What happens to the analysis if what… is, what is its application, how is it done and what are the results? In this article, what if analysis is a specific type of scenario analysis? We explain how to do it and review the results of each. If you want to anticipate potential complexities and the impact they have on your company’s performance, better manage risk in your organization, or better assess the impact of changes in the value of your estimates, stay tuned for the rest of this article.
Decide by finding scenarios
Mahnaz is a successful retailer and has three jewelry stores.
She also plans to open a clothing store selling luxury women’s clothing with French brands.
He has written a business plan based on several hypotheses and has made good estimates of competition, industry health and sales forecasts.
But how can he try this plan and decide whether to implement his idea or not? He must make sure that this new business will remain stable under difficult conditions. To achieve this, he decides to use the “what if” analysis.
“What if” analysis is a special type of scenario analysis in which you ask a number of “what if” questions to anticipate potential complications and the impact they have on your company’s performance. Mahnaz can ask questions like: “What if another luxury women’s clothing store opens on the same street?” And “What if my most important supplier goes bankrupt?” (Bankruptcy) These questions help Mahnaz decide if there is a guarantee to protect her business if the dangers she thinks are real happen.
What consequences should he expect if another women’s clothing store opens in the same area? How do revised sales figures change a company’s profits and losses? Similarly, what effect will the bankruptcy of the original supplier have on sales and customer service? Are there other suppliers? How long does it take for Mahnaz to establish a successful working relationship with them? If any of these challenges occur, how long will it be possible to sustain its business with the liquidity it needs?
There are many questions that you can answer through “what if” analysis or “what if” analysis. These questions can be high-level risk management planning questions or questions that have definite and measurable effects. The choice of scope and depth of analysis depends on you. You can have a completely qualitative or completely quantitative analysis. Usually the best case scenario is something between qualitative and quantitative, and includes elements of both.
Qualitative “What if” analysis
“What if” analysis, as a risk management tool, helps you assess the risks of a brainstorm and then look for a solution. Mahnaz “What if” analysis may include the following:
- What happens if a competitor opens a shop on the same street?
- What if my resources are limited?
- What if the exchange rate changes?
- What happens if the sales tax goes up?
Mahnaz has to answer all these questions and make sure that her business plan has enough possibilities. When asked the first question, “What if a competitor opens a shop on the same street?” Looking deeper, he realizes that there are strategic options to consider, these options may include the following:
- Reducing prices.
- Identify corner markets and marketing in them.
- Offering a series of complementary products.
- Improve customer service
Then, Mahnaz can explore each of these options and adjust her business model or plan based on them.
Quantitative “What if” analysis (sensitivity analysis)
A special type of “what if” analysis is called sensitivity analysis, which examines the effect of changes in the value of existing model estimates or hypotheses. The question that arises here is: “How does changing this value affect other parts of the model?” This type of analysis is usually used in decisions using a spreadsheet.
For example, Mahnaz may want to know how the fall in prices will affect the profits and losses of her business. Using sensitivity analysis, it can manipulate sales figures to see how much it can lower prices. In the same way, he can examine exchange rate fluctuations to ensure that, despite these changes, his proposed model is sound and can maintain his desired profit margin.
By integrating the sensitivity and flexibility analysis of the spreadsheet, you can easily and quickly see the impact of any changes on sales, profits and losses and net income. Then, you can identify which changes are having a significant impact on your business, and which ones need further consideration and planning. Your hypothesis may be that increasing the cost of goods sold is far more important than increasing the rent of a shop, however, with sensitivity analysis you can test these hypotheses quickly.
Once you have a probabilistic understanding of how values change, you can use Monte Carlo analysis. This allows you to perform sensitivity analysis with large amounts of data and obtain integrated outputs.
What if Analysis Steps
Step 1: Specify the scope of the analysis.
Clearly identify the boundaries of required and risk information. Do you want to know the potential impact of the risks associated with the sale? Do you want to make decisions based on your investment activities? Maybe you want to focus on employee retention issues? Our Risk Analysis article will help you identify potential sources of risk, including risks arising from human, financial, and political change activities.
When should we use “What if” analysis:
Because this analysis is so simple, you can use it for any kind of decision. What decisions are made at the crossroads and what are the planning issues. What if analysis identifies your concerns quickly and effectively, and examines those that are most likely to be troublesome.
Step 2: Identify the underlying problems and analyze them in more depth.
The scope of the analysis identifies the problems you want to address. When it comes to sales, you probably start with questions about sources of supply, competition, costs, and demand. With investment activities, you will focus on changes in interest rates, market conditions and economic forecasts. Employee retention issues will also focus primarily on the ability to pay more than competitors, the cost of training opportunities, and organizational culture.
Step # 3- Discovering Your Purpose Ask the “What if” analysis questions for each problem.
Think of a hypothetical solution that you think affects each issue. Which one might affect sales, investment, and employee retention?
- What if the cost increases by 5%, 10% or more?
- What happens if interest rates increase by 1.2%, 1/4 or more?
- What if the cost of training increases by 2%, 4% or more?
Because your What If analysis questions rely more on hypotheses, it is best to try the hypotheses. This will help you identify good questions that are worth considering. The tools that help you in this way are the ladder of point inference and point analysis.
Step 4: Answer the “What if” analysis questions
Answer the “What if” analysis questions by delving deeper, testing the hypotheses, and using sensitivity analysis. If there is a significant impact on a particular section, it is best to examine that section more carefully, otherwise you will conclude that the impact is not significant enough to be worth further planning and review.
Analyze the risks you find for potential impacts. Using the probability / risk impact chart, you can identify which questions identify the risks that you need to focus on the most. This helps you to limit your focus to decisions that relate to potential and potential risks.
Step 5: Use the results in your decisions
Once the analysis is complete, align your plan and plan with it or take new action accordingly.