What Is Scenario Analysis and Contingency Planning?

Scenario Analysis and Contingency Planning is a process that allows executives to explore and prepare for several alternative futures. It examines the outcomes a company might expect under a variety of operating strategies and economic conditions. Contingency planning assesses what effect sudden market changes or business disruptions might have on a company and devises strategies to deal with them. Scenario analysis and contingency plans avoid the dangers of simplistic, one-dimensional, or linear thinking.

By raising and testing various “what if” scenarios, managers can brainstorm together and challenge their assumptions in a nonthreatening, hypothetical environment before they decide on a certain course of action. Scenario Analysis and Contingency Planning allows management to pressure-test plans and forecasts and equips the company to handle the unexpected.

How Is Scenario Analysis and Contingency Planning Implemented?

Key steps in a Scenario Analysis and Contingency Planning process are:

• Delineating critical market and competitive uncertainties potentially impacting the business
• Defining extreme, but plausible, scenarios
• Testing the impact of each scenario on future business performance
• Identifying no-regret moves that are valuable under most or all scenarios
• Determining big bets, tied to the scenario in which leadership has the most conviction, surfacing strategic hedges and options
• Designating trigger points and signposts to highlight changes
• Establishing regular forums to monitor signposts and decide corrective actions
• Developing contingency plans tied to significant changes in signposts
• Being prepared to change course if necessary

Related Topics

• Crisis Management

• Disaster Recovery

• Dynamic Strategic Planning and Budgeting

• Simulation Models

 

What Are the Common Uses of Scenario Analysis and Contingency Planning?

By using Scenario Analysis and Contingency Planning, a company can:

• Challenge widely held beliefs and assumptions about the business and its strategic direction
• Surface critical factors that can influence the company’s future course
• Make long-range planning more dynamic and consequential
• Develop a clearer view of the future
• Achieve a higher degree of organizational learning

• Selected references (click to expand)

  Bazerman, Max H., and Michael D. Watkins. Predictable Surprises: The Disasters You Should Have Seen Coming, and How to Prevent Them. Harvard Business School Press, 2008.

  Bood, Robert, and Theo Postma. “Strategic Learning with Scenarios.” European Management Journal, December 1997, pp. 633–647.

  Chermack, Thomas J. Using Scenarios: Scenario Planning for Improving Organizations. Berrett-Koehler Publishers, Inc., 2022.

  Elkins, Debra, Robert B. Handfield, Jennifer Blackhurst, and Christopher W. Craighead. “18 Ways to Guard Against Disruption.” Supply Chain Management Review, January 1, 2005, pp. 46–53.

  Fuld, Leonard. “Be Prepared.” Harvard Business Review, November 2003, pp. 20–21.

  Joglekar, Nitin, and Phadnis Shardul. “Accelerating Supply Chain Scenario Planning.” MIT Sloan Management Review, November 2020.

  Mankins, Michael, and Mark Gottfredson. “Strategy-Making in Turbulent Times,” Harvard Business Review, September 2022.

  McGrath, Rita Gunther. Seeing Around Corners: How to Spot Inflection Points in Business Before They Happen. Houghton Mifflin Harcourt, 2019.

  Nolan, Timothy N., Leonard D. Goodstein, and Jeanette Goodstein. Applied Strategic Planning: An Introduction. 2d ed. Pfeiffer, 2008.

  Ramírez, Rafael and Wilkinson Angela. Strategic Reframing: The Oxford Scenario Planning Approach. Oxford University Press, 2018.

  Schoemaker, Paul J. H. “Scenario Planning: A Tool for Strategic Thinking.” MIT Sloan Management Review, Winter 1995, pp. 25–40.

  Van der Heijden, Kees. Scenarios: The Art of Strategic Conversation. 2d ed. Wiley, 2005.

  Van der Heijden, Kees, Ron Bradfield, George Burt, George Cairns, and George Wright. The Sixth Sense: Accelerating Organizational Learning with Scenarios. Wiley, 2002.

  Wack, Pierre. “Scenarios: Shooting the Rapids.” Harvard Business Review, November/December 1985, pp. 139–150.

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