5 key reasons why CEO’s should ALWAYS consider performing Scenario Analysis

Today we wanted to discuss about the importance of scenario analysis in decision making. Scenario analysis is a process to determine and analyse how a projected change in variables can affect the outcome. It is often used to compare different scenarios and their potential outcomes based on changing conditions. From this, the analyst can decide on best case and worst case scenarios. The idea behind this construct is to establish future planning which can minimise surprises and broaden the span of managers’ thinking about different possibilities

A brief History of Scenario Analysis

The scenario planning concept first emerged following World War II, as a method for military planning. The US Air Force tried to imagine what its opponents might do and to prepare alternative strategies. The big push for scenarios as an organisational or institutional model for clarifying ideas about the future goes back to the Department of Defence in the 1950s. In the 1960s, Herman Kahn, who had been part of the Air Force effort, refined scenarios as a tool for business prediction. The great value of a scenario is being able to take complex elements and weave them into a story which is coherent, systematic, comprehensive, and plausible.

Public attention towards the use of scenarios was initially alerted by the publication of the highly contentious “The Limits to Growth by Dennis and Donella Meadows”  in 1972. The early professional impetus was provided by Jay Ogilvy, Paul Hawken and Peter Schwartz in their seminal text Seven Tomorrows (1980) and wider acceptance was gained by the work of Michel Godet with a particular emphasis in his contributions on morphological analysis (1987 and 1995) in France, Garrett (1966) in the USA and Robertson (1983) in the UK (Ratcliffe, 1999). According to Ratcliffe (1999) primary purpose of scenarios is to create holistic, integrated images of how the future might evolve. These images, in turn, become the context for planning, a testing ground for ideas, or the stimulus for new development. Further, scenarios should inform decision makers and influence as well as enhance decision making

5 Reasons for Scenario Analysis:

1. Planning: Scenario analysis helps in assessing the impact of change in situation and approaching situations from a multi-dimensional perspective.
2. Forecasting investment returns: The analysis focuses on the impact of various factors over a period to derive results for forecasting the return on investment.
3. Mitigate Risk: Scenario analysis helps decision makers to assess the risk factor and prepare for mitigation that may occur during the investment process.
4. Better Decision: Scenario analysis enables a business to make an informed decisions in a rapidly changing environment based on the data driven results.
5. Create a strategic thought: Scenario analysis provokes a strategic thought by removing obstacles to creative thinking and aim to anticipate future threats and opportunities which helps in creating better options for decision making.

How Analytics can help in Scenario Analysis

Analytics can be a great tool to evaluate scenarios quickly and to bring in a much better cognitive element to make the user understand the impact of a change in one or more variables. We have shared a sample scenario analysis dashboard which considers expense ratio, interest cost and rate of tax to enable decision makers take decisions faster with an intention to trigger new creative thoughts. From a technology stand point we have used Power Bi as our data modelling and visualisation tool. 

Please try it out and let us know your thoughts on the comments section.