This document discusses scenario building and its advantages and precautions. It provides guidance on building scenarios including covering a broad range of possibilities, including "stretch" and unlikely scenarios. Scenarios should have catchy names and consider contrary views. At least four scenarios should be developed, including a central case scenario. Scenarios help with flexible long-term planning but can also confuse if too many outcomes are presented. Costs of contingency plans for all scenarios must be considered.

1. THE USE AND ABUSE OF
SCENARIOS
NIKHIL SHARMA
160101135
SECTION - C

2. CONTENTS
Scenario
Building
Precaution
sAdvantage
s
Thumb
rules
Further
Discussion

3. SCENARIO BUILDING
• Helps in flexible long-term planning
• Recognition that many factors may combine in complex ways to create sometimes
surprising futures
DemographicD
GeographicG
ReservesR
IndustryI
EthnographyE
Facts
SocialS
TechnicalT
EconomicalE
EnvironmentE
PoliticalP
Driving
Forces
Outcome
s

4. ADVANTAGES
• Possible Outcomes backed by sequence of events that
would lead to it
• Challenges belief that change will occur gradually
• Planning considering events spanning across wider
timelines
Expand
Thinking
• Identification of powerful drivers of change
• Identification of outcomes that are the inevitable
consequence of events that have already happened
Decodes
inevitable
futures Predetermined outcomes Rained in Mountains Flood in plains
Demographic
trends
Economic action
and reaction
Reversal of
unsustainable
trends
Scheduled events

5. ADVANTAGES
• Power structure within companies inhibits the free flow of
debate
• Reduces senior person dependency
Protection
against Group
thinking
Less threatening way to lay out alternative futures in which
strong status quo assumptions may no longer be true
Challenges
convention
al wisdom
Contrarian Thinking

6. PRECAUTIONS WHILE BUILDING SCENARIOS
• Wide range of possible outcomes turns the organization
confused and it may lack in direction
• Organisation might stop acting as it faces an uncertain
future
Remove
Confusion
GOAL SETTING – Robust under different scenarios
Does definite
future provide
confidence ??
Pick the scenario whose
outcome seems most
likely and to base a
plan
upon that scenario !!
“Victory at all costs,
victory in spite of all
terror, victory
however long and
hard the road may
be”

7. PRECAUTIONS WHILE BUILDING SCENARIOS
• Scenarios can help leaders avoid looking stupid
• Wide range of scenarios should be used before making
public
statements
Avoid muddy
communicatio
ns
Admitted that he had put too much faith in the self-correcting power of free markets and
had failed to anticipate the self-destructive power of mortgage lending
Alan Greenspan
Former Federal Reserve chairman
Avoid relying
on excessively
narrow
outcomes
• Creating scenarios that do not cover the full range of
possibilities can leave organisations exposed exactly when
scenarios provide most comfort
Human Behaviour – “We are typically too optimistic going into a downturn and
too
pessimistic on the way out”

8. PRECAUTIONS WHILE BUILDING SCENARIOS
• Among presented scenarios people choose only scenarios
lying
to immediate right/ left of reality
Don’t chop the
tails off the
distribution
Uniformity in
Number of
Scenarios
• Sometimes the most interesting and insightful scenarios
are the ones that initially seem the most unlikely which
get discarded
Include “Stretch Scenarios” Watch list
Add one scenario for each that is discarded
When to avoid
Scenarios
• At least two variables should be used to construct
scenarios—and the variables must not be dependent
Use of
Multivariate
• When uncertainty is so great that they cannot be built
reliably at any level of detail

9. THUMB RULES FOR BUILDING SCENARIOS
Cover
Broad
Range
Scenarios
must
have
catchy
names
Listen to
contrary
voices
Presence
of Central
Case
Always
develop
at least
four
scenarios
Appreciate Mavericks
“Best Scenarios are built
on new insights”
Change Organisation
Lexicon
Avoid boring and Dull
Names
Highest Probability
Crystal clarity about
the degree of certainty
Central
tendency
Provide three
every one chooses
central scenario

10. POINT TO BE DISCUSSED
• Cost involved in developing contingency plans for all scenarios and how to
determine level of security
• Case in Point -
Apple’s revenue reduced by 5% owing to appreciation of Dollar against other currencies
“Apple lost more money to currency fluctuations than Google makes
in a Quarter” – Jan 28,2015
Company contemplates over various scenarios
• Uses currency derivatives
• Replaces hedging contracts at current levels
• Mid cycle realignment of prices