Scenario Planning

If I could get €5 for each time someone asks me when I think the pandemic will end, I could likely have saved a good sum of money. Rather than speculating on when the pandemic will end or hoping it will end soon, we need to plan ahead according to the various possible different scenarios that are reasonably plausible.

I fully understand the difficulty and challenge for business leaders as to how best plan for an unclear future. This is why, now more than ever, businesses should be applying scenario-based planning approaches to manage the uncertainty of the current situation and ensure they have sufficient cash reserves.

Considering the level of uncertainty that businesses presently face, I thought it would be useful if I forward you with what I believe are the best practices to be used when performing scenario planning in the current circumstances.

Really do an effort to describe find alternative future states—not just variations of today
Scenarios should be relatively far apart from one another to foster a meaningful debate on different courses of action.

Manage complexity
Scenario models should not be too complex. Ideally, companies will identify a few key variables that describe both the external macroeconomic environment, such as GDP growth, and company-specific parameters, such as fixed operating cost. To limit unnecessary work, only the financial line items required for decision making should be simulated.

Connect scenario planning to action
Variables should be linked to specific, well-defined outcomes. For instance, simulated cost-reduction initiatives should have direct impact on planned fixed- or variable-cost lines.

Have the right granular details to steer your business
The chosen modeling granularity for each level of the business structure (such as business units or product lines) should be sufficient to show specific effects and suggest specific actions.

Select the modeling approach that is best for your business
In the deterministic approach to scenario modeling, at least three to four scenarios should be modeled to sufficiently cover the range of possible outcomes. Alternatively, stochastic models, which are based on a Monte Carlo simulation model using thousands of scenarios, can provide the additional probabilistic lens of expected outcomes.

The COVID-19 pandemic has created a dynamic and difficult-to-predict environment with many uncertainties that challenge businesses each day. Navigating through the crisis is a formidable task and scenario-based planning can be a valuable tool in preparing and planning for the next normal.

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