Why is Scenario Analysis (and Planning) Important to Your Small Business?

First, what is scenario planning and scenario analysis? Scenario planning has been used for many years within the military to plan strategy and build preparedness for the unexpected. The importance of scenario planning and analysis in our business environment is that it enables us to build competencies in strategic planning and decision making. It also enables us to build a plan to be prepared for any eventuality or occurrence.

After building and enacting the scenarios planned, the key outcome is to analyze those scenarios and how your business handled them and document the lessons learned. Then you must build an action plan to help you minimize the weaknesses you have uncovered and maximize the strengths.

Many business owners have not yet accepted the importance of scenario planning. But if your business develops a number of scenario plans, analyzes the outcomes and builds an action plan, you will be better prepared to handle any number of occurrences that are happening with ever-more frequency. Such as, the impact of a massive power failure, the impact of a hurricane or tornado; the impact of fire; the impact of a significant embezzlement of your company’s funds; the impact of a major economic failure (i.e. bankruptcy) of one or more of your top customers; the impact of your bank going into bankruptcy or shutting its doors; the impact of a severe shortage of skilled labor; and so on. If you pick up a national newspaper, listen to the news on radio or television or go online, you can read, see or hear about at least one (and on a bad day, many) of these events on a daily basis; recognize that these events can have a serious impact on your business.

Is your business ready and prepared to handle such an event? If you commit to scenario planning and scenario analysis, you will not escape these events but you will be much better prepared to handle them.

Actions to take:

  1. Build some specific scenarios. Do this each year. Maybe two or three scenarios a year.
  2. For each scenario, consider the political, environmental, social, technological (PEST) driving forces. For example, if your scenario is the impact of your bank shutting its doors: Are there political driving forces that can help your business (will legislation protect you)? What about technological (for example, if you do a lot of business with credit cards rather than cash, can you contact your credit card company to see if they can re-direct payments to a new bank account on very short notice, that is, with a phone call)?
  3. Detail your preparations for managing a specific scenario. What did you do? Why? Who was important to the issue and the management of the issue? Did you have the necessary contact information? Create a timeline of the events during the scenario simulation. When did the scenario peak? What was the most effective and least effective of the actions you planned?
  4. Can you define the indicators of that scenario? For example, in the bank shutting down scenario, what were the early warning signs? If you can’t think of this yourself, look for analyses of these events in the ‘real’ world (check online and offline).
  5. Once you’ve done some research, prepare a list of indicators for each scenario that you might face. What can you infer from the scenario? For example, in the bank shutting down scenario, you can infer that other banks might also be in trouble therefore before you choose a back-up bank (which might be one of the outcomes of your scenario analysis); you need to check the health of the bank. You might also infer that legislation, insurance, or other changes might come out of that scenario. How will you handle those outcomes?
  6. Analyze your business response to the scenarios you have created. What have you learned? Look for your weaknesses and your strengths. Build a plan that will enable you to minimize the impact of a serious event that you cannot control.

Do not wait for bad things to happen to your business; engage in scenario planning and scenario analysis so that your business is prepared and in control of how it manages its way through challenges.