Even Nostradamus might hesitate to make predictions about the future in today's dramatically disrupted world.
Climate, geopolitics, technology, markets, demographics - everything is in flux. What's more, their constantly shifting dynamics are changing the way we live and work at a dizzying pace and on an unprecedented scale. Determining an effective investment strategy in current circumstances is enormously challenging.
Enter scenario planning - a strategic methodology that's tailor-made for times like these.
Scenario planning is not a forecasting tool. It focuses on the plausible, not the probable. And it certainly doesn't claim to future-proof your investments. But because it deals with identifying options, not answers, its iterative processes can significantly strengthen your decision-making capabilities and help you prepare today for many possible versions of tomorrow.
Scenario planning is not a new idea. Most experts attribute its introduction to the legendary futurist Herman Kahn, who developed a technique to describe the future through stories (which Kahn called "scenarios") while he was working as a military analyst at the RAND Corporation, back in the 1950s.
Others credit French academics, who were working at the same time as Kahn but in Europe, and on scenarios of the future that could be used as a guide when formulating public policy.
By the 1970s, in any event, scenario planning was being applied in a strategic context by several big companies, notably Royal Dutch Shell. By encouraging executives to consider any scenario that could not be rendered implausible through logical reasoning, the method helped to break the habit, ingrained in most corporate planning, of assuming that the future would look much like the present.
Since then, several different approaches to scenario planning have evolved as organisations, businesses, and individuals have sought to imagine how they might best react in the here and now to futures that may (or may not) unfold.
One of the best-known of these approaches was developed at Oxford University's Said Business School in the UK. The Oxford approach uses the term TUNA to describe times of Turbulence, Uncertainty, Novelty, and Ambiguity, and it's designed to help people navigate in such times by questioning and rethinking their assumptions and perceptions.
Because scenarios are unthreatening yet plausible stories, they create a safe space in which to acknowledge uncertainty. They also encourage you to open your mind to previously inconceivable or imperceptible developments. Such as if energy prices were to really sky-rocket. Or if a technology emerged that was even more game-changing than AI, and upended our assumptions about a huge range of industries.
As it is context-specific, the approach serves just one user and one purpose at a time. By playing with one or more variables and pushing yourself to imagine extremes - like moonquakes rather than just earthquakes - you can expose and test your assumptions, and thus develop more intelligent strategies.
In the realm of scenario planning, it is essential to start with clear distinctions between several core concepts:
Understanding these distinctions helps us map out how to position an effective strategy for a TUNA world.
Building scenarios involves creating frameworks, developing system maps, and contrasting and comparing different future possibilities. Using scenarios entails engaging with relevant stakeholders, developing monitoring systems, and continually adapting strategies based on emerging information and early warnings.
Scenario planning helps us make more informed and realistic decisions.
Considering systemic risk, for example, you might imagine a scenario in which an ideal employer - inclusive, diverse, sustainable, and socially responsible - suddenly changes its culture. Or imagine a scenario in which a long-standing threat to the security of an investment becomes less threatening or is even neutralized, simply because people who were once sworn enemies start talking to each other.
Armed with a fuller and deeper understanding of potential future contexts and the options available to you, you can begin to make more informed and realistic decisions.
Scenarios are not predictions, forecasts, or mere preferences. They are structured narratives that can help burst the bubbles in which we all tend to live. Tunnel vision, group think, overconfidence - all are challenged.
These narratives are purposeful, plausible, and tailored to be relevant and useful for specific needs and different futures. Through iterative cycles of reframing and re-perceiving, scenario planning promotes a dynamic inquiry into our strategic environment, encouraging us to craft, research, and refine our strategic outlook.
By distinguishing between what is true and what is useful, and by embracing an open-minded approach to strategy formulation, we can better manage ambiguity and mobilize action. Which also means that scenario planning is an indispensable tool for any investor.
LGT’s experts analyze global economic and market trends on an ongoing basis. Our research publications on international financial markets, sectors and companies help you make informed investment decisions.
