Best Practices

Best Practices


It seems to me that macroeconomic and geopolitical uncertainty have been heightening of late, perhaps making your 2020 business planning more complicated than usual. Scenario planning can help you think through the key issues and bring more clarity and better preparation. This column is aimed at guiding you through the scenario planning process.

Lets first consider which macroeconomic scenarios could have significant impact on your business over the next few years and consider how to set your base case, or the most likely conditions your business will face. Here are a few you are likely to consider:

Business expansion vs recession. I suggest you plan for a base case in line with publicly available forecasts. For example, the Federal Reserve is forecasting a 2 percent gross domestic product growth rate for the United States in 2020. If your business is international in nature, you could check the International Monetary Fund forecast or other public sources.

Tariffs and trade. I would plan for a base case in line with the current situation regarding tariffs, both in place and announced.

U.S. presidential election outcome. I would more or less ignore the impact of this, as there are too many possible outcomes if you consider not only the presidential election but also how the Senate and House elections turn out. However, you should consider the impact of any specific issues of importance to your business, such as some of the ones below.

Environmental standards. I would plan for a scenario in which environmental (and particularly fuel economy) standards continue to tighten in line with trends and current legislation. I am watching with interest the future battle regarding California air standards, but I regard it unlikely that long-term trends will be abandoned. Of course, depending on your business, you may need to analyze scenarios in detail.

Oil price. I would again use a publicly available source such as the International Energy Agency, which is forecasting a Brent spot price of $62 per barrel in 2020.

Other. You should identify any business-specific scenarios that could have significant impact over the next few years, such as any involving a change in your competitive landscape or your customers, and choose the most likely base case for your business plan.

Once the above is set in place, you can put together your 2020 business plan. Focus on setting key variables such as volumes by product, margins and fixed costs, to be consistent with the base case scenario you have determined. I recommend a kind of bottoms up process, which involves key people in your organization and ensures that the best and most current information is factored into your forecast.

Be sure to send out planning guidelines in advance of the forecasting process, so that the input is consistent with regard to such things as GDP growth, category changes, new product rollouts, competitive landscape, impact of customer bids and any other business specifics.

I suggest you review your base case business plan with key staff for reasonableness and consistency. You may need to rework aspects of the plan if it does not meet overall management expectations for profitability or if it seems overly optimistic compared to the current year.

Next, you need to proceed with scenario analysis. Lets revisit the macroeconomic scenarios discussed above:

I would explore a recession scenario for 2020 and 2021, especially with regard to the impact on volumes and margins. You may wish to take a look at what happened to your business in 2007 to 2009, as that is most likely a worst-case scenario. In this scenario, you may choose to impose actions to reduce fixed costs and delay capital expenditures.

Given that the base case is a continuation of the trade war (if you have gone along with my suggestion), I would explore a trade war resolution scenario. Such a scenario may be expected to show higher volumes and improved margins. You may choose in this scenario to accelerate capital projects or increase spending in focus areas.

With regard to environmental standards, you may wish to look at a few different scenarios, depending on your business. This is quite a complex area, especially if you are an original equipment manufacturer. If this is an important driver of product slate and profitability, then I suggest you pull together a team to lay out key scenarios. Try not to overcomplicate the scenarios, and limit the number you examine to the critical few. Ensure that regulators understand your views and rationale.

Regarding oil price, it is quite interesting that in the face of the recent attack on Saudi Arabian oil facilities, crude oil prices moved up sharply but not anywhere near as much as might have been anticipated 10 years ago. This is in large part due to the increase in U.S. oil production capability (although perhaps also influenced by the relatively short time frame for the recovery of Saudi production). However, you may wish to analyze a high oil price scenario with Brent around $80/barrel. You may find this scenario similar economically to the recession scenario, but it is worthwhile to consider whether it may pose additional complications such as those related to your supply chain or that of your customers.

Do explore one or two business-specific scenarios related to competition or customers, especially if you have evidence to suggest a changing environment. For example, such a change could be related to merger and acquisition activity or a competitor entering a new product segment.

With regard to the scenario analyses, I would not develop them to the same level of detail as your base case. I would limit the analysis to high-level volumes, margins, fixed costs, capital plans and profitability, as well as lay out at a high level key actions that each scenario would entail.

Be sure to set in place a process for monitoring key leading indicators such as trade talk progress, quarterly GDP data or changes in agency forecasts, government or legal actions on environmental standards, and competitive data. I hope the scenario planning process can assist you through turbulent times!

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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