Scenario Analysis

Abstract

Strategies and scenarios are usually designed by strategic planners who prepare a decision which is irreversible for a long period of time. First, the factors are identified which affect the economic, political, and social developments until a predetermined horizon and which are beyond the decision maker’s control. Because these factors are mostly interconnected, the hypothetical future developments can be bundled into a small number of coherent scenarios. Usually, the planners design a trend-following scenario where the current developments are continued without interruptions (business as usual), an optimistic scenario where the developments proceed in a more upward direction, and a pessimistic scenario with a less upward or even downward direction of the developments. Each strategy has certain desirable and/or undesirable consequences within the context of the respective scenarios. In choosing a strategy, the decision makers have to evaluate and to weigh these consequences and to take into account the scenario probabilities. For the benefits and the pitfalls of scenario analysis, see Leemhuis (1985) and de Geus (1988), the pioneers at Royal Dutch/Shell in the nineteen seventies, and Mintzberg (1994).