According to Makridakis, Wheelwright, and Hyndman (2008), forecasting and scenario planning exhibited deploying alternative futures models, encompassing potentials, and challenges simultaneously. Generally, the history of forecasting faced discouraging results, yet does not undermine the essential process conducted for business planning and innovation. Traditional methods involve time series, trend extrapolation, and regression analysis, relying on past data to provide future estimation (Tidd & Bessant, 2020). In comparison, scenario planning focuses on making assumptions through a specific set of uncertainties to predict the business future. The approach anticipates future changes through strategic planning considering various driving forces in economic, societal, environmental, and even political (Chermack et al., 2001).
Initially, forecasting relies on historical data to learn from and build a future prediction model. The learning process includes trial and error due to the market change invoking a high level of complexities and challenges. The acquisition of knowledge and accurate prediction depicts the multivariate dependent variables involving the internal and external environment (Tidd & Bessant, 2020). Several techniques can be applied with various tools and algorithms that require skilled resources to choose the appropriate solution. The selection relies on several factors covering the data’s availability and accuracy with the forecast’s associated value (Chambers et al., 1971). Recently, several algorithms are employed for comparison and evaluation to select the optimized model. However, the challenges could be due to the unpredictability of future incidents that were not anticipated while building the model or have never happened before. Additionally, the historical data should follow particular assumptions such as linearity and trends to deliver accurate results.
Alternatively, scenario planning motivates strategic thinking to overcome limitations by creating multiple predictions (Amer et al., 2013). The method is used mainly by managers to promote decision-making. The reason is that management maintains a better understanding of the business environment that assists in developing a future view. The main difference from forecasting is that scenario planning extends the prediction to explore alternative scenarios, possible outcomes, and multiple future situations (Godet, 2000), while forecasting techniques identify the most likelihood and estimation. Linneman and Klein (1983) observed wide adoption of scenario planning among large-sized companies with strategic planning rather than tactical decisions. Linneman and Klein added that almost 50% of all US Fortune 1000 adopts the techniques actively in the early 80s.
In summary, the scenario does not perform prediction but rather stimulate possible and multiple future situations, while forecasting provides quantitative prediction relying on historical data. The latter demands skilled resources and performed through statistician and analyst compared to the managers involved in the scenario planning. Lastly, forecasting may fail to deliver long predictions and is more precise in the tactical decision, while the planning focuses on strategic decision-making.
Amer, M., Daim, T. U., & Jetter, A. (2013). A review of scenario planning. Futures, 46, 23-40.
Chambers, J. C., Mullick, S. K., & Smith, D. D. (1971). How to choose the right forecasting technique. Harvard University, Graduate School of Business Administration.
Chermack, T. J., Lynham, S. A., & Ruona, W. E. (2001). A review of scenario planning literature. Futures Research Quarterly, 17(2), 7-32.
Godet, M. (2000). The art of scenarios and strategic planning: tools and pitfalls. Technological forecasting and social change, 65(1), 3-22.
Linneman, R. E., & Klein, H. E. (1983). The use of multiple scenarios by US industrial companies: a comparison study, 1977–1981. Long range planning, 16(6), 94-101.
Makridakis, S., Wheelwright, S. C., & Hyndman, R. J. (2008). Forecasting methods and applications.New York: John Wiley & sons.
Tidd, J., & Bessant, J. R. (2020). Managing innovation: integrating technological, market, and organizational change. Hoboken: Wiley.