Scenario Analysis

What It Is And How To Do It

14 min readMay 26, 2022

Scenario Analysis is an important tool for strategists and visionary leaders. It’s a valuable way to think about how the world is changing and what that means for you and your business.

I recorded a video walking through this content, which for many might be the easiest way to learn:

The (Almost) Real World Example: Altimeter Software

When teaching tools like scenario planning, I like to use a somewhat real world example. So, let me set the context for you. I initially developed this example late in 2020 at a time when society had been completely turned upside down by the COVID-19 pandemic and social justice unrest initiated by the murder of George Floyd, and we hoped that 2021 would be better. Here we are in the middle of 2022 and we are still facing these and new issues (e.g. Ukraine, inflation/possible recession), but rather than updating the example, I think that time of turmoil and extreme uncertainty is a great example of when to use a tool like scenario planning .

For our example, I’m going to be using a company I helped students launch out of their university almost a decade ago. The company actually shut down in 2019, so I’m safe to use it as an example without exposing any company secrets.

Altimeter Software helped organizations engage their people in events that enriched their lives. Almost all of their customers were small universities focused on student engagement. Students earned points for attending university-approved events. The product was a SaaS solution with a mobile app.

The students basically got credit for being in the right place at the right time. Administrators would use the web interface to set goals, define and manage events, to track student progress toward their goals, and to perform data analysis to identify at-risk student sub-populations. The students would use the mobile app to find approved events, to check in to events via bluetooth beacon or GPS location, and to track their progress toward their goals.

The main thing you need to remember for this example to make sense is that the primary customer base was small universities and the solution was all about live, in-person events.

For this example, we’ll act as if we are the Altimeter leadership team doing this scenario analysis.

A High Level Overview of Scenario Analysis

The goal in scenario analysis is to identify a small number of future scenarios around which we can build plans. In reality, it’s highly unlikely that any of the scenarios we pick will actually turn out exactly as we envision it, but if we pick a good representation of different scenarios, then when reality falls somewhere in between, we’ve thought through and planned for the different factors so that we are ready to respond and excel.

Specifically, we’re going to develop four different scenarios, and we’re going to get those four by picking two possible outcomes for each of two different key unknowns or uncertainties. I like to go with an optimistic view and a pessimistic view on each of those two dimensions so that we can have good coverage of possible outcomes.

The very first thing we need to do is choose the unknowns that will define the scenarios. Scenario Analysis can work in lots of different situations. You may be focused very operationally on things like supply and demand and you want to create scenarios to make sure that your operational planning is robust. Or it may be very financially focused and you want to build scenarios around costs and revenues so that you can think through cash flow plans for different potential situations. Those are great applications of scenario analysis.

But, acting like a CEO, I want to take a very broad view of the environment within which Altimeter operates and develop scenarios that really will help define the vision for the business and the overarching business strategy.

In working on business strategy, I think it’s helpful to think about the macro environment and to also think more narrowly about our competitive environment. So I like to use Six Segment Analysis and Porter’s Five Forces.

Six Segment Analysis

Let’s start with the Six Segments. There are different frameworks that we could use for looking at the Macro environment. You may have heard of PEST or PESTEL analysis — which stands for Political, Economic, Socio-Cultural, Technological, Environment, and Legal. I like a slightly different list of six segments: demographics, sociocultural, political and legal, economic, technological, and global. You can use whatever framework you’re most comfortable with.

I specifically use this Six Segment Matrix to think about each of the segments through a lens of the current situation, known trends and disruptions, uncertainties (this is our main focus for identifying scenarios) and opportunities and threats emerging from this segment.

When I’ve led strategic planning for big companies, we typically take a couple of months on the situation assessment. Someone on my team would be assigned to each of these segments. They’d go and do a lot of research, finding as much data as possible to populate the matrix and identify key trends.

Instead of spending weeks researching the environment, I spent about a day preparing this example, and I’m going to summarize it for you in a few minutes. So, I apologize that this lacks the rigor and hard data that you really want to use in strategic planning, but I think it will effectively show you the process.

I’m going to go column by column here so that you can see how the story builds. I’m not going to spend time on every little detail as we go through this, just enough to give you a sense for how the process flows and the kind of information we are looking for.

We will start with the current state column. We’re going to use this to describe how things were at the beginning of 2020. In the next column we will cover the major disruptions that have happened in 2020. Since Altimeter primarily serves universities, and especially small ones, that is our focus for much of this analysis.

There are many things we could look at in terms of demographics, but I chose to focus on university enrollment. From the most recent data, there are almost 20 million university students in the U.S. with over 3 million of those being online only.
Moving on to sociocultural, over the past decade or so, technology has dramatically changed how people interact with each other and how they consume content.
We could say a lot about the political landscape, but from a current state entering 2020, there’s not much relevant there.
On the economic front, at the beginning of the year, the economy was very strong.
We already briefly touched on technology when looking at sociocultural issues, but notably, technology is also enabling things like online universities.
And finally from a global perspective, of the nearly 20 million students in the U.S., over 1 million are international students with most of them coming from China and India. There obviously was a fair amount of tension between the U.S. and China even before COVID-19.

I went through that really quickly. Optimally, I’d have more hard data behind these boxes. My teams would often produce a 100 page deck covering the situation and complications surrounding these environmental segments, the competitive environment, the customer environment, etc.

Moving on to the next column, what do we know has been changing? What are the trends and disruptions?

Most notably, even before COVID, there’s been a long term trend of increasing online learning. COVID made that basically 100% at least for a season.
Covid lockdowns have also had a major impact on culture, but social justice unrest is also very important to note, and at the end of 2020 there was an overall sense of heightened accountability.
COVID policy had been a major political and legal issue and for Altimeter, the restrictions on public gathering have had a significant impact.
Obviously, COVID shutdowns also had a major impact on the economy, basically a complete reversal from the beginning of the year.
As I mentioned before, those shutdowns also drove all students online.
COVID travel restrictions dramatically impacted international students.

I’ve moved through the first two columns as quickly as I could because it’s the third column that we really want to focus on for scenario planning. If you were doing this for your company, obviously you’d have different content in these first 12 boxes, but hopefully you get an idea for what we are looking for.

Moving to the uncertainties column, what don’t we know?

I really couldn’t come up with anything significant in demographics, but in the sociocultural space, the real question for Altimeter was when will the kind of events that the service is built around start happening again?
The same question, framed differently belongs in the political and legal segment.
When would the economy start to recover and most importantly, would smaller universities be able to survive the downturn?
When would students fully return to the classroom, or would they ever?
And on the global front, would schools lose enough revenue from international students to cause a major problem?

Hopefully you are starting to get a sense for this process. Altimeter Software is all about events and the company primarily serves smaller universities. The company should be very concerned about the uncertainties around these two critical factors and scenario planning gives us a systematic way to consider the implications for the business whichever way it goes and allows the company to develop plans to be prepared.

Opportunities and Threats from Six Segments

I’ll go ahead and finish out the table with the last two columns. The threats column gives us a sense for the scenarios we need to consider.

What happens to on-campus events and
What happens to our customers and our target market?

The opportunities column actually gives us some ideas that we might build into our plans for different scenarios.

Could we maybe tap into the social justice movement and give people a tangible way to celebrate and get credit for being in the right place at the right time as part of that movement?
Could we pivot to focus on student engagement through virtual events instead of in-person events?
Could we target larger universities or maybe organizations (like fraternities and sororities) at those larger universities?

Porter’s Five Forces Model

For Porter’s Five Forces Model, the exercise is very similar, but now focused on our industry. In this case instead of focusing on the narrow industry segment of software for student engagement, I focused on the higher education industry. The health of Altimeter is very tightly tied to the health of smaller universities.

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Michael Porter’s Five Forces Model was initially designed to evaluate the attractiveness of industries or markets and that’s based on the relative power of different forces within the industry.

How great is the threat of new entrants?
How much power do suppliers wield over the industry?
How much power do customers wield over the industry?
How threatening are substitute approaches and solutions?
How great is the rivalry between industry players?

As with the Six Segment Analysis, we want to look at what is changing in each of these dimensions, what uncertainties there are, and what opportunities and threats do we need to pay attention to.

To keep this brief, I’m sharing the complete matrix with you at once. I’d focus your attention on the uncertainties column.

There’s a lot of pressure on traditional universities, and smaller ones are especially vulnerable with their smaller endowments and less room for error.
There’s the potential that online-only new entrants, and non-degree programs like full stack bootcamps and massive open online classes may start to challenge the need for traditional degrees.
Enrollment has already been dropping and it didn’t seem like COVID was going to help.
We were seeing accelerated retirements amongst K-12 teachers out of health concerns, we thought we might see the same among professors.
All of that seemed likely to lead to more universities and colleges closing or merging.

Again, I’ve gone through this really fast. It’s not unusual to spend weeks or months doing the research to fill this out with confidence.

Scenario Analysis Step By Step

Now we are ready for the main Scenario Analysis process. There are 6 steps:

Look at all the uncertainties we’ve identified and prioritize the ones that have the greatest impact on our strategic question.
For the top two uncertainties, select two possible outcomes. I like this to be an optimistic view and a pessimistic view.
Estimate the likelihood of each outcome on each uncertainty.
Name the resulting 4 scenarios. Give it a short, catchy name, that has meaning.
Create a narrative around each scenario. Who wins? Who loses? What will it take to survive and thrive? What is the impact on our business?
Develop plans for each scenario.

We’ll walk through each of these steps.

Step 1: Uncertainties

First, we take the uncertainties from the Six Segments and Five Forces.

When can/will people gather for large events?
Will live events ever return to prominence?
When will students fully return to the classroom?
Will online learning replace campus-based higher ed?
Will alternative online programs be accepted by employers?
How quickly will the economy recover?
Can smaller colleges & universities survive?

I’ve done a little consolidation and clean up to simplify the list. Looking at these uncertainties, the two that are most impactful on our plans are #2 what happens with live in-person events, and #7 can small colleges and universities survive.

Step 2: Possible Outcomes for Each Uncertainty

For each uncertainty, we consider the range of possible different outcomes.

As I said, I like to take an optimistic case and a pessimistic case as the two outcomes used to build the scenarios, so for in-person events we’ll take the end points that either they return to the old normal, or they basically get completely replaced by virtual events. Similarly, on the fate of small colleges and universities, we’ll take the end points of they basically go away or they actually grow — maybe students and their parents are scared of being on the big campuses (many of which have had large COVID outbreaks in the Fall of 2020) and they like the idea of smaller classes instead of huge auditoriums full of strangers.

Step 3: Likelihood of Outcomes

Next we need to figure out how likely each of these outcomes is. In reality, for any uncertainty there are an almost infinite number of possible outcomes, with the likelihood of any specific outcome being really really low (near zero), but we want to split 100% between the two outcomes we’ve chosen.

You might disagree with my likelihoods here, but in 2020 I thought it was 60% likely that in-person events would be down dramatically and only 40% likely that they would bounce back. On the other uncertainty, I thought it was 70% likely that many small schools would fail and only 30% likely that they would recover well.

Mathematically we can calculate the likelihood of each of the four scenarios, multiplying the likelihoods of the outcomes that create each scenario, so the scenario where small schools have healthy growth, but events are almost entirely virtual is 30% of 60%, or 18% likely.

Step 4: Name the Scenarios

The next step is to name each of these scenarios. You want to have a little fun with this. The names should be short and memorable because you’re likely to reference them a lot as you continue with your planning. They should also have pretty clear linkage to the underlying drivers so that you can remember which is which.

I’ll start in the top right with the best possible outcome. For the scenario that our target market does well, and in-person events do well, then basically our traditional business bounces right back. So, I’ve called this one “revival”.
Moving to the left, if our target customers are doing well, but they’ve replaced in-person events with virtual ones, then we still have the opportunity to help them with student engagement, but not in “real” events, so I picked the name “unreal engagement”.
Moving down from there, we have the worst possible outcome. Our customers and target customers go away and the events our service supports go away. Campuses will become “ghost towns”, thus the name.
And finally to the bottom right, small schools go away, but in-person events return, then there’s a “party” (or a bunch of them) on the “big campuses”.

This one graphic really pulls together everything we’ve done to this point to identify the scenarios.

Step 5: Create Scenario Narratives

The fifth step in the process is to develop narratives for each scenario. These really are stories — pictures of the future told from a future eyewitness perspective, but effectively each one tells who the winners and losers are, which customers we would focus on, and what capabilities would be critical for success.

There’s a lot in this table. Let’s break it down by looking at the top half and the bottom half separately.

We’ll start with winners and losers. I didn’t want to really bog this article down by talking about Altimeter’s competitors and the substitutes that they went up against, so this chart is actually not a very fair representation especially of the winners and losers, but hopefully this approach gives you the general idea of how to work through the process.

Altimeter should definitely do well in the best case scenario where their target customers are doing well and the events their service is tied to come roaring back.
Altimeter should also be able to do well in the scenario where events are important but only at big schools. There’s a lot of execution risk because the company would need to pivot to focus on a new market, but the potential is there.
In the virtual event world, that really requires a different kind of solution than Altimeter has built, so a new entrant has as good of a chance as anyone.
And if the schools themselves go away, then really there are no winners.

The bottom two rows really start to build the foundation of possible plans for the different scenarios.

Which customers to target is pretty straightforward for three of the four.
For the Ghost Town scenario, if we want to survive, we probably need to abandon the academic market. For example, maybe pursue the opportunity we identified before to build personal social capital by being there for the movements that you are passionate about, whether that be Black Lives Matter, or Denver Broncos games and live events.
The capabilities required under each scenario are perhaps the most important outcome of this entire process and will feed into the plans.

Step 6: Develop Plans for Each Scenario

The final step is to develop the strategy and plan for each of these scenarios. You can’t execute all four plans, but you take into account the likelihoods to determine what your primary plan is and what contingencies you need to build in to be prepared for a different outcome.

Of course, part of your plan is likely to do whatever you can to influence the outcomes to a favorable scenario for you. That might involve trying to influence the thinking of clients, possibly regulatory work, or technology partnerships, whatever can help guide the future to what favors your company.

Although this was a quick flyover, hopefully it gives you a good idea of how to do scenario analysis. At the very least, you now know what it looks like and when it makes sense to use it. If you’ve got a good sense for how to do it — great! Jump in and do it.

If you ever need a hand, feel free to reach out for help.