Forecasting and Multiple Scenario Plans
No one can predict the future, but that does not stop people from wanting to find ways where they can get an idea of what is to come. Forecast planning and scenario planning work on this principle by giving you the ability to have an idea of what is just around the corner. Forecast planning and scenario planning are used in a wide range of business sectors, as well as in our personal life. If you have thought about asking your boss for a raise and have gone through how this request will go, then you have done forecast planning. When a company releases its budget for the coming year, they are forecasting how their sales will be in relation to the costs that they will need to pay.
It is all about determining, to the greatest degree of accuracy, just what is going to happen down the road.
Forecasting is the process by which you make statements about events when you do not know what the outcome is going to be. It is often called making a best-estimation of what is going to happen. When someone asks you if it is going to rain, you make your best-estimation by saying that it might, but you cannot guarantee that it will. There are plenty of sectors and applications that use forecast planning, including:
- Supply chain management
- Transport planning
- Earthquake forecasting
- Land use forecasting
- Product forecasting
- Sport team performance
- Political forecasting
- Sales forecasting
Scenario planning is a strategic planning method that many organizations and individuals use to create long-term plans that are typically very flexible. Military intelligence will often do strategic planning through scenarios like simulation games that test whether or not a certain strategy is going to work. Business, which is often a war zone of its own, has latched onto the concept of strategic planning. Royal Dutch/Shell is one company that has done so, using scenario planning to determine changing mindsets from around the world.
The main thing to remember with scenario planning and forecasting is that they are typically wrong. This is not because the forecasters do not know what they are doing, but simply that it is not possible to predict the future with any certainty. There are far too many variables to make any sort of prediction concrete. This is why weather forecasters no longer say “Rain tomorrow”. They say “40 percent chance of precipitation.” They do this because if there is only a light drizzle, they are covered by the precipitation part and if it does not rain, they can show there was only 60 percent chance of it not raining.
Scenarios are very important for business, military and people in their day-to-day lives. The reason for this is that people can determine what course of action is going to be best. Here are some examples:
- A military campaign against an enemy needs to be run through scenarios. Various tactics will be determined and put against how the enemy is predicted to respond. The tactic that gets the best results over several scenario runs will probably be the campaign that is used.
- Investors want to know how the market is going to move. So, they run scenarios using specialized tools to determine, based on past data, how the market may move down the road. This gives them a better understanding of how to invest, thereby hopefully lowering the overall risk that they face. With scenario planning and forecasting, investors can see both the upsides and downsides. For example, they may determine there is a good chance that the stock they have is going to fall in price. So, they sell the stock and when it does fall, they have saved themselves from losing money.
- Weather forecasters will use data from the past to formulate an idea of how the weather is going to turn based on data they have at that moment. What we mean by this is that if a low pressure system is approaching, and it is April, the weather forecasters will look at how low pressures affected April weather in the past and use that as a way to determine what the weather is going to be like.
- Individuals will use scenario planning to determine how they should respond to things in their life. For example, a person will be looking at buying a car but they will have to run through scenarios of how they are going to pay for it. So, they run a scenario that figures out the costs of having a high-priced sports car, with its lower gas mileage and higher insurance, versus a hybrid that will cost less and save the person money. Through the scenarios, comparing costs with income, the individual can determine if they will be able to afford the sports car. Without this scenario planning, the person may buy the sports car and end up not being able to pay for it.
It is important to remember the difference between scenario planning and forecasting. Scenario planning looks at several different futures that may come about, while forecasting only looks at one. Therefore, scenario planning offers you more of an opportunity to make the right decision since forecasting can only see one future and there is a good chance that future will not happen.
Scenario planning gives us the ability to foresee, plan for and deal with surprises and problems. If we do scenario planning that shows us moving to a new town will cost us more than benefit us, we can eliminate the regret of moving to the town by not moving.
With scenario planning, unlike forecasting, you can have a backup plan. You can have several scenarios so that if one does not pan out, you can move to the next most likely scenario and so on. Remember the adages of ‘Plan for the worst, hope for the best’ and ‘Chance favours the prepared mind.’
First Published: EntrepreneurJourney.com Apr 24, 2010