Scenarios of possible events

Scenarios of possible events
See also
Scenarios of states in environment EFE matrix Strategic management functions Strategic scenarios method Strategic planning models Scenarios of processes in environment Macro environment analysis Evaluation of risk ASTRA analysis

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.

References

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