Forecasting Vs Scenario Planning

Forecasting

            Forecasting is the act of predicting future by using past data. For centuries we have been forecasting events like travel time, weather, duration to complete a construction project, etc.. Complexities of forecasting can vary from simple fairy tales to well formulated statistical predictive models. Forecasting allows us to make decisions without absolutely knowing the future. Castel, et. al. (2019) suggest four characteristics that are essential for any forecasting instrument – (a) there are regularities to be captured; (b) those regularities are informative about the future; (c) the proposed method captures such regularities; yet (d) excludes distorting non-regularities (noise). Forecasting models use past regularities in the data to understand the effect of different factors on the outcome. 

Scenario Planning

            When the future is uncertain and the current norms are disrupted by unforeseen circumstances, scenario planning might provide a method to chart the future. Scenario planning was used heavily during world war II and helped Royal Dutch/Shell company during oil crisis. Some scenario planning approaches try to predict the best case and worst-case scenarios while others try to present the most optimal state that should be created in the future (Ramírez et. al., 2020). Oxford scenario planning method, as per Ramírez et. al. (2020),  “by recognizing the part of uncertainty that is unpredictable and by actively exploring the sources of the turbulence and uncertainty, the goal is to iteratively and interactively generate new knowledge and insights to help organizations perceive their circumstances”. Scenario planning uses all levels of expertise within an organization to brainstorm and understand how future might be reshaped by current events. During scenario planning, multiple iterations are conducted to generate new knowledge and plausible future scenarios.

Advantages and Disadvantage of Forecasting and Scenario Planning

            Both forecasting and scenario planning try to foresee the future with the understanding of past events. Statistical forecasting uses systematic analysis of data to understand causal relationship between influential factors. Systematic analysis of past data using statistical forecasting models provide a repetitive and a reproducible analytical pattern. Statistical forecasting models try to eliminate bias by focusing on the data than opinions. On the other hand, scenario planning uses the knowledge and intuition of multiple individuals. When future is changing drastically from the past, statistical forecasting will not be able to predict future. It requires human intuition. Also, when data about the past is not available, statistical models will not perform well. Scenario planning, because of the expertise of individuals involved in the discussion, could perform better even when some of the data from the past is not available. At the same time, scenario planning could introduce tunnel vision and prevent individuals to confront all plausible future scenarios.

References

Castel, J. L., Clements, M. P., & Hendry, D. F. (2019). Forecasting: An essential introduction. New Haven: Yale University Press

Ramírez R., Churchhouse S., Palermo A, Hoffmann J. (2020). Using Scenario Planning to Reshape Strategy. MIT Sloan Management Review.