Strategic scenario planning is an essential part of continuous planning, the regular (often quarterly) review cycle for portfolios of investments, and it may also be applied on an ad hoc basis when a significant change, threat, or opportunity occurs. Your submission has been received! Perhaps you try changing your price levels to various different points, and you notice a pattern emerge: Perhaps you're a mathematically-inclined bread salesperson, and you realise that you can fit an equation quite nicely onto your data points: The above gives us a way to understand how the volume of bread sold relates to the price per loaf. What-if analysis allows decision-maker to predict the uncertainties of future on which the enterprise has no control whereas scenario planning builds various scenarios on the assumptions made in what if analysis, adopts the best strategy to control and keep inline the overall performance of the enterprise. All portfolios use resources to execute on the work that is being invested in, but this is a particularly important consideration for portfolios where resource allocations are more fluid programs, projects, etc. Strategic scenario planning, or what-if analysis, is a series of interconnected analyses designed to help the organization understand the choices available to adjust or adapt organizational portfolios. Errors or gaps in this analysis can result in the inability of the organization to deliver in the future, and may jeopardize the organizations very existence. Organizations have to excel at strategic thinking if they are to optimize performance. Further, the analysis tools they do have often arent integrated with each other, or with the strategic portfolio management platform, making comprehensive analysis even more difficult. In the simple case, where the volume of bread sold doesn't depend on the price of the bread, the analysis is very easy. The World Bank suggests eight steps: 1. What-If Analysis example. Scenario Analysis My personal definition of scenario analysis is painting a financia. Scenario analysis takes the best and worst probabilities into account so that investors can make an informed decision. For using this feature, we can create What-If parameter and interact with the variable as a slicer. The first is by selecting the project and using the General tab details form to make the project status assignment, Figure 2. Thats why effective strategic analysis of organizational data, and the ability to develop the right recommendations with insight into the implications, dependencies and limitations, is so essential. It can also prevent that no single person alone can make decisions and a drive culture that several people are involved in the process. Organizations cannot optimize performance unless they are able to ensure that they are getting the best possible return on each investment without compromising other areas of their business today and in the future. To add a scenario, select add option as shown below. What-if scenarios must allow decision makers to consider and answer questions like: Without this level of insight it is impossible to make decisions with the confidence that the best possible choices are being made. Strategic thinking must be managed from the top of the organization down, delivering meaningful insight and practical decision support through all investment types, all work structures and across the tri-modal reality. This ultimately allows your business to mitigate risks, explore growth opportunities and generate a healthy bottom line. Enter the corresponding value 0.6 and click on OK again. August Jackson, a Strategy & Competitive Intelligence Manager, identifies four steps - the ones shown in the image above - to scenario analysis. That of course requires the right tool suite to support that. Something went wrong while submitting the form. Doing S&OP on top of an operational hierarchical model (based on aggregation/disaggregation) and handing it over for financial translation is inadequate because the optimization becomes locally focused on heuristics such as cost per unit vs. globally optimizing for total financial impact on the company. Example 1: Sales Headcount Planning. Lets start with the obvious. This term is defined in the 5th edition of the PMBOK. This type of analysis must still be done in conjunction with the other elements of scenario analysis, but these ad hoc analyses provide the scenario team with a specific context to the analysis cycle that they are a part of. To use Scenario Analysis, follow these five steps: Do I need a subwoofer with my Sonos soundbar? The What-If analysis is helpful here as well. However, this level of analysis and insight relies on accurate, complete and timely data. To explain what this means, let's go straight to an example. The difference between the two methods is that sensitivity analysis examines the effect of changing just one variable at a time. While these projection tools are both useful for quantifying and analyzing different outcomes, they differ slightly. Only then can a complete picture of the advantages and limitations of each possible course of action be developed. And that data must come from all of the frontlines projects, programs, products, capabilities, etc. Understanding Scenario Analysis vs Sensitivity Analysis The difference between the two methods is that sensitivity analysis examines the effect of changing just one variable at a time. How to automate your FP&A on top of Google Sheets? From the different scenarios, you then look at which results contributes most to the objective. Asking questions about the current financial market or the . When they finally realize the huge challenges that Excel bringsnamely that S&OP process proliferation always results in a lack of a single version of the truththey switch to an S&OP system of record toolkit/solution. Create a new scenario by selecting the + symbol. In a constantly changing world, organizations need a plan B. Financial model makers can effectively communicate with the decision makers for example, by making . To create an analysis report with Scenario Manager, you have to follow these steps . It must consider how those investments align with strategic priorities to ensure that resources are focused on elements of work that will make the biggest benefit to the business. It usually causes the company to measure 3 different scenarios: Base-case scenario - Refers to the ordinary or typical scenario that would happen based on previous circumstances or what has the most chance of occuring. They have a tool that optimizes resource capacity planning and allows for some consideration of different future scenarios for resource allocations. Why is strategic scenario planning / what-if analysis important? To compare scenario analysis vs. sensitivity analysis, one should first understand that investment decisions are based on assumptions and inputs. A base case scenario can adapt the most likely assumptions to model the financial performance under that scenario. Resource capacity planning and utilization are primarily focused on people. Many organizations dont have the tools to do that. This model is also referred to as a what-if or simulation analysis. It requires one to explore the impact of different market conditions on the project or investment as a whole. A What-if Analysis consists of structured brainstorming to determine what can go wrong in a given scenario; then judge the likelihood and consequences that things will go wrong. Causal can easily account for uncertainty. There are firms projecting massive amounts of money to, As a concept, capability based planning is fairly straightforward. A scenario dashboard allows users to modify levers associated with the business (costs, capacity, demand, products) as well as their objectives in terms of business strategy (e.g. You will be able to effectively test your business plans against a variety of different scenarios to make more informed decisions as to how condition changes in the market will affect your bottom line more accurately. During what-if scenario analysis, assumptions are put into play to check the schedule results as well. To create an environment where all of the data required to drive effective what-if analysis can be created, maintained and managed in a consistent way, organizations must change how they plan by creating their own scenarios. Click on the What If Analysis dropdown and choose Data Table. What exactly are the differences and which one is best for your organization? By providing business decision makers with ranges of possible financial outcomes, from positive to negative, what-if scenario analysis gives them the tools they need to make proactiverather than reactivedecisions, as they can see a clearer picture of the businesss financial performance based on varying assumptions. Power your growth with free access to CPE events, on-demand videos, the Vena Academy and more. Let's say you sell bread at a market. Your business leaders will benefit from understanding the possible variations to the best possible outcome through what-if scenario planning. Grow your network, learn best practices and connect with the smartest minds in finance on the Vena Plan To Grow Forum. Their investment management approach must evolve from using projects as the primary work delivery vehicle to an approach that embraces program and product level investment management. What-If analysis is a powerful business analytics planning tool when used correctly. Instead of. Weve already discussed the challenges around that, and later well look at the most appropriate approach, but for now lets focus on the following forms of analysis. Scenario analysis is the process of forecasting the expected value of a performance indicator, given a time period, occurrence of different situations, and related changes in the values of system parameters under an uncertain environment. Scenario planning cannot be separated from other strategic imperatives and in fact supports the ability to deliver on many of those imperatives. The Goal Seek feature, which is one of Excel's what-if analysis tools, allows you to input a value for a dependent variable, and then calculates the corresponding value for the independent variable. The more questions you ask, the greater your ability to anticipate problems. Organizations cant have just one strategic plan. If the above felt a little clunky then don't worry, what-if scenarios are much easier to build in Causal. The most commonly used amongst these tools is what Excel calls Scenario Manager. As the name suggests, ad hoc modeling is applied wherever it is needed on a one-off basis. Hit OK. Excel is not a strategic planning tool. Select the range of cells that contains the formula and the two sets of values that you want to substitute, i.e. There are multiple stakeholders in this analysis. Portfolio prioritization is the process of determining which assets to invest in, in which order. As an example, I've created a $3 Bread scenario and changed the Price of Bread variable within that scenario to $3. But let's imagine the situation is a bit more complex, and that the amount of bread you sell does depend on the price you charge. Key decisions are made based on possible KPIs, such as total revenue, gross profit margin, operating income, net income margin, return on capital invested, net present value and so on. What is the cost in other areas (funding, long-term plans, resource capacity, etc.) This happens because scenario manager's Changing Cells are fixed, and won't respond to changes in your model. So scenario analysis differs from sensitivity analysis by what they measure: scenario analysis is more interested in a particular set of conditions, while sensitivity analysis addresses a range of output variables based on variable model input. To understand scenario analysis vs What kind of analysis do organizations need to consider? Where are the thresholds where performance becomes marginal / ceases to improve / reaches a non-viable level? Roadmaps have become an important strategic management tool in recent years and they must be integrated with the entire strategic portfolio management approach of the organization. The scenarios may occur or may not occur, but the investor has to consider even the worst case scenario. These models often fail to predict . Sensitivity analysis can be used to help make predictions in the share prices of publicly traded companies or how interest. Each month, we'll send you our most popular articles about the latest FP&A tips and trends. In addition, organizations must do more than ensure that benefit targets are met, they must ensure that benefits are being optimized that the best possible return is being achieved for the investment that is being made. This means that the outcome of the project will be predictable. Leaders must be able to assess alternate scenarios, balance conflicting priorities and understand the trade-offs involved with each choice. It is also an area that is critically important to understand whenever the results of other analyses indicate that substantive adjustments are needed. Key benefits of what-if scenario analysis 1. These scenarios require a response, but they require the right response. What-if analysis helps answer questions about all sorts of business decisions: Note that the questions above come from a broad range of different business areas. Here, we discuss three types of What-If Analysis in Excel such as 1) Scenario Manager, 2) Goal Seek, 3) Data Tables along with practical examples, and a downloadable . 2022 Vena Solutions. Flesh out scenarios. Companies can use scenario analysis to explore a broad range of possible future situations, from economic slowdowns and natural disasters to expanding a . In todays world things move fast with emerging opportunities and threats, new technologies enabling innovation, and shifting priorities and imperatives. Ultimately, when scenario analyses are done accurately, youre empowered to make better decisions that drive business growth. Scenario planning lets you explore how different scenarios drive possible outcomes. In this post we explore the requirements of true what-if scenario analysis capabilities and the necessary integration across 3 key dimensions - Operational, Financial and Time, framed through the 3 stages of S&OP maturity that companies fall into, as shown in Figure 1. , Gather Data. They compound the data challenges described above by copying and pasting that data into spreadsheets and then manually manipulating it with formulas, or use a downloadable scenario planning template. 4. Break even analysis is often a component of sensitivity analysis and scenario analysis performed in financial modeling. Get your free copy ofThe State of Strategic Finance: Industry Benchmark Report 2022today. select the range - F2:L13. Explore possible assumptions and scenarios for business operations, Engage effective financial planning tools and technology, Use historical data and predictive analysis for better results, Promote interdepartmental collaboration for more agile solutions. A Scenario is a set of values that Excel saves and can substitute automatically on your worksheet. Its not enough to know how to improve benefits, or how to improve resource utilization. And they must be able to do that with confidence that the scenarios they are reviewing are accurate and complete. But the only thing worse than not changing a strategic plan in response to shifting circumstances, is making the wrong changes. The what-if analysis process is at the heart of business planning. It is critical for the owners of individual work items within each portfolio as it impacts how they can plan and deliver that work (regardless of structure and work approach). Sensitivity versus scenario analysis. Scenario analysis helps you analyze different KPI outcomes so your business can better navigate uncertaintyboth now and in the future. A worst-case scenario, on the other hand, will explore more unfavorable assumptions and how they impact the financial performance of a business. Within the context of scenario analysis it is the time-phased element, helping the organization understand how changes to current corporate strategy impact near- and long-term plans. Of course achieving that level of analysis needs the right what-if scenario planning tools to help you. of the optimal benefit choice? Is more value earned and / or is the value achieved sooner if the investment is increased? Taking this one step further, automating the process of populating that data into Excel will make for faster, more efficient scenario analysis and better overall business planning. Now from the Goal Seek option from What-If Analysis, select the value we want to compare. Scenario analysis is a process of analyzing decisions by considering alternative possible outcomes. But its only one of the imperatives within a complete strategic portfolio management approach to delivering success consistently and from the top-down. Answer: When in googled i got this answer, but i am looking for an example which explains clearly both Sensitivity Analysis and Scenario Analysis. Benefits of What-If Scenario Analysis #1. Stakeholders in the investment or business area directly affected will be the primary users, but depending on the impact and potential adjustments there may be a much broader set of organizational stakeholders in ad hoc analyses. It seems like everyone is talking about digital transformation these days. Effective risk management means taking a proactive approach to identifying, analyzing and mitigating unfavorable outcomes. For the pessimistic scenario managers assume a higher required rate of return, lower revenues, and high cost which results to a . Finally, analysis must cover each of the common types that we have discussed here. The challenges of what-if scenario analysis, Strategic what-if scenario planning software, 8 Steps to Effective Capability Based Planning, 5 Steps to Optimize Resource Capacity Planning, The availability, completeness and accuracy of the data that drives what-if analysis, Cost / value optimization and sensitivity analysis, Resource capacity planning and utilization, Near-term and multi-year roadmap optimization, Near-term and multi-year capital planning. This guide will try to help you overcome the challenges of multiple scenario development and create an environment where your strategic analysis is as effective and efficient as possible. ), then optimization analysis must be carried out on that roadmap. And that means there must also be integration with adaptive project management the execution focused aspects of portfolio management. The most likely scenario is that he goes back to school in the fall. And there must be the ability to quickly and easily run an ad hoc analysis whenever a significant event occurs that has the potential to drive adjustments to portfolio investments. When it is necessary or desirable to make adjustments to an enterprise portfolio, those changes must be made with the most complete understanding possible. What impact does inflation have on our supply costs and accounts payable? If you're creating complex models and moving cells around, this can often break your scenarios. To understand the differences between our scenarios, we can create visualisations such as tables or bar charts to understand how our output (Revenue) changes depending on inputs (Price of Bread): We've looked at two different methods above, so now it's time to ask: should you use Causal or Excel for what-if analyses? Companies often perform this analysis to understand . People viewing your models can change your inputs and scenarios, and see how their changes affect the model. Accounting for multiple possibilities based on different assumptions enables teams to identify opportunities for innovation, reframe strategies and find novel ways of maximizing efficiencies to achieve the best possible results. Where are upcoming bottlenecks and how easily can they be alleviated? The impact of this change in business strategy must be identified immediately in an intuitive way for the user. Causal models are built around variables, rather than rows and columns. Let's say you sell bread at a market. An example of what-if analysis would be to ask: what would happen to my revenue if I charged more for each loaf of bread? Scenario analysis includes sensitivity analysis. All are very important components of financial modelling - in fact, being able to run sensitivities, scenarios and what-if analysis is often the whole reason the model was built in the first place. View Scenario Analysis vs Sensitivity Analysis.docx from ACCOUNTING 100 at Liverpool John Moores University. At UMT360 we are proud that our strategic portfolio management software includes what-if scenario planning functionality capable of delivering all of that. Or they have financial analysis tools that allow comparison between different funding models. A critical aspect of strategic portfolio management that helps organizations adapt and adjust effectively to shifting circumstances. This is the consideration of one specific adjustment canceling an initiative, adding a new investment, delaying or accelerating one piece of work, and so on. But performing sensitivity analysis (I also call it stress testing) may or may not include using defined/named scenarios. 2. First, decide what you want to achieve, or define the decision that you need to make. Portfolio prioritization is essential for all portfolio owners and executive leaders. In addition, with work being delivered through the tri-modal reality, different work approaches often generate different data sets that cannot easily be combined and compared. Sensitivity analysis is a form of what-if analysis. Why do scientists use the scientific method? 1. Write scenario plots. How does this impact our borrowing costs? Now that we have this understanding, we can go back to our original question and answer how revenue changes depending on the price you charge. Scenario analysis is the process of estimating the expected value of a portfolio after a given change in the values of key factors take place. Everyone is familiar with the phrase garbage in, garbage out for a reason. Leaders and portfolio owners use the information as one of the main elements in their decision making around any portfolio adjustments; work owners consume the outputs to understand how their deliverables and expected outcomes are evolving; and client representatives need to understand how their accountability for business outcomes is being impacted. Scenario analysis is looked at as a more general way of analyzing scenarios in comparison to sensitivity analysis. And it is essential for HR, leadership and development and procurement functions so they can plan for any resource changes that are required. Thats what makes strategic scenario planning, what-if analysis or whatever name you choose to use, so important. Scenario analysis assesses the effect of changing all of the variables at the same time. It must include each of the tri-modal realities and it must have a common baseline for comparison of data across asset types and work methods. Furthermore, organizations should be looking to evolve beyond programs and products, embracing emerging methods like capability-driven planning and delivery. And which forms are appropriate for which situations? Both sensitivity and scenario analysis are popular types of what-if analysis. In turn, the sales team can gain insights into how higher orders impact business revenue and overall profitability so they can better develop sales strategies. Let's begin by creating a variable for the Price of Bread, and give it a value of $2: We'll then create another variable for the amount of Bread Sold. what value they should take in this particular scenario. These methods predict what will happen in the future by relying mainly on data from the past and present. Causal models are not only easy to share, but they're also interactive. You charge $2 per loaf of bread, and you sell 100 loafs a day. The major difference between the two types of analysis is the outcome of each analysis: scenario analysis reveals which scenarios are most optimal or most detrimental, while sensitivity analysis reveals how sensitive different scenarios are to changes in specific input variables. Sustainable performance requires a commitment to all of those imperatives. By this, we can enter multiple scenarios. Before you create any scenarios, it's important to ask questions. The scope will depend on your level of analysis (i.e., industry, subindustry, or strategic group), the stage of planning, and the nature and degree of uncertainty and the rate of change. A Scenario is a set of values that Excel saves and can substitute automatically in cells on a worksheet. This approach involves modeling the business at a desired (and often detailed) level including the various constraints involved in its operation. Much like roadmapping, this analysis should be undertaken for every portfolio that is subject to review and adjustment. While the future cannot be exactly predicted, an effective financial plan gives a realistic representation of overall financial performance driven by certain assumptions. These parameters and factors are analyzed in what-if scenario analysis to check whether a shorter schedule can be produced. Excel's scenario manager is a good tool for analysing models that are already built in Excel, but it has one large downside. You have to explore the impact of different market conditions on the investment or the project as a whole. Annual planning has given way to quarterly planning, which is in turn evolving into continuous, adaptive planning. If you're involved in making business decisions, no matter your focus, you can benefit from building what-if scenario analyses. This article is a guide to What-If Analysis in Excel. 6. What is Scenario Analysis vs Sensitivity Analysis? Certainly well-worth reviewing, especially if you're working in some sales environment or running analysis on financial results. Data formats are often inconsistent with each other, making it impossible to construct scenarios for what-if comparisons. A single scenario can involve multiple inputs, such as operational efficiency, personnel expenses, occupancy costs and sales orders. Select the scenario manager and give a scenario name and select the cell which contains the scenario value. Sensitivity analysis and scenario analysis 2 of the most common methods for companies to predict financial outcomes. With so much investment planning predicated by the financial capacity and capability of the organization, this is an analysis that is essential to complete and to get right. An improvement in one element may result in a worsening of another. Through comprehensive scenario modeling software, such as Vena Complete Planning, you can plan for the future with more confidence. On the other hand, a scenario analysis is when you're looking to create a comprehensive model to understand an overall outcome. As the World Economic Forum says, Scenario planning can help companies prepare for future challenges and uncover new opportunities for innovation. Have a play around with the demo model below, then hit Use this template to see how it's built. What happens if the government tightens export or import regulations for certain industries? A scenario analysis examines a specific scenario with multiple changing variables such as a global market shift and a sensitivity analysis looks at the impact a set of independent . Businesses that can identify how different scenarios might impact business performance are more likely to successfully navigate sudden events. They are both methods you can use to evaluate the level of risk involved in a variety of situations. Define the Issue. Recommended Articles. Scenario analysis can be used to estimate the behavior of the system in response to an unexpected event . It is also a critical consideration for portfolio owners to ensure their investments are generating the best return and for benefits owners for the same reason. A change driven by one analysis may breach a constraint in another element of the business. Select Data Table from the dropdown list. Go to the Data menu tab and click on the What-If Analysis option under the Forecast section. Hence, it is best to assess the magnitude of such risks (through risk analysis) and weigh them against potential benefits . Optimizing this area requires consideration of dependencies between investments, the impact downstream of changes to scope, schedule or approach in current investments, and so on. It will explain why an integrated approach to scenario analysis is a critical extension of strategic portfolio management, one ideally built on a common data set across the enterprise, which is the only way to consistently deliver. The lack of certainty in the premises and inputs brings about investment risk. Investors may use it to estimate changes in the value of . All Rights Reserved. Both scenario and sensitivity analysis can be important components in determining whet. #2. Then, to finish our model, we can create a variable called Revenue which is the product of the two existing variables: Now that we've got our model, we can start to create our what-if analysis. 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