Scenarios: A valuable tool in an uncertain world

While traditional models and forecasting have their place, scenario planning can be a real aid to preparing for the uncertainties of the future, says Stephen Boyle

Every month, the Treasury publishes a summary of the forecasts of around 40 economists. In June 2010, their projections of growth in 2011 ranged from 1.2 to 3.2 per cent. By June 2011, the spread had more than halved to 1.0 to 1.9 per cent.

Is it right to believe that the outcome for 2011 had become so much more certain, even if almost half of the year in question was already in the bag? Forecasts and the models behind them are valuable when used properly. They force you to be explicit about your assumptions and about how you think parts of the economy relate to each other.

First, no matter how sophisticated they may appear, models are a simplification of reality yet they churn out precise answers. They tell us that growth will be, say, 1.7 per cent, not somewhere between 1.0 and 2.5 per cent. Secondly, models cannot cope with events that occur very rarely but can be hugely significant – the best recent example being the events of autumn 2008.

A very useful complement to the use of models is scenario planning, which has its roots in military tradition. One corporate pioneer of this approach was Royal Dutch Shell, which continues to devote much energy to this way of trying to understand the future. In the early days, scenario planning was an industry in its own right, seemingly demanding armies of planners and fit only for the largest corporates. Yet businesses of any size can develop their own scenarios.

To start, think about the timescale over which you wish to plan. Next, identify the underlying trends in the world around you. Trends should be features that you are very confident will apply pretty well regardless of how the rest of the world evolves. Concerns about climate change seem a good example of this. Having identified trends, think about the most important uncertainties in your world. For an economist, one of those is how the eurozone and the US will manage their sovereign debt problems. How many countries will default? How will it happen and when? It is not difficult to identify uncertainties about exchange rates, interest rates, unemployment and a host of other factors.

Next, figure out a plausible range of variables for each of your uncertainties over your chosen time period. The bank rate sits at 0.5 per cent today but has been well into double figures in living memory. A range of 0.5 to 7.5 per cent over the next five years seems plausible, even if the top end is unlikely.

Decide the top two uncertainties, which, when combined, produce distinctly different but feasible worlds. If those uncertainties are how sovereign debt is managed and whether emerging markets can grow sustainably, the outcomes might be: (a) an orderly resolution of debt problems and sustainable growth; (b) a disorderly resolution of the problems and sustainable growth; (c) an orderly resolution and inflationary growth; or (d) disorderly resolution and inflationary growth.

Think hard about what each world would entail. The first might involve a steady recovery in global growth, with moderate inflation and falling unemployment in the UK, rising exports to a growing eurozone and emerging markets. Contrast that with the third option with its higher inflation, rising UK interest rates, slower growth and a generally weaker world economy.

Now judge how likely it is that each one of these worlds will happen, and how your business would be affected if it did, and decide the steps you would need to take to benefit from that set of events or to mitigate its effects.

Scenarios don’t dispel uncertainty. But in an uncertain world, they may help you to prepare better than would a spuriously accurate conventional forecast. Try it.

Stephen Boyle is head of RBS group economics. For more information, videos and advice for SMEs, visit www.freshbusinessthinking.com

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Day In a Page

General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
Public relations as 'art'? Surely not

Confessions of a former PR man

The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

Bill Granger's luxurious sweet treats

Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

The mother of all goodbyes

Paula Radcliffe's farewell to the London Marathon will be a family affair
Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

Steven Naismith: 'We know we must do better'

The Everton forward explains the reasons behind club's decline this season
Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

Michael Calvin's Last Word

Praise to Wenger for having the courage of his convictions