StrategyStreet / Diagnose / Pricing / Industry Price Outlook / Assumption Sensitivity




Part 1: Industry Price Outlook

Assumption Sensitivity
Capsule: The best guess price scenario may be okay, but check out the best and the worst case scenarios just in case.

For helpful context on this step:

Perspectives:

Symptoms and Implications:

Assumptions can be in error. The assumptions the Company has made so far represent the "best guess" scenario for the future. To prepare more effectively for the environments in which these assumptions may not hold, the Company may wish to conduct some sensitivity analyses to see how projected demand, capacity and prices change with alternative assumptions.

Sensitivity analyses project the ranges around the forecasts for demand and capacity and then evaluate the best and worst case scenarios for prices and margins. In the best case scenario, demand would grow near the top end of its estimated range and capacity would grow near the bottom. This scenario would commonly lead to strategic issues of meeting Core customer demand and of raising prices promptly and appropriately. With the worst case scenario, the demand would grow near the bottom of the range while capacity grows near the top. This scenario would often lead to issues of the management of responses to price discounting and of the judicious use of excess capacity.

This analysis closes by seeking checkpoints that might give the Company early warning of a market drift toward the best or worst case scenarios.

Assumption Sensitivity Questions

  • What environmental and competitive factors influence and limit the direction of changes in both demand and capacity?
  • What is the range of uncertainty in the projections for both demand and capacity change?
  • What is the best case scenario (demand most in excess of capacity) for the Company?
  • What is the worst case scenario (capacity most in excess of demand) for the Company?
  • What checkpoints might warn the Company that the market is tending toward the more optimistic or more pessimistic scenario?

Armed with a reasonable forecast for industry prices or for likely pressure on future margins, the Company turns to its nearer term price environment and the opportunities this environment presents.

Summary Points

Next: Company Price Environment