Question

Compare and contrast scenario analysis, sensitivity analysis, and simulation analysis.

Answer 1

• Sensitivity analysis: this is an analysis that estimates how sensitive a dependant variable is to a change in the independent variable. In some cases there would be historical data used to complete the analysis. In case of sensitivity analysis we only look at how sensitive is the changing outcome because of the change in a single variable. For example, you may think a manufacturer is going to pay big bucks for your composite, but think about the implications. If they use your composite, they will lose a lot of the money they make by selling power adapters and cords. Thus a sensitivity analysis would conclude how an x% increase in the price will result in the y% decrease in the amount of the product sold.
• Scenario analysis: this can be considered as an opposite to the sensitivity analysis. In scenario analysis, the assumptions are made on number of environmental factors & independent variables & their impact is considered on the outcome of the analysis. Thus in scenario analysis instead of looking at how one variable has an impact on the outcome we look at many factors that can impact a situation in the future. For example, if a company is selling a solar charging mobile phone composite, generally we think only about price impacting the sales, we can also consider other factors like what if we are not aware about the existing competition, use of material that makes the phone heavier, manufacturers opinion about the consumers, interference of material on clear data & voice signal etc.
• Simulation analysis: in case of simulation analysis, there are infinite calculations that are made in order to obtain the possible result & the probability for any choice of action. The entire process of simulation would compel the decision maker to take into account all the interdependencies & uncertainties that are involved with a particular project or decision. Thus, the viability of the project is determined on the basis of number of outcomes and the probabilities realized through a series of actions performed during the simulation analysis.