What Is A Scenario Impact Analysis?
Talking about scenarios, we are talking about the future. Scenarios are projections of what the world around us will look like. We come from a certain situation today, we find a respective time frame for the future and estimate how our environment will change. The farther we move away from today, the more possibilities for scenarios exist. Moreover, we can never be sure what the direction and the strength of future developments would be. Scenarios help define what kind of positive or negative development may happen. It can be estimated that nothing changes fundamentally. It can also be the case that things change drastically either in a positive or negative direction. Given this uncertainty, scenarios help you consider what you can do to make the best case scenarios possible and what to do to avoid the worst-case scenarios.
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Getting Started with Scenario Analysis
The first step in working with scenarios is defining one's actual surroundings. What is your ecosystem and what changes within that ecosystem could have an impact on your business in the future? To do that, think about your business ecosystem and industry-specific influence factors that drive your business. Such influence factors can be technological developments, new business models, changing customers' preferences, or the way value is created. Besides, you should also consider the broader ecosystem. It does not need to have a direct relationship with your business but perhaps with your business ecosystem or human behavior as such. Influencing factors at that level could relate to political initiatives, new regulations, climate change, or social movements. Based on combinations of such influencing factors and how they develop under a defined time frame, different scenarios can be created. Besides the preparation for unlikely events, scenario planning also helps you to deal with more constant developments such as emerging technologies.Overall, the benefit of scenario analysis is fourfold:
- Ensure the viability of your company. By using the systematic approach, you can detect potential opportunities and threats via careful considerations of what might happen in your environment;
- Learn more about your future environment and concentrate on the key factors driving your business, thinking about the likelihood of that change occurring;
- Prepare for the future and develop strategic robustness to be ready for multiple scenarios. Being prepared for only one possible scenario is too risky;
- Understanding future scenarios and strategic options will help you develop the future on your own. When you understand what factors there are in the future, you can set up initiatives that help you drive the ecosystem in desired direction.
These benefits apply to the different existing strategic foresight methods. While over a shorter time horizon, there are more quantitative approaches, in the long run, you can make more use of qualitative approaches. On the one hand, the first class of quantitative approaches (e.g. market forecast, economic forecast, extrapolations) helps you to develop a prognosis based on previous developments. You extrapolate historical numerical data and get detailed insights into potential sales volumes. As the time frame is shorter, the level of accuracy of such methods is higher.
On the other hand, the second class of qualitative approaches (e.g. delphi, scenarios, yellow cards) guides you in projecting what the future could look like. In such cases, you use qualitative estimations and relevant statements to derive different projections of key factors. You will be able to create rich pictures of the future, consisting of different factors. Such rich pictures serve as visions and provide orientation.
When talking about decades, it is quite impossible to create systematic pictures of the future. In this time horizon, we can only speculate about how the environment will develop.
In sum, the usability of the different scenario methods depends on three basic factors: your objective, time horizon, and data.
Classical Scenario Analysis: A Step-by-Step Approach
In the procedure of applying a classical scenario analysis, the first step is to define the ecosystem and for what scenarios should be developed. Scenarios can be very broad and global or very specific focusing on particular industries or even parts of industries. It is also helpful to develop a concise understanding of key parts of the business at this point because, in the end, scenario analysis is only helpful if the scenarios’ impact on your business is considered. Otherwise, the developed scenarios will end up being not more than nice stories.
To further enrich one's perspective of a surrounding ecosystem, it is recommended to consult internal and external experts as a second step. Although these experts provide specific insights on specific factors and how they will affect the future, with the help of those experts, you will be able to generate a long list of factors that potentially affect your business. Such lists can contain hundreds of factors and even different levels of restrictions.
Therefore, after collecting the factors with the potential impacts, you need to streamline a list and identify the key influencing factors as the third and fourth steps. For the reduction of the number of factors, most commonly an active-passive matrix is used. Active factors are those driving the development of other factors, for example, the oil price rise which curbs the usage of cars. Passive factors are the factors that are driven by other factors. By distilling the factors that most often drive other factors and factors that are most often driven, you will identify the key factors of your industry.
Based on such key factors, you can build projections that describe the possible developments of such factors in the future as a fifth step. Then you use such projections, and you do a cross-impact analysis, estimating how possible it is that certain factors happen at the same time. For example, how possible it is to see a massive drop in the oil price and a massive increase in the number of people owning cars. Such estimations for each projection will then help you to generate scenarios.
In the sixth step, you need illustrative descriptions to show others what projections within the scenarios are about. When having the scenarios, you can then think about how these scenarios will affect your business and what that means to your company.
This process might seem lengthy and time-consuming. There are also other downsides of the classical scenario analysis approach. It requires lots of effort which does not come along with large benefits. It is more often the case that the impact of the scenario analysis is rather low due to the following issues. Firstly, low impact is the case since scenario analyses end up in written documents, which is not a living place due to the format. This also leads to the problem that after scenario analysis has been conducted, in the future no one comes back to update the estimations. What we also commonly see is that considerations and recommendations only relate to isolated scenarios. So, you will only find helpful recommendations for each scenario, but the problem is that at a decision point today you do not know what the future will look like. Therefore, you need to do a risk assessment to find strategic options and their applications within each scenario, a step that is most often neglected. And all these low-impact problems together with the high effort involved in scenario analysis lead to situations of inconsistent usage of scenario planning. Only crucial events such as the COVID crisis today, remind us about the necessity of strategic foresight and planning.
Scenario Impact Roadmapping with ITONICS
The ITONICS Innovation Management Software was developed to increase the impact and decrease the effort in scenario planning. The basic idea behind this solution is a toolset that can be easily updated, accessed by different people, and help connect your current business with future developments such as trends and scenarios. Here everything starts with monitoring environmental developments and trends. In the Radar module, you will be able to monitor and track a rich collection of trends and signals to create different scenarios.
With the help of the Scenario Space Matrix, you will be able to estimate the potential impact of scenarios and the likelihood of their occurrence. This helps to sharpen your senses for critical scenarios that might determine the future viability of your company. Based on the matrix, you can use the Scenario Impact Roadmap. Such a roadmap provides a basic illustration of your business model, and you can use the different scenarios and map those on the roadmap and your business.
How ITONICS Scenario Impact Roadmapping Works
After creating an account on the ITONICS Platform, you get into your home space which is also a dashboard. This dashboard informs you about all the activities in your workspaces. You can create different workspaces for different projects and groups of your organization. In the scenario space, you can see how many trends you are currently tracking, and how many technologies and scenarios. There are also other solutions in the workspaces such as a Knowledge Base explaining how to get along with a platform, an Explorer that helps you to monitor trends, technologies or risks, and a Roadmap module that helps you to plan and control activities over time. For more, here is a step-by-step guide on how to set up scenarios with the ITONICS Cloud Solution.
- Scenario-based planning is essential to ensure the viability of your company but only if you do not just stop at generating scenarios but track the actual impact on your business.
- A scenario analysis should not be a "one-&-done"-exercise. You have to update and reassess your estimations constantly without creating every time again a complex list of impact factors.
- A scenario analysis should not end up in documents or only in illustrative stories. You need to work with your projections in the future to see the cause of actions in your company.
Learn more about how to make real use of scenario analysis with ITONICS!