Scenario Analysis
Competitive Intelligence
Strategic Analysis Technique
Presentation by 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
account 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 members 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.
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.