TABLE OF CONTENTS There is an intrinsic impermanence in industry and indeed the management task is to recreate the company in a new form every year.
Sir John Harvey-Jones, Making it Happen Reflections on Leadership, 1988.
Most business plans are deterministic, which means that they rely on the use of single point estimates for input data and assumptions. Under conditions of uncertainty, which is the most common environment in which business plans are developed, it can be difficult to produce accurate estimates using a single point approach and in such situations it would be preferable to specify input data as ranges.
For example, to say that the sales volume for the next period will be between 8500 and 12,500 will offer a greater probability of being right than a single point estimate of, say, 10,000. Similarly, to specify the average sales price as being between 45 and 52 will often have a greater chance of producing useful results than having to depend on a single projection of 50.
The structure of a deterministic plan, by its very nature, cannot cope with input data specified as ranges. However, it is possible to develop a model which enhances a deterministic, single-point estimate plan to allow data in the form of ranges to be incorporated, and which in effect converts the plan from a deterministic to a probabilistic, stochastic or risk analysis model. Risk analysis is also sometimes called probabilistic modelling, stochastic modelling or Monte Carlo modelling.
The principle...
