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.