Scenario Analysis s4m5a

Scenario Analysis Competitive Intelligence Strategic Analysis Technique Ref: Darren Smith & Nicole Hensley

Scenario Analysis Definition Scenario Analysis is a tool that helps you develop strategies for your company and a means to explore multiple outcomes to complex competitive situations, determine the implications, and set future strategies. -- Academy of Competitive Intelligence Author: Sandmore/Rose

Expanded Definition The scenario analysis tool is a process that uses decision logic and that generates scenarios based on changing variables or possible future events and assigns probabilities to each scenario.

These probabilities can then be compared so companies can make good decisions when they recognize the future events that were in the model.

A good scenario analysis will give the company a contingency plan that covers several different possibilities.

How to Use Scenario Analysis The scenario analysis tool works by looking at a future goal as if it has been obtained, and then works backward to the planning phase.

Base Case This first analysis is called the “Base Case”. This will give the company a list of events that must happen for the goal to be achieved.

Change Outcomes The object then, is to change variables in the formula to change the outcome.

Then compare the “Base Case” to the new possible outcome.

Running this tool several times with different variables or different possible decisions will give different outcomes.

Managers can then have a good idea of which decisions can be made to arrive at the desired outcome.

Scenario Analysis Tools Common Brands of Software:  Projected Financials 2.0  OutlookSoft EAP

7 Steps in Scenario Analysis There are 7 steps to make scenario analysis show what the future could look like. This is not a prediction, just a possibility.

Step 1 Load the data files that are to be analyzed onto the computer. Familiar data will already be in the computer, such as financial data, marketing data, organizational data, etc.

Step 2 Create a “Base Case” by running the model with the companies current parameters and indicators. Then add time to the model to come up with a possible future.

Step 3 Compare the results to the desired future outcome.

Step 4 Change some of the assumptions of the “Base Case” in order to for other possibilities.

Step 5 Run the model again. This will give results for a new possible outcome.

Step 6 Compare the new outcome with the “Base Case”. Study this outcome to understand why the results are different.

Step 7 Evaluate what was learned. Then repeat the process using as many scenarios as can be imagined to get a more accurate idea of the impact of different possibilities on the future.

Scenario Analysis Team Scenario Analysis is not always done with a computer program. Sometimes the manager can assign certain employees to form an analysis team.

In order to obtain more diverse ideas, the team should include managers, some lower level employees, and even outside sources such as suppliers or customers.

The more diverse the of the team are, the better chance that they will challenge each other‟s ideas and come up with more possibilities on which to base each scenario.

Why Scenario Analysis? Business is filled with many uncertainties. Scenario Analysis will help a company overcome the driving forces such as political changes, technological changes, and economic changes.

Scenario Analysis can also be used to help the company have a better understanding of possible future occurrences and how to take advantage of them.

Scenario Analysis Pros There are many reasons that a manager should adopt a scenario analysis approach.

Decision Making Scenario Analysis will increase the time it takes to make better decisions because managers will be able to react before an unfavorable situation occurs.

Early Warning System Managers will also have an idea of where the market is heading in the future based on scenarios that show current developments. A manager‟s response may determine the company‟s future.

Alternative Futures Scenario Analysis will give a company many alternatives to compare and contrast. This will help identify potential threats.

Test Current Strategy Managers can reasonably predict the effects of the current business strategy and identify prospective growth strategies.

Replace Assumptions Multiple scenarios will allow management to stay away from assuming that business will continue as usual and they can overcome preconceived ideas of how things will be.

Scenario Analysis Cons There are also factors in scenario analysis that can have a negative impact.

External Factors Companies do not have control over external factors. If the team does not recognize a possible driving force, it will not create an accurate scenario.

Time Consuming Scenario Analysis is not an easy task. It will take a lot time to research the external factors. And this could actually translate into significant resources.

Risk of Error The risk of making mistakes and judgment errors increases as the scenarios are predicted farther into the future.

Example: 

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Amity wants to set up a business school in Patna. It has done some ground work and arrived at a figure of „X‟ as fixed costs. This includes cost of renting a suitable building, hiring teachers and non teaching staff and for creating the other expenses required for running such and enterprise.

Amity university 

To start with, the university has come up with a base case. The base case is about the expected no of students getting enrolled and making the payment for the course fee.

Example 

The strategic management team now defines different scenarios based on the PEST audit, and arrives at 7 different scenarios- each depicted by no of students itted and different fee structure.

Example 

The finance team considers whether this can lead to a sustainable enterprise and decides on the different optional expenditures.

Example 

For each different scenario present, the total revenues are computed and actions that need to be taken are listed. The budget for each scenario is then prepared and viability of the project in each of the scenarios is established.

Summary Companies must be able to change with the changing times. Scenario Analysis will help managers see the future possibilities and respond better.

Scenarios will not remove the uncertainties of business but it will help remove the uncertainties of decision making.