You can achieve this as follows:
- Identify the critical uncertainties facing your business (2 or 3).
These should follow from the threats and opportunities you've already identified in your SWOT, PESTEL or Porter's 5 Forces analyses.
- Identify discreet possible outcomes for each.
For example, if the uncertainty is around a political election, then you might consider 2 discreet outcomes (1) Party A wins or (2) Party B wins. You're aiming for a small number of distinctive but realistic possibilities so there is no need to include every possible outcome, such as (3) a hung parliament, or (4) stronger or weaker wins or losses.
- Map and vividly describe the permutations of outcomes (scenarios) for all uncertainties together - they don't happen in isolation.
For example, if your critical uncertainties include the outcome of a political election, and the introduction of a regulatory change, then you might consider that the outcome of the election will impact the likelihood of the regulatory change.
- Consider how well you would fare under each scenario?
What impact would each combination of outcomes have on your business? Remember to consider the impact on demand from customers, the impact on suppliers, employees, and other stakeholders, as well as on your internal processes.
- Identify the key variables to watch - these are the early warning signs that will help you understand how the critical uncertainties are playing out.
Make sure you have systems and accountabilities in place for monitoring those early warning signs and ensuring there is an understanding of changes as they emerge. Use this flow of information to update your scenario analysis as and when required - don't just wait for next year's annual planning cycle.
- Where possible, identify means to engage with and/or influence the critical uncertainties, such as industry bodies, etc.
In many cases, you'll find your not the only player in your industry who has an interest in things. You may be able to achieve more, in some circumstances, by banding together.
- Evaluate all strategic choices against your scenarios.
Strategic choices that are robust across multiple scenarios are much more valuable than those which pay off under some scenarios only, and result in losses in others.
There are 4 additional critical success factors:
- Aim for realistic, plausible yet distinct possibilities.
- Avoid bland outcomes, such as the stock market going up by 5% versus down by 5%.
- Understand the causes and effects and the inter-relationships between your critical uncertainties.
- Ensure executive engagement, alignment and commitment around the scenarios.