Question

Difference between simulation and sensitivityanalysis

Answer 1

One of the key functions of management is planning. That may not sound like a difficult responsibility, but when you ask 'planning for what?', the discussion becomes more complex. How can managers effectively plan for different future possibilities if nobody knows what the future holds? The answer is that knowledgeable, skilled managers are able to utilize 'what if' analyses to anticipate the most likely future situations they will need to manage, and then plan accordingly.

To help bring these analyses to life, let's use a simple example. Imagine you've developed a new composite material that can be used for mobile phone casing and also absorbs solar energy to charge the phone. Yours isn't a case, but an actual composite that the manufacturers can make their phones with that is practically unbreakable, uncatchable, and keeps a phone charged all the time. Like any good entrepreneur, you want to know what to expect when your patent is finalized and you announce this new material in three months.

There are three popular 'what if' analyses that can be performed to help you conceptualize what types of situations you may face in the future. Each is slightly different, and each will give you a little more information than the other two. These three, which we'll discuss in more detail below, are: sensitivity analysis, scenario analysis, and simulation analysis.

Sensitivity Analysis

A sensitivity analysis is an analysis that estimates how sensitive your dependent variable (in this case, amount of material sold) is to a change in an independent variable (for your casing composite, price). In some situations, you may have historical data to use when completing your sensitivity analysis, but in your case, you have to use as much information as you can find about how much work it is for mobile phone manufacturers to change their suppliers, how much they currently pay for casing material, and how much you might be able to help them be offering a truly innovative new feature on their phone.