Scenario Planning versus Forecasting in Business

One of the biggest and yet sometimes unobtainable goals in business is how to become and remain profitable throughout the lifetime of the business. In order to be seen as a successful business, it is crucial to accurately forecast demand. Inaccurate business forecasts could lead to a loss of revenue due to having too little, or too much product, therefor resulting in losing a competitive advantage (Alon, Qi & Sawoski, 2001). For this reason, it is recommended that businesses utilize scenario planning and forecast planning methods to help the business remain as profitable as possible (Nigatu, 2018).

Scenario planning is “the process of visualizing what future conditions or events are probable, what their consequences or effects would be, and how to respond to, or benefit from them (Saulsgiver, 2021). The strength of this method is that when approaching risk management, it is a mix between quantitative method (GDP, unemployment, etc.) and qualitative method (fiscal policy, geopolitical tensions, etc.). Because of this type of planning, it allows for a top down, bottom up approach, as well as looking at future trends and how a portfolio might react (Saulsgiver, 2021).

Forecasting also utilizes a mixed of quantitative and qualitative methods to help make a prediction, but include expert opinions such as Delphi, surveys, time series analysis, trend extrapolation such as growth curves and life cycle scenarios, and many more (Nigatu, 2018). Forecasting is seen to be more prone to error because it doesn’t account for all possible outcomes (Peterson, Cumming, and Carpenter, 2003). Historical data is used and forecasting doesn’t include the possibility and impact that current events and trends could play in the outcome. Today, many companies tend to lean towards the use of scenario planning to help imagine the potential future outcomes and help make their businesses more successful (Nigatu, 2018).

 

References

Nigatu, B. (2018, February 2). Home. Reckoned Force. Retrieved October 12, 2021, from https://blog.reckonedforce.com/scenario-planning-versus-traditional-forecasting/.

Saulsgiver, W. (2021, October 5). Scenario planning versus forecasting. Schultz Financial Group Inc. Retrieved October 12, 2021, from https://sfginc.com/scenario-planning-versus-forecasting/.