Definition
Scenario planning is an exercise that companies carry out under which certain assumptions are made about future performance and changes in a business environment.This exercise involves identifying some uncertainties and various “realities” that may arise in the future course of business.
Example
Suppose a SaaS company has been in the business for 5 years. As part of their scenario analysis, they estimate stiff competition in the industry in the next 5 years, resulting in a drop in revenues. Thus, they start investing in R&D to come up with unique product offerings. Since the company estimated the competition well in advance, it was able to chalk out a plan to face competition and protect its revenue position.
Why it matters
Scenario planning offers a competitive advantage since it allows company management to react in a timely manner and with appropriate planning. It also allows company executives to chalk out an effective framework by considering business growth and the potential impact of future events.