An example of what-if analysis would be to ask: what would . 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. getty. There are multiple stakeholders in this analysis. Go to the Data option from the toolbar and select the Excel What-if Analysis option from the Forecast Ribbon, as shown below. This is an analysis of the question, What if the situation represented by scenario X happens?Aug 22, 2021. Using scenario analysis, you have a rational and structured way to analyze the future. 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. A scenario analysis is when you make assumptions about a number of independent variables and environmental factors, and consider their impact on the outcome of your analysis. We offer a suite of supply chain planning, network optimization, order allocation, and general planning solutions that are purpose-built for business users rather than data scientists. Certainly well-worth reviewing, especially if you're working in some sales environment or running analysis on financial results. What kind of analysis do organizations need to consider? And that data must come from all of the frontlines projects, programs, products, capabilities, etc. hbspt.cta._relativeUrls=true;hbspt.cta.load(484375, 'f56b96e7-db8d-47b7-adce-654c3feb68a7', {"useNewLoader":"true","region":"na1"}); Were on a mission to ensure companies across the globe drive maximum value with every decision they make, no matter how complex. 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. 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. 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. Thats what makes strategic scenario planning, what-if analysis or whatever name you choose to use, so important. 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. Like the first stage, the decisions made based on predictive analytics remain sub-optimal. Often variances in execution that indicate expected benefits may no longer be achievable, are a prompt for ad hoc analysis cycles, but this analysis is an essential element to all reviews. Enter the corresponding value 0.6 and click on OK again. By doing this, not only will profits increase, the entire organization will evolve into an advanced level of managing customer, product and campaign profitability. What-If Analysis example. 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. For an example of a company that does this type of prescriptive analytics, take a look at the Cox Industries Case Study. This is the second blog post in a series on TrueIntegrated Business Planning(IBP). Thats why scenario planning has become so important in todays uncertain world. Value Driver Tree Scenario Analysis My personal definition of scenario analysis is painting a financia. The difference between sensitivity analysis and scenario analysis is that sensitivity analysis changes only one input at a time in order to assess the sensitivity of the financial projection to that variable. If you've seen examples of what-if analyses before, they might look far more complex than this. Recommended Articles. 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. 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. These parameters and factors are analyzed in what-if scenario analysis to check whether a shorter schedule can be produced. Scenario analysis creates an avenue for business leaders to see how alternative decisions can drive growth. If you missed the first post on why I joined River Logic and the definition of True IBP,you can read it here. This is a high level process that typically involves brainstorming and reverse brainstorming. But performing sensitivity analysis (I also call it stress testing) may or may not include using defined/named scenarios. 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. The third stage in this evolution is to further enhance the demand plans created by predictive tools, including rough cut supply-demand balanced plans, and fine tune it through True What-If Scenario Analysis. What happens if the government tightens export or import regulations for certain industries? But this evaluation must happen in the context of a global optimization, whereby the marginal impact on profit is evaluated simultaneously with the supply and financial plans. Another gap is that S&OP solutions have evolved from a supply chain and logistics heritage and hence do not have deep financial modeling capabilities. Scenario planning is something that is frequently misunderstood and rarely executed well. To use scenario manager, you first need to build up a model. It can also prevent that no single person alone can make decisions and a drive culture that several people are involved in the process. Selecting the Best S&OP Software: 7 Tips for Success. While the future cannot be exactly predicted, an effective financial plan gives a realistic representation of overall financial performance driven by certain assumptions. Using the right tools for planning and analysis is critical for effective decision-making. Once selected, enter the desired change for each cell. A base case scenario can adapt the most likely assumptions to model the financial performance under that scenario. Is the greater value better than diverting those funds to a different investment? 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. There are two main categories of challenge that organizations must overcome to implement the kind of scenario building that will allow them to succeed. For example, you may want to perform scenario analysis on the consequences of a real estate crash on the economy. And a plan C. And potentially many more variations. 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. Let's look at how to build what-if scenario analyses in two different tools; Excel and Causal. 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. 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. As the World Economic Forum says, Scenario planning can help companies prepare for future challenges and uncover new opportunities for innovation. With scenario analysis, you can model possible outcomes driven by varying risk factors to understand what the overall impact might be on your business. Break even analysis is often a component of sensitivity analysis and scenario analysis performed in financial modeling. What impact does inflation have on our supply costs and accounts payable? 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. Put simply, what-if scenario analysis is a way of understanding how changes in one thing affect another. Another difference between these two methods is their uses. Tracking profitability metrics is essential to the success of every business. It seems like everyone is talking about digital transformation these days. Cost / value optimization and sensitivity analysis is an important consideration for every portfolio and must be a cornerstone of every portfolio review to consider the options and impacts of any fund allocation adjustments. You charge $2 per loaf of bread, and you sell 100 loafs a day. Click the DATA tab on the Ribbon. Scenarios are based on assumptions you make about your business, industry, and overall market volatility. 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. They are both methods you can use to evaluate the level of risk involved in a variety of situations. Furthermore, in a sequential process budget/finance constraints are not represented and these are equally, if not more important, than operational constraints. Is more value earned and / or is the value achieved sooner if the investment is increased? If organizational data is not integrated, consistent, and of high quality then effective strategic scenario planning just isnt possible. 4. . A change driven by one analysis may breach a constraint in another element of the business. Go to the Data tab in the Excel Ribbon. Resource capacity planning and utilization are primarily focused on people. While changes to prioritizations are potentially disruptive because they may involve shifting away from work that is already underway, it is vital to ensure that the work being done is always optimally aligned with the ever evolving needs of the business. 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. A dialog box will appear on the screen with empty scenarios. 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. But challenges around tools arent simply a case of relying on manual spreadsheets. The World Bank suggests eight steps: 1. Hence, it is best to assess the magnitude of such risks (through risk analysis) and weigh them against potential benefits . Scenario planning projects are multidimensional you cant simply conduct one scenario analysis and expect to make the right decisions. 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. Unfortunately, these tools only allow companies to automate their existing process, which remains sub-optimal. This allows for the elevation of funding and governance decisions to a more strategic level and ensures all planning and delivery remains a top-down exercise, helping to maintain alignment between priorities, delivery and benefits. The scenarios may occur or may not occur, but the investor has to consider even the worst case scenario. Scenarios and Data tables take sets of input values and determine possible results. Scenario analysis, sensitivity analysis and what-if analysis are very similar concepts and are really only slight variations of the same thing. These are possibly my most favorite analytical techniques in Power BI. But simply accelerating the frequency of planning and review cycles is not enough. August 15, 2020. To do this, we're going to use an arbitrary equation whose output decreases with the price of the bread: We chose the equation just so that it would match some of the data-points earlier in the post, and decrease quickly as you rose the price of bread. We naturally tend to think in terms of variables, making Causal quick to learn and easy to use. Portfolio prioritization should be a consideration for all portfolios, but particularly those that are directly aligned with work to support the current goals and objectives of the organization the strategic portfolio, programs, projects, products and so on. 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. In business terms, this refers to evaluating scenarios that may affect the valuation of a company or its cash flow. By this, we can enter multiple scenarios. Sensitivity analysis looks at the effects of one variable at a time. 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 business's financial performance based on varying assumptions. To add a scenario, select add option as shown below. In turn, business leaders can determine the impact of certain business decisions. The difference between the two is that sensitivity analysis examines the effect of changing a single variable at a time. Based on these scenarios, it helps users predict various possible outcomes or results. And it is essential for HR, leadership and development and procurement functions so they can plan for any resource changes that are required. We'll start by building our model. Sensitivity analysis can predict the outcomes of an event given a specific range of variables, and an analyst can use this information to understand how a change in one variable affects the other variables or outcomes. Scenario analysis can be used to estimate the behavior of the system in response to an unexpected event . what if scenario analysis (WISA): What-if scenario analysis (WISA) is a business planning and modeling technique used to yield various projections for some outcome based on selectively changing inputs. It is a great tool that can help explore the possible outcomes when varying drivers are applied to business financial models. Annual planning has given way to quarterly planning, which is in turn evolving into continuous, adaptive planning. The best-case scenario would be for us to finish the work by tomorrow. 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). 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. The second stage in this evolution is to add predictive analytics capabilities on top of the existing automated S&OP process like forecasting or planning engine driven supply planning. maximize revenue, maximize net income, minimize inventory). If an organization has a roadmap for a portfolio or business area (and these roadmaps should be in place for every portfolio, business area, department, etc. Leveraging a planning platform that consolidates data from across your organization into a central database is key to effective data organization. Now from the Goal Seek option from What-If Analysis, select the value we want to compare. #2. Choose the target issue, scope and time frame that the scenario will explore. Something went wrong while submitting the form. Figure 2 The second way is to insert a project status column using the columns feature, Figure 3. If your tools are focused only on resource management, or only on financial analysis then you are making decisions with incomplete information and at least some of those decisions will prove to be wrong. And that means there must also be integration with adaptive project management the execution focused aspects of portfolio management. 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. 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. While scenario analysis evaluates the effects of changing multiple variables in your model, sensitivity analysis focuses on one key variable at a time to see how the model responds. The first is by selecting the project and using the General tab details form to make the project status assignment, Figure 2. Have a play around with the demo model below, then hit Use this template to see how it's built. In a constantly changing world, organizations need a plan B. But its only one of the imperatives within a complete strategic portfolio management approach to delivering success consistently and from the top-down. To understand scenario analysis vs In todays world things move fast with emerging opportunities and threats, new technologies enabling innovation, and shifting priorities and imperatives. Where are upcoming bottlenecks and how easily can they be alleviated? This leads to a very rigid risk management assessment. How to automate your FP&A on top of Google Sheets? In the worst-case scenario, we would have to start the project all over again. Data formats are often inconsistent with each other, making it impossible to construct scenarios for what-if comparisons. Microsoft Excel may have a what-if analysis function, but that doesnt mean you should be using it to determine the fate of your organizational investments. of the optimal benefit choice? Those categories are: The scenario planning process relies on the ability to assess organizational data and develop multiple scenarios in support of the strategic scenario planning process. Furthermore, organizations should be looking to evolve beyond programs and products, embracing emerging methods like capability-driven planning and delivery. It is another tool used in financial modeling, sometimes alongside sensitivity analysis. Resource capacity planning is the ability to understand, manage and forecast resource demand and utilization, One comprehensive platform delivering world-class strategic portfolio management, Align every dollar with business strategy, Guide to Strategic Scenario Planning (What-If Analysis). Recognizing likely variables By considering what if scenarios, a project manager gets a better idea of ways in which a project may not go to plan. Given the importance of forward-looking assessments of climate-related risk the TCFD believes that scenario analysis is an important and useful tool for an organization to use Choose 'leading indicators'. What if interest rates increase? 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. With scenario analysis, all inputs changes are made at the same time with the purpose of assessing the effect on the business plan of a . A Scenario can have multiple variables, but it can only . Why do scientists use the scientific method? Scenario analysis, sensitivity analysis and what-if analysis are very similar concepts and are really only slight variations of the same thing. Scenario analysis is a well-established method for developing strategic plans that are more flexible or robust to a range of plausible future states. 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. For instance, if a company is dealing with high employee turnover, they want to find a new way to hire employees. Projecting investment returns or losses - The analysis makes use of tools to calculate the values or figures of potential gains or losses from an investment. Causal can easily account for uncertainty. Why Companies Need to be Following a Revenue-Based Hiring Model, We've outlined the key questions all finance leaders need to ask as they evaluate FP&A softwares for their business, Understanding the Fundamentals of Valuation. Scenario analysis is a powerful process for navigating the uncertainty of the future by analyzing the potential business impacts of future events and considering alternative possible outcomes. Business rules/heuristics by definition does not consider global constraints that span multiple dimensions such as operational, financial and time. Next, identify the key factors, trends and uncertainties that may affect the plan. Every portfolio is expected to deliver benefits to the organization so this analysis must be applied in every situation. 2. Earlier in this section we looked at cost / value optimization, but benefits and outcomes are nor restricted solely to financial measures. Watch this webinar now to learn how the right what-if scenario capabilities can help you quickly and decisively anticipate any possible disruptions before they occur, and adjust on-the-fly to whatever comes your way. Flesh out scenarios. Staff end up staying late to crunch unreliable numbers in inappropriate tools to try and develop options that are always going to be unsatisfactory. How do industry growth rates affect our key performance indicators (KPIs)? Sign up and get started for free, or book a demo to learn how Causal can transform your finance function. Why is strategic scenario planning / what-if analysis important? A worst-case scenario, on the other hand, will explore more unfavorable assumptions and how they impact the financial performance of a business. Scenario analysis is the practice of modeling possible future outcomes. Excel remains the tool of choice for companies embarking on their S&OP journey. 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. Scenario planning can be applied to assets, products, capabilities, programs, projects and any other portfolio that the organization needs to manage. Write scenario plots. Partner Story: JMT Consulting - a Vena Distinguished Partner. Excel's scenario manager is a good tool for analysing models that are already built in Excel, but it has one large downside. To explain what this means, let's go straight to an example. This term is defined in the 5th edition of the PMBOK. Scenario analysis takes the best and worst probabilities into account so that investors can make an informed decision. Finally, analysis must cover each of the common types that we have discussed here. Sensitivity Analysis: Why You Need Both Financial analysts determine when to use scenario analysis vs. sensitivity analysis to predict future results. Ultimately, when scenario analyses are done accurately, youre empowered to make better decisions that drive business growth. On the Data tab, in the Forecast group, click What-If Analysis. What-If analysis is a powerful business analytics planning tool when used correctly. 1. And they must be able to do that with confidence that the scenarios they are reviewing are accurate and complete. Traditional S&OP solutions take the demand plan as an input, and at best they allow users to prioritize which demand they want to fulfill first. Let's say you sell bread at a market. What are the differences, now and in the future, between the most preferred options. Whether the company engages in bid support, customer negotiations, trade promotions or marketing, there is a significant opportunity for companies to evaluate the product, customer and price/discount/promotional mix. Define the value(s) of your changing cell(s); i.e. Step 1. However, within the realm of scenario analysis, the consideration is to optimize the way existing resources are utilized the percentage of time allocated; the use of different skill sets, experience levels, job functions; etc. Assumptions for each activity changes in a project. 3. Organizations have to excel at strategic thinking if they are to optimize performance. When creating your sales capacity model, you discover your revenue parameters based on the number of new sales representatives you plan to hire.If you set your assumption for quota attainment based on . Both analyses help companies gain a better understanding of their potential outcomes. On the other hand, scenario analysis assesses the effect of changing all the input variables at the same time. Lets start with the obvious. To question "what if" is part of human nature and the backbone of scenario planning in business. What is Scenario Analysis vs Sensitivity Analysis? These models often fail to predict . Having benefits realization software that offers what-if scenario planning is vital to strategic portfolio management. Cost / value optimization is concerned with ensuring the return on investment (ROI) for all organizational investments is as high as it can be. The lack of certainty in the premises and inputs brings about investment risk. The impact of this change in business strategy must be identified immediately in an intuitive way for the user. With the business environment being an ever-changing one filled with uncertaintyespecially these daysconducting regular what-if scenario analysis will allow you to see how different internal and external inputs might cause business key performance metrics to change so you can help your business make proactive planning decisions that account for a range of possibilitiesboth positive and negative. Sensitivity analysis is an important part of that process. It also allows project managers to prepare contingency plans in order to overcome the impacts of the unexpected situations. While no business has exact predictions of what could occur in the future, scenario analysis with Venas easy-to-use platform can help provide predictive insights on possible future outcomes. To use Scenario Analysis, follow these five steps: Do I need a subwoofer with my Sonos soundbar? A Data Table works with only one or two variables, but it can accept many different values for those variables.