Scenario planning is a strategic method used by organizations to envision and prepare for multiple potential future outcomes. By analyzing key trends, uncertainties, and driving forces, businesses create detailed, plausible scenarios that guide decision-making and risk management. This approach helps companies adapt to change by anticipating challenges and seizing opportunities in a rapidly evolving environment. Popular in industries like finance, healthcare, and technology, scenario planning is essential for long-term resilience and success.

If you’re a fan of the outdoors, you may have experience planning a backpacking or camping trip. When you’re out in the backcountry, it’s best to be prepared for whatever the wild might throw at you: bear spray in case of a bear attack, rain gear if you get caught in a thunderstorm, extra layers in case the temperature unexpectedly drops, and a first aid kit if someone gets hurt. Although some of these scenarios might be unlikely, it’s always better to have what you need—just to be safe. Before your trip, you might run through various scenarios in your head or discuss the plans with your travel companions, making sure you’re as ready as you can be in case of an emergency. 

In the same way, many organizations use scenario planning to determine the biggest risks they face and plan for potential scenarios that may unfold. This strategic method involves four major steps:¹

1. Determine a key issue: Scenario planning starts with identifying the major issues that could impact an organization. This could be anything from future economic trends to technological, legal, environmental, and political shifts. For example, one issue could be a potential major economic downturn. An organization preparing for a possible economic dip might plan cost-cutting measures that they could take to maintain profitability if and when it occurs. 
2. Understand critical uncertainties: Some uncertain events are more likely to occur or would have a greater impact on an organization than others; these are known as critical uncertainties, the most important components for organizations to consider during scenario planning. Critical uncertainties are usually broken down within the frameworks of how conditions might evolve over time, external factors (factors outside the organization’s control, like market conditions), and internal factors (things the organization can control, like its production and resources).² Figuring out which uncertainties can and can’t be controlled helps organizations plan their response effectively. 
3. Make multiple simple scenarios with clearly defined assumptions: Because we can never have complete certainty about the future, we must make some assumptions whenever we consider a potential scenario. The assumptions made about a possible future should be clearly defined, realistic, and based on reasonable input (such as historical trends, market research, or opinions from experts). While the possible futures are endless, to avoid being overwhelmed, it’s most helpful to limit planning to a handful of scenarios based only on the most critical uncertainties. 
4. Understand implications and plan: Lastly, organizations should analyze the implications of each scenario. Regardless of whether the impacts of a potential scenario are positive or negative when handling major uncertainties, it’s beneficial to have a plan of action in place. It’s important for organizations to develop long-term and short-term strategies (whether financial, operational, or other) so that they can continue to operate effectively, even if the unexpected happens. 

Real Options Analysis: An investment evaluation method that values flexibility and strategic decision-making in uncertain environments. Similar to scenario planning, real options analysis acknowledges the uncertainty of choices and their impacts and involves creating a series of dynamic choices over time, allowing businesses to adapt, expand, or abandon projects based on evolving circumstances. 

Cost-Benefit Analysis: A method used to evaluate the pros and cons of a project or decision by comparing its total expected costs and benefits, often expressed in monetary terms. This approach helps decision-makers determine whether the benefits of an undertaking outweigh the costs, ensuring that resources are allocated efficiently.

Forecasting Method: A statistical technique used to predict future outcomes based on historical data and trends. Forecasting is a more traditional planning method that often uses mathematical models and analysis of past patterns to plan for the most likely future, contrasting scenario planning’s strategy of developing plans for a range of possible future scenarios.²

Critical Uncertainties: Uncertain events that could significantly impact an organization. Identifying critical uncertainties is essential in scenario planning, as it helps strategists focus on the most impactful variables that should be considered in future scenarios.¹

Assumptions: The underlying beliefs or statements that inform the scenario planning process. Clearly defining assumptions is crucial, as they form the foundation for developing realistic scenarios based on historical data and expert insights.¹

External Factors: These factors encompass influences outside of the organization’s control that can impact its performance and strategic choices. This could include market conditions, the economic environment, technological changes, or social and cultural trends. Understanding external factors is essential for organizations to effectively prepare for various possible future scenarios.²

Internal Factors: Elements under the control of an organization that can influence its decision-making and strategic direction. These could include the organization's culture and values, resources, capabilities, or established policies and procedures.²

Risk Mitigation: Strategies developed to minimize the impact of potential negative outcomes identified during scenario planning. Effective risk mitigation is a key benefit of scenario planning, as it encourages organizations to prepare for potential challenges.¹

Like many other strategic analysis methods, the roots of scenario planning can be traced back to military strategy as a tool for guiding decision-making under uncertainty. Scenario planning was developed during World War II, with military leaders considering possible future attacks from enemies and creating response plans. Playing out the potential scenarios in the war was incredibly helpful for the strategists, and scenario planning became a fixture of military strategy during the Cold War. Around this time, the RAND Corporation, which focused on researching new forms of weapons technology, began to refine the scenario planning methodology, with military strategist and systems theorist Herman Kahn credited for officially coining the term.³ Kahn and other “futurists” used scenario planning as a cornerstone method in the emerging field of future studies, or futurology, which aimed to explore how people would live and work in the future based on current trends.

In the early 1970s, the executive team at Royal Dutch Shell, including leader Pierre Wack, adapted Kahn's scenario planning techniques to corporate strategy. Although it may seem like military strategy and corporate planning belong to entirely different worlds, it is vital for oil companies to adequately prepare for potential disruptions. Consider the major fluctuations that occur in the oil market or the history of geopolitical tensions in the Middle East, a major source of oil. Pierre Wack’s team created scenarios that helped Shell anticipate the 1973 oil crisis, allowing the company to make strategic decisions that positioned it favorably compared to competitors.^3,4

As the methodology expanded to additional corporate sectors, scenario planning was formalized through a series of workshops and reports that emphasized the importance of exploring multiple futures rather than relying on single forecasts. In the early 1990s, as South Africa navigated a transition from apartheid to a democratic government, leaders applied scenario planning in a political context, mapping out the “Mont Fleur Scenarios” to envision potential future states of the country.³

By the late 1990s and early 2000s, scenario planning continued to be integrated into a broader range of frameworks, and organizations began creating scenarios not only for risk assessment but also for innovation and long-term planning. The practice evolved to include various types of scenarios, namely normative and operational scenarios, allowing organizations to address specific strategic questions and challenges.³ Today, scenario planning, along with other tools like competitive analysis, is still used across a variety of sectors, including business, government, and nonprofit organizations.

Pierre Wack

Often regarded as a pioneer of scenario planning, Pierre Wack was an executive at Royal Dutch Shell who contributed to the development of scenario planning methodology in the 1970s, helping Shell navigate oil crises by considering various future scenarios. His work emphasized the importance of understanding external uncertainties and their potential impacts on business strategy.³

Herman Kahn

This American researcher was a key figure in the development of scenario planning, particularly during the Cold War era. His methods have influenced not only military strategy but also business and environmental planning. He emphasized the importance of imaginative and strategic thinking in decision-making, advocating for detailed narratives that could help organizations anticipate and prepare for a variety of uncertainties.⁴

Kees van der Heijden

A prominent figure in scenario planning, Kees van der Heijden is known for his work in strategic management and foresight. He has authored several influential books on scenario planning, including Scenarios: The Art of Strategic Conversation. His contributions focus on integrating scenario planning into organizational strategy and fostering a culture of strategic thinking.⁵

David Wright

As a consultant and expert in scenario planning, David Wright has worked with various organizations to implement scenario planning processes. He emphasizes the role of scenarios in enhancing organizational resilience and adaptability in the face of uncertainty. His practical approach helps businesses develop actionable strategies based on scenario analysis.⁶

Bill Sharpe

A key figure in the development of the Three Horizons (3H) framework, Bill Sharpe has made significant contributions to scenario planning and strategic foresight. His work helps organizations visualize different future paths and understand the implications of various trends and uncertainties. This framework is widely used in scenario planning to explore long-term strategic options.⁷

Scenario planning helps organizations map out long-term strategies for the future, not only because they can incorporate safeguards as they plan, but the act of scenario planning may also help leaders identify major pain points they might’ve otherwise overlooked, even offering opportunities for innovation. This strategy is also important for preparing organizations for extreme uncertainty, encouraging them to plan responses to potential disasters.

Improved Strategic Decision-Making

When organizations dive into the process of scenario planning, it involves sitting down and conducting an in-depth analysis of plausible futures. As organizations simulate how different market conditions, regulatory changes, or technological advancements might affect their operations and strategic goals, they become more familiar with their own processes and products.⁸ Established techniques like Bill Sharpe’s Three Horizons framework and Kees van der Heijden’s outline of a step-by-step scenario planning process for businesses provide guidelines for companies to conceptualize potential outcomes. Ideally, when leaders gather to conduct a comprehensive scenario planning analysis, they spend time looking towards the future and focusing on long-term objectives—potentially clarifying organization-wide goals and generally improving company well-being.

Research has shown that when organizations incorporate scenario planning into their strategic processes, they tend to outperform their peers in terms of adaptability and long-term success.⁸ This is likely because these organizations have created a solid game plan for themselves, crafting strategies in advance instead of being forced to react under immediate pressure.

Enhanced Preparedness for Extreme Uncertainty

Scenario planning should prime organizations for their ideal potential futures, but it can be an incredibly helpful exercise to prepare organizations for possible negative events. By developing multiple scenarios, organizations can identify and analyze potential major fiascos and figure out where they should establish safeguards. While traditional forecasting models tend to focus on the most likely outcome, scenario planning takes into account the unfortunate truth that, although some of the most devastating futures are unlikely, they are, in fact, possible and require preparation. For example, during the 1973 oil crisis, consultant David Wright worked with the Shell company, utilizing scenario planning to navigate wildly volatile market conditions. While their competitors had relied on conventional forecasting techniques, Shell was one of the few companies that had proactively strategized a response to an unplanned major disruption, enabling them to respond more quickly and effectively than their competitors.⁹

Fostering Innovation and Creativity

Sparking creativity usually requires challenging existing assumptions. Scenario planning involves considering a huge range of possibilities, even those that may seem unlikely or unconventional. Thus, scenario planning serves as a catalyst for innovation, as decision-makers are pushed to contemplate all sorts of out-of-the-norm situations.⁸ As we’ve discussed, scenario planning can protect organizations in the face of dangerous and unexpected disasters. It’s easy to imagine how a housing development company that makes a response plan for the case of a coastal flood or forest fire would be much better prepared than a company without a plan (although it’s hard to fathom that any construction development company isn’t preparing for the increasingly common forest fires across North America), but even considering the possibility of a massive fire might inspire the company to design more fire-resistant homes. When extremes are considered during scenario planning, these discussions may inadvertently lead to novel ideas for how to best protect and serve not only the company but perhaps also people and the planet. 

Whenever we try to make a perfect plan for the future, we almost always end up feeling like we missed something. Scenario planning can be time and resource-intensive and greatly impacted by cognitive bias. If the scenarios that organizations try to plan for don’t happen or play out in a drastically different way from their predictions, the effort put into scenario planning can feel wasted. 

Effectiveness and Underestimating in Hindsight

One of the most common complaints about scenario planning comes from executives and managers who try to implement the technique but find that it often underdelivers its promises. In fact, a 2013 survey showed that 40% of managers felt that scenario planning had little effectiveness in their organizations.⁸ It’s possible that the skepticism from managers and executives stems from a lack of experience and understanding of how to implement scenario planning effectively.

Of course, managers may also think that their planning has all been in vain because it can be difficult, if not impossible, for managers to accurately gauge how effective their scenario planning is. Individual organizations are only aware of the scenarios that have actually occurred, and without a control condition, there’s no way to establish what their outcome would’ve been had they not planned out different scenario responses. Hindsight bias describes our tendency to think that unpredictable events are predictable only after they occur. Therefore, scenario planning that effectively prepares organizations for times of crisis may seem less valuable in the aftermath, as leaders might assume that they would’ve been prepared for the situation regardless. On the flip side, it can be easy to write off the importance of preparing for potential disasters when they (thankfully) don’t end up happening. 

Impact of Cognitive Biases

Scenario planning can be influenced by a multitude of additional cognitive biases, which may undermine its effectiveness. For instance, the anchoring bias (relying too heavily on the first piece of information that we’re given), the availability heuristic (overly focusing on readily available information), and overconfidence (or the hard-easy effect) can distort the development and discussion of different scenarios. With all of the subjective elements involved in scenario planning, it’s easy to imagine how the many biases and heuristics we rely on can lead organizations to overlook critical uncertainties or misjudge the likelihood of certain events, ultimately hurting the efficacy of the scenario planning process. 

Complexity and Resource Intensity

Although it would be foolish to try to outline every single possible future, even mapping out several potential future scenarios and planning for them can be incredibly complex and resource-intensive. Developing meaningful scenarios and finding the time and brainpower to appropriately plan for each scenario may be hard for an organization of any size, and this can dissuade them from engaging in scenario planning. If organizations do take on the challenge but are strapped for time or resources, leaders may take shortcuts or use overly simplistic forecasting methods, and the process could lead to superficial analyses that don’t actually capture the depth of potential futures.⁶

Virginia's Changing Landscapes Initiative

A pilot study in Northwestern Virginia, conducted by the Changing Landscapes Initiative (CLI), held two large-scale scenario planning workshops related to environmental challenges.¹⁰ The workshops involved more than 40 decision-makers, planners, conservation leaders, and community members. By bringing all of these people together to go through a scenario planning process, the study provided an opportunity for decision-makers to combine scientific data and general community input for land-use planning. 

The team guided stakeholders through scenario planning workshops: first, they identified the critical uncertainties, like population growth and political will for coordinated land-planning decisions, and then developed four distinct scenarios for what Northwestern Virginia could look like in 2061 based on the different combinations of critical uncertainties. These scenarios included narratives that illustrated potential futures, helping the stakeholders visualize the impacts of various planning strategies. Ultimately, the scenarios provided valuable insights for local planners and decision-makers, enabling them to anticipate different futures and develop resilient long-term plans, but the process itself also fostered community engagement across the different groups. Although 2061 has not yet arrived, the study demonstrated that, in the face of extreme environmental uncertainty, scenario planning can be incredibly helpful for bridging the gap between scientific research and community needs, guiding local and regional planning efforts.

Emergency Preparedness 

Although we’ve mostly discussed scenario planning’s usefulness in a business context, it’s necessary to acknowledge the importance of scenario planning in a broader sense, particularly for the safety of the population at large. While many schools and some offices have routine fire, tornado, or even active shooter drills, most people are incredibly underprepared for some of the most catastrophic potential large-scale disasters.

Organizations like Ready.gov are designed to educate the public on preparedness for all sorts of disasters and emergencies and offer resources.¹¹ A large part of their role involves disaster-scenario planning and designing and dispersing educational resources to prepare people for emergencies like avalanches, biohazard exposures, drought, floods, hurricanes, landslides, pandemics, tsunamis, and volcanoes (just to name a few). Scrolling through their lists of resources, it may seem overwhelming to consider just how many different flavors of emergency could occur. Some of the disasters you may not have even known to worry about. Fortunately, major emergency response and preparedness organizations do a significant amount of scenario planning for you; officials often run through countless simulations, following the same scenario-planning steps that any business would follow. 

First, they identify a potential disaster (like a major earthquake) and then develop a plausible scenario to simulate. The team will assume certain earthquake characteristics for each scenario (like a particular magnitude, location, and fault line geometry) and then conduct a training exercise based on the realistic earthquake scenario.¹² For each scenario, the emergency response teams, utility organizations, and local governments will run through the simulation, helping them identify the biggest potential impacts and gaps in their current response capabilities. Not every organization has software designed to mock up their scenarios, but these teams’ scenario planning capabilities are bolstered by earthquake simulation software, which can help officials identify where the most likely damage will be to major structures, utilities, and transportation corridors for a given scenario. All of these disaster run-throughs are important for keeping response teams coordinated and ready if and when a disaster occurs. This, in turn, informs their recommendations for the public so that we can plan for any scenario, just in case. 

Cyber Scenario Planning with Alan Iny, Sanjay Khanna, and Michael Coden

Scenario planning is essential for adequate preparation and protection against all sorts of disasters, including cyber attacks. In this podcast episode, the TDL team discusses the intersection of risk, scenario planning, and cybersecurity with a number of experts in the industry, highlighting how scenario planning and creative problem-solving can help mitigate such threats. 

What is a Cost-Benefit Analysis?

In addition to devising plans for potential futures, organizations must also take definitive action. It can be difficult to take all of the possible costs and benefits into account when devising a future strategy, so some organizations use a cost-benefit analysis to determine how to move forward. Read this article to learn more about how cost-benefit analyses play out across a variety of sectors.

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2. Cordova-Pozo, K., & Rouwette, E. A. J. A. (2023). Types of scenario planning and their effectiveness: A review of reviews. Futures, 149, 103153. https://doi.org/10.1016/j.futures.2023.103153 
3. Wack, P. (1985). Scenarios: Uncharted waters ahead. Harvard Business Review, 63(5), 26-43. https://hbr.org/1985/09/scenarios-uncharted-waters-ahead
4. Horwath, R. (n.d.). Scenario planning: No crystal ball required. Strategy Skills. https://www.strategyskills.com/Articles/Documents/ST-Scenario_Planning.pdf 
5. Heijden, K. van der. (2005). Scenarios: The art of strategic conversation. Wiley.
6. Burt, G., Wright, G., Bradfield, R., Cairns, G., & van der Heijden, K. (2006). The role of scenario planning in exploring the environment in view of the limitations of PEST and its derivatives. International Studies of Management and Organization, 36(2), 50-76. https://doi.org/10.2753/IMO0020-8825360303 
7. Sharpe, B., Hodgson, A., Leicester, G., Lyon, A., & Fazey, I. (2016). Three horizons: A pathways practice for transformation. Ecology and Society, 21(2), Article 47. https://doi.org/10.5751/ES-08388-210247 
8. McKinsey & Company. (2020, September 1). Overcoming obstacles to effective scenario planning. https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/overcoming-obstacles-to-effective-scenario-planning 
9. Cornelius, P., Van de Putte, A., & Wright, G. (2005). Three decades of scenario planning in Shell. California Management Review, 48(1), 92-109. http://strategy.sjsu.edu/www.stable/B290/reading/Cornelius,%20P.,%20A.%20Van%20de%20Putte,%20et%20al.,%202005,%20California%20Management%20Review%2048(1)%2092-109.pdf
10. Smithsonian's National Zoo and Conservation Biology Institute. (n.d.). Case study: Scenario planning in Northwestern Virginia. https://nationalzoo.si.edu/conservation-ecology-center/case-study-scenario-planning 
11. Federal Emergency Management Agency. (n.d.). Be informed. Ready.gov. https://www.ready.gov/be-informed
12. U.S. Geological Survey. (n.d.). Earthquake scenarios.https://earthquake.usgs.gov/scenarios/