Scenario-Type Planning and the Perils of Standard Forecasting: A Case Study of the Retail Industry

For decades, Sears and Toys "R" Us held a significant share in the retail market. However, due to the lack of scenario planning, they could not grow with the changes in technology and consumer trends, which led to their decline. As this research shall elucidate, scenario planning is far more beneficial in 'planning for change' and promoting innovation in organizations. As this article discusses, scenario planning protects organizations against social catastrophes and promotes resilience. 

Standard forecasting is a type of forecasting used in retailing, where brick-and-mortar stores are located. The retailer would look at historical data and set assumptions around incremental change in online shopping while looking at a gradual decline in the importance of physical stores. The problem is that it needs to be revised, as we have seen a dramatic change in online shopping over the past few years. In contrast, scenario planning does not lead to such inaccuracies, as it focuses on wrestling with uncertainty while projecting a range of scenarios to achieve company objectives. With the help of scenario planning, a company can future-proof its business against the risks of change and drastic market shifts.  

Scenario planning enables innovations and changes in the organization by challenging the organization to predict disruptions, raise resourcefulness, and be prepared for the unexpected. One of its notable strengths is the ability to predict future disruptions and their context. For instance, a suspected retailer employing scenario planning in 2000 may have drawn e-commerce scenarios where shopping was easier online, better logistics were developed, or the marketing was through social media. Such scenarios could have consolidated the case for investing in e-commerce, mobile apps, or personalization earlier than necessary.  

However, the scenario planning approach aids in developing alternate remedies for achieving strategic goals within the organization. In comparison, the conventional least-squares forecasting would snare most businesses in the most inflexible of plans sufficiently so that nonlinearity projections are the only consideration. Retailers that were able to invest in Walmart targets focused on accurate scenario planning were able to shift strategies, effectively investing in omnichannel strategies targeting to combine traditional shop entry with the online one and concentrate on chain ratios management strategies (Wenzel et al., 2020). Making predictions about different futures and scenario planning enables organizations to evolve according to the new relevant trends and needs.  

Changing technology has, for example, been a critical driver of industry transformation. The spread of smartphones, the rapid development of AI-based recommendation systems, and the evolution of logistics have fundamentally affected how consumers shop, and retailers supply goods. Retailers such as Sears that failed to adapt to these changes lost out to other retailers like Amazon, which were able to control their stock levels, target marketing, and enhance customer satisfaction through technology (Brynjolfsson et al., 2019).  

In addition, economic forces could support the evolution of retail. The events of 2008 and their aftermath changed consumer behavior, creating room for value retailers such as Dollar General and putting pressure on department stores. Retailers who based their judgments on casual forecasting underestimated the long-term effects of these changes, resulting in store network overbuilding and unmanageable costs.  

Social and cultural forces have added a layer of complexity to the retail environment. Customers today value time and focus on sustainable and customized functions. The growth of social commerce powered by Instagram, TikTok, and others created new frontiers and challenges for retailers. Businesses that could not anticipate these cultural trends found engaging with younger and more technologically active consumers easier.  

For example, they could not modify their marketing strategies and store experiences that were appealing to millennial parents with their children, which led to their bankruptcy in 2017, Toys "R" Us.  

Apart from all this, the retail industry is also influenced by regulatory and political factors, concerning data protection, labor relations, and international trade. Retailers using generic predictive models have often needed to catch up on the changes, considering regulations, such as the General Data Protection Regulation (GDPR) in Europe. On the other hand, scenario planning allows two organizations to assess the dimension of the change in regulations and to take the necessary steps in advance.   

The Three Horizons Framework is helpful for scenario planning in the retail industry. Using this frame, organizations can think at three-time intervals: now Horizon 1 when they are fine-tuning existing processes; shortly Horizon 2 when they seek out new possibilities; and in the future Horizon 3 when they imagine radical shifts (Baghai, Coley, & White, 1999). Recent studies have extended its application, such as its use in developing pathways toward sustainable futures in agricultural strategies (Schaal, King, & Robinson, 2023). 

To illustrate, a company implementing this framework differs as it may invest its resources into improving the supply chain, particularly in Horizon 1, expanding its capacity in AR shopping at Horizon 2, and expecting the universal with the help of AI autonomous stores in Horizon 3. Incorporating the Three Horizons Framework within the organization fosters an equilibrium where short-term and long-term goals coexist.  

Futuring Perspective and Setting Scope – Scenario is applicable for potentially addressing challenges in today's business environment as one approach the contemporary milieu, and how one approaches it can be discerning. In retail, for instance, changing the consumer behavior ecosystem can transform the future competitive landscape, business opportunities, and resource allocation. An AI overhaul of their customer service operations or even the expansion of geographic conflict is provided on the possibility of a retail company raising more sustainable goals in climate change scenarios that have now become so relevant. Such an analysis can furnish retailers with strategies that are not only creative but also enduring.  

Scenario planning also includes coping with the social consequences of having undergone many changes. The rise and disappearance of mass retail outlets such as Sears and Toys "R" Us also raised issues such as unemployment, loss of community space, and lack of cheap products in selected markets.  

Including social impact assessments in the scenario planning process assists in identifying possible and appropriate areas where the negative impacts can be minimized. For instance, a supermarket might consider scenarios in which there are initiatives to provide job training to the affected individuals or establish joint ventures with local authorities to convert unused retail spaces into an outreach with the environment the program serves. The emphasis on social aspects improves the organizations' corporate image and social relations.  

In conclusion, the retail trade sector best illustrates the pernicious effects of unthinking adherence to business-as-usual forecasting methods. On the other hand, scenario planning proves helpful for organizations as it widens the horizon of possibilities and enables organizations to be at the forefront of changes and thereby be proactive. Organizations that opt for this strategy are better positioned to be at the center of the storm when changes occur, get the message, and act toward creating value for their clients and society. For me, scenario planning will be the center of my effort to innovate in domains such as AI, IoT, etc., where rapid developments are becoming the norm. Envisaging several such scenarios enables me to formulate situational strategies that best serve the changes in demand and align with society's values so that the changes are worthwhile for all people involved.  

References

Baghai, M., Coley, S., & White, D. (1999). The alchemy of growth: Practical insights for building the enduring enterprise. Perseus Books. 

Brynjolfsson, E., Hu, Y. J., & Rahman, M. S. (2019). Competing in the age of AI: Strategy and leadership when algorithms and networks run the world. Harvard Business Review, 97(1), 62–71.  

Schaal, T., King, C., & Robinson, M. (2023). Applying the Three Horizons Framework to future agricultural strategies. Sustainability Science, 18(2), 345-358. https://doi.org/10.1007/s11625-022-01275-z 

Wenzel, M., Stanske, S., & Lieberman, M. B. (2020). Strategic responses to crisis. Strategic Management Journal, 41(3), 837–865. https://doi.org/10.1002/smj.313