Econometric analysis for scenario-based planning
Quantifying potential impact
Companies have become well aware of how challenging it can be to compete in the current rapidly changing marketplace. Couple this increasing pace of doing business with economic and political uncertainty and it is clear that the ability to react to change is more important than ever.
Companies that are well prepared and able to quickly execute strategically thought-out plans are better positioned to thrive during uncertainty.
Suppose your boss, the chief financial officer or chief strategy officer, asked you how your company’s revenue would be impacted by a changing economic climate in coming years. How would you quantify the potential impact of specific events or variables? Unfortunately, there is not a crystal ball to create a revenue forecast. Scenario-based planning using econometric analysis may be the next best thing and can assist you in being better prepared for future uncertainties.
Scenario-based planning is a tool designed to assist the development of strategies for operating in any of several contrasting business and economic environments that could lie ahead. Scenarios can run the gamut of plausible outcomes and can be used to develop a wide range of plans from tactical contingency planning for near-term economic developments to fundamental changes in strategy caused by global paradigm shifts.
Here we provide an introduction to using the statistical techniques of econometric modelling and multiple regressions to project financial performance within scenario-based planning.