Wednesday, September 21, 2011

Scenario Analysis

Scenario analysis is a fundamental tool that firms use to think strategically about the future. In this consideration how are uncertainties to be dealt with and contingency plans? Scenarios developed involve multiple plausible stories about the future. Here an assessment of the implications of future variables as economics and operating strategies may be modeled. The present tactic stated in the text argue that a strict min-max philosophy does not prevail. Hence scenarios reflect less than a perfect market and do not necessarily have to include a ultimate doomsday projection. Conversely in public foreign policy a Mutually Assured Destruction (MAD) scenarios are developed concerning Nuclear, Biological or Chemical attacks.

Futurist Peter Schwartz in discusses seven steps in scenario planning:

1. Determine area, scope, and timing with greatest relevance to your organization.

2. Research existing conditions and trends in obvious and non-obvious perspectives.

3. Examine the drivers or key factors that will control the outcome.

4. Construct multiple stories of possible outcomes.

5. Play out the impact of each hypothetical future.

6. Examine your and look for actions common to all scenarios.

7. Monitor develops with a key to triggering your early response system.

De Kluyver and Pearce indentify four factors that your scenario should include:

1. Relevance to users. (CEO or middle management).

2. Internal consistency.

3. Descriptiveness regarding futures that are different, than variations.

4. Scenarios that will be able to be acted upon in an enduring environment. This is contrast to a future that will be short-lived for the organization.

Hence the value lies in making these scenarios occur if the triggering conditions exist. Hence if you were a metals firm selling gold, now would be optimal if you were buying in increments from when the price was $1000 an oz.

In your scenario you could program a sell order for a percentage of your portfolio.

If such planning has no relevance and all the planning is a strawman it is a distraction for immediate concrete decision making and should not be the controlling factor.

What is important is the transformational character that scenario analysis creates in strategic planning, contingency and operational decisions. It helps establish a learning curve that could be useful in overall decision making over time.

Ball, D. A.,  Geringer, M., Minor, M., and McNett, J. International Business: The Challenge of Global Competition. 12th ed. New York: McGraw-Hill Irwin, 2010.