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

Start your day with The Independent, sign up for daily news emails
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific