The Concepts of Scenario Planning Versus Traditional Forecasting
It is crucial for any business to accurately forecast demand to stay profitable because without good perdition of where the business is going too much or too little would result in losing revenue and the firm’s competitive advantage (Alon, Qi & Sadowski, 2001). This will not be a simple goal to achieve as (Schoemaker, 2004) state complexity and uncertainty clearly complicate our attempts at sound forecasting. Peterson, Cumming & Carpenter (2003) suggested businesses should make this decision based on their expectation of uncertain future and provided scenario planning and forecasting as methods to understand their expectation.
Wade (2012) state scenario planning is widely used in the business world by planners and decision makers to handle issues and plan for future business-related scenarios such as how customers’ opinion will change in the future. Whereas, forecasting is providing the best estimate of a particular method, action or model to give an optimal decision that maximizes the net benefit (Peterson, Cumming & Carpenter, 2003). The value of scenario planning is realized by a range of feature rather than the ability to predict a particular glamourous prognosis (Wade, 2012). On the other hand, forecasting can help a business to understand to conduct a potential future impact such as the size of a market for a new product and to predict the market size and based on the purchasing power of customers. The authors added forecasting could help to evaluate markets and project their staff size (Derbyshire & Giovannetti, 2017).
Differences Between Scenario Planning Versus Traditional Forecasting
Derbyshire and Giovannetti (2017) depict scenario planning, and forecasting should be viewed as complementary, rather than the alternatives. Peterson, Cumming & Carpenter (2003) states scenario planning is more resilient and will perform better in cases of irrational situations and reduces uncertainty. Scenario planners should avoid predicting the future instead they should visualize what could happen and avoid acting the prediction will come true (Wade, 2012). Forecasting focuses providing the best possible estimate of the future state of a subject at hand (Peterson, Cumming & Carpenter, 2003). Schoemaker (2004) state forecasting involves making predictions about an unknown question or issue.
Scenario planning involves identifying possible completes and uncertain futures systematically (Peterson, Cumming & Carpenter, 2003). Scenario planning relies on few set of limited scenarios to study the uncertainty surrounding the decision about the future using quantitative and qualitative methods (Peterson, Cumming & Carpenter, 2003). Forecasting also attempts to mine both quantitative and qualitative data to make a prediction. Some of these forecasting techniques include expert opinion such as Delphi and Surveys, time series analysis, trend extrapolation such as growth curves and life cycle scenarios, lead-lag indicators, cross-impact, technology progress function, analogy Causal models, regression analysis, simulation models such as deterministic and stochastic methods, relevance trees, morphology (Daim, Rueda, Martin & Gerdsri, 2006).
Considering the margin of error, forecasting is quite uncertain because if fails to account all range of outcomes (Peterson, Cumming & Carpenter, 2003). This uncertainty arises because traditional forecasting relies only on extrapolating historical data and do not account the effect of novel events the future might pause (Bradfield et al., 2005). Wack (1985) state the fact that traditional forecasting is not always wrong in fact it gives the right prediction than not and that even makes more dangerous. Peterson, Cumming & Carpenter (2003) presented six iterative stages for scenario planning to improve such high uncertainty of forecasting techniques that includes identification of a focal issue, assessment, identification of alternatives, building scenarios, testing scenarios and policy screening.
Companies have used scenario planning to imagine the possible future and apply that to a wide range issue (Schoemaker, 1995). Schoemaker (1995) gave examples where scenario planning was used including the infamous Royal Dutch/Shell that used scenarios since the early 1970s as part of a process for generating and evaluating its strategic options in forecasting petroleum consumption. As we have seen multiple scholars tried to point out the weakness of forecasting, scenario planning is not free from drawbacks as well. Schoemaker (2004) state despite their adherence in industry scenario planning has weak integration into other planning and forecasting techniques.
Alon, I., Qi, M., & Sadowski, R. J. (2001). Forecasting aggregate retail sales:: a comparison of artificial neural networks and traditional methods. Journal of Retailing and Consumer Services, 8(3), 147-156.
Bradfield, R., Wright, G., Burt, G., Cairns, G., & Van Der Heijden, K. (2005). The origins and evolution of scenario techniques in long range business planning. Futures, 37(8), 795-812.
Daim, T. U., Rueda, G., Martin, H., & Gerdsri, P. (2006). Forecasting emerging technologies: Use of bibliometrics and patent analysis. Technological Forecasting and Social Change, 73(8), 981-1012.
Derbyshire, J., & Giovannetti, E. (2017). Understanding the failure to understand New Product Development failures: Mitigating the uncertainty associated with innovating new products by combining scenario planning and forecasting. Technological Forecasting and Social Change, 125, 334-344.
Peterson, G. D., Cumming, G. S., & Carpenter, S. R. (2003). Scenario planning: a tool for conservation in an uncertain world. Conservation biology, 17(2), 358-366.
Schoemaker, P. J. (1995). Scenario planning: a tool for strategic thinking. Sloan management review, 36(2), 25.
Schoemaker, P. J. (2004). Forecasting and scenario planning: the challenges of uncertainty and complexity. Blackwell handbook of judgment and decision making, 274-296.
Wack, P. (1985). Scenarios: Uncharted waters ahead. Harvard Business Review September–October.
Wade, W. (2012). Scenario planning: A field guide to the future. John Wiley & Sons.