Scenario planning

Scenario planning is a process that is used by organisations that make long term plans.

It, as the name implies, involves the construction of a number of alternative scenarios. Scenario planning starts with identifying the key driving forces in the area of interest (which might be an industry, a country, or the global economy).

The key driving forces are those that are both important (any changes will have a significant effect) and uncertain.

The scenarios are then drawn up estimating the outcomes of different combinations of the key drivers. These possible scenarios are then used for planning.

Scenario planning, as a systematic technique was developed by Shell, which remains a heavy user of the technique, and has been credited with making Shell significantly better prepared than the other major oil companies for the fall in oil prices in the 1980s.

A number of useful scenario planning links can be found here.

Scenario planning is not often used in investment, although a case could be made for using it more widely. Its strength is taking into account qualitative rather than quantitative changes. This deters most professional investors, who prefer more quantitative methods. It has some similarities to monte-carlo simulation which is widely used by investors.