that you predict could be disrupted by a range of different factors. Challenging your assumptions and guarding against making unfounded assumptions about the continuity of the status quo, means that your decisions will more likely be sound, even if circumstances change.

But what are the most likely outcomes in response to changing circumstances? Author and corporate strategist Peter Schwartz, one of the pioneers of scenario thinking, identified the following common scenarios:

  1. Evolution: All trends continue as expected. Things gently move towards a predictable end point.
  2. Revolution: A new, disruptive, factor fundamentally changes the situation.
  3. Cycles: What goes around comes around. Boom follows bust follows boom follows bust.
  4. Infinite Expansion: Exciting trends continue. Think of the computer industry in the 1950s.
  5. Lone Ranger: The triumph of the lone hero against the forces of inertia.
  6. My Generation: Changes in culture and demographics affect the situation.

Scenario Analysis is often used for crisis planning. By imagining a range of negative situations, your business can face worst case scenarios and best prepare for them. That said, this can also be used in a positive context. You can use scenario analysis to forecast a range of possible futures to encourage innovation within a framework that enables you to assess and minimize potential risks.

1. Define the Issue: A first step is to define what your goal is, or the decision that you need to make. Then assess the timeline in which this will need to happen which will be driven by the scale of the plan.

2. Gather Data: Identify the trends, variables, and uncertainties that may affect the plan. For more large-scale plans, you may find it useful to do a PESTLE Analysis  of the Political, Economic, Socio-Cultural, and Technological, Legal, and Environmental context in which it will be implemented.

3. Separate Certainties From Uncertainties: As predictable as many ongoing trends may appear, remember that in volatile economic conditions, certainties are far more scarce – you should try to avoid unconscious bias in favor of certain assumptions, by identifying and analyzing potential blind spots in your thinking. List uncertainties in priority order, with the largest, most significant uncertainties at the top of the list.

4. Develop Scenarios: Starting with your primary uncertainty, take a moderately good outcome and a moderately bad outcome, and develop a scenario around each that combines your certainties with the outcome you’ve chosen. Follow this process in order of the uncertainties you have listed.

 

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