Business strategy: The increasing relevance of scenario planning

Business planning can never be addressed with standalone methods. Forecasting and scenario planning, when used together, deliver great results

Ashim Sharma
Updated: Oct 23, 2019 04:32:33 PM UTC

Ashim Sharma is Partner & Group Head at NRI Consulting & Solutions and can be reached at ashim.sharma@nri.com. NRI Consulting & Solutions is part of Global Nomura Research Institute (NRI), a leading global management consulting enterprise head quartered in Tokyo. It works extensively in automotive and engineering value chain, across OEMs, suppliers and dealers in strategy and performance improvement area with an objective to improve their top and bottom lines.

Image: Shutterstock
Image: Shutterstock

It’s a VUCA (volatility, uncertainty, complexity and ambiguity) world that we live in today. Global megatrends such as geopolitical transitions, dynamic oil pricing, technological advancement, etc. shape industry dynamics, making the future business scenario unpredictable and complex. It is, therefore, crucial to assess these megatrends thoroughly and incorporate them in business strategies.

Regulation changes, for instance, impact in shorter time horizons, while factors like changing demographics show their effect in the longer term. To evaluate trends across time horizons, organisations follow different approaches. Traditional methods like forecasting are effective in a relatively stable environment; however, in a rapidly changing business environment, alternative methods like scenario planning take the uncertainties into consideration too. This helps organisations determine if their current strategy would suffice to succeed. Organisations can operate from a proactive position in response to the elements of surprise of any conceivable future.

Here's how to undertake scenario planning for your company 

Define the focal theme
The focal theme acts as an anchor for the entire planning process. It could be open-ended like, “The future outlook of the automotive industry” or precise like, “Is ASEAN an attractive market for our product, 10 years later?” The scenarios and strategies formulated in the subsequent steps should clearly address the focal theme.

Identify megatrends
The megatrends affecting a product-oriented business can be identified using the business ecosystem framework, which buckets elements affecting a business into three layers. The central layer includes elements contributing to the core functioning of the business. The middle layer includes the extended enterprise elements whereas the outermost layer includes all elements that could possibly affect the business.

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The complex interaction of emerging trends in every element helps in identifying the megatrends that could affect an industry in the mid-to-long term. In case of the automotive industry, a shortened product lifecycle is a resultant of various trends such as evolving consumption, technology convergence, etc. Similarly, the use of alternative powertrain is a result of climate change, de-carbonisation norms, natural resource constraints, etc.

Along with the identified megatrends, there could also be certain discontinuities like the US-China trade war, which could possibly change the path of emerging trends, resulting in rapid acceleration in their transitions or may even cause them to disappear. It is therefore important to check for signs of any discontinuities to avoid the latent cost.

Megatrends, which mark ‘high’ on relevance to the focal theme and on degree of uncertainty, are considered as critical uncertainties. For the focal theme ‘The future outlook of the automotive industry’, evolving consumer needs, de-carbonisation and safety norms, could be some of the critical uncertainties.

Build a scenario matrix
A pair of critical uncertainties that represent independent elements from the business ecosystem framework can form a scenario matrix. The next task is to build scenario stories around the identified scenarios that effectively address the focal theme, clearly link the relevant trends and draw distinct causation to future scenarios.

Identify strategic opportunities
Each scenario is critically analysed for its implications on the industry and organisation, and appropriate strategic options are identified. The strategic options applicable in every scenario should be immediately worked upon and transformed into detailed strategy. Those that play out in 2-3 scenarios should be next in line; and lastly, the ones that are relevant to a single scenario.

The identified strategic options are absorbed into the overall corporate strategy, in line with the organisation’s vision and mission. In case of the automotive industry, companies need a vehicle segment plan and, thereby, individual product-cycle plans. A program-specific strategy is developed for vehicle design and development, tooling and manufacturing.

Monitor early indicators
Once the scenarios are identified and strategies are built, it is essential to look out for signs when the scenarios start to unfold. A monitoring system needs to be set up with measurable lead indicators that can be tracked and it should be flexible for continuous updating to track the obvious, subtle and the unforeseen-at-first indicators.

Integrating into long, medium and short-term strategic planning
While the monitoring system tracks the already identified megatrends, it might miss out on the newly emerging trends. Therefore, it is important to re-conduct the entire exercise over a suitable time period. The 10-year corporate strategy plan, at the group and divisional level should be reviewed every 2-3 years. This may lead to updating technology roadmaps or new business models. The five-year plan should be reviewed annually and product or platform strategies should be updated accordingly.

In the short-term, the business environment is relatively stable. However, some abrupt factors like unusual rainfall, stock levels, etc. may result in temporary business uncertainties. It is important to identify such triggers beforehand and fine-tune the demand forecasts accordingly. For this, the annual plan should be updated by conducting quarterly reviews.

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Long-term business planning process

Organisation and Governance structure

A dedicated team comprising of the board and the management with representation from key functions is essential. The process of identifying strategic options is a joint board-management effort, following which, the management majorly focuses on building and implementing the strategy, at group and division level, whereas the Board conducts evaluation through reviews.

It is also important to have a governance structure in place, through a set of guidelines with regards to accountability and decision-making powers.

Continuous upgrading
Business planning can never be addressed with standalone methods. Forecasting and scenario planning, when used together, deliver great results. The real business scenario could be more complex than what you have formulated. Therefore, it is important to update the business planning process annually to make it more accurate as per the changing business environment.

The writer is Partner & Group Head at NRI Consulting & Solutions. NRI’s Kalyani More (Deputy Sr. Consultant) also contributed in the article.

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  • Benoy K Antony

    Sounds interesting. Qualifying & quantifying the impact would be a challenge. Megatrends (pace at which alternate fuels vehicles would be accepted)/trade wars is where scenario analysis loses ability to provide insights.

    on Oct 26, 2019
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