Scenario planning vs. forecasting: what’s the difference?
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It’s important to note the difference between scenario planning and forecasting, which is a separate strategic planning methodology. Neither tool is better than the other; they simply offer different approaches to solving problems and should be used in a complementary way.
Forecasts are constructed by applying quantitative data and trends to predict one probable future scenario that an organisation then uses as the basis of its plans. They are typically built using historical data or trends and is a shorter-term tool that provides certainty based on known variables in the system.
Scenario planning requires organisations to look beyond the ‘here and now’ and describe what could happen across multiple alternative scenarios, both over the short- and long-term. It offers enhanced flexibility and preparedness to deal with risk and uncertainty instead of purely quantitative forecasting.
Six factors to help teams decide between forecasting or scenario planning:
When deciding which tool to apply to a problem or opportunity, there are factors to help identify whether scenario planning or forecasting will be more effective:
| Forecasting | Scenario planning |
|---|---|
| • The future certain and predictable – the past is a reliable predictor of what’s to come. | • The future is uncertain and unpredictable. |
| • One future option is likely | • Multiple futures are likely |
| • The focus is quantitative analysis | • The focus is qualitative analysis |
| • The organisation is looking for an objective, fact-based discussion with stakeholders | • The organisation is looking for a subjective, wider-ranging discussion with stakeholders |
| • The organisation is looking for a shorter-term (within one year) perspective on the future? | • The organisation is looking for a longer-term (multi-year) perspective on the future |
| • The analysis results can be replicated on an ongoing basis | • The analysis results are a one-time representation of unique information |
Four examples of scenario planning
Every company has unique attributes, which are reflected in its scenario planning approach. Here are four scenario planning examples organisations can utilise based on industry, goals, and challenges.
1. Operational scenarios
Also known as event-driven scenarios and are some of the most common internal planning formats. Operational scenarios explore the impact of different events and how they may impact the business. They specifically explore the immediate impact of an event, and provides short-term strategic implications.
For example, operational scenarios can consider supply chain disruptions to competitors launching a new, more innovative product. A plan is devised for what actions will be taken for each scenario.
2. Quantitative scenarios
With quantitative modelling, key performance indicators (KPIs) such as revenue, costs, ROI or market share are adjusted to identify the driving factors behind the best- and worst-case scenarios. This helps the business to quantify the impact of the scenarios being considered.
3. Normative scenarios
Also known as prescriptive scenarios and describe a preferred or achievable end state. It uses a vision statement as the starting point and works backward to determine the steps needed to get there.
Normative scenarios are often used together with other scenario planning formats.
4. Strategic management scenarios
The focus is on long-term changes in the market instead of short-term issues. Examples include changes in consumer preferences, government regulatory changes, and impact of climate change on supply chain. Strategic management scenarios can be challenging to develop as they require deep insights into the industry, economy, and marketplace.
Value-adding scenario analysis goes beyond short-term what-if analysis. For example, adding resources to sales and the impact it would have on revenue, should be built into the forecasting process. Real scenario analysis involves a group of subject matter experts coming together to consider a whole range of economic, geopolitical and technological issues, and how they might evolve to create a number of plausible futures.
For further information, including best practice tips, download our guide.
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