If only we knew. With scenario planning, we do. Here's how to prepare better for the next crisis

Many companies have organized and operated their value chains to maximize efficiency and production capacity and to cut costs. Value chains have been driving just-in-time strategies to keep stocks to a minimum, and they tend to work assets hard, primarily for shareholders’ financial returns.

But COVID-19 has shown that cost optimization is no longer enough. The sheer scale of the upheaval confirms how the roles, actions, and interactions of the many actors in a company’s value-creating system need to deliver more than mere transactional efficiency.

They now need to develop more resilience. Most organizations were not sufficiently prepared, and traditional forecasting methods using sensitivity analyses provided inadequate protection against an event as catastrophic as the pandemic. Nor are the futures they have planned for ready for the deep transformations that will gain ground faster than anticipated. New approaches are needed in these new, uncertain times.

Increasingly organizations turn to scenario planning to strengthen how they cope with uncertainty. The approach, designed and practiced at Saïd Business School, aims to reframe companies’ long-term strategies by developing plausible scenarios.

Herman Kahn began this in the 1950s with his work on Cold War military strategies for the nuclear age. Scenario planning then spread to the corporate world, most notably when Royal Dutch Shell changed its approach to be well prepared for the turbulence created by the 1973 oil crisis.

The strength of this iterative process comes from the individuals who come together and share their collective understanding of the present and address the environmental or contextual factors that may contribute to future change. By detailing the diverse factors of a given contextual environment, which are often beyond their control, an organization can develop several scenarios, as plausible alternative outcomes.

Scenario planning aims to provide a more useful method to prepare for economic uncertainty, unexpected events and disruptive innovations; that is not only practical and rigorous but that also encourages collaboration.

This type of collaborative approach offers rich insights. By co-operating and exploring different perspectives and viewpoints, from many individuals and diverse groups across a business organization, an industrial sector or a scientific field, the resulting scenarios contribute to more effective and robust strategies.

In these complex times, strategies need to be much more collaborative than competitive in order to consider new opportunities and partnerships previously ignored. This approach opens up new conversations; adding value for all stakeholders, and ensuring that organizations stay viable, resilient and prepared for the next possible crisis.

Scenario planning can be used by corporate strategy teams to actively explore sources of possible disruption and rather than taking those as unsettling and destabilizing elements for a given strategy, they offer opportunities to adjust and innovate. The methodology can encourage new external partnerships and co-innovation opportunities as teams explore paths previously not explored.

Schneider Electric has worked with a team of NormannPartners advisors who are also at Saïd Business School, University of Oxford to better prepare for the future.

The organization’s experience in scenario planning resulted in different plausible futures based on a number of assumptions all related to the energy transition; that is, different versions of evolutions in energy demand, energy efficiency, fuel switching and energy supply, up until 2040.

Initially this work aimed at shaping innovation initiatives, but it has revealed energy transition scenarios that require urgent attention. Exacerbated by Covid fallout, the drive to decarbonize is accelerating, as is the increased need for resiliency. Lower technology costs and favorable policy confirm that as global energy consumption forecasts grow threefold, the shift to electricity-powered infrastructure will also ramp up.

Electric Vehicles (EV) sales are growing faster than expected, and price parity with Internal Combustion Engine vehicles could happen within 5 years and this increased electricity demand will further impact buildings where most EVs are charged. All of these factors provide innovation opportunities that can be uncovered using scenario planning.

Other real-world adjustments companies have made as a result of scenario planning include making budgeting time horizons shorter or changing criteria-investment committee uses to assess new investments. The Saïd Business School team has also seen that scenario planning has a positive effect in creating strong new communities within an organization.

Recent analysis on how COVID-19 turbulence, uncertainty, novelty and ambiguity should drive organizations to rethink their procurement strategies focuses on making companies more resilient with long-term “value constellations” connecting stakeholders both holistically and dynamically, to better withstand external shocks.

The current pandemic is a crisis of historic proportions, and we still don’t know what the future will hold. Increasing inequalities, de-globalization, tax burdens, and massive migrations are all possible scenarios. The uncertainty we face now could pale in comparison to future scenarios where we face the effects of climate change.

It is in times of crisis that we witness greater resourcefulness and creativity, stretching the boundaries of innovation. If companies are solely steered to deliver financial efficiency, the spreadsheet becomes the enemy of innovation. Companies that use this moment to take a fresh look at how they operate and apply scenario planning, it can also represent an opportunity: to emerge from the current crisis more agile, resilient and innovative.