Scenario analysis

Advanced Probability: Uncertainty in Data

Maarten Van den Broeck

Senior Content Developer at DataCamp

What is scenario analysis?

  • Strategic decision-making method
  • How do different combinations of conditions affect outcomes?
  • Prepare for multiple future scenarios

Evaluating different paths

Advanced Probability: Uncertainty in Data

Scenario types

  • Baseline scenario: things stay the same
  • Best-case scenario: optimistic view
  • Worst-case scenario: pessimistic view

Three types of scenarios

Advanced Probability: Uncertainty in Data

Applications of scenario analysis

  • What happens if...?
  • How will this change if this changes?
  • What can we expect best-case or worst-case?

 

  • Examples:
    • What happens if inflation rises faster than expected?
    • How will our profits change if demand decreases by 20%?
    • What's our best and worst-case revenue projection for next year?

What if?

Advanced Probability: Uncertainty in Data

How to conduct scenario analysis

  1. Identify key variables

Illustration of variables

Advanced Probability: Uncertainty in Data

How to conduct scenario analysis

  1. Identify key variables
  2. Define possible scenario's

Illustration of different scenarios

Advanced Probability: Uncertainty in Data

How to conduct scenario analysis

  1. Identify key variables
  2. Define possible scenario's
  3. Model the outcomes

Illustration of scenario results

Advanced Probability: Uncertainty in Data

How to conduct scenario analysis

  1. Identify key variables
  2. Define possible scenario's
  3. Model the outcomes
  4. Analyze and compare results

Illustration of a person analyzing data

Advanced Probability: Uncertainty in Data

How to conduct scenario analysis

  1. Identify key variables
  2. Define possible scenario's
  3. Model the outcomes
  4. Analyze and compare results
  5. Develop strategic responses

Illustration a person communicating possible strategic responses

Advanced Probability: Uncertainty in Data

Example: Retail business revenue forecast

Scenario Projected Monthly Revenue Projected Operating Costs Projected Net Profit/Loss
Best-Case $700,000 $400,000 +$300,000
Baseline $500,000 $450,000 +$50,000
Worst-Case $350,000 $480,000 -$130,000

Visualization of scenario analysis results

Advanced Probability: Uncertainty in Data

Example: Retail business revenue forecast

The retail company plans accordingly:

  • High demand: increase marketing efforts, expand inventory, open more stores
  • Stable demand: proceed as usual and monitor
  • Low demand: cut costs, essential products only, delay expansion

Image of people shopping

Advanced Probability: Uncertainty in Data

Let's practice!

Advanced Probability: Uncertainty in Data

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