# How to proxy "sensitivity analyses" in a 45-minute case scenario?

Cases Finance Practice cases pricing
Neue Antwort am 1. Mai 2020
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Good morning PrepLounge community,

My case partner warned me about not considering 'sensitivity analyses' at the end of my Business Plan, in a recent case. It's hard to actually make a sensitivity analysis without a computer, but it makes sense to at least suggest some points of analysis.

My doubt is: what is a potential answer to a "sensitivity analysis" question that must be (of course) back-of-the-envelope?

I'd like to investigate two areas:

A. Thresholds/Boundaries
A1. Price threshold
Understanding the P* or the Contribution Margin* at which the NPV of my investment is = 0
--> This gives me a sense of the lowest price/CM possible to make my NPV still not negative
A2. Demand threshold (similarly for Q)
A3. Market share threshold (similarly for Mkt %)
A4. Cost threshold (similarly for Costs)

B. Volatility/Standard Deviation
A1. Price volatility
Understanding the standard deviation of P/MC
--> This can help me calculate a how many standard deviations I can 'accept' in P
A2. Demand volatility (similarly for Q)
A3. Market share volatility (similarly for Mkt %)
A4. Cost volatility (similarly for Costs)

Would this make sense? Any other aspects I should consider?

TJ

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Beste Antwort

Hello,

You are right, a sensitive analysis could be the right solution to most of pricing cases. On the other hand, you have to be able to give and answer without using a laptop and there are other strategies that can give you an 80/20 solution:

1. Cost based - Starting from the production and distribution cost, taht is usually the lower limit of your price range
2. Revenue based - Starting from the revenues targets that you could have, considering also the customers willingness to pay
3. Competition based - Starting from the analysis of the competitive landscape, analysing the actual market price and the potential competitive response

The final strategy can be a mix of the mentioned, don't forget the price differentiation strategy that can be important in many cases.
Before rushing into numbers, you can also ask the interviewer if you have any data or exhibit regarding the price elasticity of the market, that would be something similar to your initial approach. At the end of the case, you could mention as "next step" the possibility to run a proper "sensitivity analyses".

Hope it helps,
Luca

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Hi, a sensitivity analysis is a reasonable questions to ask in a strategy case. However, I would avoid an approach that is too complex or hard to follow by the interviewer (remember he is also not on his laptop). Usually the goal of a sensitivity analysis is to test your logic and to some extent math skill (but usually simple math). So I would suggest the following:

1. Develop an approach for the sensitivity analysis, e.g. Pick an assumption that matter the most for the company such as traffic for a port, govt. pricing for utilities
2. As if for these driver the interviewer has an available data if they have they will give you and usually simple numbers
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Hi TJ, that is certainly a solid expert question. On the face of it, your structure makes sense but it is likely to be too complex and there is an increased danger of losing your interviewer in this process. On the flip side, if your interviewer is very skilled in sensitivity analysis he can easily confuse you and make you feel lost. In conclusion, sensitivity analysis is a high-risk area.

It should be kept in mind that when questions on sensitivity are asked, it is to test your business sense and not your math skills. Therefore, be sure to keep it simple and avoid talking about standard deviation, abbreviations, and math terms.

Again, the interviewer wants to see that you have a solid business understanding and that you understand what are flaws in your calculations/model. Therefore, as an initial step, your list is solid, but I would recommend it to limit it to price, demand, and cost. Then you want to probe your interviewer by hypothesizing which variable has the largest impact on your model for a specific case. Then give an example, but do not do any math on this unless clearly asked. Again, you want to show that you understand the conceptual impact, so be sure to mention how it can impact the conclusion.

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Hi there,

In a real case project yes we would do sensitivity analysis as needed, in the models. However, in a case interview, I think it would be very rare that interviewer ask you to actually do sensitivity analysis, given its complexity.

Maybe worth to clarify with your case partner whether he/she is saying you should suggest/mention sensitivity analysis as one of the next steps, or does he/she actually wants you to do some calculation.

What would be more common is the interviewer would expect you to do some sanity check, i.e. putting your number into context and make a quick back-of-the-envelop assessment on whether your number is in the right ball park or not.

Best,

Emily

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Hi there,

are you referring to a standard case interview? You won’t have to cover sensitivity analyses there, unless you want to put as possible areas in risks and next steps. As mentioned by Emily, what you may want to do is a sanity check of your analysis, in particular after a market sizing.

Best,

Francesco

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Hi,
case preparation will be the classical one with 2 additional points to focus on:

• 80-20 prioritization: quickly navigate an important amount of data to find what really matters to the case resolution;
• Executive summary: develop 1-2 pages to present that sum-up the problem and your recommendations.

I have a couple of well done written cases, feel free to text me for sharing.

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