Scenario Planning: linking Finance & Strategy Perspectives.

SCENARIO PLANNING:
LINKING
FINANCE & STRATEGY
PERPECTIVES
EXPLORE HOW SCENARIO PLANNING
CAN BE LEVERAGED TO ENHANCE
FINANCIAL AND STRATEGIC PLANNING
Y V E S - B E R N A R D B R I C E M E T A L O
P A R I S B U S I N E S S C O L L E G E
F R A N C E , 2 0 1 5

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THEORETICAL FRAMEWORK
This memoir has been written in the context of my Bachelor of Business
Administration.
Please accept my sincere apologies if the referencing is not perfect. In such cases, I
did not wish to attribute to myself only the fruit of work from any researcher. Note
that there were no supervisor that helped or conducted me in my researches and
writings.
If any issues to be raised, please get in contact with me for modifications and update
to this body of work.
Advice to contact me: ybmetalo@gmail.com or LinkedIn Yves-Bernard METALO.
I have condensed many approaches to formulate a Strategy and Finance perspective in
same research. In fact, it is not possible to dissociate both, simply because: in
“business reality”, they both go hand-to-hand in order to make the company move
forward!
Within this memoir, researches sources are various: it ranges from consulting
companies white paper (expert and practitioners); researcher’s own memoir’s; and
classic book abstracts.
The ground foundations for the writing of it are:
“Econometric Analysis for Scenario Based Planning” by Deloitte Consulting;
“A Scenario-based Approach to Strategic Planning” by Prof. Dr. Wulf, Meissner,
Stubner; “Scenario Analysis: A Tool for Task Managers” Jonathan N. Maack (World
Bank);
“Fundamentals of Corporate Finance” Brealey, Meyers and Marcus;
“Introduction to scenario planning” Thinking Futures, Maree Conway
The depiction of these sources relays mainly on the understanding and transcription of
methodologies and processes. In fact, there is many ways scenario planning is used,
and each one is adaptable depending on the company conditions. Therefore, a
condensed view of the most common and pertinent elements across scenario planning
approaches is presented, in my view.
Also, in scenario analysis, there is no right or wrong. Therefore, when applicable, we
will take the case of Delphi, multinational automotive part supplier, to illustrate major
steps.

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THANK YOU MUM: YVETTE MBIAKOP METALO!

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SUMMARY
Theoretical framework............................................1
Page intentionally left blank ....................................3
thesis statement........................................................5
I. Scenario planning: what is it? ...............6
1) a diversity of definitions........................6
2) Strategic implications of scenario planning 7
2.1) where does it sits? ............................................7
2.2) the characteristics of effectiveness...................7
3) the finance nterlink................................8
3.1) scenario vs forecast..........................................8
3.2) The business environment ................................9
3.3) scenario planning as an input to strategy & finance10
II. scenario planning within finance: exploration of a two-fold process12
the scenario planning process.............................13
1) Definition of scope ...........................................13
2) Environmental scanning.................................15
2.1) Defining meaningful indicators......................15
2.2) Determining key drivers of change ................16
3) Scenario building...............................18
3.1) developing the scenarios ................................18
3.2) Build the econometric model..........................19
4) strategic and finanical implications .21
4.1) developing and considering options...............21
5) implement & monitor........................22
5.1) business unit level of implementation.............22
5.2) monitoring ......................................................23
III. Limitations of scenario planning.........25
1) the matter of subjectivitty....................25
2) corporate capabilities...........................25
3) Implementation....................................26
final thoughts .........................................................27

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THESIS STATEMENT
Today’s world is more uncertain than ever. Industries grow so fast that they are
ending up exploding as the sub-primes; countries evolve so much that they change the
economic landscape like China; and certain products enters the market and totally
disrupt it as the first iPhone did. Within that landscape of uncertainty, companies are
left-out wondering, walking by rules of thumbs, and eventually end-up living for
today… Only!
At a recent position, as a Business Strategy Analyst, I had the possibility to do some
research work on Risk Management. The intent was to come up with a best practice
guidelines for Corporate Risk Management. After extensive information gathering,
the practice of scenario analysis came into light as a risk assessment and mitigation
planning practice.
Later on, I have established that “Scenario” methods are used across various
disciplines, essentially: Risk Management, Strategy and Finance. For the purposes of
this Research Paper, we are going to concentrate on the two latest aspects of it.
The practice of scenario planning have been popularized by the need for companies to
plan their strategies and investments accordingly to an ever-evolving environment.
Considering that, strategic and financial planning are increasingly in the need for pro-
activity, flexibility and adaptability.
While several companies have employed those practices, for several reasons, it
remains an un-common practice within both private and public sectors.
Why should you read this paper? The main reason is in within the intent itself:
bringing the light on the uses and practices of scenario planning in order to strengthen
long-term financial planning.
Within this memoir, we will initially cover what scenario planning is; then a how can
it be unfolded within the financial long-term financial planning; and finally the
limitations of such practice.

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I. SCENARIO PLANNING: WHAT IS IT?
1) A DIVERSITY OF DEFINITIONS
That is the very first question to be asked. Many version of that definition have come
to the surface since the 1960’s.
Initially originating from World War II US Air Force, it was initially used to
“imagine what opponents might do and to prepare alternative strategies”.1
The scope then expanded to the overall corporate environment when Shell, in the
70’s, started to popularize those practices by employing it for corporate strategy
planning.
As a result, they eventually succeeded to anticipate, adapt and respond to 1973 and
1979 oil crisis.
We can retain 3 main definitions of scenario planning:
 “A planning method used to deal with uncertainties in the future
business environment”2
 “Identify some significant events, the main actors and their
motivations and it conveys how the world functions”3
 “Scenario is a tool for ordering one’s perceptions about alternative
future environments in which one’s decisions might be played out”4
In all cases, it will always ask “Are our proposed strategic actions ‘wise’ when
considered from a ‘future’ perspective?”5
There scenario can also be looked at diverse perspective from different disciplines.
Within finance, according to Brealey, Meyers and Marcus; scenario analysis helps
managers to look at testing project performances under different scenarios. It focuses
on a diverse but consistent combination of variables that constitute scenarios as a
whole. In most cases, it is used within the forecast process as well as project NPV and
risk evaluation.
In the Strategy world, the focus is more about the development of a plausible future
for which adjusted strategies will be developed. They are rich data-driven, stories
about tomorrow that enables organization to make better decisions in the now. It thus
provide an organized framework that helps to make sense of market signals.
Within the Corporate or IT Risk Management area, according to the ICASA
Organization, it emphasis on the contingency planning aspect.
1 The art of long view: planning for the future in an uncertain world, Peter Schwartz
2 Scenario planning: the link between future and strategy, Mats Lindgren & Hans Bandhold
3 Shell. Scenarios: An explorer’s guide
4 Scenario planning: the link between future and strategy, Mats Lindgren & Hans Bandhold
5 Inspired « Introduction to scenario planning » Thinking Futures, Maree Conway

7
In fact, it is about raising the right questions that will help managers to prepare for the
unexpected by allowing for better risk analysis, assessment and response.
All things considered, in order to have a better understanding of scenario planning,
there is a need to look how it fits within the environment of Strategy.
2) STRATEGIC IMPLICATIONS OF SCENARIO PLANNING
2.1) WHERE DOES IT SITS?
First of all, it is important to understand and locate where scenario planning sits does
as an approach to strategy.
In fact, within strategy; we distinguish three inter-dependent elements:
Strategic Thinking: an intuitive, synthetized and creative activity intended to generate
options;
Strategy Development: assessment of options to examine choices and make decisions
that will set a goal;
Strategic Planning: concerns the pragmatic steps to be taken and implementation of
the actions required to reach these goals.
At the end, scenario planning resides within Strategic Thinking. The reason being that
it is a thinking process that intend to consider plausible alternative futures; not to
predict the unpredictable.
2.2) THE CHARACTERISTICS OF EFFECTIVENESS
In general, scenario planning will deliver a whole new perspective about the most
important forces that influence the business environment.
Scenario planning can be used and adapted to many types of situations and
organizations.
Although, according to Johnson, Scholes and Whittington6
, there is some
organizational characteristics and/or strategic positions that will make the scenario
planning truly valuable.
1) Limited number of drivers influencing the success of strategy: not everything that
can be counted, counts;
2) High level of uncertainty about such influences: estimating what’s plausible is the
purpose;
3) Outcomes could be radically different: it is not a best/worse/realistic case type;
4) Organization have to make substantial commitments into the future that may be
highly inflexible and hard to reverse in adverse circumstances: the need to make
large and long-term capital investment such as oil/automotive companies.
6 Adapted from “Exploring Corporate Strategy” 8th edition.

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Obviously, companies into which scenario is planned to be undertaken might not have
all these characteristics; but the ones who does shall leverage the most on the benefits
of this practice.
3) THE FINANCE NTERLINK
3.1) SCENARIO VS FORECAST
Scenarios differs from simple pro-forma forecasts. In fact, forecasting usually uses
historic data in order to project future revenues and costs. While subject matter
expertise is involved, it only considers what is known to the organization from both a
trend and risk perspective.
Taking on this graphic from Thinking Futures Consulting, we can explain that idea.7
Forecasting is often a process intended to predict what might happen, but founded on
elements for which uncertainty is low.
This result in the high predictability of elements that are analyzed in order to perform
projections and sensitivity analysis (see layers of environment later on). Thus, the
perspective of the forecast are within a limited time frame because of these short-term
variables and assumptions.
Scenario planning on the other hand, rely more on a long-term approach that can
support financial planning for the long-run (5 years +). The indicators that are
analyzed during the scenario methodology solely focuses on what is less predictable
nor certain, but still are drivers of business environment.
That mixture of uncertainty and predictability is what makes that method relevant.
As well as it is senseless to produce scenarios for next week, it wouldn’t make any
sense to forecast the next decade using the traditional methods.
7 « Introduction to scenario planning » Thinking Futures, Maree Conway

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8
3.2) The business environment9
The challenge to capture the macro-economic events and translate them into
measurable potential business impacts. The aim will be to leverage on econometric
models in order to build long-term financial planning with sets of hypothesis.
Due to his long-term horizon, financial planning focuses on the big picture: too much
detail isn’t relevant, especially as many event can occur that might completely shift
the plan.
8 Adapted from GBN Consulting’s introduction to scenario planning
9 Adapted from « Exploring Corporate Strategy » 8th edition, & « Introduction to scenario
planning » GBN Consulting
Organization level comprises of assets,
product or services, costs etc. Most forecasts
will consider this level of environment,
explaining their short-term nature.
Industry environment is including
competition, customers and market
dynamics. In this space resides some more
mid-term elements that can be leveraged for
scenario planning purposes.
The contextual environment is what is
considered the most for scenario planning,
and the less in traditional forecasting. It
focuses on macro events that can range from
all elements of a PESTEL analysis.
Scenarios also considers past data, but emphasize
on issues that might emerge Also, it will provide a
modelling that represent multiple outcomes for each
of these uncertainties.
Most forecasting processes are based on facts that
happened in the past, without really considering
plausible future outcomes. The sensitivity analysis
will only allow for business impact analysis based on
+ or – estimations.

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3.3) SCENARIO PLANNING AS AN INPUT TO STRATEGY & FINANCE
Draw the line: scenarios are not strategies! The value lies in the process of exploration
and contingency planning elicited by the Foresight work.
Below, I have built an integration of the components of Foresight Process10
at
Swinburne University, and Financial Planning based on Brealey, Meyers and Marcus.
We will depict this “graphic/framework” from Foresight to Financials.11
The inputs are originating from the scanning of the strategic environment. By
encompassing elements that are within a near-future and long-term context, it helps to
understand “what is currently happening” as well as what might happen.
In the meantime, financial statements as inputs to financial planning, financial
planners need to worry about unlikely events. And they also have to prepare (if they
don’t already use external specialists) macro-economic and industry forecast.
The Foresight segments:
Analysis comprises the trends issues and themes that are being identified which are
related to the company (more on the levels of business environments later on);
Interpretation will allow the focus to be zoomed on “deep drivers of change” that
are the most directly linked to the business environment;
Prospection itself will then be the process of developing the scenarios using a
framework.
10 Can be defined as « an approach of thinking of alternative plausible futures”, Maree Conway
11 Quotations based on both « Introduction to Scenario Planning » and « Fundamentals of
Corporate Finance.

11
Planning model segment: calculate the implications of the manager’s forecasts for
profits, new investment, and financing.
Key value drivers will be determined through the foresight work of scanning the
contextual environment;
Hypothesis are drawn-out in forms equations specifying the key relationships
between events implications on business performance and financial results;
Estimates will be made to project financial results under each scenarios that have
been built.
Contingency planning will be developed based on scenario’s new found real options.
Therefore, it is a clear need of financial statements in order to provide practical
translation of macro-economic events and scenarios impact on the P&L;
The outputs is an expanded perception of the Strategic options of the company (i.e
new markets, products or contingency strategies could be explored).
The financial managers will need to evaluate whether there are opportunities for the
company to exploit its existing strengths by moving into a wholly new area”. Strategy
development phase will assess these new options found during the foresight work.
From there, financial managers have to consider these options and justify them as
potentially profitable growth options.
Financial planning must also reflect the strategic plans made by senior
management.12
Forcing Consistency will be necessary at the strategic planning phase to provide the
necessary steps needed to reach these new goals.
Financial planning will therefore play a go/no go role in terms of evaluating the NPV
of these goals based on the financial requirements of the proposed strategy.
The projected financial statements shall be supported with financial ratios that will
evaluate the health of the company under these various scenarios.
This demonstration shows that complementing Scenario and Financial planning
provides the link between strategy and operations by intervening at all the main steps
of thinking, developing and planning the strategy.
12 “Fundamentals of Corporate Finance”, Chapter 18, Brealey, Meyers & Marcus, 7th editions

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II. SCENARIO PLANNING WITHIN FINANCE:
EXPLORATION OF A TWO-FOLD PROCESS
During this chapter, we are going through scenario planning as a two-fold process,
involving both the strategy and finance perspective. The late has been extracted and
adapted from several sources in order to form a logic that is common between most
scenario planning methods.
In “Scenario-based strategic planning”, Schwenker and Wulf they explain about the
conflict between the planning and the process school of strategy.
The outcome of the research is to prove that scenario planning can link the opposed
approaches by: offering a systematic process to scenario creation that is built on
specific management tools and thus easy to implement.13
Within this book, they succeeded to demonstrate that scenario-planning is not a side
activity to be done by strategist in their own world. It is rather an approach that can be
specifically framed, and can result in an enhanced strategic planning by involving
various type of stakeholders to get insights.
From a finance perspective, elements of “Econometric analysis for scenario-based
planning” by Deloitte is setting the ground for the “concrete”. They greatly illustrate
the overarching intent of this research paper, which is exploiting strategic methods in
order to enhance a finance practice.
The whole question is “Suppose your boss, the CFO or CSO (Chief Strategy Officer),
asked you how your company’s revenue would be impacted by a changing economic
climate […] how you would quantify the potential impact of specific events or
variables?”14
… A challenge!
13 « Scenario-based Strategic Planning : – Integrating planning and process perspective of
Strategy », Bukhard Schwenker, Torsten Wulf
14 « Econometric analysis for scenario-based planning », Deloitte, Jeanne Wood, Mike Dougherty

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THE SCENARIO PLANNING PROCESS
1) DEFINITION OF SCOPE
The first and most important step of this process is to determine the framework of this
scenario planning process.
According to GBN Consulting15
, scenario planning have these main applications:
Creating a more sustainable long-term strategy;
Taking strategic decisions under conditions of uncertainty;
Develop the ability for the organization to think flexibly and creatively;
Aligning key stakeholders in support of a shared vision.
This sets the tone for using the first tool fit-for-purpose of this process: the Framing
check-list.
15 Adapted from GBN Consulting’s « introduction to scenario planning »
Definition of Scope
Environmental
scanning
Scenario building
Strategic &
Financial
implications
Implement &
Monitor

14
Tool n°1: the Framing checklist.16
Goal of scenario project: this is the focal question or issue that the organization
intends to explore. It allows to maintain the focus to the project team as well as
determining what will be the final output-like of the planning process.
It can be such as: “How would the prolonged economic downturn or economic
uncertainty of the European region can affect our business and cause us to require
additional sources of financing?”17
In this case, the application of scenario planning
will mainly be about taking strategic decisions under uncertain conditions, be it
economic in this case.
Strategic level: at which level the organization wished to conduct the scenario
planning process? Remember the three layers of business environment: organizational
(short-term), industry (medium-term), macro-environment (long-term).
It is key to determine this, in the sense that it will shift all other components of the
framing check-list. If we continue on our first example with Delphi, it is concentrated
on a macro-economic level, by looking at current negative trends and their potential
implications on the business performances, be it the sales.
Participants: it has to be decided who is going to be running the workshops. They
shall represent all the areas as well as levels of the organization, in order to counter
the traditional top-down approach to strategy planning.
From a finance perspective, it shall include mainly controllers, treasurer, financial
analyst and economist (or external specialist on that field), and of course run by the
CFO when he is available. A broader audience shall be consulted (key customers and
suppliers, industry experts etc) in order to obtain the more valuable and objective
input possible. That alone will play a major role in the following steps.
Time horizon: how far shall the project plan for? This is more or less conditioned by
the focal question and strategic level: 1, 2, and 5, 10 years or longer. This will also
indicate the expected time sustainability of the strategic and investment choices that
shall be made. In the case of Delphi that we have cited earlier, it should be a 5-10 year
exercise due to the fact we are looking at economic growth (GD) in Europe.
16 Adapted from « Scenario-based Strategic Planning », Bukhard Schwenker, Torsten Wulf
17 Adapted from Delphi Corporate 10K SEC Annual report, 2012

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2) ENVIRONMENTAL SCANNING
Here we will take on a two phase approach of “Identifying basic trends” and then
“Identify key uncertainties” which have been brought P Schoemaker.18
2.1) DEFINING MEANINGFUL INDICATORS
After the scope has been defined and agreed, the first necessity is to understand the
current environment into which the organization is playing in. The purpose is to
capture and understand the forces or factors that plays a major role for the success or
failure of the current strategies.
Those can be captured by the extended participant’s lists, which includes outsiders, in
forms of a questionnaire or brainstorming.
Depending on the level of environment that has to be analyzed, could be used:
 PESTEL framework at the macro-environment level, for long-term
perspectives
 5 Forces or Diamond framework for industry level analysis of trends
 SWOT analysis or organizational level analysis
For our purpose, we will focus on the macro level. Below, an example of PESTEL19
applied to Delphi Corp, 2012.
At this point, the finance team should arm himself with the current financial
statements which will be used down the line to produce the pro-forma.
18 « Scenario planning : a tool for strategic thinking », P Schoemaker
19 « Competitive advantage : Techniques for analyzing Industries and Competitors

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The next step then, which can be run in conjunction with economists, financial
analysts and CFO, is to:
1) Determine the macro indicators that might impact the business.
On this case, it can be: currency values across EMEA and North America,
GDP growth in European countries; macroeconomic impacts of natural
disasters on aggregate economic variables like GDP 20
etc…
Those would be used later on in order to “translate” those events into financial
impacts;
Those are more or less known on a general basis for such finance teams.
However, the involvement of the external participants often brings new
perspectives as to what can be dangerous.
2) Collect historic data on multiple variables.
Those are ranging both from the historical economic data on these defined
indicators and the historical revenue data from the company. Those data are
recommended to be extracted from 30 data points (i.e: 30 quarters of company
revenue data) for statistical significance which enables relevant econometric
modelling.
In the Delphi case, it can be: USD, EUR, GBP, RUB, LIR currency values
evolution from the last 7 years, GDP growth for the main markets such as
France, UK and Spain; estimated impact on GDP of 2008 Sichuan earthquake
in China etc.
2.2) DETERMINING KEY DRIVERS OF CHANGE
Later on, we should end up with an extensive list of factors and indicators. Now, is
time to define what factors will be your “key drivers of change”. Those are the forces
that are most likely to affect the structure of an industry, sector or market21
. The
challenge here is to assess each factor to determine the most important trends and
critical uncertainties that can potentially impact the future of the company22
.
A meaningful tool has been developed for this purpose: the Impact/Uncertainty matrix
which have been developed in the 1970’s by K.v.d. Heijden.23
The method, which
have been greatly used in Royal Deutsch Shell for their scenario planning.
20 According to a study by the World Bank, most disaster estimations are measured against GDP
growths evaluations, « Macroeconomic Impacts of Natural Disasters”, Reinhard Mechler
21 From “Exploring Corporate Strategy”, 7th edition, Johnson, Scholes, Whittington
22 Adapted from “« Scenario-based Strategic Planning», Bukhard Schwenker, Torsten Wulf
23 « The Art of Strategic Conversation » K V D heidjen.

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Here, a presentation and application of it by the Chair of Strategic Management and
Organization in Lupzig school22
a German photovoltaic company and industry.
The matrix allows for classifying the factors based on a potential low/medium/high
impact and/or uncertainty to the business. This simplifying ranking approach will
determine if:
-factor is determined as a “secondary element”; meaning that it will remain important
issues to the strategy or potential scenario drivers to monitor;
-factor is a “trend/predetermined element”; in other words, uncertainty is low
therefore it is what we already know that might happen.
Those one can become critical planning issues when reaching certain levels of impact.
Referring to our Delphi case, it could be the sustained economic downturn and slow
recovery of the European downturn.
Due to all the lights on that subject in the financial news, there is awareness is huge,
and the impact on the car demand of the European market can greatly decrease for
Delphi’s customer, therefore causing a sales decline.
-factor is a “Critical uncertainty” when it can have a huge impact but there is an
opacity that cause high uncertainty of the event to happen in the time-frame of the
analysis.
If we consider that Delphi has some manufacturing plants in Asia Pacific to serve the
market, it is never away from a natural disaster that could cause spike to operating
costs, if not interrupting it. And even, if it is not him, it could be the increase of
commodity prices that increase overall COGS and reduce its bottom line.
The key for finance is to assess the impacts of those factors on business
performances. In fact, they shall work with business units in order to pre-estimate
how those events could impact the business performances based on current
investments and cost commitments.
These evaluations shall be made by financial analysts in conjunction with business
planning and the business units heads. Subject matter expertise will be required as
well as an understanding of macro trend forces.
The historical revenue and macro data that has been gathered previously shall enable
to pre-assess how past events have behaved jointly with past performance
performances.

18
By doing so, it would allow for building a high level relationship between the events
and the company performance24
. It will seed the ground for the econometric model
that has to be built all through the process (more on that on the following phase,
scenario building).
3) SCENARIO BUILDING
3.1) DEVELOPING THE SCENARIOS
As a result to the last step, we have successfully identified the uncertainties the
organization might be faced with. Now, it is time to prioritize: the Critical
Uncertainties (high impact and probability factors) will be considered for developing
the scenarios. Other trends or secondary elements might be briefly taken into
consideration.
With the factors defined, refined and categorized, the scenario building can start.
The main tool used for this purpose, is the Scenario Matrix25
which have also been
employed at Royal Dutch Shell.
It provides a visual representation of the scenarios that will be developed by the team.
But in the meantime, it provides guidelines as to how to build them, see below26
.
The first step is to select two key uncertainties from the previous step. They will form
the end-point of Critical uncertainty 1 and 2; those will be called the scenario
dimensions27
. Those will then extended to their own positive and negative outcomes
in order to sketch-out four distinct scenarios.
On the Delphi case, say we established that one critical uncertainty is: “customer’s
credit availability may be affected due to slow economic recovery in Europe”. On the
positive state we may have “European credit availability driving sales increase” at the
24 « Econometric analysis for scenario-based planning », Deloitte, Jeanne Wood, Mike Dougherty
26 « Introduction to scenario planning », Thinking Futures, Maree Conway

19
top of the arrow of Critical Uncertainty 1; and negative “European credit availability
creates losses in sales” at the other hand.
Those are defined as world as they would depict different future state of the
corporation and especially the environment it plays in. The context will be defined
and explained during the creation of the scenarios.
Shell scenario planning approach estimated that: two scenarios are often limited to
just polarizing; three scenarios that to bias them into the forecast logic of
best/worst/realistic case; making four scenarios a general principle.
Next, in order to have more accurate description of the scenarios, is often used
influence diagrams. Those will allow to elicit the influence of the trends we
previously identified on the critical uncertainties28
. This allows to understand the
inter-relationship of several events in order to build a more accurate picture of the
future state/world that will be depicted for each scenarios.
Below an example adapted from the German Photovoltaic Industry Scanning from the
earlier mentioned Leipzig research project.
Hence, it produces more detailed scenarios that emphasis on the critical uncertainties
while still considering other trends that may even change the direction of those.
3.2) BUILD THE ECONOMETRIC MODEL
Now armed with detailed scenarios, key indicators, factors, and historical macro and
revenue data, we shall be able to build an econometric model for financial planning
purposes.
In fact, with the potential impact performance estimated with business units as well as
meaningful macro indicators, we can look at two aspects:
-Key Risk Indicators29
arising from the analysis and scoping of business relevant
macro-events;
29 « KRI are metrics used by organizations to provide an early signal of increasing risk exposures
in various areas of the enterprise” from “Developping KRI to streghten ERM”, COSO ERM

20
-Key Performance Indicators that may be affected from an operational and financial
perspective if these events were to occur.
Provided with those valuable information, we shall:
 Build an econometric model based on historical data.
The intent here will be to define a relationship between the KRI’s and KPI’s
over time based on the collected historical data. A perfect correlation isn’t
possible, although, co-jointly with financial analysts, economists and Business
Unit’s SME will allow for estimating financial impact based on the high
impact and uncertainty KRI’s with the KPI’s affected over the time of the
historical data analysis.
Here, the key is the use of econometrics into financial modelling. Multiple
linear regression may be used in this case in order to establish correlations
accross multiple variables.
 Testing and validating the model.
This type of modelling can of course build a certain number of
inconsistencies.
Firstly, while using multiple regression, it can be difficult to interpret the
relationship between each variable and the resulting factor. In fact, if
Delphi’s KRI are customer credit availability, interest rates and GDP, it
becomes harder to establish the strongest correlation; hence explaining the
need for multiple regression.
Secondly however, the focus shall be on the business logic rather than the
statistics. For example, the probability might show that strongest KRI happens
to be the fall of government spending in military arming, including heavy duty
vehicles.
But if those represent, and it represent only 2% of Delphi’s business units, it
will not be logical to rank it as high from a business correlation perspective.
Adjustments have to be made while building the econometric model and establishing
the KRI/KPI relationship.
On historical revenue data:
Seasonality; in order to really compare “apples to apples” from one period with
another;
M&A; because comparing with as-is state won’t be relevant as company valuation
and attributes are now drastically different.
Business diversity; diversified companies such as Bouygues cannot use on
econometric model for all, because they have completely disparate business segment
from construction to telecommunications and network. The reason being that business
segments will react differently with macro-events, therefore making the KRI/KPI
different. In fact, it can even be totally different Key Drivers of Change.
On macro-event data:
Lags; some event might show an impact on the business but with a n+1 timing,
therefore expressing variances later on in the quarter or year;

21
Onetime events; for example a sudden favorable interest rate for 1month to
customer that boost car spending and increase Delphi shall not be confused with
steady KRI/KPI relationship.
4) STRATEGIC AND FINANICAL IMPLICATIONS
4.1) DEVELOPING AND CONSIDERING OPTIONS
At this point, all inputs are in readiness to be exploited for strategy development.
Remember as we stated in part one, scenario planning in an input and doesn’t
substitute the strategy.
In fact, we know have a knowledge, quantifiable understanding of what might happen
and how it could impact us.
At this point, it is about developing strategic options available for each of the new
built scenarios. The real options and decision three approach can be taken. It shall be
the option to expand, to abandon, to wait or to be flexible.
For example, Delphi might have the option to close a manufacturing plant in China in
the event that natural disaster happen, option to abandon. As a contingency, they
might decide to move that production to Taiwan, if it meets requirement, and still
serve the South Asian market.
The finance team is not twisting fingers in the meantime. Referring back still to 3.3)
scenario planning as an input to strategy: we have the key value drivers (macro
trends), the assumptions (KPI/KRI econometric model) and the estimations
(scenarios).
That combined allows to build and exploit the long-term financial planning model.
 Financial Impact Analysis of each scenario.
Evaluate the financial impact of the scenarios on the most relevant areas such
as sales, profit, costs etc.
To do so, sensitivity analysis might be used based on a list of assumptions that
have built based on the scenarios story lines. Though, as we are on the long-
term financial planning, it should remain a high level view on key financial
elements.
It shall prove how sensitive the high level financial statement is to those
macro-events. In the meantime, it shall allow for testing the econometric
model.
 Revenue projections under each scenario.
Firstly project the historical macroeconomic indicators, on the timeframe of
the analysis that have been set at the first step of scenario planning (framing
checklist).
Once those made, you may now use the initial financial statement in order to
make revenue projections using the econometric model that has been built.30
30 Inspired from « Econometric Analysis for Scenario Planning » Deloitte, B. Schwenker, T. Wulf

22
 Assess current vs future state of financial health.
In fact, financial ratios are still a good way to assess the companies’ high level
financial health. Here, it would be a practical look at what the company is
looking like today on the financial statement vs. how it looked like under our
initial forecast (without going through the scenario planning process) vs how it
is under each scenarios.
With those information in hand, the CFO shall now be in position to make informed
decisions based on multiple plausible futures and how they will impact the business.
On the other hand, the CSO or strategy team have indicators in hand and strategic
options.
Therefore, it comes to the end-point strategic planning: what will the company do
under each scenario? Failure to adjust to those new found parameters may result in
strategic drift for the organization31
.
Under this new paradigm, financial strategies have to be developed for each strategic
goals set under the four distinct scenarios. Those would be, as a result, pro-forma that
have been developed all through this process so far, based on an econometric
enhanced financial model.
5) IMPLEMENT & MONITOR
5.1) BUSINESS UNIT LEVEL OF IMPLEMENTATION
Like any strategy, the challenge always lays into the implementation of it. In this
approach, one of the main element to consider is actually the management of
stakeholders: key stakeholders needs to be involved from day one.
During the buildup of the econometric model, it is essential for financial managers
and analysts to obtain insights from SME’s with the assistance of Business Unit’s
managers.
For the simple reason they are the one executing the strategy on a day-to-day basis.
Thus in better position to evaluate the impact of a particular event on them: it needs to
be incorporated in the strategic and financial planning processes.
By consulting all key stakeholders in all business segments and at all level, it facilitate
an organic integration of the planning model into the processes32
.
That element is the key to scenario planning, therefore an educational process of the
benefits of the practice also have to be conducted gradually. If the approach is not
embraced by business unit heads it will be harder to make them commit to the
practice of it; and nearly impossible to enforce the implementation of the contingency
strategy.
31 « where strategies progressively fail to address the strategic position of the organiwation and
performance deteriorates », from « Exploring Corporate Strategy », Johson, Scholes, whitthington
32 Adapted from « Econometric Analysis for Scenario Planning » Deloitte, B. Schwenker, T. Wulf

23
5.2) MONITORING
Within this research paper, the scenario planning has been approached as a process, as
the intent is to reiterate it.
For this purpose, a three step approach has been proposed by the searchers of the
University of Lupzig: the scenario cockpit33
.
 Step one: defining indicators. In fact, by involving stakeholders, you would
be able to determine what are the indicators of the risks/even to happen. Those
signposts will be crucial in the sense that it will provide a guidance as to the
progress of the key risks indicators. This would also allow business unit to
warn for early signals.
Those can also be derived from the influence diagram that we have mentioned
in the scenario building part. Remember they are trend that affect the high
Impact/Uncertainty macro-indicators that we chose to build the scenarios.
I.e. for Delphi the interest rate of private customers on personal line of credit
in Europe.
Such indicators may also be included in the financial planning model as new
input after the initial scenario planning process.
 Step two: evaluate value ranges for these indicators. As our proposed
approach suggest, there is a need for quantification at each step of the scenario
planning process. Here, it is about determining a valuable threshold on the
evolution of a particular indicator.
On the previous example, it may be a trigger point for a financial analyst if
personal credit rate is higher than 8% for five consecutive quarters.
 Step three: monitor the indicators. In fact, KRI’s such as KPI’s have to be
monitored over time. This comes to the heart of scenario planning practice
itself in a sense that it will allow to assess the evolutions of the contextual
environment. These evolutions might or might not be the ones expected within
the scenarios, hence requiring even more attention. Key stakeholders,
especially CFO and CSO or divisional management, shall then be presented
these reports on a periodical basis in order to re-assess and improve the
scenarios and strategic plans.
The stakeholders might also provide necessary input in order to improve the
econometric model.
Below, a graphic from COSO34
Strategic Risk Management which illustrate the
relationship between the goal (increase revenues/reduce costs), the strategic initiative
and the KRI’s.
34“Developping KRI to strengthen Enterprise Risk Management”, COSO ERM

24
To add on this graphic, we can consider that a successful strategic planning will allow
to determine KPI’s of each strategic initiatives. Furthermore, the potential risks and
KRI’s are elicited through the scenario planning process. Therefore, there will be a
quantified (thanks to econometric modelling) link between the initiatives and the
KPI/KRI relation.

25
III. LIMITATIONS OF SCENARIO PLANNING
Like all processes and methodologies, it is not absolute. Here are the key points I have
denoted within this approach that may discredit some if not all of its benefits.
1) THE MATTER OF SUBJECTIVITTY
There is a lot of perception involved within this process. In fact, it starts right from the
focal question of the framing checklist: “is it really the most important question that
the company has to ask itself right now?”
How many times leadership teams prefer to neglect the actual painful issues that the
company faces? It could be both because they do not see the blind spots, and also that
if some of them were to come at the surface shareholders may make them exit!
Then, all through the process there is “bias opportunities”. In conditions where a
company is resulting from a Merger, the financial rules could be completely disparate.
Thus creating a revenue projection that is incorrect in a sense that the recognition of
sales isn’t the same between those units.
Even econometric modelling, after all, is based on the assumptions of these scenarios.
Macro level data such as natural disaster, even though are available, are still in
development for possible exploitation in economic fields. Therefore, we might end-up
with pro-forma that are not so far-off from traditional forecasting, whose are meeting
immediate business needs.
2) CORPORATE CAPABILITIES
Although considered that it could, this method is hardly adaptable by any type of
companies.
 Subject matter expertise in various disciplines (finance, strategy, economy,
operational…) which may not all be available, requiring consultant and expert
involvement. In fact, the approach could possibly efficient if all expertise can
be leveraged over a certain amount of time;
 Information systems structured from which we can extract historical company
data (may therefore pre-requisite investments in IT infrastructure and/or
Business Intelligence);
 The culture of the company itself has to be in readiness of such practice. For
some corporations, it is not even in the habits to think beyond 2 years,
although they might be affected by 10 years ahead environmental policy
changes for example. Hence, that culture impact the strategic thinking
capabilities of a leadership or management team might be limited to it, not
enabling for foresight work.

26
All in all, the success of it highly depends on the resource available to the company,
be it human, financial, infrastructural and even time…!
3) IMPLEMENTATION
Compared to traditional approach, scenario planning can be considerate as quite
cumbersome. In fact, if it is not 100% embedded into the strategic development and
planning process, I doubt if it would work. The reason being that it will be seen as an
additional work by business unit managers, more than a valuable input: it is a hard
sell!
Also, once indicators have turned into red, how well and quickly the organization can
react will play a major key. If the strategies haven’t been taken for ownership at
business unit level, that reaction could be very slow.

27
FINAL THOUGHTS
Within this research paper, we have approached Scenario Planning from a Strategy
and Finance perspective. As the result of this two-dimensional view, we have been
able to go through all necessary steps and overview what has to be done for both
disciplines.
The first part gave us the necessary understanding of what scenario planning is about.
There is a diversity of definitions and approaches to it, which calls for a
benchmarking of the diverse methods.
Then, we had to understand what the strategic implications of such practice are. Clear
distinction between thinking, developing and planning a strategy is essential.
But also, the finance interlink is what is making the improvement to long-term
financial planning. In fact, idea is that a CFO get closer to a CSO thinking in order to
understand that traditional forecasting may not be sufficient for real long-term
financial planning purposes.
Although, they both goes hand-to-hand in order to make a successful, practical and
actionable scenario planning process.
That partnership is then illustrated during the overall scenario planning process.
It is important to scope what is the purpose and outcomes of the process. That will
define how we will scan the environment the business is playing it.
Outcome of these, macroeconomic indicators that enables to prioritize uncertainties
and build detailed scenarios. Not only that, it is an econometric model which will
improve financial modelling while engaging key members of an organization into
thinking and measuring its plausible future.
The key identified benefits of scenario planning for CFO is therefore:
1) discovering a whole set of new plausible long-term real options;
2) methodic approach for capture and analyzing macroeconomic events impacts on
the business by using econometric modelling;
3) improved long-term financial planning thanks to the model and continuous
monitoring of indicators.
This research paper was more intended to open new perspective that providing a
perfect solution. There is many more extension possible to the scenario planning
process.
Nowadays, the use of Business Intelligence and Predictive Analytics will play a major
role into the process as well as its implementation.
In fact, with a correct IT infrastructure as well as business process owners, it can
greatly simplify the collection of the business’s historical performance using
QlikView for example.
By getting economic indicators data from the World Bank, Central Banks of
specialized consulting or even rating agencies, sufficient macroeconomic indicators
can be found.

28
In the meantime, SAP and SAAS provide top-notch solutions in order to produce
statistical projections using econometrics or Monte Carlo simulations.
Then once indicators determined, it is now easier with technologies such as Tableau
to build Dashboard of the evolution of these indicators, as long as a reliable data
source is provided.
To put it in a nutshell, with today’s science, financial modelling and technology,
scenario planning can be erected to the top of strategic and finance planning practices.
But it will require the democratization of these technologies first, thus will make it
100% effective for only a selected few Fortune 100 companies.
But as anything, the dimension that is often forgotten is the Human. Yet, that is what
will make or fail any scenarios and financial plan.
Therefore, there is an opportunity for Financial Planning with the inclusion of
Scenario Planning, Strategic Risk Management, Business Intelligence & Analytics…
and Change Management!
At least, that is where I see its future going…
7 147 words
Y-BM

29
REFERENCES
1. “The art of long view: planning for the future in an uncertain world”, Peter Schwartz
2. “Scenario planning: the link between future and strategy”, Mats Lindgren & Hans
Bandhold
3. “Shell. Scenarios: An explorer’s guide” Shell corporation
4. “Scenario planning: the link between future and strategy”, Mats Lindgren & Hans
Bandhold
5. « Introduction to scenario planning » Thinking Futures, Maree Conway
6. “Introduction to scenario planning” GBN Consulting
7. « Scenario-based Strategic Planning : – Integrating planning and process perspective
of Strategy », Bukhard Schwenker, Torsten Wulf
8. « Econometric analysis for scenario-based planning », Deloitte, Jeanne Wood, Mike
Dougherty
9. Delphi Corporate 10K SEC Annual report, 2012
10. « Scenario planning : a tool for strategic thinking », P Schoemaker
11. « Competitive advantage : Techniques for analyzing Industries and Competitors »,
Miichael Porter
12. « Macroeconomic Impacts of Natural Disasters”, Reinhard Mechler
13. “Exploring Corporate Strategy”, 7th edition, Johnson, Scholes, Whittington
14. “Exploring Corporate Strategy”, 8th edition, Johnson, Scholes, Whittington
15. « The Art of Strategic Conversation » K V D heidjen.
16. « Macroeconomic Impacts of Natural Disasters”, Reinhard Mechler
17. Developping KRI to strengthen Enterprise Risk Management”, COSO ERM

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