Scenarios of possible events

Scenario methods are a tool of strategic management. They help in preparing of corporate strategy in the long run. These methods predict different types of phenomena that can occur in a changing environment and help managers in preparing for them.

Scenarios of possible events represent the impact of various factors influencing the company, its trends and the capacity of the enterprise to adapt to them.

Building the scenario

Construction of scenarios consists of five stages:

1. Identification and development of events in the environment - to do this, managers divide the spheres of business environment, and then choose factors in the sphere that may affect the company's activities in the period for which the strategy is created. Such spheres can be:
   • The economic sphere
   • Technological sphere
   • The social sphere
   • Sphere of regulatory and legal matters
   • Sphere of international activity
   • The political sphere
   • The demographic sphere
2. Determine the effects of selected factors on the activity of the enterprise - for this purpose managers should determine the trend (increasing, constant, decreasing) of each factor. Then they should assess impact of each factor on a scale of - 5 to 5, or 1-10 (where - 5 (1) represents the most negative impact and 5 (10) - the most positive) and the probability of each factor to emerge.
3. Calculating the average impact force of a factor to a company by multiplying the assessment and the probability of each factor.

Results of above steps is recorded in following table:

Table. 1. Environment trend analysis

Name of factor	Trend	Evaluation of the impact-force (1-10)	Probability (0-1)	The average impact
Economic sphere
Factor A	Increasing Fixed Descending
Factor B	Increasing Fixed Descending
Sphere of Technology
Factor K	Increasing Fixed Descending
Factor L	Increasing Fixed Descending

Types of scenarios==Based on the above table managers can then create various scenarios. Most commonly used are the following scenarios==Optimistic scenario

It takes into account the highest rated trend of each factor.

Table 2. Optimistic Scenario

Elements of scenario	The strength of the impact
Economic sphere
Factor A Factor B The average impact strength
Sphere of Technology
Factor K Factor L The average impact strength

Pessimistic scenario

It takes into account the lowest-rated trend of each factor

Table 3. Pessimistic scenario

Elements of scenario	The strength of the impact
Economic sphere
Factor A Factor B The average impact strength
Sphere of Technology
Factor K Factor L The average impact strength

The most likely scenario

It takes into account trend, which has the highest probability of occurrence.

Table 4. The most likely scenario

Elements of scenario	Probability	Negative strength of the impact	Positive strength of the impact
Economic sphere
Factor A Factor B The average impact strength
Sphere of Technology
Factor K Factor L The average impact strength

Surprise scenario

It takes account of this trend, which has the lowest probability of occurrence.

Table 5. Surprise scenario

Elements of scenario	Probability	Negative strength of the impact	Positive strength of the impact
Economic sphere
Factor A Factor B The average impact strength
Sphere of Technology
Factor K Factor L The average impact strength

Rating of scenarios

To evaluate the quality of each scenario managers need to create a table containing:

• Deviation from the most optimistic scenario from the most likely scenario, measured as an average difference between effect of each factor of each scenarios.
• Deviation from the pessimistic scenario from the most likely scenario (measured as above)
• The sum of average deviations

Place each factor, determined by the sum of average deviations (first is the factor having the largest deviation)

Table. 6. Evaluation of the results

Name of factor	Optimistic scenario	Pessimistic scenario	Most likely scenario	Deviation Optimistic-MostLikely	Deviation Pessimistic-MostLikely	Sum of deviations	Rank
Economic sphere
Factor A Factor B	Average impact force	Average impact force	Average impact force
Sphere of Technology
Factor K Factor L	Average impact force	Average impact force	Average impact force

On the basis of the above table managers creates list of opportunities and threats, which facilitates a clear breakdown of business development opportunities and risk areas. This is the basis for planning of various company strategies.

Examples of Scenarios of possible events

• Scenario 1: An increase in the availability and affordability of technology, such as cloud computing and artificial intelligence, resulting in increased efficiency and productivity.
• Scenario 2: An increase in global competition, leading to increased pressure on companies to develop innovative products and services quickly and cost-effectively.
• Scenario 3: A shift in consumer preferences, leading to a greater emphasis on sustainability, health, and convenience in product and service offerings.
• Scenario 4: A disruption in the supply chain, such as a natural disaster or pandemic, leading to supply shortages and disruption in the flow of goods and services.
• Scenario 5: A change in government regulation, leading to new requirements for companies to comply with or changes in the tax code.
• Scenario 6: An increase in the prevalence of cyber-attacks, leading to increased security measures and disruption in the flow of data and information.

Advantages of Scenarios of possible events

Scenario methods are a powerful tool for strategic management, offering numerous advantages in preparing for long-term corporate strategy. Some of the benefits of using scenario methods include:

• Improved decision making: Scenarios provide a way to anticipate possible events and draw up plans accordingly, helping managers make more informed decisions.
• Risk mitigation: Scenarios help managers identify potential risks and plan ways to minimize or avoid them.
• Increased flexibility: Scenario methods encourage managers to think flexibly and come up with creative strategies to deal with unpredictable changes.
• Improved resource allocation: By anticipating potential events, managers can allocate resources more effectively to upcoming challenges.
• Improved communication: Scenarios provide a framework for discussing and understanding any given situation, making communication between all relevant parties easier.

Limitations of Scenarios of possible events

Scenario methods are a valuable tool for strategic management, yet they have their own limitations. These include:

• Lack of Accuracy: Scenarios are based on predictions and estimations and thus, their accuracy is limited. The output of the scenarios is always an approximation and the actual outcome may differ from the predicted one.
• Unforeseen Events: Scenarios do not account for events that are unforeseen or outside the scope of the scenarios. This can lead to unexpected outcomes if these events are not taken into account.
• Bias: Scenarios can be biased due to the fact that they are based on the predictions and assumptions of the people creating them. This can lead to scenarios that are not fully accurate or comprehensive.
• Limited Scope: Scenarios are limited to the number of variables that can be considered when creating them. This can lead to scenarios that do not consider all possible scenarios and outcomes.
• Time Consuming: Scenarios are time consuming to create and analyze and may not be suitable for situations that require quick decision making.
• Costly: The cost of creating scenarios can be quite high as they require a lot of resources and time.

Other approaches related to Scenarios of possible events

Apart from Scenario approach, there are other methods to predict possible events:

• The Delphi Method: The Delphi method is a structured communication technique used to collect opinions from a panel of experts. It is used to facilitate group discussion and reach a consensus on a certain topic.
• SWOT Analysis: SWOT analysis is a strategic planning tool used to evaluate the Strengths, Weaknesses, Opportunities, and Threats of a business or project. It helps managers to identify both positive and negative factors that will affect the potential success or failure of a project.
• PEST Analysis: PEST analysis is a strategic planning tool used to assess the Political, Economic, Social, and Technological aspects of a business or project. It helps managers to understand the external environment in which their business operates and identify potential threats and opportunities.
• Scenario Planning: Scenario planning is a technique used to plan for different possible outcomes of a decision. It involves analyzing various scenarios and developing plans to respond to each one.
• Trend Analysis: Trend analysis is a tool used to identify and analyze trends in data over time. It helps managers to predict future trends and plan accordingly.

In addition to Scenario methods, there are other approaches that can be used to predict possible events, such as The Delphi Method, SWOT Analysis, PEST Analysis, Scenario Planning, and Trend Analysis. Each of these methods has a different purpose and can be used to gain insight into different aspects of a business or project.

Scenarios of possible events — recommended articles

Simulation scenarios — Strategic foresight — Feasibility analysis — SPACE method — Macro environment analysis — ASTRA analysis — Business portfolio analysis — Dynamic risk — Strategic scenarios method

References

• Hsia, P., Samuel, J., Gao, J., Kung, D., Toyoshima, Y., & Chen, C. (1994). Formal approach to scenario analysis. IEEE Software, 11(2), 33.