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A Role for Scenario Analysis

 
#1 A Role for Scenario Analysis
24/07/2002 00:00

James

With higher levels of market uncertainty, it seems to be trickier to get sign-off for strategy projects. I specialise in scenario analysis (stress-testing planned decisions using excel-based financial models). I enjoy this role because it integrates strategic planning and financial pragmatism. I have also found that once a board understands the sensitivity or robustness of the projections, they are more willing to commit to the strategy. Does this present a case of comparative advantage, whereby incorporating my financial modelling under your project badge might enhance the combination? I would appreciate your views.

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#2 Re: A Role for Scenario Analysis
25/07/2002 00:00

Denver McCann

James, I could not agree with you more....

The extent to which current trends in assessing strategic initiatives is done on a fairly adhoc basis is probably quite high, not to mention the risk of having junior consultants perform this task badly.

In my experience as a member of the KPMG consulting Business Modelling Team, not enough people value the services of a professional commercially minded business modeller. Our ability to convert strategic intent and theory into a believable model of the options being evaluated and then overlaying sensible scenario analysis and risk evaluation is not easily found and something which is usually the task left to the juniors on the team.

Strategy consultants might be great at thinking outside the box, however they then need to ground theory in financial reality, analysing and identifying the true drivers of financial performance in the organsiation, and the sensitivities arround those drivers.

In summary my coleagues have on many occassions not truely understood the value of a professional modeller, and subsequently having worked with us, will not embark on any significant decision making process without a reliable business modelling resource to assist in the analysis.... Having said that, I would assume that most credible strategy boutiques would have some of these types of resources as a core part of their team... if not give James a call.....

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#3 Re: A Role for Scenario Analysis
28/07/2002 00:00

AD

Hello James, I read your message with great interest. Can you please let me know how or where I can learn scenario analysis/business modeling. Are there any books on this or can I find it in any excel book? Your advise will be very helpful as this is something I would like to learn. Thank you very much indeed.

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#4 Re: A Role for Scenario Analysis
29/07/2002 00:00

James

As I may have mentioned, scenario analysis is really the integration of strategy and financial numbers. This means good news, and bad. The good news is that it is an appraisal technique that can be developed and implemented quite quickly. The bad news is that there is no formal module for learning it. It consists of a number of basic disciplines (Financial Accounting and Business Decision Analysis), and a good working knowledge of Excel. You can probably get good books on both of these at your local library, but there are none that really stand out.

Having said this, it is easier than it (now) sounds. Here are some guidelines about the technique:

1. Keep all of your assumptions on a separate page to the rest of your worksheets - this way they are explicit, and you can 'flex' them more easily.

2. Build each line of cost or revenue independently. The financial picture is like mother of pearl - layers and layers of thin detail.

3. When performing the 'what if' analyses, the art is in asking the right questions, which is where the strategic insight comes in.

As suggested here it is an art more than a science. However, if you have built the framework well, you can use brute force techniques to 'stress test' the financial projections. One of these is Monte-Carlo Simulation, which involves allowing all of the assumptions to move randomly within a range, and capturing the projections for, say 30,000 repetitions. This will tell you what catastrophic combinations could occur, and more importantly, how to avoid them.

If there is enough interest, I could put together a 'guru' piece on business modelling and scenario analysis. Let me know!

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#5 Re: A Role for Scenario Analysis
29/07/2002 00:00

AD

James, once again thank you very much for your reply. I am very interested in this and quite like your idea of a 'guru' paper. If this is not too much trouble. Perhaps you can email me on liyanaduk@yahoo.co.uk - rgds ashne

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#6 A slight change of subject
08/06/2007 17:42

Q to AD (#5)

I work in a similar role but I'm wondering what my future prospects are if I continue. 9Currently have 2yrs experience). Building financial/strategy models is all well and good but will this mean I can go on and do better roles where I'm not just seen as a spreadsheet monkey?

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