Business strategy: The increasing relevance of scenario planning

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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 

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.

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.

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.

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.

NRI’s Kalyani More (Deputy Sr. Consultant) also contributed in the article.