Best Practice in Use of Scenario PlanningOne of the more useful articles that has come my way from McKinsey & Co. appeared this month. Charles Roxburgh, a director in McKinsey's London office, writes about "The Use and Abuse of Scenarios."
The article is around pages and well worth reading in its entirety. As a sample of what you'll find, I'll note the don'ts Roxburgh discusses:
- Don't become paralyzed, unable to act because you don't know which of the possible scenarios you've defined you should plan for. Roxburgh's advice is "to pick the scenario whose outcome seems most likely and to base a plan upon that scenario. It should be buttressed with clear contingenices if another scenario or one that hasn't been imagined begins to emerge instead."
- Don't let scenarios muddy communications. Instead of sharing all the scenarios with employees, "communicate a single, bold goal convincingly."
- Don't rely on an excessively narrow set of outcomes. You need to think through how you will respond if and when an unlikely scenario comes to pass. For instance, Roxburgh advises, "When the economy is heading into a downturn, pessimistic scenarios should always be pushed beyond what feels comfortable. When the economy has entered the downturn, there is a need for scenarios that may seem unreasonably optimistic."
- Don't chop the tails off the distribution. "Because the risk of an event is equal to its probability times its magnitude, a low-probability event can still be disastrous if its effects are large enough."
- Don't discard scenarios too quickly. Scenarios do need to be revised as the environment and circumstances change. Roxburgh recommends swapping in a new scenario whenever an existing one is dropped because it has lost relevance.
- Don't use scenarios when uncertainty is too great. Sometimes uncertainty is so high that it is simply impossible to build reliable scenarios.
- Don't use a single variable. "At least two variables should be used to construct scenarios and the variables must not be dependent, or in reality there will be just one spectrum."
The scenario that is highest in probability should always be identified, and that ought to become the base case. If that proves impossible, it should at least be feasible to fashion a “central” case but there must be crystal clarity about the degree of certainty attached to it, the alternatives, and the resilience of any strategy to those alternatives.For a view of scenario planning complementary to Roxburgh's (cited in an earlier post), you can go here.