Traditional Forecasting Vs. Scenario Planning

Traditional Forecasting

Traditional forecast is essentially extrapolating where you were and where are you are now into the future, and at the end of this extrapolated line this is “the most likely scenario” (Wade, 2012; Wade, 2014).  Mathematical formulations and extrapolations is a mechanical basis for traditional forecasting (Wade, 2012). At one point, these forecasts make ±5-10% in their projections and call it the “the best and worst case scenario” (Wade, 2012; Wade, 2014).  This ± difference is a range of possibilities out of an actual 360o solution spherical space (Wade, 2014). There are both mathematical forms of extrapolation and mental forms of extrapolation and both are quite dangerous because they assume that the world doesn’t change much (Wade, 2012).  However, disruptions like new political situations, new management ideas, new economic situations, new regulations, new technological developments, a new competitor, new customer behavior, new societal attitudes and new geopolitical tensions, could move this forecast in either direction, such that it is no longer accurate (Wade, 2014). We shouldn’t just forecast the future via extrapolation; we should start to anticipate it through scenario analysis (Wade, 2012).

Advantages (Wade, 2012; Wade, 2014):

+ Simple to personally understand, only three outcomes, with one that is “the most likely scenario.”

+ Simple for managements to understand and move forward on

Disadvantages (Wade, 2012; Wade, 2014):

– Considered persistence forecasting, which is the least accurate in the long term

– Fails to take into account disruptions that may impact the scenario that is being analyzed

– Leads to a false sense of security that could be fatal in some situations

– A rigid technique that doesn’t allow for flexibility.

Scenario Planning

Scenario planning could be done with 9-30 participants (Wade, 2012).  But, a key requirement of scenario planning is for everyone to understand that knowing the future is impossible and yet people want to know where the future could go (Wade, 2014).  However, it is important to note that scenarios are not predictions; scenarios only illuminate different ways the future may unfold (Wade, 2012)!

Therefore, this tool to come up with an approach that is creative, yet methodological, that would help spell out some of the future scenarios that could happen has ten steps (Wade, 2012; Wade, 2014):

  • Framing the challenge
  • Gathering information
  • Identifying driving forces
  • Defining the future’s critical “either/or” uncertainties
  • Generating the scenarios
  • Fleshing them out and creating story lines
  • Validating the scenarios and identifying future research needs
  • Assessing their implications and defining possible responses
  • Identifying signposts
  • Monitoring and updating the scenarios as times goes on

However, in a talk Wade (2014), distilled his 10 step process, to help cover the core steps in scenario planning:

  • Create a brainstorming session to identify as many of the driving force(s) or trend(s) that could have an impact on the problem at hand? Think of any trend or force (direct, indirect, or very indirect) that would have any effect in any way and any magnitude to the problem and they could fall under the following categories:
    • Political
    • Economical
    • Environmental
    • Societal
    • Technological
  • Next, the group must understand the critical uncertainties in the future, from the overwhelming list. There are three types of uncertainties:
    • Some forces have a very low impact but very in uncertainty called secondary elements.
    • Some forces have a very high impact but low uncertainty called predetermined elements.
    • Some forces have a very high impact and high uncertainty call critical uncertainties.
  • Subsequently, select the top two most critical uncertainties and model the most extreme cases of each outcome, it is “either … or …”. They must be contrasting landscapes from each other. Place one critical uncertainty’s either/or in one axis, and the other on the other axis.
  • Finally, the group should describe the different types of scenarios. What would be the key challenges and key issues would be faced in either of these four different scenarios? How should the responses look like?  What are the opportunities and the challenges will be faced? This helps the group to strategically plan and find a way to potentially innovate in this landscape, to outthink their competitors (Wade, 2014)?

Advantages (Frum, 2013; Wade, 2012; Wade, 2014):

+ Focuses on the top two most critical uncertainties to drive simplicity

+ Helps define the extremes in the four different Landscapes and their unique Challenges, Responses, and Opportunities to innovate to create a portfolio of future scenarios

+ An analytical planning method helping to discover the Strengths, Weaknesses, Opportunities, and Threats affecting each scenario

+ Helps you focus on the players in each landscape: competitors, customers, suppliers, employees, key stakeholders, etc.

Disadvantages (Wade, 2012; Wade, 2014):

– No one has a crystal ball

– More time consuming than traditional forecasting

– Only focuses on 2 of the most critical uncertainties, in the real world there are more critical uncertainties needed for analysis.

References

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