Foresight and scenario studies can seem daunting, complex and so their value unclear. This is particularly the case for SMEs with resource constraints, a short-term planning window, and a narrower market focus. So, in this article, we explain what role such studies play, when they are valuable, how they differ from business planning or forecasting, what is involved in doing them, what they produce, and what the benefits are.
Background
So-called "foresight studies" or "scenario planning" involve researching and analysing the future market environment, and the resulting implications for a business. As such, they offer a business the opportunity to mitigate important risks and be more ready for new opportunities to grow.
Modern approaches to foresight work are attributed to work at the RAND Corporation in the 1950s, which prepared the US for different military scenarios during the Cold War. Foresight approaches have since been adopted by supranational organisations like the UN or World Bank, national governments or big corporations, to tackle complex and uncertain futures. For instance, the UK government published scenarios for achieving net zero in April, which explored the different challenges ahead should the UK transpire to express low vs. high economic growth and weak vs. strong levels of international collaboration.
Of course, business owners routinely worry about different eventualities and the implications when a new disruptive factor emerges. As time has gone on, more medium-sized businesses, especially, have started to use foresight and scenario planning too, to formalise and improve the effectiveness of such thinking, while grounding it in data and evidence. While the scale of the issues may be different to the UN's, the same type of challenge - i.e. uncertainty in the face of complexity - can be dealt with using the same fundamental approaches.
Yet, the rate of uptake of foresight disciplines in SMEs is arguably not as high as it should be, given the higher risks of business failure that SMEs face compared to corporations or public sector entities. Scenario planning has not gained the same traction as financial or marketing planning disciplines for instance, or formal service and product management best practices. This is despite historic evidence that a lack of scenario planning has correlated with business failure because managers can overly focus on individual events and overlook forces for change (Burt, G. and van der Heijden, K., 2005).
Research has shown foresight studies face particular barriers in SMEs (Nyuur, 2015):
Resource constraints - Foresight studies are expensive when procured from consultancies or agencies. Meanwhile, SMEs run a tight ship, which means there is a lack of available people with the time to carry out the work internally.
Networking effectiveness - SMEs often get insight from networks and forums. They often provide sufficient intelligence for keeping up with industry developments.
Aptitudes and personalities - SMEs tend to employ more people with entrepreneurial flair and a sales mindset, but less who do complex, structured thinking about how markets and technologies are evolving. Because SMEs tend to work in narrow product-market segments, with customer feedback and competitor analysis being relatively routine, they simply don’t need ‘future thinkers’ who might be motivated to instigate such work.
Focus - SMEs tend to focus more on short-term survival than the longer term. If the company is still in business, then this focus can be continually assumed correct. If it goes out of business, then it's too late for a foresight study!
Foresight and scenario studies can seem, at the outset, complicated, and daunting, and the returns on the effort expended are therefore unclear. So, the rest of this article explains what they are, when they are needed, what makes them different from annual planning, what they entail, what they produce, and what the benefits are.
1. Why do they exist?
Foresight studies analyse the future, to prepare a business better to deal with it.
…. And basically, that’s the long and short of it.
We all see trends in the world around us, and we also hear about possible future technological developments or speculation about how geopolitics might change the global economy.
These are complicated issues and the implications are not always intuitive. Businesses need a project to surface and make sense of these factors; to evaluate what is important and what isn’t; to think about what it is going to do in response.
Not all trends are yet in the mainstream consciousness either.
Foresight studies need not be carried out in a business' entire market either but can cover a new or specific growing sub-market or technology.
2. When are they needed?
There tend to be several times when such a study is particularly valuable.
To support the annual strategy or a longer term (3-5 year) planning exercise
To support a customer growth programme
To explore a new market before deciding on entry
To evaluate the impact of an emerging technology or business model in the industry
To build an innovation idea pipeline
To provide external context to a risk management plan
To provide insight if considering an acquisition or key partnership to diversify.
3. What makes them different?
Foresight studies and scenario planning projects differ in purpose and scope compared to business forecasting.
Annual budget forecasting analysis generally assumes the market will have the same structure as today. The business will, meanwhile, fundamentally carry on doing similar things to today, but with high, medium and low revenue projections based on the favourability of conditions.
Foresight studies start by noting limitations to market and business forecasts. Our ability to plan for the future is curtailed by the interaction of complex forces. Therefore, to best prepare for the future, we have to imagine what the world (market, business and suppliers etc) could evolve into if different plausible eventualities (scenarios) emerge.
In creating scenarios for the future, foresight studies use lessons from history about how clusters of trends tend to prevail together. This allows us to bundle up trends into “scenarios” - descriptions of the future world that have been reached after several trends have evolved and interacted.
For instance, in a given market, high market growth is usually accompanied by factors like a high number of new entrants, giving way to a period of consolidation, partnerships and product differentiation. New entrants will invariably adopt the latest technology from Day 1. At some point, it is likely that large incumbent players will seek their slice of the pie, begging the question of the role they will play.
So, studies take trends observed today and extrapolate them, realising that different ones will become more or less important in different future scenarios. Resulting scenarios can be classified as probable, plausible or possible. Businesses can hope for the best, but prepare for the worst, taking action on the basis of likelihood and impact, or even their ability to shape a new market space themselves.
The process itself helps business decision-makers to get a broader and heightened awareness to be able to identify if and when their market and business start to take a different path, what signals to look for, and the effectiveness of different strategic responses.
3. What is entailed
The crux of the work in a foresight study is in identifying, prioritising and interpreting trends, dynamics and events. There are lots of trends, so it can seem daunting. However, it is a straightforward and structured process.
At X2Y, we use a broad range of tools, data and other research and can access other sources as needed, such as experts, influencers and low-cost research methods. We track several hundred trends and have access to perhaps 100 times that number. Ultimately, the job at hand is to surface trends and developments that might be important for a business, organise them and evaluate the implications. The trend landscape we explore is likely to be similar to the one below, but may vary based on the scope of the project. Trends will be further away or closer to impacting the business being investigated, so could be positioned on a radar.
The steps in a full end-to-end project are as below. Collaboration between the foresight researcher(s) and business experts can add particular value, as it brings different perspectives and combines external and company knowledge.
4. What they produce
The process itself should have raised considerations, and options, and has maybe already surfaced a few factors that the business feels they ought to have started to address.
Ultimately, a good end point of such a study is to create lists of trends and corresponding options that fall into the following categories:
Action: These trends or events require short-term (action). They are already having an effect or will do soon, and the business stands to lose out by not responding.
Plan: These trends or events are probably going to have an impact over the following 1-5 years. The business needs to start accommodating them in plans.
Explore: Trends or events have been identified that appear important but their implications are not clear. Alternatively, there are various ways that the business might respond to them. Further research or analysis is needed.
Track: Trends or events have been identified that could possibly become important, but is it not clear that any action is yet justified. These should be tracked to see if the situation changes sufficiently to justify moving them to Explore, Plan or Action.
Reject: Trends or events have been identified which can be rejected because they will have no material effect if the business carries on with its present course.
There will be further work needed beyond this point, particularly with “Explore” options, while the business will need to decide exactly how and when to take “Action”.
5. What the benefits are
The benefits are:
A clearer, fuller understanding of emerging and future opportunities and risks, which underpins many subsequent planning decisions, or informs a specific plan or action.
Tools and a repeatable process for managing both innovation ideas and risks in future
Support through a facilitated process to explore ways and means to respond to the trends that are identified.
Shared learning and understanding amongst an internal team.
The job for SMEs is not the same as for an entire net zero programme, or a global economy, though we might likely consider the influence of both of these. The timescales for consideration, for SMEs, would be more likely to be 3-5 year than the next 20-50. However, the foresight approaches are still highly applicable, to think through a) how customers, markets and technologies will change, b) how the business can best adapt to the new business models, competitors and consumer expectations that could result.
Within 5 years, we are fully expecting to see a host of new factors, ranging from changes in UK Government policy, a step change in net zero, and a fuller emergence of AI and automation that will effect most, if not all, SMEs.
About X2Y
At X2Y, we make foresight research more accessible, practical and affordable for SMEs, while also taking a collaborative approach to derive the ultimate conclusions.
The service described in this post was our “Map” service, involving a fuller audit of a business and its current and emerging environment.
For those wanting to take a first exploratory step into developing a foresight capability, our “Intro” service involves an internal review of the modus operandi with stakeholders in terms of managing future opportunities and risks, a workshop to share these perspectives, examine some relevant current trends, and provide an interactive introduction into some practical tools.
Please get in touch to talk further.
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