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ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk

Orlin Pharma operates in a sector where regulation, technology and customer behaviour could change in highly uncertain ways, and historical data is unreliable. The board wants to explore how its strategy would hold up under several coherent, plausible futures rather than assign probabilities to outcomes. Which technique is most appropriate, and what does it imply for risk management?

Scenario analysis is most appropriate. It develops several coherent, plausible futures to test how robust the strategy is and to identify early-warning indicators, without needing reliable probabilities or historical data, which Orlin lacks. Value at risk and expected value depend on such inputs.

  1. AScenario analysis; it builds narratives of alternative futures to test strategy resilience and identify early-warning indicators without needing precise probabilitiesCorrect
  2. BValue at risk; it estimates a single maximum loss using historical volatility
  3. CExpected value analysis; it requires reliable probabilities for each outcome
  4. DSingle-variable sensitivity analysis; it models the combined effect of all uncertainties simultaneously

Explanation

Scenario analysis suits high uncertainty where probabilities cannot be reliably estimated, as it tests strategies against plausible alternative futures and highlights signals to monitor. Value at risk and expected value rely on historical data or probabilities. Sensitivity analysis changes one variable at a time, so it does not capture combined effects.

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