Scenario planning: strategies, techniques, & examples [2024]

What is scenario planning?

Scenario planning is a method of forecasting and analysis that takes a variety of assumptions to drive different outcomes in the future.

This planning method can be traced back to the days of the Cold War when analysts used existing information to predict how nuclear war could play out to manage uncertainties better.

Though nuclear war could be considered an extreme scenario, a global pandemic has done just that, reminding finance and business leaders of the importance of planning for the unknown.

This planning method can be traced back to the days of the Cold War when analysts used existing information to predict how nuclear war could play out to manage uncertainties better.

Though nuclear war could be considered an extreme scenario, a global pandemic has done just that, reminding finance and business leaders of the importance of planning for the unknown.

Scenario Planning vs. Business Continuity Planning

Scenario planning focuses on the big picture and long-term outcomes. It involves examining multiple potential futures and creating and comparing scenarios considering business revenue over time. 

A typical scenario planning process involves:

• Determining future scenarios 
• Identifying trends, patterns, and driving forces
• Designing a scenario planning template 
• Developing a scenario 
• Evaluating a scenario 
• Updating strategies according to verified scenarios 

What is Business Continuity Planning?

Business Continuity Planning (BCP) is a temporary solution or plan that helps businesses manage emergencies and keep the business up and running during an incident. 

For example, the USAID business contingency plan lays out technical and administrative operations to manage crises, such as health crises and natural disasters.

 A BCP process involves: 

• Evaluating essential operations 
• Determining critical equipment 
• Considering key personnel needed 
• Considering functional weaknesses
• Evaluating proposed 

Scenario planning will enable your business to prepare for many possible outcomes, good or bad. It can most likely guide your business continuity plans, which are temporary solutions for handling incidents. 

How scenario planning works

Here are steps to follow for effective scenario planning:

1. Determine a key issue 

Scenario planning begins by identifying key issues that could affect your company through possible future economic, technological, legal, and political shifts.  

Analyzing these scenarios enables you to better prepare for unexpected events and create strategies for managing those scenarios in case they happen. 

For example, you can plan cost-cutting measures to maintain profitability during economic downturns. 

2. Understand critical uncertainties

Some uncertain events are more likely to occur or have a greater impact on your business than others; those are classified as critical uncertainties. 

Let’s say you’re a software company. Two critical uncertainties you could consider are technological disruption and data integrity regulations. 

Critical uncertainties should be understood within the framework of time, external factors, and internal factors. 

• Time: This represents how uncertainties like trends and marketing conditions evolve over the course of time
• External factors: These represent factors outside the business’s control (i.e., economic shifts, the threat of new entrants into the market, regulatory changes, etc.) 
• Internal factors: These represent factors the organization can control, such as its productive capabilities, resources, and ability to react to changes.

Understanding these factors, how they change over time, and whether they are within the business’s control can help you better plan for unforeseen situations. 

3. Clearly define assumptions

Regardless of how much knowledge you have about the market you operate in, you must make certain assumptions about future outcomes based on historical trends, market research, or opinions from expert employees. 

These assumptions should be clearly defined and assessed to ensure they’re valid and in line with critical uncertainties. 

By defining assumptions, you’ll give yourself solid groundwork for creating scenarios based on realistic outcomes and expectations. 

4. Make multiple, simple scenarios 

Scenario planning involves creating and planning multiple scenarios, but considering many possibilities can be overwhelming. 

Therefore, keeping it simple is the best way to ensure you plan for only critical uncertainties. Create two or three major uncertainties and build scenarios based on them.

5. Understand implications 

After following steps one to five, you probably have several scenarios and strategies. But do you understand the implications?

The final part of scenario building is understanding the implications of each strategy you’ve developed to manage critical uncertainties and ensuring that they align with your long—and short-term business mission and goals. 

The implications could be positive, negative, or neutral, but they are usually financial and operational outcomes that must be considered to determine the next steps if a scenario occurs. 

Types of scenario planning

FP&A professionals use multiple types of strategy planning to analyze and prepare for a wide range of potential future scenarios.

Let's examine four common types of scenario planning, each designed for a specific purpose and providing essential tools for informed decision-making in a rapidly changing environment.

Quantitative scenarios 

These scenarios are based on financial models, presenting both the best and worst possible outcomes. 

They allow for quick adjustments by changing key variables and are commonly used for annual business forecasts.

Quantitative scenarios help businesses put a value on possible risks so they can plan financially for any unforeseen events. 

Operational scenarios

Operational scenarios are what-if situations that organizations use to prepare for events or crises that may affect their current operations.

Basically, these scenarios focus on an event's immediate impact. 

They help organizations explore short-term operational plans and strategic implications and responses to specific situations.

Normative scenarios

Normative scenarios describe a preferred or achievable end state, emphasizing goals and how the company envisions operating in the future.

In addition to outlining future organizational performance, normative scenarios enable organizations to develop roadmaps to achieving their goals. 

With normative scenarios, the business would consider milestones, long-term visions and goals, and what resources to allocate to their goals.

Strategic management scenarios

Strategic management scenarios consider the broader external environment in which products and services are consumed. This provides a platform for brainstorming decisions and narratives based on industry, economic, and world views.

These scenarios help the organization prepare for shifts in their industry and manage any technological and economic changes. 

Benefits of proper scenario planning

While a scenario planning project may seem like a golden ticket to success for every organization, it's not a simple process to stand up. It's worth analyzing whether the benefits outweigh the costs before building a scenario planning process from the ground up. 

Here are some of the benefits of investing your time in scenario planning:

1. Risk mitigation

Because scenario planning is essentially the practice of creating backup plans, identifying and avoiding risk becomes a natural part of your organization's financial planning.  

Risk mitigation helps you plan how to reduce a bad scenario's effect on your business should it occur.  This can help you build a resilient business that can adapt to changing situations. 

2. Improved decision-making

With multiple options for business leaders, scenario planning enables more informed strategic decision-making. 

Scenario planning provides a structured approach to making decisions, allowing you to understand the why and what behind every business decision. It also helps you determine what resources you need to implement these decisions.

3. Flexibility and adaptability

With multiple plans in place, it's easier for organizations to pivot and make changes when needed without having to draw up a Plan B from scratch.  

Having multiple plans available is the most effective way to ensure business continuity regardless of the situation. 

This also increases stakeholders' confidence in your business because they are assured that your business is always ready to navigate any scenario. 

4. Strategic alignment

By closely monitoring the cause and effect of alternative strategic management scenarios, business leaders can determine which plan aligns more closely with business strategy. 

Strategic alignment ensures that business decisions align with your overall end goal at every point in time. This promotes clarity within the organization and helps everybody work toward a single goal, increasing the chances of success. 

5. Contingency planning

Proper scenario planning allows organizations to develop contingency plans for potential disruptions or unforeseen circumstances. 

Contingency plans are essential tools for risk management. They provide a sense of security and preparedness so you can navigate challenges with confidence and agility.

6. Communication and collaboration

Scenario planning requires input and insights into key drivers across the business. 

This organically creates an environment of collaboration and a holistic approach to financial planning. 

Encouraging communication and collaboration through scenario planning promotes cross-functional alignment across all teams involved and helps them remain aligned when making decisions. 

7. Improved forecasting accuracy

With a range of potential outcomes and scenarios incorporated into strategic thinking, finance leaders can forecast more accurately. Scenario planning helps teams identify key drivers of change, mitigate cognitive biases, and consider various potential futures. 

This also contributes to a stronger, more adaptive strategic financial management process. 

Challenges of scenario planning

Scenario planning can be complicated, especially with having to evaluate multiple outcomes. Here are some of the challenges you might face:

1. Complexity and resource intensity

Naturally, scenario planning requires more resources because it involves developing multiple plans instead of assuming Plan A will always work. Some organizations have scenario teams dedicated to mapping out different possible outcomes and the effect on the business's future. However, creating scenarios becomes less complex when you use the right software, the right people, and adequate resources.

2. Overemphasis on external factors

It's easy to focus on potential external disruption without focusing on internal business drivers that can either lead to business success or challenges. Organizational structure, operational efficiencies, and employee performance all impact business outcomes. 

Neglecting these internal factors in scenario planning may result in a skewed perspective of the business's future, underestimating the potential for internal initiatives to drive significant change or the risks that internal weaknesses pose to organizational resilience.

3. Assumption sensitivity

Some business leaders shy away from scenario analysis because it's hypothetical by nature. It relies on assumptions that may not accurately reflect reality. 

But, assumptions are just a side of scenario planning. Scenarios and strategies are generally supported by historical trends and data. 

4. Overlooking unforeseen scenarios

Scenario planning is not a fail-safe. Even the best planners can be left flailing from completely unpredictable scenarios (like Covid-19 for example). 

Always remember that you can’t foresee every scenario–but you should be ready to adapt and respond to unexpected situations. 

5. Decision paralysis

With multiple possible outcomes and strategies developed through scenario planning, it may seem like it's difficult to chart the best course. This can lead to decision paralysis for the businesses and business leaders.

This makes it difficult for businesses to identify key scenarios and prioritize strategies–increasing the risk of planning for scenarios that may never happen. It’s helpful to slow down and establish clear decision-making criteria and a framework for prioritizing key objectives. 

6. Continuous monitoring of challenges

Scenario planning is a living, breathing project that requires consistent maintenance and adjustment. This focus can be difficult for some finance teams and get in the way of productivity.

However, the long-term benefits of improved risk management and strategic agility significantly outweigh the short-term challenges, ultimately enhancing the team's overall effectiveness and contributing to the organization's sustainability.

Best practices in scenario planning & analysis

Scenario planning is most commonly used to run various outcomes in a single budget or plan, which we will cover today.

The most common example is drawing various outcomes from an annual operating budget to improve business decisions around resource allocation and adjustment.

After hundreds of budget cycles, we’ve developed a best practice around multiple scenario development in annual planning.

1. Create your scenario planning team 

First, you should build a cross-functional scenario planning with members from all major departments in the organization, such as finance, marketing, operations, and external affairs. 

Each member should have analytical and forecasting skills relevant to their job and should be able to think critically about future trends and key uncertainties. 

They should also understand how their roles intersect and be able to work together to create collaborative scenarios and strategies. 

If you can bring together a great scenario-planning team, your organization will likely be better prepared for future uncertainties.  

2. Start with the major goals

These are typically the targets that the business would like to achieve, often set by the CEO and the board (for example: grow x% this year while maintaining the same operating expenses).

The goal plan is also referred to as “top-down” and can be used to back into the major line items of a plan, such as revenue, gross margins, operating expenses, and cash. 

It is critically important to assess whether these goals are achievable by building a bottoms-up plan that matches the key drivers and metrics in the goal plan. 

All assumptions related to the goal should be defined clearly and updated, KPIs should be indicated, and the scenarios created should be refreshed on a regular basis. In addition, you need to secure commitments from senior management, and select team members and organize scenarios around key issues to be addressed and evaluated. 

Finance leaders should do this assessment, and any dissonance in achievability should be called out to management by citing KPIs from other companies in the industry.  For finance teams to execute confidently, they need the right data, going well beyond the general ledger. 

To create better, more accurate models, finance needs historical and comparative sales data, headcount and expected growth, and actuals from the general ledger. They'll also need to understand the costs of producing products and services, which are foundational, and which are additive.

See Rule of 40 and SaaS for a discussion on balancing growth and profit.

3. Follow up with the base plan

While the Goal plan details what the business hopes and expects to achieve, a best practice is to build a robust “bottoms up” plan called the Base Plan or Base Case.

The “Base Case” should be the most realistic version of the plan that still gets the business closest to its most important goals, typically revenue and/or profitability.

This is the time to cross-check the plan with KPIs. It’s also an opportunity to evaluate that the plan has achievable goals that are neither easy to hit nor efficient.

Assess the need to build in commonly missed assumptions such as employee turnover.

4. Choose the right scenario planning model 

Having the right models and tools can make a world of difference in scenario planning.

These frameworks and instruments are the backbone of effective scenario planning, helping organizations navigate uncertainty and develop strategic responses.

• Matrix-Based Scenario Planning: This model involves creating a matrix with multiple variables, each representing a different aspect of the future. Organizations can visualize the potential outcomes and their corresponding impacts by combining various scenarios within the matrix.
• Driver Analysis: Driver analysis focuses on identifying the key drivers or forces that shape the future of your industry or market. By thoroughly understanding these drivers, organizations can develop scenarios that revolve around their potential variations.
• Cross-Impact Analysis: Cross-impact analysis takes scenario planning a step further by examining the relationships and interactions between different variables. It helps uncover unexpected consequences and dependencies, providing a more holistic view of the scenarios.
• Quantitative Modeling: For organizations seeking a more quantitative approach to scenario planning, mathematical models come into play. These models use statistical analysis and mathematical simulations to assess the likelihood and potential outcomes of various scenarios.

5. Build a best and/or worst-case scenario

Building this plan as a “realistically worst-case” scenario is vital when considering the worst-case scenario. A company might wonder, “What if we miss revenue by 15%”? What is the one metric the business hopes to optimize if this happens? Is it cash flow? Profitability?

For example, if the company misses revenue but wishes to achieve profitability over increased cash, it will drive different decisions around building the plan. To increase profitability, they may focus on cutting costs. However, if cash is the goal, the business may be drawing down on a line of credit.

A “best case” scenario might mean that the business has exceeded its goal and can invest in more areas of the business that support this growth. For high-growth companies, strategic planning out a “best case” can support the business with scaling challenges that arise when the business grows too quickly but doesn’t have the right resources to support the growth.

It’s a highly underutilized practice that can mean the difference between success and failure.

6. Create a flexible response strategy 

Some organizations make the mistake of not designing flexible response strategies when developing scenarios. Regardless of how skilled your scenario planning team is in analytics and forecasting, they cannot completely predict future outcomes. 

A flexible response strategy would serve as a framework for the organization to adapt quickly to an unplanned outcome. Developing scalable responses such as alternative business models or diversified product offerings ensures agile reaction to all outcomes.  

7. Manage your scenario planning scope

So that the planning team does not lose track of key focus areas, it is important to manage your scenario planning scope by clearly defining focus areas of the analysis and forecasting to ensure all scenarios created are relevant to the business goal. 

You can achieve this by:

• Identifying key focus areas
• Setting clear objectives
• Defining scope boundaries (i.e., setting limits on time, geographic regions, etc.)
• Prioritizing key uncertainties 
• Building a flexible scope 

8. Measure the ROI of your scenario planning

Understanding how to quantify the value scenario planning brings to your organization is crucial.

Below are practical methods for measuring scenario planning's ROI, offering insights into its tangible benefits and its role in bolstering decision-making, risk management, and long-term success.

Financial Metrics: Assess the impact of scenario planning on financial performance, such as revenue growth, cost reduction, and profit margins.

Risk Mitigation: Evaluate the reduction in financial risks and potential losses by comparing scenarios in which planning was employed versus those in which it wasn't.

Resource Allocation: Track the efficiency in resource allocation by comparing scenarios that utilized planning versus those that did not.

Competitive Advantage: Analyze how scenario planning has contributed to gaining a competitive edge in the market.

Operational Efficiency: Evaluate improvements in operational efficiency, including supply chain optimization and workforce management.

As the company approaches its next scenario planning session (or its first-ever!), consider these strategies.

Utilize the industry KPIs to set realistic primary goals before crafting the perfect Base Plan.

From there, it’s easy to build out best- and worst-case scenarios to understand how the business plan should be sculpted for the coming periods. In some cases, finance teams can develop scenario planning templates to make future iterations easier. 

Combined with the organization's goals and careful scenario analysis, these scenarios can be used to develop a strategic plan for future events.

9. Use scenario planning tools

Scenario planning tools are software designed to support forecasting future outcomes. They include:

Financial management software

Financial management software can be used to monitor and analyze the organization's current financial stability and position and make predictions about future performance based on historical patterns. 

This software provides features like budgeting, forecasting, financial planning, and scenario planning tools.

An example of financial management software is Cube. Cube has a planning and modeling solution designed especially for small businesses and startups. 

With the software, you can create accurate forecasts and projections to identify trends. The platform can serve as a single source of truth for accessing historical performance data and accelerating planning cycle time so that your business can always be prepared, no matter the future outcome. 

The planning and modeling tool can be used by all teams–finance, sales, HR, and the C-suite. It also provides other tools, such as centralized data management, forecasting, driver-based planning, reporting and analytics, and variance analysis, that support scenario planning. 

CRM software 

Customer Relationship Management (CRM) software contains real-time data on customer preferences and behaviors that can inform scenario planning. It can be used to simulate, test, and model scenarios to determine their impact on the sales pipeline, customer relationships, and revenue forecasts. 

Risk management software

Risk management software has features for identifying and assessing risks that can be used to measure the potential risk exposures tied to each scenario developed. Like CRMs, it supports scenario modeling and provides tools for quantifying risks so that you can focus on the more important risks that scenarios pose and create action plans for mitigating them. 

Risk management software could also be used to document risks so that as scenarios and strategies are adjusted, risks can also be updated.

revenue. 

Scenario planning issues to avoid 

Scenario planning determines the success of your business when faced with unforeseen events, so it is important to plan carefully. Here are important pitfalls to avoid:

Developing scenarios without first defining issues 

According to McKinsey, 40% of scenarios companies develop are ineffective, and one reason this happens is that they prioritize unlikely events. 

When you develop scenarios without first defining key issues, you risk creating scenarios that aren’t critical uncertainties. 

Your organization would waste time, resources, and finances preparing for events that won’t happen or have little impact. 

Sticking to short-term views 

Scenario planning is a long-term game.

Therefore, you should design scenarios based on future events while also considering immediate impact. 

A common mistake businesses make is focusing solely on short-term factors like your existing market, competitors, or products when you should anticipate what your business’s operating environment could become in addition to its current environment. 

Creating too many scenarios

The most important scenario planning best practice is to develop scenarios for only key uncertainties with a high impact on the business. 

Creating too many scenarios can lead to two major issues. 

One is analysis paralysis, where the planning team may become overwhelmed by all the possibilities they have to plan for, and the other is probability neglect, where they risk prioritizing low-impact scenarios. 

Attempting to make a perfect scenario

Attempting to build perfect scenarios can slow decision-making and make scenario modeling complex.  Keep it simple and focus on a few changes; adding more variables to a scenario does not improve it. 

Rather, you should optimize for building scenarios with a flexible response strategy so the business can quickly adjust to any unplanned event. 

Fixating on specific scenario (even after it’s no longer relevant)

Another common cognitive bias when planning teams create scenarios is fixating on a specific scenario and focusing strategy-building efforts on it. 

Scenario planning is about choosing multiple options for the future and developing a strategy that covers all scenarios. 

Therefore, always be ready to create diverse scenarios and let go of scenarios that are no longer relevant. 

Industry-specific scenario planning examples

These practical cases offer insights into how businesses in different sectors effectively employ scenario planning to navigate uncertainty and make informed decisions.

Non-profit scenario planning 

Nonprofit businesses typically deal with funding fluctuations, program challenges, economic downturns, shifts in public perception, and other issues. 

Scenario planning enables them to anticipate situations that affect funding sources and operations. 

It could range from modeling new funding sources, seeking new partnerships, or scaling programs in response to budget constraints. This proactive approach allows non-profit organizations to adapt to changing economic situations and ensure financial stability regardless of how much funding they receive. 

Scenario planning for Software & SaaS

Software and SaaS businesses deal with frequently changing technology trends and managing customer data. 

Scenario planning involves preparing for disruptions such as regulatory changes, infrastructure failure, and cybersecurity breaches such as hackers accessing confidential customer information. 

A common scenario-planning example for Software and SaaS companies is simulating data breaches to assess breach response protocols. By identifying security vulnerabilities and preparing for them, these companies can minimize the loss or breach of data.

Manufacturing scenario planning

Manufacturing companies use scenario planning to prepare for supply chain disruptions caused by various factors. 

These factors could include natural disasters, geopolitical tensions, or supplier issues. 

By identifying potential vulnerabilities and developing contingency plans, manufacturers ensure resilience in their operations and minimize disruptions' impact.

Real Estate scenario planning

In real estate, scenario planning revolves around evaluating property value fluctuations during economic downturns. 

By analyzing different economic scenarios and their effects on the property market, real estate professionals can make informed decisions about investments, risk management, and portfolio diversification.

With scenario planning, they can also increase the accuracy of their projections of the value of real estate and quickly adapt to changing conditions that might result in a loss. 

Healthcare scenario planning

In healthcare and biotech, scenario planning addresses potential challenges in drug development. 

This could be clinical trial setbacks, safety concerns, or regulatory delays. 

By considering different scenarios and their implications, organizations can strategize effectively, allocate resources wisely, and navigate the complex landscape of pharmaceutical innovation.

Scenario planning for business services

For businesses offering professional services, scenario planning plays a crucial role in market entry and expansion strategies. It involves assessing regulatory changes, competitive landscapes, and potential risks in new markets. By anticipating scenarios and adapting their approaches, businesses can successfully enter, grow, and thrive in diverse markets.

Scenario planning for financial services

In the financial services sector, scenario planning focuses on evaluating investment strategies and risk exposure during market crashes or financial crises. 

This proactive approach helps financial institutions to create multiple strategies to deal with forecasted scenarios.

This way, financial institutions can safeguard assets, adjust portfolios, and maintain stability when faced with challenging market conditions. 

Using scenario planning to optimize performance

Once the major plan versions have been developed, it’s time to put them to work.

Communicating the right plan to the business is often more art than science, but we’ve had good results by using the plans in various ways:

1. Plan to have enough cash to support the worst-case scenario.

Cash is the lifeblood of the business, so it’s worth taking extra precautions around cash flow management.

That may mean looking for additional debt or equity before it’s needed when it’s easier to access.  You can also implement proactive strategies to identify and solve possible cash flow issues before they become worse.

2. Use the base plan as the operating plan for the business.

Using the Goldilocks method, ensure that the base plan is neither “too hot” nor “too cold.”

Keep in mind that the budget and the forecast could vary over time as the business evolves.

Ensure you regularly review the base plan–especially as business conditions change–so your planning always aligns with business needs. 

3. Communicate a revenue range to stakeholders and investors.

Aim for the range to hedge from 10-15% below plan through the base plan.

For example, revenue could be $20-22M for the quarter and the operating expenses and cash plans are tied to the base case.

This approach gives stakeholders and investors realistic expectations of potential revenue while also accounting for fluctuations in business revenue. 

Unlock the power of scenario planning for your business 

Scenario planning is a powerful tool for foresight and adaptability, offering valuable insights and strategies to aid organizations in navigating uncertainty, making informed decisions, and charting a path to success.

Ready to take your scenario planning to the next level? Explore the powerful capabilities of Cube and how it can transform your strategic decision-making.

Book a demo today to unlock the full potential of scenario planning for your organization.