Scenario Planning Example

Scenario Planning Example: How to Plan for Any Future

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Amid a pandemic rife with uncertainty, most of us can agree that important decisions (especially those involving money) should be made using concrete data and careful analysis—not intuition or “gut feeling.” 

But this isn’t always easy. For one thing, the data you need to make crucial capital decisions may not be readily available. Even if you have historical data, it can only tell you what happened—which is not always the same as what may happen.

In reality, every decision your organization faces carries some degree of risk. What’s important is mitigating this uncertainty using the tools at your disposal.

But how do you forge a strategic path forward for your organization without knowing what the future holds?

Enter scenario planning: the forecasting method that allows your organization to gain far better insights in the face of uncertainty. Scenario planning is a powerful tool that can help your business make well-informed decisions no matter what the future may hold.

What is Scenario Planning?

Scenario planning as a process was pioneered by the US military. Originally, groups of analysts generated simulation exercises for policymakers using known facts, including geo- and sociopolitical data, hard numbers on GDP and military strength, and much more.

When adapted for business, scenario planning helps decision-makers better understand the behavior of competitors (or opponents, in military terms) as well as unpredictable external factors. These insights are used to make predictions about what the future holds so that an organization is ready to pivot towards safety and away from danger no matter what happens.

This type of rigorous, data-based planning allows leadership to make the best decision and choose an appropriate course of action whether the worst-case scenario or the best-case scenario occurs.

Why is Scenario Planning So Essential?

While it may sound abstract, scenario planning is used in very practical ways, including projecting a company’s financial earnings, estimating its cash flows, and avoiding bad investments. It’s usually used to assess and manage risk.

Simply put, scenario planning attempts to eliminate two of the most common errors made in strategic analyses: overestimation and underestimation. Scenario analysts segregate the knowledge at their fingertips into two discrete categories: things we know for certain (independent variables, or inputs) and things we’re uncertain about (dependent variables, or outcomes).

By providing realistic projections of possible future outcomes, scenario analysis provides decision-makers with the ability to act proactively by preparing themselves for the unknown far ahead of time, rather than reactively to repair the damage.

Let’s say a brutal tropical storm is forecast to hit a town in the Southeast. Would the governor advise residents to stay or evacuate? In this example, all outcomes are bad ones, and it’s simply a matter of determining which ones are worst, as well as how to react to every possible disaster.

But this kind of decision-making in the face of uncertainty is also true in situations where most outcomes are good ones. Say, for example, a small video game studio releases a new game. After a popular streamer features the game, sales skyrocket 1,000% overnight. In the face of this unexpected windfall, how can the studio best allocate their cash inflows?

Without conducting scenario analysis, organizations leave themselves exposed to tons of risks. But by knowing what may happen ahead of time (in both the best and worst cases), leadership prepares everyone to respond with more confidence.

A Simple Scenario Planning Example

There’s no single, standardized method to conduct scenario planning. Businesses use a wide variety of approaches and templates, ranging from decision trees to four-sectored graphs.

To see how scenario planning might help your organization, let’s take a look at how a private university might have used scenario planning during the COVID-19 pandemic.

A large private university in the Northeast was experiencing a steady increase in enrollment until the COVID-19 pandemic hit. Faced with significantly more risk and financial uncertainty, the university decided to build and analyze various scenarios to identify the best course of action that would leave them solvent (and hopefully expanding) once the pandemic is over.

The university decided to focus on the most pressing issue: whether students would resume in-person studies in the fall semester, or whether remote teaching would continue. 

When conducting their scenario planning, the university first identified the known factors (independent variables, or inputs) that might impact their decision:

  • Key issues: What are the main issues they are trying to assess?
  • Timeline: How far into the future will they be looking to make predictions?
  • External factors and trends: What are the external factors and trends most likely to impact their scenarios?
  • Internal drivers: What are the major internal drivers that will need to be addressed?
  • Maintenance: Does the university have sufficient technology, data, skills, and bandwidth to develop and maintain their scenarios?

Next, the university outlined their assumptions (dependent variables, or outputs) that their scenarios would grapple with. They then described two major scenarios using these known and unknown variables:

 

Scenario #1:

Classes remain remote

Scenario #2:

In-person classes resume

Key issue

Long-term lost revenues from room and board, meal plans, and on-campus activities

Unpredictable loss in revenues if the university is forced to close in-person instruction due to student infection

Timeline to evaluate

6 months (until end of fall semester)

6 months (until end of fall semester)

External factors/trends  

Social distancing legislation; local and national infection rates

Social distancing legislation; local and national infection rates

Internal   drivers

The adaptability of faculty and staff; redirection of funding toward supporting remote instruction

The adaptability of faculty and staff; ability to fund and follow sanitization and remaining social distancing measures

Assumptions

Enrollment will remain largely the same and increase once in-person instruction resumes

Many on-campus activities will be paused or conducted remotely; class capacities will be reduced

Maintenance

Will require technology upkeep to support seamless instruction and document/file sharing between students faculty; also includes keeping staff responsible for maintaining these services

Will require strict adherence to safety protocols, including hiring additional custodial staff, closely monitoring student activity, and pausing certain on-campus activities

So, how did the university use this information?

First, they implemented cost-saving measures to reduce unnecessary spending and show lenders they made all possible cuts, in case extra funding is needed. If their assumptions are correct (e.g., enrollment remains the same and rebounds once in-person instruction resumes), they will begin scaling back these measures and resuming their typical spending.

After this, they watched for warning signs. While closely following external trends and information on the spread of COVID-19 in their community and across the country, the university found that infections started spiking again as the weather grew colder. Social distancing mandates began to tighten. 

Ultimately, the university decided to keep all instruction remote for the fall semester. And because they planned for both scenarios well in advance, they were prepared. 

The university factored in a financial cushion for lower enrollment rates in case students missed payments due to financial strain or decided not to return until in-person instruction resumed. They kept a close eye on enrollment rates and tuition payments, making note that any significant changes in these metrics would call for another scenario with further spending cuts.

The university also determined that seeing a rise in typical revenues through the fall semester would be unlikely, so they decided to focus on further reducing discretionary spending and being prepared to adjust for decreased class sizes. If they start to see a drop in enrollment, the university’s decision-makers plan to seek additional funding from investors.

Take the Guesswork Out of Scenario Planning

As you’ve seen, scenario planning is a powerful tool for informing the best decisions to make in times of uncertainty. Pandemic or not, it’s vital that your organization understand what to do when the unexpected happens—for better or worse.

But performing complex scenario planning manually in spreadsheets can be an agonizing. More importantly, no time can be wasted in the face of crises or opportunities.

At Synario, we’ve created a scenario planning tool that allows decision-makers and analysts to examine all potential futures with confidence. With pre-mapped algorithms, patented multidimensional layering technology, and automated presentations, our platform lets you rapidly test multiple scenarios at once—all in a single, dynamic financial model.