Standard Forecasting Pitfalls and How Scenario Planning Can Help

 How Does Scenario-type Planning Support Planning and Innovation for Change?

Whether we like it or not, change is inevitable. Change can be good; change can be bad. From a technological perspective, new emerging technologies have the potential to reshape our future. The Industrial Revolution, for example, brought about large-scale industrial technologies that had a substantial impact on the people of the time. Unfortunately, there were also negative impacts such as pollution and poor labor conditions. How can we approach change? We can approach change by being prepared. One of the best ways to prepare (for literally anything) is proper planning. There are two approaches as it relates to planning: scenario planning and traditional forecasting.

Scenario planning is a type of planning that can assist with identifying potential outcomes. These outcomes can then be weighed and prioritized to help predict future outcomes. Scenario planning is used in a wide variety of industries. One such use of scenario planning is in business. Businesses will use scenario planning to identify potential outcomes, estimated impacts, and evaluate responses to both positive and negative possibilities (Luther, 2022). Scenario planning helps take those “what if” questions to examine second and third order effects so that the organization can plan to accommodate for those changes.

Traditional forecasting is another tool that can be used to predict future changes. Simply put, traditional forecasting is concerned with predicting future outcomes. Unlike scenario planning, traditional forecasting methods are not as creative (Mortlock, n.d.). Mortlock (n.d.) also explains that traditional forecasting methods rely heavily on the assumption that the future looks like the current state (whatever that may be). The data used to provide traditional forecasting is typically in the form of historical quantitative inputs and methodology.

What Forces are Involved, and What Impacts Do They Make?

The advantages of scenario planning are that it is more creative and can provide several plausible predictions. It can also be used to explore risk and uncertainties when used for planning (Mortlock, n.d.). A few cons of scenario planning include the subjectivity of the process. Being subjective, it can be difficult to test for accuracy (Mortlock, n.d.).

The advantage of traditional forecasting methods includes the fact that it can be tested for accuracy. Forecasting predictions are based on objective truth. As discussed, data involved is typically in the form of historical data. As such, the results of forecasting can generally be replicated (Mortlock, n.d.). One of the biggest pitfalls is the lack of creativity. This lack of creativity provides a single, probable result without considering risk and uncertainty (Mortlock, n.d.).

The Success and Downfall of a Bookstore Giant

There have been countless businesses and entire industries that have been battered for the lack of appropriate scenario planning. Borders Bookstores is just one of the unlucky reminders that the lack of vision and proper scenario planning can be devastating. The once beloved bookstore can trace its roots back to 1971 when two brothers, Thomas and Louis Borders, opened their first bookstore in Ann Arbor, Michigan (Hooper & Rawls, 2014, p. 1). The company enjoyed over three decades of success. One of the most audacious expansion efforts occurred under the guidance of CEO Robert DiRomulado in 1988; by 1992 Border’s quadrupled in size and was valued at $190 million (Hooper & Rawls, 2014, p. 3).

In a time were ebooks and other electronic formats were either unavailable or in their infancy, Borders had a comparative advantage over their competitors, to include Barnes & Noble, because of the size of their superstores. Hooper and Rawls (2014) indicate that competitors could not afford to stock even a faction of the titles housed in Borders superstores (p. 5). Another advantage held by Borders included an innovative inventory management system that monitored sales trends and would replenish titles as they were sold (Hooper & Rawls, 2014, p. 1).

As competitors such as Barnes & Noble started to invest heavily in e-commerce and digital transformation in the book industry, Borders opted to dedicate massive real estate in their superstores to physical media for music. Additionally, the company decided to expand overseas. The overseas expansion proved to be unsuccessful. Mike Edwards, the CEO of Borders from 2010 to 2011, summed up the company’s critical mistakes as “opening too many stores an making them too big, expanding internationally, buying back stock and failing to get the Internet right” (Hooper & Rawls, 2014, p. 11). As ebooks became increasingly popular, Amazon, Barnes & Noble, and Sony already dominated the eBook market by 2010 (Hooper & Rawls, 2014, p. 11). Borders once again underestimated the digital transformation taking place and opted to not develop an e-reader like Barnes & Noble.  

One can sufficiently argue that sufficient scenario planning could have saved the once behemoth bookstore. The company relied on traditional forecasting methodologies that could not anticipate the digital transformation of the book industry. Once books started to become purchased and enjoyed via electronic means through e-readers, the massive superstores became obsolete. The ability to have large quantities of physical books on hand was once Borders greatest advantage. After the digital transformation, the physical stores started to become obsolete. Furthermore, the company decided to invest heavily into providing customers with music media. The company went as far as restructuring their superstores and dedicating large amounts of real estate to this section. Unfortunately, just as society experienced a digital transformation of the book industry, physical CDs were starting to phase out in favor of digital music. The model below shows how scenario planning could have potentially saved the company from bankruptcy.

Include an appropriate illustration or a model.

How will you use scenario planning for future innovation efforts?

            Scenario planning is a powerful tool. Unlike traditional forecasting methods, scenario planning allows organizations to consider “what if” scenarios that could arise. A “what if” scenario has been described earlier in this paper – the digital transformation of the book industry. Traditional forecasting methods would not be able to account for this marked shift in society. As such, traditional forecasting methods failed Borders. I will use scenario planning to the best of my ability moving forward. Although many scenario planning scenarios cannot be tested for accuracy, they can be useful to help predict new and emerging trends. A smarter choice is to incorporate both traditional forecasting methodologies and scenario planning into the overall strategy.

Does the scenario plan account for the social impact of change?

            Scenario planning can account for the social impact of a change. Scenario planning helps take those “what if” questions to examine second and third order effects so that the organization can plan to accommodate for those changes. This can include the social impact of a change to a socio-technical system. Scenario planning provides the ability to be creative when considering the future state of something to include and organization or emerging technology. It is the creative aspect of scenario planning that can truly help account for the social impact of a change. It is without saying that the scenario plan must consider the social impact as the action of scenario planning alone is not enough to account for the social impact of a change.

References

Hooper, W., & Rawls, M. (2014). Borders Group, Inc.’s final chapter: How a bookstore giant failed in the digital age. https://ir.law.utk.edu/utk_studlawbankruptcy/38/

Luther, D. (2022, August 25). Scenario planning: Strategy, steps and practical examples. https://www.netsuite.com/portal/resource/articles/financial-management/scenario-planning.shtml#:~:text=In%20the%20context%20of%20a,how%20your%20organization%20will%20respond.

Mortlock, L. (n.d.). Scenario planning vs. forecasting: 6 questions to ask to prepare for a post-pandemic future. https://www.leadershipnow.com/leadingblog/2021/05/scenario_planning_vs_forecasti.html