Methodologies > Scenario Analysis
| Introduction |
Scenarios provide a framework for structuring perceptions about alternative future environments in which specific business development and/or investment decisions will unfold. They enable explicit consideration of uncertainty in the broader social/business/regulatory environment (context). They are not predictions or variation around a mid-point base case; they are descriptions of alternative plausible futures that are structurally different from one-another (see Figure 1).
They are produced by management and staff insight and perceptions through workshops which focus on the issues of concern—they are not one-person’s view of the future. These were developed at Royal Dutch Shell; key developers moved to SRI International where the practice was employed in assessing a wide variety of consumer and industrial products and services. This is where STG staff developed its skills with this process. |
| Process/ Methodology |
Scenarios are formally-defined, internally-consistent descriptions of alternative future social and business environments. The scope (depth, breadth and focus) of the description is prepared to be appropriate to the needs of the problem being assessed. Scenarios are developed in 1 ½- to 2-day workshops. In the first half-day (approximately) workshop participants identify factors and forces that will influence the future environment. At this part of the process, these do not need any particular order or logic—those parts come later. In the second half-day, participants group these factors and forces into levels of uncertainty and importance. Some of these factors are external to the industry (Macro), others are internal (Micro). In the remaining part of the workshop, those factors and forces which are most important and most uncertain are focused upon. Major dimensions in which these forces operate are identified. Alternative future environments are constructed around plausible variations in these important but uncertain forces and dimensions.
Typically two facilitators are required. Preparation time is need in advance, and time for documentation of the findings is needed following the close of the workshop itself.
In Figure 1, as example, if the issue was related to the future of the oil and gas industry, Scenario A might identify forces leading to slow or no-growth in real petroleum-based energy costs, Scenario B might identify forces leading to moderate growth in prices, Scenario C might identify forces leading to a high growth in prices, while Scenario D might identify forces leading to erratic or unpredictable changes in prices. But such groupings of forces into these four scenarios does not occur until the second day; they are an OUTPUT of the process, not an INPUT. |
| Strengths and Weaknesses of Scenario Analysis |
Scenarios enable specific business decisions (or investments) to be assessed or tested across alternative futures to determine possible outcomes and to determine whether such decisions appear “robust” (viable) across a range of plausible futures. They provide a map of the total business environment and its plausible variations while helping focus attention on issues of importance. They are used to evaluate specific business decisions. While not primarily quantitative, scenarios permit some quantification. They are best utilized for decisions which will occur over a longer period of time—5 to 10 years or longer- and if potential discontinuities are anticipated. |
Figure 1 Scenario Versus Point Forecasts
