Best Practices

Best Practices


It seems to me that lately the political and business environment has become somewhat more volatile and difficult to predict than in recent years, and this climate may make it somewhat more challenging to perform typical tasks such as formulating your business plan, analyzing capital projects and allocating your budget. In such an environment, it becomes more important to take a step back and ensure you are carrying out such tasks with an eye on key trends.

First, develop and document your overall macroeconomic and industry thesis in advance of developing plans and projects. Include explicit statements of your assumptions for key macroeconomic variables, such as gross domestic product growth, oil pricing, political environment and key legislative developments that could affect your business. Specify your assumptions about recent hot-button issues, including trade barriers and tariffs between the United States and its trading partners, especially the European Union, China, Canada and Mexico.

Also include some assumptions about pertinent tax rates, inflation rates, interest rates and environmental legislation that could have an impact on your project economics or five-year business plans. This macroeconomic thesis is best developed via a planning meeting attended by key business functions at a relatively high level within your organization. It will be enhanced if you can discuss the thesis with key business partners and review publicly available information from government agencies and the like.

Similarly, document key industry assumptions such as lubricant demand growth rates (by quality level and geography, if pertinent), additive growth rates, your market position, that of your competitors and of key customers and how they are expected to change over time, and any other assumptions that you believe are important. Make sure that your expectations about growth rates, quality levels and market positions are supported by recent historical trends, or be clear about the rationale if these assumptions depart from recent trends. Get your management team to endorse your thesis or agree on some modifications before embarking on your plan or project development.

As you develop your project economics, think hard about the sensitivity analyses that you will need to apply. Be sure to develop sensitivity analyses around key project variables that will affect the return, such as investment cost, project completion, sales penetration, timing, market position changes and any other important project-specific variables.

However, with the added overlay of this particularly uncertain environment, consider how your project or plan will be impacted by key trends. Ponder the following key trends and discuss with your teams whether these trends are short term, long term, flat or cyclical in nature and whether you can identify a clear direction or not. Consider also whether any of the key parameters are not really part of a trend but rather a binary choice made by others-which is difficult to predict. An example of the latter might be the adoption of an industry specification or passage of a piece of legislation that hinges on the yes-or-no decision of an individual or committee. Trends include:

Oil price. Cyclical. Short-term trend likely higher due to geopolitical tensions. There was a time when the prevailing thinking was that the oil price trend was only upward due to increasing demand and depletion of supply. With the growth of fracking and improved technologies, the trend is somewhat less clear. I tend to regard crude oil prices as cyclical in nature, as increasing investment leads to more supply and lower prices, followed eventually by a period of reduced investment and higher prices. Similarly, demand is a push-pull between growth in emerging economies and improvements in the economics of alternative energy sources.

Tariffs and trade. Binary choice. This is an area that is more of an unpredictable choice rather than a trend. Stay away from major investments that rely on one outcome until the landscape is much clearer. It is wise to prepare backup plans and consider supply chain changes in the short term if they can be implemented quickly and reduce costs. My personal expectation is that there will be agreements reached with Canada, Mexico and the EU, but the battle with China is likely to persist for some time.

Environmental legislation. Long-term trend with clear direction. There is too much momentum in the direction of stronger environmental legislation, implementation of global warming agreements and investment in alternative technologies to turn back time in this area. Pace, however, is debatable, and appropriate sensitivities should be considered in your project economics and long-term plans.

U.S. GDP. Short-term trend with clear direction. Second quarter gross domestic product was over 4 percent, and it seems likely that 2018 overall will be a strong year for the U.S. economy. However, the data also suggest that we are in the late cycle of this economic expansion, and that 2019 and especially 2020 are much harder to predict and will likely be slower in growth. If you are a player in the global market, then it seems a somewhat less optimistic picture that will be impacted by the trade and tariff decisions mentioned before.

U.S. interest rates and inflation. Short-term trend with clear direction. With a 4 percent unemployment rate, it seems very likely that wage inflation will pick up in the coming year. The Federal Reserve has clearly indicated plans to raise interest rates between now and year end, as well. Higher oil prices and tariffs on steel and aluminum will also have an impact.

Of course, you may disagree with my analysis of these trends, but its intended to be an example of how you may want to think through the various aspects of your economic thesis and the sensitivities that may be appropriate to consider. Screen or categorize your projects according to their degree of alignment with these trends and give particular priority to those projects that make the trend your friend.

Sara Lefcourt of Lefcourt Consulting LLC specializes in helping companies to improve profits, reduce risk and step up their operations. Her experience includes many years in marketing, sales and procurement, first for Exxon and then at Infineum, where she was vice president, supply. Email her at or phone (908) 400-5210.

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