Scenario analysis in strategic management: what are the best tools?


what is scenario analysis


The fact that we are in a world that changes rapidly and with great intensity, and that this has great influence on business and economic-financial scenarios, is no secret to anyone.

And it is increasingly necessary for companies to be attentive to these changes, be they in the behavior of consumers, the economy, the government, or even in the competition.

Organizations need to analyze their position in this economic scenario in detail and predict and prevent negative factors influencing it.

At the same time, they need to highlight their strengths and direct their strategies to succeed in this mutant environment.

And this is where Scenario Analysis in strategic management comes into play.

In this post, you’ll understand what scenario analysis is, you’ll see some internal and external scenario analysis tools, examples, and how to use them all in a company’s strategic assessment.

What is Scenario Analysis in strategic management?

Scenario Analysis is a concept disseminated by studies and consultancies that came to be widely used as a management tool, despite having its origin in military theory.

It allows strategies to be established considering a future context.

In this case, factors that can drive the business are identified, waiting to get advanced before different types of scenarios in strategic planning.

Scenario Analysis is what a company’s strategies will be based on, so it is of extreme importance in the design of Strategic Management.

Its main function is to analyze the context (internal and external) in which the company is inserted.

Then, the future factors that are likely to occur are identified, allowing a clearer view of the current scenario and allowing more informed and accurate decision making.

It is important to note that the main function of scenario building in strategic management is not to try to predict the future, but to identify factors that can become real in the long run.

Tips for Effective Scenario Planning

When analyzing scenarios for a business plan, competitor analysis and strategic management play a key role.

Only then will it be possible to make an adequate projection of scenarios.

Here are some important actions:

  • Think strategically and analyze the adversary and the environment in detail, discovering points that are in fact relevant for the analysis of scenarios and identification of risks, always being objective.
  • Get to know your competitors well, by analyzing the competitive environment, detecting your strengths, identifying points that you are ahead of them, and at the same time the threats, that is, the areas where they can overcome you.
  • Despite all the efforts you can put into performing the analysis of the internal and external environment of your organization, it is impossible to be 100% unbiased. So, get people who know your business and are familiar with the method, to review the analysis and contribute.
  • Make use of the internal and external scenario analysis tools established and used by the big companies in the market.

How to use scenario and construction analysis in strategic planning

As we have seen, Scenario Analysis is a process that can be simple, which allows companies of the most diverse branches and sizes to use it as part of their definition of strategic planning.

The construction of company strategic scenarios uses factors that are common to all of them, being necessary only that each one analyzes the internal and external environment of the organizations and the market.

Organizational Scenarios Analysis helps in the direction and accuracy of strategic planning through a broad analysis of the corporate environment.

This will result in the creation or adaptation of new strategies or action plans to minimize risk and maximize opportunities and chances of success.

Partial Scenario Analysis tools in strategic planning

As we have said, in order to study scenarios, several factors must be taken into account.

From the concept of economic scenarios, through to the analysis of the competitive environment and the use of internal and external scenario analysis tools.

Without this, there is no way to build a good example of critical business analysis.

In this context, we have selected some internal and external scenario analysis tools that will be of great help in the planning of organizational scenarios:

  • Competitive environment analysis;
  • PESTEL (and enlarged PESTEL);
  • Analysis of the internal and external environments of organizations.

Lets learn about these strategic planning tools for projecting organizational scenarios?

But before proceeding, watch this interesting animation produced by SEBRAE, focused on scenario analysis and risk identification.

Porter: competitive analysis

Analyzing competitors during strategic planning is critical.

And this tool idealized by Professor Michael Porter from Harvard is one of the most sacred when it comes to the strategic analysis of a company.

Here’s how to use them in building a company’s scenarios:

  • Rivalry between competitors: knowing the other companies that operate in your market segment is fundamental. The rivalry between competitors tends to be greater when there are more companies present in the market and there are smaller differences between what they offer. Seek out the strengths and weaknesses of each company, get to know your target audience, and figure out how to meet their needs better than your competitors do.
  • Suppliers negotiation power: the more suppliers you have, the less they can dictate prices and delivery times. Remember that they are also suppliers to your competitors, who may try to dominate some of them with exclusivity contracts.
  • Threat of substitute products: are those that do not belong to the same category that you produce, but that meet the same needs for your customers. A famous example is the case of butter and margarine. Find out what are the features and benefits of your products that make them positively differentiate from substitutes.
  • Threat of entry of new competitors: what are the entry barriers that can prevent the emergence of new competitors in your market?   The need for high investments for installation, patents, government regulation, consolidated brands and complex technologies often inhibit the entry of new competitors.
  • Client negotiation power: those who define the characteristics, positioning and price of their products, is always, in essence, the customer. The greater the number of competitors and the similarity between products, the greater the bargaining power they have. Differentiation is the way to try to control this scenario.

PESTEL Risk Analysis

The PESTEL analysis is used for scenario studies and is fully focused on the external environment.

The name PESTEL is derived from the initials of the letters of different types of scenarios that strategic planning demands be analyzed.

Strategic scenarios of the PESTEL analysis:

  • Political
  • Economic
  • Social
  • Technological
  • Ecological
  • Legal

For each of these points, a scenario analysis should be done for the business plan, defining opportunities and threats (which are also used in SWOT analysis).

For example, when looking at the concept of economic scenarios, factors such as these could be listed:

  • Opportunity: Lower interest rate and dollar will facilitate financing and import of production inputs.
  • Threat: The increase in the rate of a certain tax will bring a significant increase in production expenses.

Although some of the scenarios used in strategic scenarios are considered to be very useful, some feel that the PESTEL scenario analysis of a company could be even more complete, including other factors, or better detailing the six that it already uses.

Topics for studying organizational scenario analysis:

  • Great Upheavals: Strong changes in government, downfall of ministers, wars, reforms and new laws.
  • Big Uncertainties: Inflation, deflation, increasing unemployment, increased or decreased consumption, increased or decreased interest rates, strikes, exchange rates.
  • Big ambiguities: High unemployment and higher consumption due to low interest in savings or stockpiling due to the fear of inflation.
  • Optimal Statistical Data: They are considered optimal due to the seriousness of the information source.
  • Questionable Statistical Data: Do not use for decisions in strategic planning due to the low credibility of the source.
  • Serious Elevation of Costs: Import or export taxes, scarcity due to high demand, difficult labor force.
  • Severe Scarcity of Raw Material: Off-season, shortage due to ecological or production reasons, importation restricted by law.
  • Strong State Interventions: New tax or tax rules, prohibitions on sale or production.
  • Strong Social Interventions: Strikes, pressures from ethical, religious, union, or environmental protection groups.
  • Serious Technological Deficiencies: Technology still unknown, costly, not available in your location, need to hire foreigners.
  • Strong Modifications in the Level of Consumption: Due to fads consumption will fall or increase. Consumption will be indispensable or almost nonexistent.

A key point that can not be overlooked in scenario analysis in strategic management are the social and behavioral impacts that the advent of new technologies, such as the internet and cloud computing, have been causing.

The study of so-called X, Y (Millennials) and Z generations is a mandatory part of any scenario analysis in strategic management and risk identification.

SWOT: Internal and External Scenario Analysis Tool

The analysis of the internal and external environment of organizations is usually done with the help of the SWOT matrix.

In fact, this is one of the most important business strategic scenario analysis tools.

The use of SWOT in strategic management seeks to identify the strengths and weaknesses of a company (internal environment) and opportunities and threats (external environment).

Let us better understand what SWOT analysis is for defining these two environments?

Internal Environment – Forces and Weaknesses:

Everything you can control within your company is composed of the strengths and weaknesses of your internal environment.

  • Thus, for example, a company with a reputation for innovation, with state-of-the-art facilities and high employee engagement, can list these characteristics as strengths.
  • On the other hand, a company that has distribution difficulties, low market share, high costs of raising financial resources and low economies of scale has these points as troubling weaknesses.

External Environment – Opportunities and Threats:

Forces of nature, economic policy, social and behavioral changes are among some of the external factors over which your company has no control.

Thus, for example, a company with a reputation for innovation, with state-of-the-art facilities and high employee engagement, can list these characteristics as strengths.

As we showed in the previous topic, the best way to do external scenario planning is to use the PESTEL analysis, which can be extended with other factors specific to your market segment.

Crossing Strengths and Weaknesses with Opportunities and Threats:

It is here where SWOT analysis in strategic management shows you results.

With it, you must define:

  • Which of your strengths can potentiate opportunities?
  • Which strengths can defend you against threats?
  • Which of your weaknesses can potentiate threats?
  • Which of your weaknesses can hurt opportunities?

Based on these strategic scenarios, you must define action plans to strengthen your weaknesses or use your strengths to take full advantage of the opportunities and adequately defend yourself from the threats.

After all these explanations, strategic planning tools, and scenario-setting definitions, has this activity become clearer to you?

If you want this task to become even easier and more agile, use strategic planning software to do your scenario analysis like STRATWs One, and do it all with the help of technology, based on real data and ease of collaboration between teams.

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