"What If" Analysis
Making Decisions by Exploring Scenarios
Denise is a successful retailer with three stores that sell women's accessories.
She's now considering opening a clothing store that specializes in luxury ladies' clothing from French designers.
She's written a business plan, which, of necessity, relies on a number of assumptions and best estimates related to things like competition, the health of the industry, and sales expectations.
But how can she test the plan to decide whether to go ahead? She needs to make sure the new business will remain strong and viable under a variety of challenging conditions. To do this, Denise has decided to use "What If" analysis.
In "What If" Analysis, a specific type of Scenario Analysis, you ask a series of "what if" questions to predict potential complications and the impact they'll have on company operations. Denise could ask questions like "What if another luxury clothing store opens on the same street?" and "What if my main supplier goes out of business?" Denise's questions could help her decide whether she has adequate safeguards in place to protect her, if the risks and complications she's thinking about actually happen.
If another luxury store opens in the same area, what impact can Denise expect on sales? How will these revised sales figures change the bottom line? Likewise, if her main supplier goes out of business, how will that affect sales and customer service? Are there other suppliers, and how long will it take to set up properly functioning relationships? And if she faces these challenges, how long can Denise sustain her operations given her cash flow needs?
There are many questions that you can ask and answer with "What If" Analysis. These could be high-level risk management planning questions, or they could be questions that have very specific, measurable impacts. It's up to you to choose the scope and depth of analysis. You could have a purely qualitative analysis or a purely quantitative one. A typical "What If" Analysis is somewhere in the middle, with elements of both.
Qualitative "What If"
As a risk management tool for decision-making, "What If" Analysis helps you brainstorm risks and then explore solutions. Denise's "what if" questions might include the following:...