What-If Analysis: Definition and Example
What-If Analysis: this article explains the What-If Analysis or Scenario Analysis in a practical way. After reading it, you will understand the basics of this powerful Decision Making tool.
We cover what a What-If Analysis is, give you an example and explain what the 5 steps are to use this tool.
What is a What-If Analysis?
All throughout the day, people make decisions; at work, at home or wherever. Some decisions are taken without thinking, but others require serious consideration, comparison and analysis.
This analysis method is a decision making method that helps to make the right decision and think about what effect it will have beforehand.
It can also prevent that no single person can make a decision, but that a number of people are responsible for that. The What-If analysis is helpful for that as well.
This method is a suitable way for both companies and individuals to come up with different scenarios. It is particularly useful if data is limited or if a company needs more information before they can make a decision. The best result can then be carefully chosen by examining the various results.
Generally, these kind of analysis are executed in data tools, such as Excel. These tools allow for features, such as the scenario manager. Adjustable cells and data tables allow for multiple variables like interest rates.
What-If Analysis example
A What-If Analysis is about looking at what happens when certain actions are taken. From the different scenarios, you then look at which results contributes most to the objective. For instance, if a company is dealing with high employee turnover, they want to find a new way to hire employees.
They come up with the following scenarios and immediately determine the advantages and disadvantages:
- Offering permanent contracts to all the temporary employees. The advantage is that all employees know what is expected of them and this increases loyalty. The disadvantage is that it is expensive and it becomes more difficult to fire an employee if they do not perform well.
- Implementing an individual bonus for each employee based on achieving their individual targets. The advantage is that it will stimulate employee performance. It can be a disadvantage if it leads to employees competing with each other.
- Work with freelancers as much as possible. The advantage is that the company will only pay them when they are needed. The disadvantage is that they are less loyal to the company.
Based on the possible situations described above, the company can make a decision. Costs will of course be included in the decision. However, the primary goal is not to limit themselves to a single solution, but to include all solutions in the decision.
What If Analysis as a brainstorming technique
Essentially, this is a brainstorming technique. The first step in an analysis is identifying possible solutions, as was shown in the example.
Only brainstorming with a team can lead to usable scenarios.
As such, the What-If Analysis can be seen as a structured brainstorming sessions that can be applied at practically any stage of the business process. Based on the answers to the what-if questions, risks are revealed. The less acceptable the risk, the more likely that solution will not be chosen.
What If Analysis: 5 basic steps
The execution of the analysis can differ. In general, it is wise to follow the steps below to achieve a good result:
1. Assemble a team
A supervisor has to assemble a team that is capable to come up with possible solutions to a problem defined in advance. The What-If analysis would be pointless if the team does not have the required expertise.
2. Develop ‘what-if’ questions
Together, the team will develop ‘what-if’ questions that relate to the problem definition. It is mainly about useful, quality ideas and the potential risks that these carry. Determining the advantages and disadvantages really helps.
3. Risk assessment
Together, the team members will consider the entire list of ‘what if’ questions they have come up with earlier. They will evaluate all ideas and assess possible risks that the different scenarios entail. During this phase, they also determine the likelihood of mistakes and the consequences they would have.
4. Develop a recommendation
The team considers the acceptability of the potential risk. Based on that, they come up with a plausible recommendation for a scenario. If the team expects that corrective measures will need to be taken, the risk is unacceptable.
If it is not likely that further measures will be needed, the risk is acceptable and the scenario can be chosen. By the way, it is a good idea to not discard the other scenarios yet in case the chosen solution fails after all.
The choice is made for the previously selected solution. It is important to evaluate along the way and check if the scenario goes as predicted. Sometimes, it can be necessary to make adjustments or follow up on things.
It is even possible that people will choose to try out a different scenario.
It’s Your Turn
What do you think? Is the What-If Analysis or Scenario Analysis applicable in your personal or professional environment? Do you recognize the practical explanation or do you have more suggestions? What are your success factors for good decision making?
Share your experience and knowledge in the comments box below.
- Hsia, P., Samuel, J., Gao, J., Kung, D., Toyoshima, Y. & Chen, C. (1994). Formal approach to scenario analysis. IEEE Software, 11(2), 33-41.
- Postma, T. J. & Liebl, F. (2005). How to improve scenario analysis as a strategic management tool?. Technological Forecasting and Social Change, 72(2), 161-173.
- Schoemaker, P. J. (1995). Scenario planning: a tool for strategic thinking. Sloan management review, 36(2), 25.
How to cite this article:
Mulder, P. (2017). What-If Analysis: Definition and Example. Retrieved [insert date] from Toolshero: https://www.toolshero.com/decision-making/what-if-analysis/
Published on: 07/22/2017 | Last update: 11/09/2022
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