Firms often perform scenario analyses in conjunction with finalizing business plans. Explain the concept and the role it plays in addressing risk in planning.

A scenario is a plan put together under a specific set of planning assumptions. A scenario analysis involves creating several scenarios by varying key planning assumptions, and evaluating the sensitivity of the plan's results to the changes. Since all planning assumptions are estimates of the future, none are entirely accurate. Therefore there's a good deal of risk associated with most plans. Scenario analysis lets managers see a range of business performance outcomes that come from likely variations in the factors that underlie planning assumptions. One scenario is eventually chosen as "the" plan, but scenario analysis gives managers a sense for the variability of results around that particular projection.