Scenarios Instead of Forecasts: Three Possible Futures for Your Business

Why a single forecast misleads

Most planning in small businesses rests on a single number for the future: five percent more revenue next year, costs up three percent. For twelve months, that is reasonable. For three to five years it becomes dangerous, because over that period funding rules, interest rates, energy prices, and customer behavior can change so much that an extrapolation has nothing to do with reality anymore.

This guide answers one question: How does a small business sketch three possible futures with little effort, and how do they turn into decisions rather than mere thought experiments? To answer it, we first distinguish forecast and scenario, then introduce Shell’s method as a mental model, examine what studies say about its benefits, and finally go through the steps using an example.

A forecast tells you where you will arrive. A scenario tells you what to watch for so that you notice when you arrive somewhere else.

Forecast or scenario: two different tools

A forecast is an estimate of what will happen with high probability, usually as one number. A scenario is an internally consistent description of a possible future, without claiming to be the most likely one. That is why you always sketch several. Fergnani (2022) contrasts the two approaches in a review: the forecast delivers a single point estimate and usually looks one to five years ahead. Foresight with scenarios delivers several complex pictures and often reaches five years and more into the future.

The two tools do not exclude each other. Revenue planning for next year, as described in the guide monthly revenue planning, needs a number. The question of whether a new hall, a second branch, or a new line of business pays off needs more than a number, because its success depends on developments nobody can predict.

The mental model: Shell’s scenario method

The method usually meant today when people speak of scenarios was developed in the 1960s and 1970s at the oil company Royal Dutch Shell (Fergnani 2022). Its best-known proponent, the planner Pierre Wack, described it in 1985 in two articles in the Harvard Business Review. By his own account, Shell’s management was prepared for the possibility of the 1973 oil crisis, if not for its timing. Whether the scenarios actually caused the company’s later success is disputed among researchers.

The core of the method is a distinction. Predetermined elements are developments that will occur with high certainty because they are already in motion, such as the age structure of your own customers or an adopted obligation with a fixed date. Critical uncertainties are developments that matter a great deal to the business but whose direction is open. Only for these do you sketch different futures. Everything predetermined belongs in every scenario.

An everyday analogy helps: if you plan a mountain hike, you know it will be colder at the top. That is predetermined and goes into every backpack. Whether it will rain, you do not know. So you take a jacket that does not get in the way in rain or sun, and decide in advance at which cloud cover you will turn back. Scenarios work the same way: they lead to measures that hold in all situations and to signals that tell you when a particular situation is arriving.

What studies say about the benefits of scenarios

Whether scenarios make a business more successful is hard to measure. Two studies give indications. In two exploratory studies, Phelps, Chan, and Kapsalis (2001) compared companies from the British water industry and from IT consulting. In both industries they found indications of better financial performance among companies that used scenarios. But they also describe a possible side effect: the companies may have focused more on financial returns at the expense of customer service.

Rohrbeck and Kum (2018) developed a model that measures a company’s preparedness for the future. They compared how much foresight a company needs with the maturity of its actual practice. Measurement took place in 2008 and was compared with performance in 2015. Well-prepared companies achieved 33 percent higher profitability and 200 percent higher market capitalization growth than average. Companies with deficits lagged by 37 to 108 percent.

Both findings should be read with caution. The samples consist of large companies, and an association does not prove a cause. Companies that practice foresight may also be better managed in other respects. For a business with twenty people, no guarantee of success follows. A more modest statement does: if you regularly think about several possible futures, you are better prepared for disruptions than someone who only extrapolates a number.

Two objections and how I weigh them

The first objection is: a small business has no time for this. It reacts quickly anyway, so it can do without scenarios. That is not wrong. Small businesses are more agile than corporations, and the analysis effectuation shows that experienced entrepreneurs often act with available means under uncertainty rather than predicting futures.

The second objection is: scenarios are thought experiments that lead nowhere. That also applies if no decision stands at the end. Fergnani (2022) therefore distinguishes between isolated, often outsourced exercises and foresight that is firmly connected to planning. Only the second changes what a company does.

I consider the first objection weaker than it sounds. Only someone who recognizes a signal as a signal in time can react quickly. That is exactly what scenarios do: they determine in advance what to watch for. I take the second objection seriously. The method below therefore does not end with three stories but with a list of robust measures and thresholds at which action is taken.

Three futures in five steps

For a small business, one afternoon with two to four people is enough. The example is a building services contractor with 18 employees and 2.4 million euros in revenue considering opening a second branch.

1. Set the question and time frame

   Formulate the decision at stake and the period, usually three to five years. In the example: will a second branch pay off by 2030?

2. Collect and sort drivers

   Collect everything that influences the answer and separate predetermined elements from critical uncertainties. Predetermined in the example is that many older heating systems will have to be replaced. Uncertain are funding policy and the availability of skilled workers.

3. Describe three futures

   Choose the two most important uncertainties and describe three consistent pictures: a continuation, a headwind situation, and an upheaval. Give each picture a name and half a page of text.

4. Estimate consequences

   Roughly calculate what each future means for revenue, costs, and the planned decision.

5. Set measures and signals

   Determine measures that make sense in all three futures, and signals with thresholds that indicate which future is arriving.

From scenarios to decisions

The example shows why the scenarios change the decision. With a single forecast matching the continuation, the business would have opened the branch. With three futures, it becomes visible that it holds in only one of them. What follows is not a rejection but three kinds of measures.

• Robust measures make sense in all futures. In the example: retain and train skilled workers, expand maintenance contracts, reduce dependence on subsidized orders.
• Options keep a path open without taking it yet. In the example: hold talks with a partner business in the target region instead of renting a hall right away.
• Signals with thresholds say when to change course. In the example: if the share of subsidized inquiries falls below a third for three months in a row, the “headwind” future is considered to have arrived.

How to read signals from inquiries, rejections, and prices is described in the guide reading market signals early. For evaluating the options, the matrix from the guide evaluating strategic options helps, and the signals belong in the risk register from risk management for small businesses.

Conclusion: what three futures achieve

To the guiding question: a small business sketches three possible futures with little effort by separating predetermined developments from critical uncertainties and describing different pictures only for the latter. That is the core of Shell’s method. The scenarios turn into decisions when the result is robust measures, open options, and signals with thresholds. The studies suggest a benefit but do not prove it for small businesses.

For this week, a beginning is enough: take the biggest decision coming up in the next two years and write down which two developments will determine its success that you cannot predict. How to decide on such questions anyway is described in the essay deciding under uncertainty.

The sober observation is this: scenarios do not make anyone a clairvoyant. They only ensure that the future surprises you less.