Forecasting vs. Scenario Planning

Forecasting:

Investopedia (http://www.investopedia.com/terms/f/forecasting.asp) defines forecasting as "The use of historic data to determine the direction of future trends." It goes on to further explain businesses use forecasting to determine yearly budgets based on demand for goods versus cost of production and investors use forecasting to predict share price based on events affecting the company, such as sales expectations.

In a related article of forecasting methods, Investopedia (http://www.investopedia.com/articles/financial-theory/11/basics-business-forcasting.asp) tells us there are Qualitative and Quantitative Models. Qualitative Models depend upon expert opinion (including Delphi Method) and is successful in the short term. Quantitative Models discount expert opinion and focus entirely on data and attempt to take the human element out of the equation.


Pros:
(from http://www.brighthub.com/office/entrepreneurs/articles/109618.aspx)

• Helps predict the future and keeps companies future-focused.
• Learn from the past.
• Reduce inventory while maintaining proper output of goods

Cons:

• Rigid planning based on a single future with no ability to adapt to unforeseen events.
• Data is always old and there is no guarantee the future will act/react the same way as in the past.
• Business is influenced by their forecasts but forecasts can't predict their own impact.

Scenario Planning:

(from http://en.wikipedia.org/wiki/Scenario_planning#Scenario_planning_compared_to_other_techniques)
A method of strategic planning that uses known facts about the future such as demographics, political, industrial, and economic information. Originally scenario planning was used by the military to create simulation games for policy makers. In the business world Scenario Planning has been adapted away from simulating opponent behavior toward a game against nature.

Pros:

• Provides alternate perspectives on the future.
• After several iterations, scenarios will become frameworks for dealing with the alternate futures.
• Provides a method for dealing with diverse or conflicting collections of data.
• Iterative method with built-in consistency checks.

Cons:

• Little to no academic acceptance or research.
• Subjectivity
• Tendency to favor one particular scenario vs. consider all of them.
• Tendency to take scenarios too literally, instead of using as a flexible tool to bound the future.
• Organizational limitations
• Team composition
• Facilitator role
• Focus (long vs. short term, global vs. regional, etc.)
• Weak integration into other planning techniques.
• Budgeting and planning based on one future.