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2010+SL - Scenario planning for economic recovery...

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Scenario planning for economic recovery: short-term decision making in a recession Patrick B. Marren and Peter J. Kennedy Jr S cenario planning has enjoyed a recent upsurge in interest due to last year’s near-collapse of the global financial system and the ensuing economic trauma of what has been called ‘‘The Great Recession.’’ CEOs are suddenly painfully aware that spreadsheet models that offer a detailed single vision of the future are almost certain to be wrong in many critical respects, so corporate leaders are casting about for alternative methods of managing future uncertainty that actually help a business prepare for a number of alternative possibilities. So we have seen, in the past few months, articles on ‘‘Managing in the fog’’ in The Economist ; ‘‘The secret of successful scenario planning’’ in forbes.com; and ‘‘Don’t oversimplify your scenarios’’ from Business Week . And there has been a similar upwelling of interest in other ideas about dealing with uncertainty such as ‘‘fat tails’’ and ‘‘Black Swans.’’ These two concepts refer to events that are falsely deemed extremely unlikely, but whose impact is potentially enormous. This renewed interest in alternative futures seems apt after financial market events occurred that one leading banking house reportedly deemed to be 25 standard deviations away from the norm. But corporate leaders will find that scenario planning requires a different mindset from the numerical approaches that were touted by the ‘‘quant jocks’’ who were burned so very badly in the financial meltdown. Those numerical methods of measuring uncertainty generally deal in chains of causality and in probability, and are based to one extent or another on historical data. Scenario planning, in contrast, when done correctly, disregards probability entirely; nor is it based on historical data. Nor does scenario planning have anything to do with prediction. Scenario planning is about anticipation of plausible future events that might happen, and which would have significant effects upon an organization. In a typical scenario methodology, two, three or four critical external variables (‘‘dimensions’’) are identified and mapped into a matrix of different possible outcomes, or ‘‘scenario worlds.’’ Since sixteen or even eight different scenarios are usually too many to examine in depth, a smaller subset of the most intriguing – not the ‘‘most likely’’ – scenarios are chosen for in-depth analysis. Once the scenario set is selected, the logic and details of each individual ‘‘future world’’ are rigorously imagined, and, ultimately, strategies are developed that are optimized for each of the separate scenarios. The strategies that work across all of the scenarios are those that the organization ought to consider; other strategies that may be absolutely necessary in one or more worlds, but poison in others, are set aside as contingent strategies, to be pursued only as events demand.
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