Scenario planning is the creation of different actions for a business to implement based on potential events and situations known as scenarios. It is a tool originally used by the military. The main value of scenario planning is that it allows organizations to make and learn from mistakes without actually failing in real life.
Forecasting, on the other hand, is the use of historic data to determine the direction of future trends. Organizations use forecasting to decide how to allocate their budgets for an upcoming time period. Generally, this is based on demand for the goods and services offered compared to the cost of producing them.
Organizations use forecasting to decide if events affecting a company will increase or decrease the price of shares in that organization. Forecasting also provides an important benchmark for firms which have a long-term perspective of operations.
The marketplace is dynamic and volatile. Forecasts, no matter how sophisticated, are largely simplified representations of reality, that will in most probability, be incorrect in many respects.
More and more businesses use the scenario planning to devise its organization’s “strategic direction.” One of the most popular reasons to use the scenario planning is that traditional forecasting does not keep up with the constant changing pace today’s businesses moves.