Scenario planning: base, upside, downside, and deciding when you cannot know
Build three versions of the future from the few drivers that matter, compare options across all of them, and choose one that holds up, with a trigger for when to change course. A worked example from a cold store in Saudi Arabia.
Key takeaways
- When you cannot know the future, do not bet on one forecast.
- Common mistakes: Making the downside a gentle version of the base case, so it never tests anything.
- Compare expected value: weight each scenario by its chance. Good when no single outcome is ruinous.
- Check the worst case: can the company live with the downside? If not, rule the option out, whatever its expected value.
- Prefer options you can change later: a small first step with the right to expand often beats one big bet.
Key idea
When you cannot know the future, do not bet on one forecast. Build a base, an upside and a downside case from the few drivers that matter, see how each option does in all three, and pick the one you can live with in every case, with a clear signal for when to change course.
A scenario is one consistent story of the future, with numbers. The base case is what you expect if things carry on as now. The upside is a believable better world, the downside a believable worse one. Change only the drivers that are both uncertain and important, such as demand, price or a cost, and change them together in a way that makes sense: if a rival opens next door, both volume and price fall. This is different from sensitivity analysis, which changes one driver at a time to see how much the answer moves.
Companies have used scenarios for decades. Shell, the energy company, began building them in the 1960s, and its own history says the early ones helped it prepare for the 1973 oil crisis. Shell is clear that scenarios are not predictions; they are a way to test a plan against several futures.
| Scenario | Chance (percent) | Pallets stored (thousands) | Price per pallet a year (SAR) | What would cause it |
|---|---|---|---|---|
| Upside | 25 | 85 | 1,000 | Food imports and online grocery grow fast |
| Base | 50 | 70 | 900 | Growth carries on at today's pace |
| Downside | 25 | 45 | 800 | A rival opens nearby and prices fall |
So-what
In the downside both volume and price fall together, which is what makes a scenario different from changing one number.
Worked case
Build big now, or build in phases?
The prompt
A logistics company plans a cold store in Dammam, Saudi Arabia, using the three scenarios in the table above. Option Big: 100 thousand pallet places, fixed costs of SAR 45 million a year. Option Phased: 60 thousand places now, fixed costs of SAR 28 million a year, with land and permits ready to add 40 thousand more later. Each stored pallet adds SAR 200 a year of variable cost. Compare yearly operating profit in each scenario. (Fictional company, illustrative figures.)
The structure
- Profit = pallets stored x (price minus SAR 200) minus fixed costs, in each scenario
- Pallets stored = the lower of demand and capacity
- Profit of each option in each scenario
- Key: Expected profit and worst case
- A trigger for expanding later
Working it through
1. Big, upside
85 thousand pallets x SAR 800 margin, minus SAR 45 million (all in SAR millions).
Big, upside profit (SAR millions):85 × (1,000 - 200) ÷ 1,000 - 45 = 232. Big, base
70 thousand x SAR 700, minus 45.
Big, base profit (SAR millions):70 × (900 - 200) ÷ 1,000 - 45 = 43. Big, downside
45 thousand x SAR 600, minus 45.
Big, downside profit (SAR millions):45 × (800 - 200) ÷ 1,000 - 45 = -184. Phased, upside
Capacity caps storage at 60 thousand.
Phased, upside profit (SAR millions):min(85; 60) × (1,000 - 200) ÷ 1,000 - 28 = 205. Phased, base
Still capped at 60 thousand.
Phased, base profit (SAR millions):min(70; 60) × (900 - 200) ÷ 1,000 - 28 = 146. Phased, downside
45 thousand fit easily.
Phased, downside profit (SAR millions):min(45; 60) × (800 - 200) ÷ 1,000 - 28 = -17. Expected profit, Big
25, 50 and 25 percent weights.
Expected profit, Big (SAR millions):0.25 × 23 + 0.5 × 4 + 0.25 × -18 = 3.258. Expected profit, Phased
The same weights.
Expected profit, Phased (SAR millions):0.25 × 20 + 0.5 × 14 + 0.25 × -1 = 11.759. Expansion trigger
Expand when the phased store is 90 percent full for two quarters in a row.
Trigger (thousand pallets):60 × 0.9 = 54
The recommendation
Build in phases. The phased store earns more in the base case (SAR 14 million against 4 million a year), loses almost nothing in the downside (1 million against 18 million), and gives up only SAR 3 million in the upside. Its expected profit is about SAR 11.75 million a year against 3.25 million for building big, and that is before counting the lower building cost. The big store only wins if the upside arrives, and even then the phased store can catch up by expanding. Set a signpost: start the second phase when more than 54 thousand pallets are stored for two quarters in a row. The risk is that building later costs more or takes too long; agree the expansion design and permits now so the second phase can start quickly.
Four ways to decide when you cannot know
- Compare expected value: weight each scenario by its chance. Good when no single outcome is ruinous.
- Check the worst case: can the company live with the downside? If not, rule the option out, whatever its expected value.
- Prefer options you can change later: a small first step with the right to expand often beats one big bet.
- Set signposts: decide now which number, at which level, will make you switch plans, so you act on facts, not hope.
A snack maker in Indonesia is weighing a launch. Upside (30 percent chance): profit IDR 120 billion. Base (50 percent): IDR 60 billion. Downside (20 percent): a loss of IDR 40 billion. What is the expected profit, in IDR billions?
Making the downside a gentle version of the base case, so it never tests anything. Changing drivers in ways that cannot happen together, such as volume crashing while prices rise. Building ten scenarios when three clear ones would do. Calling the base case a forecast and forgetting the other two once the plan is approved. Choosing on expected value alone when one scenario could sink the company.
What is the difference between a scenario and a sensitivity?
Option X has the highest expected profit, but in the downside it would leave the company unable to repay its loans. What should you do?
What is a signpost in scenario planning?
Oil and gas projects take years to build and run for decades through price cycles, so the industry tests every plan against several price paths. The oil and gas brief shows how.
Read the oil and gas briefSources for this lesson (2)
- Recognized public explanations of case-interview concepts and terms
- Shell, "40 Years of Shell Scenarios" (2013), the company's own history of its scenario work (checked 2026-10-01)
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