Scenario Planning: Navigating through Today's Uncertain World
EXECUTIVE SUMMARY * The past is not a good predictor of the future. To respond to uncertainty, finance and accounting professionals can use scenario planning to help managers better understand the threats and opportunities in today's world. * Scenario planning is not just a strategic planning tool. Many organizations now apply it to operational planning, budgeting and forecasting processes to evaluate their effectiveness under different assumptions. * There are four broad types of scenarios: (1) Social, (2) Economic, (3) Political and (4) Technological. * Scenario planning is largely focused on answering three questions: (1) What could happen? (2) What would be the impact on our strategies, plans and budgets? And (3) How should we respond? * Scenario planning equips CPAs with tools for career advancement. It enables CPAs to effectively support the strategic planning process; provides a frame of reference for developing alternative financial plans and forecasts; tests the sensitivity of key assumptions, financial measures and variables under different scenarios; and helps define key performance measures. * It is essential to be clear about the issue you want to address before embarking on a scenario planning exercise, and then to define the appropriate scope and time horizon for the scenarios to be constructed. ********** Imagine you are sitting at your desk in September 2007. The Dow is close to 13,900; U.S. unemployment is 4.5%; and oil is $45 a barrel. You are in the middle of developing your organization's plans and budgets for 2008. How likely is it that the assumptions in your 2008 plan accurately forecast that in September 2008 the Dow will be below 9,000; U.S. unemployment will have risen to 6.5%, on its way to more than 10%; and oil prices will have risen to more than $140 a barrel before falling below $40 a few months later? [ILLUSTRATION OMITTED] An aberration? Unlikely, not with a European sovereign debt crisis, a massive oil spill in the Gulf of Mexico and major health care reform m the United States. Uncertainty, volatility and risk are here to stay The world has been transformed from a series of loosely connected, reasonably predictable economies to a complex web of relationships where the global impact of local events is felt almost instantaneously. In this climate the past is not a good predictor of the future. In response to such uncertainty, scenario planning has been used by organizations as diverse as the Australian government, AutoNation, British Airways, Coming, Disney, General Electric, the U.S. Federal Highway Administration, JDS Uniphase, KinderCare (a large U.S. chain of day care centers), Mercedes, Royal Dutch Shell, UPS and the World Bank. Today, scenario planning is being widely used by many small and midsize organizations operating in uncertain or volatile markets. WHAT IS SCENARIO PLANNING? Scenario planning is a way of understanding the forces at work today, such as demographics, globalization, technological change and environmental sustainability that will shape the future. While the origins of scenario planning were in the world of strategic planning, many organizations now apply scenario planning techniques to the operational planning, budgeting and forecasting processes as a means of evaluating their effectiveness under different sets of assumptions about the future. Two forces are fueling the increased popularity and use of scenario planning. The first is the rapid and broad global impact of unpredictable events such as 9/11, or the global credit crisis. The second is the accelerated pace at which new trends become material. For example, the rapid growth of China and India, the rise of social media, and smart phone adoption have occurred in a decade or less. BUILDING SCENARIO PLANS Scenario planning is largely focused on answering three questions: 1. …