The document serves as a practical guide for managers on using Excel to make more rational business decisions, illustrating through various case studies how to apply analytical tools like NPV and IRR for investment analysis. It covers topics such as decision-making frameworks, option comparisons, and methods for cost savings through investments in technology and process improvements. The guide also includes a sales pitch for an online course that provides detailed calculations and case studies in Excel.

1. 1
Decision Making with
Excel for Managers
Practical guide how to use Excel to make more
rational choices

2. 2
In business you have to make a lot of important decisions
As a manager you will be tempted to trust your guts and use your experience to
decide what and how to do it. Sometimes this approach may be misleading

3. 3
In business you have to make a lot of important decisions
In this presentation I will show you how to make more rational choices as a manger
using Excel. We will go through a lot of case studies that will help you master this skill.

4. 4
Option comparison Rankings
Basic tools to make
decisions
What to do when there is a
lot of uncertainty
Make-or-buy analysis
Below how the presentation is organized.

5. 5
This presentation will help you make
better decisions as a manager using Excel
on the level of top management
consultants

6. 6
In business you have to make a lot of important decisions
In this presentation I will show you how to make more rational choices as a Manger
using Excel. We will go through a lot of case studies that will help you master this skill.

7. 7
Decision Making with Excel for
Managers
$190
$19
What you will see in this presentation is a part of my online course where you
can find case studies showing analyses along with detailed calculations in Excel
Click here to check my course

8. 8
Basic tools to make decisions

9. 9
Basic tools to make decisions –
Introduction

10. 10
In this section we will discuss the basic tools and we will apply them to
solve case studies
Time Value NPV & IRR
Investments – General
thoughts
Cases studies devoted to
investment analyses

11. 11
Time value of money

12. 12
Let’s first start by calculating what is the future value of 100 USD
100 100
Today After 1 year
100
After 2 years
Nominal Value
Interest rate you can earn
every year 5% 5%
Future Real Value of 100
that we have today 100 105 110
Nominal
Value x (𝟏 + 𝒓) 𝟏 Nominal
Value x (𝟏 + 𝒓) 𝟐

13. 13
Now imagine that the you are getting 100 USD every year. You want to
calculate the Present value of the money
100 100
Today After 1 year
100
After 2 years
Nominal Value
Interest rate you can earn
every year 5% 5%
Present Value
100 95 91
Nominal
Value
(𝟏 + 𝒓) 𝟏
Nominal
Value
(𝟏 + 𝒓) 𝟐

14. 14
NPV

15. 15
Let’s start with a short definition
 NPV stands for Net Present Value
 NPV is the difference between the present value of cash
inflows and the present value of cash outflows over a
period of time usually related to some investment
 It’s used to determine whether something (action,
investment etc.) makes sense or not
NPV =

16. 16
Just as a reminder Present Value of money is different than the Nominal
Value
100 100
Today After 1 year
100
After 2 years
Nominal Value
Interest rate you can earn
every year 5% 5%
Present Value
100 95 91
Nominal
Value
(𝟏 + 𝒓) 𝟏
Nominal
Value
(𝟏 + 𝒓) 𝟐

17. 17
Let’s have a look at the NPV for a small investment
- 1 000 300
Year 1 Year 3
300
Year 5
Cash flows generated by
the investment in nominal
value
300
Year 2
300
Year 4
- 1 000 272 247
Present value of cash
flows generated by the
investment for interest
rate r=5%
286 259
64
NPV 5 year for the end of
Year 1; rate r=5%
300
(𝟏 + 𝟓%) 𝟏
Formula for the present
value calculations using
interest rate r=5%
300
(𝟏 + 𝟓%) 𝟐
300
(𝟏 + 𝟓%) 𝟑
300
(𝟏 + 𝟓%) 𝟒

18. 18
NPV enables you to make decisions about specific investment
NPV 0>
 The investment can generate more cash than it
requires. Can be considered to be done
NPV 0<
 The investment will be eating away cash. Rather
consider not doing it
NPV 0=
 Neither creates nor destroys value. Look for
other criteria i.e. strategic, tactical factors

19. 19
Let’s have a look at the NPV for a small investment
- 1 000 300
Year 1 Year 3
300
Year 5
Cash flows generated by
the investment in nominal
value
300
Year 2
300
Year 4
- 1 000 272 247
Present value of cash
flows generated by the
investment for interest
rate r=5%
286 259
64
NPV 5 year for the end of
Year 1; rate r=5%
300
(𝟏 + 𝟓%) 𝟏
Formula for the present
value calculations using
interest rate r=5%
300
(𝟏 + 𝟓%) 𝟐
300
(𝟏 + 𝟓%) 𝟑
300
(𝟏 + 𝟓%) 𝟒

20. 20
IRR

21. 21
Let’s start with a short definition
 IRR stands for Internal Rate of Return
 IRR is a discount rate that makes the net present value (NPV)
of all cash flows from a particular project equal to zero
 IRR tells us how much you would have to earn on saving
account every year to get to the same results as from the
investment you are analyzing
IRR =

22. 22
If you want to decide on whether to do certain investment or not
compare IRR with the right interest rate
IRR
Interest
rate
>
 The investment can generate higher returns than
the alternatives. Can be considered to be done
IRR
Interest
rate
<
 The investment will generate lower returns than the
alternatives. Rather consider not doing it
IRR
Interest
rate
=
 The investment is as good as other alternatives.
Look for other criteria i.e. strategic, tactical factors

23. 23
NPV and IRR gives you the same directional information
NPV 1 NPV 2>
 Investment 1 is better than Investment 2
IRR 1 IRR 2>
 Investment 1 is better than Investment 2

24. 24
NPV – How to calculate it in
Excel

25. 25
Investments – General
thoughts

26. 26
Apart from capacity increase there are 4 main reasons why you do
investment
Investments
Replacement
Required by the
customer
Reducing costs Removing bottlenecks
Total cost of Ownership /
Usage – comparison
Margin that may be lost if you
don’t do the investment
Margin that can be gained if
you do the investment
Change in labor costs
Change in materials and
related costs
Change in energy & other
utilities costs
Margin gained thanks to the
removal of the bottlenecks
Reduction of costs related to
production
Reduction of other costs (not
related to production)
Change in maintenance costs

27. 27
To decide whether something makes sense or not we compare Capex and
Benefits
Capex Benefits?
Cash outflow /
Negative cash flow
Cash inflow /
Positive cash flow
?

28. 28
We usually use the NPV or IRR to decide whether the investment makes
sense
NPV IRR

29. 29
In the next few slides we will look at 4 case studies. Detailed analysis of
those cases in Excel you can find in my online course
Replacement Investment –
Furniture Production
Required by customer
investment – Food Industry
Investment in bottlenecks
removal – Plywood
Click here to check my course

30. 30
In the next few slides we will look at 4 case studies. Detailed analysis of
those cases in Excel you can find in my online course
Cost reduction Investment –
Retail
Cost reduction Investment –
Ceramic Tiles

31. 31
Replacement Investment –
Introduction

32. 32
Imagine that you work for a furniture producer that operates in Europe
10 factories
Sells most of his production to
France & Germany
You have to calculate whether the
investment in new forklifts makes
sense

33. 33
Replacement Investment –
Solution

34. 34
Just as a reminder you work for a furniture producer that operates in
Europe
10 factories
Sells most of his production to
France & Germany
You have to calculate whether the
investment in new forklifts makes
sense

35. 35
Let’s have a look how to show the results of investment in replacing
forklifts in the Power Point
3 691
7 185
10 875
8 182
2 694
NPV of Difference in Maintenance
Costs
NPV of Difference in Fuel / Electricity
Costs
NPV of Total Benefit NPV of Capex NPV of the whole investment
NPV of benefits and investments
In thousands of USD

36. 36
Required by customer investment –
Introduction

37. 37
We will now have a look at a company selling branded juice in Romania.
They were asked to start using plastic bottles
Currently they sell juice in glass,
tetra pak and aluminum cans
One of the customers (a
discounter) wants to get juice in
plastic (PET) bottles
This will require significant
investment

38. 38
Required by customer investment –
Solution

39. 39
Just as a reminder we have to estimate wheter it makes sense to get
into PET bottles as we were asked by the customer
Currently they sell juice in glass,
tetra pak and aluminum cans
One of the customers (a
discounter) wants to get juice in
plastic (PET) bottles
This will require significant
investment

40. 40
Let’s have a look how to show in Power Point the results of PET
investment
34 804
12 489
22 315
13 182
9 133
NPV of Additional margin from PET NPV of fixed costs related to PET NPV of Net Benefit NPV of Capex NPV of the whole Investment
NPV of benefits and investments – 10 year perspective
In thousands of USD

41. 41
Investment in bottlenecks removal –
Introduction

42. 42
Let’s have a look at a plywood producer that considers removing a
bottleneck for one of the factories he has
3 plants
They have a bottleneck in 1 of
the factory
They have a demand for
products from this factory

43. 43
Below you can see the capacity for the factory in question by stages. As
you can see sanding is the bottleneck
200
100
90
80
120
100
50
90
120
Preparation of
the wood
Peeling Drying Repairing Cold Press Hot Press Sanding Foil Triming &
Packing
Production Capacity by stages
In thousands of cubic meters (m3)

44. 44
Just

45. 45
Investment in bottleneck removal –
Solution

46. 46
Just as a reminder we are working for a plywood producer that
considers removing a bottleneck for one of the factories he has
3 plants
They have a bottleneck in 1 of
the factory
They have a demand for
products from this factory

47. 47
Let’s have a look how to show in Power Point the results from the
improvement of sanding line
6 565
1 004
5 561
209
5 352
NPV of Additional margin from
higher sales
NPV of Additional fixed costs NPV of Net Benefit NPV of Capex NPV of the whole Investment
NPV of benefits and investments – 10 year perspective
In thousands of USD

48. 48
Cost reduction investment –Retailer
– Introduction

49. 49
Imagine that you are working for a fashion discounter that operates a
retail chain in Easter Europe
The retailer has 2 000 stores in
Europe
The retailer uses traditional lighting
He wants to switch to LED lighting

50. 50
Cost reduction investment –Retailer
– Solution

51. 51
Just as a reminder you are working for a fashion discounter that
operates a retail chain in Eastern Europe
The retailer has 2 000 stores in
Europe
The retailer uses traditional lighting
He wants to switch to LED lighting

52. 52
Let’s have a look how to show the results from the change to LED bulbs
in the Power Point
15 624
1 250
620
17 494
3 636
13 858
NPV of Difference in electricity
costs
NPV of Difference in bulb costs NPV of Difference in labor
costs
NPV of Total Benefit NPV of Capex NPV of the whole investment
NPV of benefits and investments – 10 year perspective
In thousands of USD

53. 53
Cost reduction investment –ceramic
tile producer – Introduction

54. 54
Imagine that you are working for a ceramic tiles producer that has 10
factories in Eastern Europe
He has 10 factories
Every factory on average has 15
production lines
Currently loading the tiles is done
mannually (2 people per line)

55. 55
Cost reduction investment –ceramic
tile producer – Solution

56. 56
Just as a reminder you are working for a ceramic tiles producer that
has 10 factories in Eastern Europe
He has 10 factories
Every factory on average has 15
production lines
Currently loading the tiles is done
mannually (2 people per line)

57. 57
Let’s have a look how to show in Power Point the results from the
introduction of robots to ceramic tiles factory
156 890
37 566
16 657
102 668
27 273
75 396
NPV of Difference in labor
costs
NPV of Difference in electricity
costs
NPV of Difference in
maitenance costs
NPV of Total Benefit NPV of Capex NPV of the whole investment
NPV of benefits and investments – 10 year perspective
In thousands of USD

58. 58
Decision Making with Excel for
Managers
$190
$19
For more details and content check my online course where you can find case
studies showing analyses along with detailed calculations in Excel
Click here to check my course

59. 59
Option comparison

60. 60
Option comparison –
Introduction

61. 61
In this section we will discuss ways in which you can compare different
options to achieve the same goal using Excel
Total cost of ownership
Case Study – rent or buy
a house
Case Study – how to
shorten the lifespan of a
product
Case Study – is better to
sell a product or a service

62. 62
Total cost of ownership

63. 63
 All the cost related to owning or using a specific
item / thing
 It will also include the cost of lost opportunity i.e.
money not earned due to spending time on
repairing the thing
Total cost of
ownership
=
Let’s start with a short definition

64. 64
 Cost of buying a car
 Insurance
 Fuel
 Cost of maintenance including repairs &
parts
 Time wasted on maintenance, parking etc.
 Other i.e. parking tickets, traffic ticket etc.
Let’s compare the cost of owing a car and using a rideshare /
taxi / cab service
 Cost of rideshares

65. 65
Rent or buy an apartment / flat –
Introduction

66. 66
Let’s imagine that Peter is considering 2 choice: buying an apartment or
renting it. Let’s use the total cost of ownership to see what makes sense.

67. 67
Let’s have a look at the information that Peter has
Buying the apartment would
require EUR 150 K
Renting cost EUR 600 per month
Interest rate is 3%, inflation 2%,
Wage increase is 5%
Peter currently earns EUR 30 per
hour

68. 68
How to shorten the lifespan of a
product – Case Introduction

69. 69
Ceramic tiles in Easter Europe are
exchanged every 12 years
Ceramic tiles in Western Europe are
exchanged every 3-5 years
The ceramic tiles producers wants
to get closer to Wester Europe
Imagine that you are working for a ceramic tiles producer that wants to
change the frequency at which customers are remodeling its houses

70. 70
Before we move on a short example why it is so important to consider the
lifespan of the product
100 houses ÷
10 years between
renovations
=
10 house to be
renovated every year
100 houses ÷
5 years between
renovations
=
20 house to be
renovated every year

71. 71
How to shorten the lifespan of a
product – General rules

72. 72
There are some standard ways to make people shorten the
lifespan
Fad / Fashion
Standards required by law
Lower the cost connected with the
exchange
Solve problems connected with the
exchange
Give discounts for exchange
Shorten the technical lifespan of the
product / make it less durable
Create second market for the exchanged
products
Recycle the exchanged products

73. 73
In our case we will look at 3 ways
Fad / Fashion
Standards required by law
Lower the cost connected with the
exchange
Solve problems connected with the
exchange
Give discounts for the old product
Shorten the technical lifespan of the
product / make it less durable
Create second market for the old products
Recycle the old products

74. 74
How to shorten the lifespan of a
product – Solution

75. 75
Ceramic tiles in Easter Europe are
exchanged every 12 years
Ceramic tiles in Western Europe are
exchanged every 3-5 years
The ceramic tiles producers wants
to get closer to Wester Europe
Imagine that you are working for a ceramic tiles producer that wants to
change the frequency at which customers are remodeling its houses

76. 76
Both the Revenue and the Net Margin level suggest that we should reduce
the lifespan by mainly lowering the cost of exchange of the ceramic tiles
304 355 403 391
Curent Fad / Fashion Lower cost of exchange Simplify the exchange
Total Revenues 2020-2030
In millions of USD
1 217
1 775
2 015
1 775
Curent Fad / Fashion Lower cost of exchange Simplify the exchange
Net Margin 2020-2030
In millions of USD

77. 77
From SMCG to service – Case
Introduction

78. 78
He currently sells around 600 K
smartphones and has a bas of
around 1 M customers
He has to acquire new customers to
cover for the lost ones and grow
He considers switching to offering
annual subsription model
Imagine that you are working for a smartphone producer that considers
instead of selling smartphones to offer contracts with different duration

79. 79
From SMCG to service – Case
Solution

80. 80
Just as a reminder you are working for a smartphone producer that
considers instead of selling smartphones to offer contracts
He currently sells around 600 K
smartphones and has a bas of
around 1 M customers
He has to acquire new customers to
cover for the lost ones and grow
He considers switching to offering
annual subsription model

81. 81
As you can see if we switch to the smartphone as a service we can
drastically increase our revenues
Revenues by years
In millions of USD
877 913 949 985 1 022 1 058 1 094 1 130 1 166 1 202 1 239
648 675 702 729 756 783 810 837 864 891 918
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
If sold as a service If sold as a product

82. 82
The structure of the revenues will be different as well for both situations
Revenues 2020
In millions of USD
600
440
48
158
280
If sold as a product If sold as a service
Revenues from selling phones / contracts Revenues from cross-selling Revenues from reselling phones

83. 83
As you can see if we swith to the smartphone as a service we can drastically
increase our Net Margin
Net Margin
In millions of USD
405 416 426 436 444 452 459 465 470 473 476
289 297 305 313 320 326 332 337 341 345 347
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
If sold as a service If sold as a product

84. 84
Decision Making with Excel for
Managers
$190
$19
For more details and content check my online course where you can find case
studies showing analyses along with detailed calculations in Excel
Click here to check my course

85. 85
Rankings

86. 86
So far, we have discussed only situation when you have just one criteria - NPV.
Quite often you have more difficult situation in such cases you can use rankings

87. 87
In this section we will discuss what is ranking and I will show you using
case studies how to build them in Excel
Introduction to Rankings
Which country you
should enter first?
How to choose a
boyfriend

88. 88
Rankings – Introduction

89. 89
Quite often you have options that you want to somehow compare and
rank them
Option 1
Option 3
Option 4
Option 5

90. 90
Thanks to the ranking you not only give points but you can sort them
from the most wanted to the least desired
Option 5
Option 3
Option 1
Option 4

91. 91
You may use ranking for many things
Pick the best option from
available options
Create priorities for further
actions
Rank people / team members
Rank business ideas
Motivate
Create benchmarks

92. 92
Rankings are done in 5 steps
Create criteria and
weights for the
ranking
Gather data
Calculate the points
and create the
ranking
Pick the preferred
option
 At least 3-4 criteria,
preferably
independent
 Every criteria
should have a
weight – not all
criteria have to
have the same
importance
 For defined options
gather data on the
criteria so you are
able to calculate
the points for every
criteria and option
 Define the rule /
function that
assigns points for
every criteria
 Calculate the score
for every option-
criteria
 Using weights
calculate the total
score
 Use the total score
to rank the options
 You can use
additional criteria
 Using the ranking
and additional
criteria you can
pick the preferred
option
Define options
 You have to define
all options that you
will be choosing
from

93. 93
How to chose the right boyfriend
– Introduction

94. 94
Let’s imagine that you were to help Maria pick the ideal guy / boyfriend.
For this try to use rankings

95. 95
There are a few things that we know about Maria
She has 4 potential candidates
She wants her boyfriend to be
nice, intelligent, good looking
From her perspective his
earnings and assets matter
She is not sure about importance
of specific criteria

96. 96
How to chose the right boyfriend
– Solution

97. 97
Just as a reminder you were to help Maria pick the ideal guy / boyfriend.
For this try to use rankings

98. 98
Let’s summarize the results of our ranking
8
0
6
10
4
6
4
63
6
4
46
5
10
10
0
5
10
15
20
25
30
35
Alejandro Santiago Jose Pablo
Inteligence Being nice Financial situation Attractivness

99. 99
Make-or-buy analysis

100. 100
Make-or-buy analysis
– Introduction

101. 101
 Analysis where you compare whether it is better
to do something on your own / do it in-house or
rather buy ready made solution from a 3rd party
Make-or-buy
analysis
=
Let’s start with a short definition

102. 102
We will go through 2 case studies. Detailed analyses of thos case studies
in Excel you can find in my online course
Should Maria delegate some of
her everyday work?
Should you buy or produce a
training internally
Click here to check my course

103. 103
Delegating some work to others –
Case Introduction

104. 104
We are back to Maria. Using previous case study we will try to decide
which activities she should delegate using the make-or-buy analysis.

105. 105
Below some information on Maria and meal preparation
She earns EUR 40 per 1 hour
after deducting taxes
She cooks every day. It takes 1
hour to prepare a meal
She uses food that costs per
meal EUR 5
She can order food to be
delivered at price EUR 10

106. 106
Below some information on Maria and how she cleans the house
She cleans the house every
week. It takes 4 hours to clean.
She can hire somebody to clean
instead of her
1 cleaning would cost EUR 60

107. 107
Below some information on Maria and how he does shopping
She shops every second day. It
takes her 2 hours per 1 visit.
She can order online and save
1.5 hour per 1 purchase
Delivery would cost on average 5
EUR per delivery

108. 108
Make-or-buy courses – Case
Introduction

109. 109
Imagine that you have to analyze for a consulting firm whether it
makes sense or not to produce online course devoted to Data Science

110. 110
A few information about the firm that we will be analyzing
They have 15 on the lowest position –
Business Analysts & Associates
They have 3 PM and 2 Directors
Every year 50% leaves
You have to train all new employees

111. 111
A few information about the Make option
The course will take 250 hours to prepare
& 50 hours every year for modification
The delivery will take 30 hours each time
In the group there can be 5 people
Associate / BA costs EUR 21 per hour.
Director EUR 62 per hour

112. 112
A few information about the Buy option
The course can be also created &
delivered by external person
It this case each delivery will costs EUR 3
800 per group
In the group there can be 5 people
Associate / BA costs EUR 21 per hour.
Director EUR 62 per hour

113. 113
Make it or buy it – When to make
even if it is more expensive

114. 114
In some cases even if it is more expensive to make than to buy
it still makes sense to make
There is no content on the right level
Your standard differ from the
general standards
You treat the teaching system as also
standardization tool
You grow drastically in terms of
people
You want to keep the knowledge to
yourself
There are not specialists in a specific
area
NDAs?
…..

115. 115
Decision Making with Excel for
Managers
$190
$19
For more details and content check my online course where you can find case
studies showing analyses along with detailed calculations in Excel
Click here to check my course

116. 116
What to do when there is a lot of
uncertainty?

117. 117
What to do when there is a lot
of uncertainty – Introduction

118. 118
In this section we will discuss the tools you can use to deal with decision
making under uncertainty
Decision Tree Analysis Scenario Analysis Voting models
Backward logic
Strategic alignment
framework
Value proposition
alignment framework
Portfolio decision making Least regret framework

119. 119
Decision Tree Analysis

120. 120
Quite often you have to make important decision faced with uncertainty. In those
situation it is very useful to apply the so called decision tree

121. 121
Let’s have a look at example. You are to build a chocolate factory. You
have to decide on the size of it.
Big Factory
(Invest $50 M)
What factory you
should build?
Small Factory
(Invest $30 M)
Big Demand
(EBITDA= $100 M)
Small Demand
(EBITDA= $20 M)
Big Demand
(EBITDA= $50 M)
Small Demand
(EBITDA= $30 M)
 50
Outcome
In M USD
 -30
 20
60%
40%
60%
40%
 0

122. 122
Once you have the outcomes for each and every option it is time to
calculate the expected value for both decisions
Expected Value = Outcome 1 x
Probability of
Outcome 1
+ Outcome 2 x
Probability of
Outcome 2
Expected Value for
Big Factor
= 50 x 60% + - 30 x 40% 18=
Expected Value for
Big Factor
= 20 x 60% + 0 x 40% 12=

123. 123
Once you have the outcomes for each and every option it is time to
calculate the expected value for both decisions
Big Factory
(Invest $50 M)
What factory you
should build?
Small Factory
(Invest $30 M)
Big Demand
(EBITDA= $100 M)
Small Demand
(EBITDA= $20 M)
Big Demand
(EBITDA= $50 M)
Small Demand
(EBITDA= $30 M)
 50
Outcome
In M USD
 -30
 20
60%
40%
60%
40%
 0
18
12

124. 124
How big house should we build –
Introduction

125. 125
Let’s imagine that you have to help Adam and Eva pick the best size of the house for
their family. They have currently 1 kid but will have more. Pick the optimal solution.

126. 126
A few information about Adam and Eva
They may have in total 2 or 3
kids
They will have 2 kids with
probability 60%
Small house costs EUR 150 K
Big house costs EUR 250 K

127. 127
If the house is too big or too small they will have cover additional costs
Big House
(Invest EUR 250 K)
How big house
should they build
Small House
(Invest EUR 150 K)
2 kids
3 kids
2 kids
3 kids
 0
Renting
additional space
In K EUR
 0
 0
60%
40%
60%
40%  151
 50
Not used space
In K EUR
 0
 0
 0

128. 128
How big house should we build –
Solution

129. 129
Just as a reminder you were to help Adam and Eva pick the best size of the house for
their family. They have currently 1 kid but will have more. Pick the optimal solution.

130. 130
If the house is too big or too small they will have cover additional costs
Big House
(Invest EUR 250 K)
How big house
should they build
Small House
(Invest EUR 150 K)
2 kids
3 kids
2 kids
3 kids
 0
Renting
additional space
In K EUR
 0
 0
60%
40%
60%
40%  151
 50
Not used space
In K EUR
 0
 0
 0

131. 131
Let’s see what is we get after the calculation in Excel
Big House
(Invest EUR 250 K)
How big house
should they build
Small House
(Invest EUR 150 K)
2 kids
3 kids
2 kids
3 kids
 0
Renting
additional space
In K EUR
 0
 0
60%
40%
60%
40%  151
 50
Not used space
In K EUR
 0
 0
 0
-280
-210

132. 132
Scenario Analysis –
Introduction

133. 133
Future is pretty difficult to figure out. You don’t know what will happen.
In those cases it is a good idea to consider a few different scenarios

134. 134
Future is pretty difficult to figure out. You don’t know what will happen.
In this cases it is a good idea to consider a few different scenarios

135. 135
Imagine that you are ice cream producer and you have to decide how much
ice-cream to produce for the next day without knowing what will be the
weather. Therefore, you have to consider different scenarios
Scenario 1 Scenario 2 Scenario 3
100 70 30

136. 136
The scenario analysis consists of 5 steps
Define the thing
(goal function) you
want to analyze
Define which drivers
are the least certain
Define the scenarios
Define your
behavior / policy
Check the goal
function for every
policy
 You should be
analyzing the things
that are threatened
by different
scenarios and are
important for your
business
 It can be profit,
NPV from new
investment,
inventory you
should have etc.
 It is good to define
3-5 different
scenarios
 In every scenario
the main drivers
will have different
value
 You should assign
certain probability
to every scenario
 Scenarios do not
depend on you but
your behavior does.
 You can define a
policy / behavior
that helps you in a
specific situation
 Concentrate on
drivers that have
big impact and big
volatility
 The aim of this step
is to pick the right
policy, given the
scenarios and their
policy
 The best policy is
the one that gives
you highest
benefits (highest
goal function)

137. 137
In the next lectures I will show you how to create and use
scenario analysis in practice using an example from airplane
industry
Which price formula is the best
for my profits

138. 138
Which price formula is the best
for my profits – Introduction

139. 139
Now we will try to see which price formula is better for aircraft
maintenance service company
2 sites – in Poland and
Croatia
Consider 4 different
formulas
Consider 3 different
scenarios

140. 140
Now we will try to see which price formula is better for aircraft
maintenance service company
Materials
Scenario 1
 $ 30 K
Number of
manhours needed
 3 000 man-hours
Probability of the
scenario
 30%
Scenario 2
 $ 20 K
 3 400 man-hours
 25%
Scenario 3
 $ 15 K
 3 800 man-hours
 45%

141. 141
Now we will try to see which price formula is better for aircraft
maintenance service company
Materials
Times & Materials
 Cost of Materials
increased by 15%
markup
Labor
 $ 50 per 1 man-
hour
 We look at the real
man-hours needed
Fixed Fee
 $ 25 K
 $ 140 K
Mixed Option 1
 $ 25 K
 Fixed: $ 140 K
 On top of that 15%
of the labor cost
calculated using
Times & Materials
formula
Mixed Option 2
 $ 25 K
 Fixed: $ 140 K
 On top of that for
all man-hours
above 2 800 we
use the Time &
Materials formula
but using the price
of $ 90 per 1 man-
hour

142. 142
Which price formula is the best
for my profits – Solution

143. 143
Now we will try to see which price formula is better for aircraft
maintenance service company
2 sites – in Poland and
Croatia
Consider 4 different
formulas
Consider 3 different
scenarios

144. 144
It seems that the Mixed Option 2 price formula is the best
solution
Gross Margin
In thousands of USD
90
58
84
117
Times & Materials Fixed Fee Mixed Option 1 Mixed Option 2

145. 145
Voting models – Introduction

146. 146
A lot of decisions can be made using voting. The are 4 main things you have to
decide on
What is the majority rule
/ threshold to vote in
favor of an option?
How many votes each
person eligible to vote
has?
Are all votes treated
equally or some people
have preferred votes?
Does anybody have the
veto right?

147. 147
Below some examples of voting systems
Consensus
 100%Majority rule /
threshold
 1# of votes per person
 YesAre all voters treated
equally?
 EverybodyWho has the veto right?
Simple majority
with 1 vote per
person
 51%
 1
 Yes
 Nobody
Supermajority
with 1 vote per
person
 66%
 1
 Yes
 Nobody
Supermajority
with many votes
per person
 66%
 Everybody has # of
votes equal to 33%
of all options
 Yes
 Nobody
Supermajority
with preferred
votes
 66%
 1 vote in most
subjects
 Area expert gets 3
votes in his / her
area of expertise
 Area experts get
stronger say in
specific area –
more votes
 Nobody

148. 148
In the next lectures we will see how the voting results will differ
depending on the system used
Decision making based on voting
– Maintenance Company

149. 149
Voting models – Case
Introduction

150. 150
We will see how the voting model works in practice. As an
example we will use airplane maintenance service industry.

151. 151
Imagine that you have to decide which new type of aircraft to start servicing
We will first vote on
Dreamliner B787
We will use 3 different
models of voting
We will also see how the
many vote model works

152. 152
Voting models – When it makes
sense to use them

153. 153
Let’s see when it makes sense to use voting as the way to make the
decision
There is high uncertainty
NPV analysis of benefits and costs
does not suffice
There are plenty of criteria that you
have to take into account
There are many decision makers
You need some sort of alignment
between different stakeholders
You want to discuss results of data
analysis

154. 154
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Managers
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155. 155
Backward reasoning

156. 156
Imagine that you were supposed to say how much you have to
spend to create a company that has revenue of $ 100 M dollar
Imagine that you were supposed to say how much you have to
spend to create a company that has revenue of $ 100 M dollar

157. 157
You could use for that the so called backward reasoning
CC: Flickr; Cycle Track

158. 158
Imagine that you were supposed to say how much you have to
spend to create a company that has revenue of $ 100 M dollar
Total Costs
$ 400 M
Cost of 1 lead
$ 2 K
# of leads
200 K
÷
% Conversion
10%
x # of customers
20 K
Average revenue
per customer
$ 5 K
Revenues
$ 100 M
x

159. 159
Backward logic based decisions –
Case Introduction

160. 160
Let’s try to put the backward reasoning to practice. In this case study we will
use it to decide what effort has to be done to 10x the current business

161. 161
A few information about the retailer
He has currently 100 stores. Each store
sales are equal to EUR 2 M
He wants to 10x the business up to
Year 5
Estimate what LFL growth he must get
and how many stores he must open
Assuming EUR 1 M per store estimate
the Capex
Estimate how many people he has to
recruit assuming 6 people per store

162. 162
Backward logic based decisions –
When it makes sense to use it

163. 163
Backward logic can be used in many situations. Below some of them
You have a clear goal in the future
but not a clear path towards it
You want to estimate the pace
needed to reach the goal
You want to check the implications
for you or your department
You want to see what are the
limitations preventing you from
reaching the goal
You want to see whether the goal is
not too ambitious
You want to see whether the goal
does not require too big resources

164. 164
Strategic alignment framework –
Introduction

165. 165
Is it aligned
with the
overall
strategy?
Impact
YESNO
High
Low
 Things with big impact that are aligned
with our strategy
1
 Things with small impact that are
aligned with our strategy
2
 Things with big impact that are not
aligned with the strategy
 Those are the “Maybe projects”
3
No
In the strategic alignment framework we divide projects into 4 groups

166. 166
The impact can be measured in many ways
Future EBITDA
 This is a useful criteria if you
are quoted at the stock
exchange or you will be selling
the company at some point
 Most investor perceive the
value of the firm as the EBITDA
multiplied by some multiplier
 In this case we only look at the
future EBITDA for the project
we are considering
NPV of the cash flow
 Here we would look at the NPV
of the cash flow generated by
specific project
 We would pick this as a criteria
if we consider the cash
generation as extremely
important, more important
than the future valuation
Users / Market share
 In some cases the future
profitability depends heavily
on the future size
 In those cases the future
structure of the industry will
be some sort of monopoly
(including oligopoly)
 This is important especially if
the investors are not treating
profitability as the main
criteria

167. 167
Strategic alignment framework –
Case Introduction

168. 168
Imagine that you have to help a producer of products from milk to
decide which projects he should implement and which to neglect

169. 169
A few information about the firm
They want to 3x EBITDA in 5 years
They have defined a strategy for the
next 5 years
They have 10 projects that they
consider

170. 170
Below a summary of their strategy
Goal
Sales & Marketing
Operations
Other issues
 3 x EBITDA
 Concentration on new products introduction &
direct-to-consumer marketing
 No changes to distribution model
 Decrease waste level
 Decrease labor costs
 Carbon neutral
 Higher share of recyclable packages
Current Future
 USD 100 M
 10 products
 Waste level – 4%
 Labor costs – 8%
 Recyclable packaging share
– 10%
 USD 300 M
 20 products
 Waste level – 3%
 Labor costs – 6%
 Recyclable packaging share
– 80%
Description
Main Value Creation
Methods
 Better penetration in Poland
 Entering other countries
 New products but still related to mil
 Poland penetration - 15%  Poland penetration - 20%

171. 171
Strategic alignment framework –
When it makes sense to use it

172. 172
Strategic alignment framework can be used in many situations. Below
some of them
You have many projects
Projects were generated by different
departments
Projects are not necessary aligned
with the strategy
You have limited resources (money
& people)
Organization has to be focused
There are many stakeholders

173. 173
Value proposition alignment
framework – Introduction

174. 174
In value proposition alignment framework you select projects
that will be the most efficient in improving customer satisfaction

175. 175
Below how you should use the value proposition alignment framework
to make the decisions
Define the customer
segment
Define the value
proposition for the
segment
Pick the metric &
measure the current
state
List projects that will
improve the
situation
Select projects and
implement
 Not all segments
have the same
needs
 Not all segments
you have to keep
equally happy
 Pick the segment
that is the most
important
 You can take care of
other segments
during separate
projects
 Define the value
proposition for the
segment you have
selected
 Pick the metric that
will help you
measure how
satisfied the
customer is with
the value position
you are offering
 One of the metrics
can be Net
Promoter Score
(NPS)
 List projects aiming
at improving the
customer
satisfaction / value
proposition – real
or its perception
 Estimate costs &
impact for every
project
 Select the projects
that will be the
most efficient in
terms of improving
customer
satisfaction
 Plan the
implementation of
those projects
 Implement the
projects

176. 176
Value proposition alignment
framework – Cases Introduction

177. 177
Now let’s help Fast Food Salad Chain pick the right
projects to improve the customer value proposition.

178. 178
A few information about the salad chain
100 location in Easter Europe
Their NPS is currently 30%
They want to improve the NPS
to 50%
They are analyzing 6 different
projects

179. 179
Value proposition alignment framework
– When it makes sense to use it

180. 180
Value proposition alignment framework can be used in many situations.
Below some of them
High competition
Customer satisfaction the most
important factor
Big innovation in the industry when
it comes to customer satisfaction
Moderate margins
Projects may have big impact on
costs or capex
High customer value

181. 181
Portfolio decision making –
Introduction

182. 182
In many cases you don’t have to be right on every decision but only
on average. In this case portfolio decision making comes very handy

183. 183
To exemplify it let’s imagine that you have to 2x the value of the money given
to you on 2 projects. It may mean that on both projects you have to 2x or…..
10 M 20 M
2x
5 M 10 M
5 M 10 M
2x
2x

184. 184
… you achieve it mainly by increasing the value of just one of them to much
bigger extent.
10 M 20 M
2x
5 M 20 M
5 M 0 M
4x
0x

185. 185
Below how you should use the portfolio management to make decisions
List potential
projects you
consider
Estimate their
potential impacts &
probabilities
Group them by risk
groups
Define the number
of projects you will
invest in
Pick the projects
diversifying the risk
 List all potential
projects that you
consider
 Here you should
either list projects
that are using the
same budget or
addressing the
same issue / area
 Decide what do you
mean by impact –
NPV of the cash
generated by the
project, EBITDA,
market share etc.,
 For every project
estimate the
potential impact
 Estimate the
probability of the
project achieving
the goal
 Assign to every
project the main
risk factor
 Group the projects
around the same
risk factor (i.e. in
one group projects
that depend on the
market growth as
the main driving
force)
 Define the total
budget you can
spend on projects
 Define the number
of projects you will
invest
 Define how many
projects you will
pick from the same
risk group
 Make sure that you
don’t overspend
your budget
 Make sure that no
more than certain
share (i.e. 10%) is
invested in the
same risk group
 Pick the projects
using the previously
defined criteria &
limits on risk
concentration

186. 186
Portfolio decision making – Case
Introduction

187. 187
Let’s have a look at a plywood producer that considers 15 different
projects
3 plants
They have 15 investment ideas
Use portfolio management to
decide which one to pick
You cannot spend more than
EUR 30 M

188. 188
Portfolio decision making – When it
makes sense to use it

189. 189
Portfolio decision making can be used in many situations. Below some
of them
The outcomes is very unpredictable
You want to diversify risks
You are doing a lot of investments so
the risk can be spread
The main sources or risks are
beyond your control
The investments are not depending
on each other
You will use the same resources for
the investments

190. 190
Decision Making with Excel for
Managers
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studies showing analyses along with detailed calculations in Excel
Click here to check my course

191. 191
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