How to Use Risk Scenarios to Plan for Uncertainty: Part 1
Understanding the macroeconomic outlook in key markets is an essential component of market research. Macroeconomic shocks can have a major impact on market potential, market segmentation and production costs. Robust market research needs to evaluate business decisions, like the scale of entry or investment in a market, by considering how they will succeed in the face of a wide range of possible macroeconomic scenarios.
It is common to summarise the outlook for a country in a single baseline forecast. However, the baseline forecast reported by Euromonitor International and most other forecasters is usually surrounded by a lot of uncertainty. While it is the most likely of several possible scenarios, it might turn out to be wrong. Euromonitor International usually assigns the baseline forecast 20-30% probability, leaving a lot of room for alternative outcomes.
This first part of a two-part blog series introduces three steps for performing scenario analysis that could help organisations future-proof their strategies. The second part of the series focuses on applying these steps into an actionable strategy with a help of Euromonitor International’s Macro Model, the Economic Barometer and Industry Forecasts Models.
Source: Euromonitor International
Step 1. Evaluate current economic conditions
The process begins by assessing the current economic health of a market and how it is forecast to change. Start by looking into historic performance and recent trends of economic indicators like real GDP growth, industrial production, retail sales, inflation, unemployment and business and consumer confidence. Understanding current economic developments and tracking the leading economic indicators will give you an early-warning about potential upcoming changes in economic trends.
Then, examine the baseline forecast for key market research indicators, like economic output or category value sales. While baseline projections are essential in building up a picture of how the market is forecast to perform in the future, it is also critical to take into account any additional information. This includes reviewing recent events and news, credit market changes or the views of policy institutions that will help to reflect any uncertainty or risks surrounding the baseline forecast.
Step 2. Evaluate risks
To take this further, you need to deep dive into which macroeconomic risks specifically could affect the baseline forecast the most. This is particularly important when dealing with highly volatile economic environments of emerging market countries.
Understanding and quantifying the impact of macroeconomic risks will help organisations rank the top threats to their target market. This can be done by plotting out the estimated probabilities for various macroeconomic shocks and their impact on key indicators, such as real GDP growth. The selected scenarios can be either global, regional or country-specific – generally those that present the biggest or the most likely risks to your target country.
Step 3. Analyse risks impact on key markets and plan a response
Once you have assessed the impact of top scenarios on your target country, it is possible to narrow down their impact to the more specific consumer markets and segments. This includes potential implications for consumer industries, like packaged food or alcoholic drinks, or consumer groups by income.
Some categories are more sensitive to economic shifts and income changes than others. Higher sensitivity to macro shocks suggests more caution in investing in such markets, despite the possibly high growth rates in the baseline forecast. In contrast, keeping an option of switching to the less vulnerable categories might be useful in case of unexpected macroeconomic shifts. This enables organisations to future-proof their strategies and be prepared with the most effective response strategy.
Forecasts can be wrong, but using macro scenarios reduces negative surprises
While baseline macroeconomic forecasts are likely to be wrong, market analysts can minimise surprises by examining the impact of downside risks. Systematic incorporation of alternative macroeconomic scenarios as part of market research leads to more robust strategy planning, and a better response strategy to negative shocks.
Read part 2 of our blog series, to see how to do this using a case study example. Or to learn more about how Euromonitor International’s economic analytics tools to help your business strategy, read our report ‘Why Economic Analytics Matter for Business Strategy’.