Thursday, February 12, 2009
So once you start 'Thinking in Ranges'; the next key step is to understand what is driving that variability. If you are an executive making decisions based on numbers, then you should always:
1. Know the range around the number, and
2. Know the key drivers of that range.
A sensitivity chart shows you those drivers. It much more realistic than a tornado chart because it is varying all of the assumptions simultaneously and each assumptions varies according to its own distribution.
Sensitivity charts are also handy for negotiation and expense cutting. When negotiating, you know which dimensions you can compromise on and how much while still preserving your overall objective. With expense cutting, you can trim expense in low impact areas to preserve your upside.
I like to think of these as "Know What Matters" or "Where to Focus" charts. And every organization needs help in understanding where to focus its energies.