How Managers Perform a Simple Scenario Analysis

Introduction

When a company seeks to undergo change – external or internal – it becomes imperative that it understand the changes that take place in the environment of the company. In other words, it becomes important to understand the forces that drive the industry. Scenario analysis provides a process through which a company can think and communicate about the future environment of business.

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Scenario analysis can be of two types – qualitative and quantitative. Quantitative analysis is done through simulations to identify “distinct and likely outcomes”. A qualitative analysis entails narration of the various factors that might affect the environment of the company and interpreting them analytically. In this paper, we will conduct a qualitative scenario analysis in order to understand the specific background and trends in the industry.

In this essay, we will conduct a scenario analysis of FedEx in United States. FedEx is one of the leading overnight courier and freight service, logistical solutions, and business support services. It operates in the primarily in the US and in 220 countries around the world. It earned revenue of $ 35,497 million in the fiscal year 2009, which was an increase of 2.1% over 2007. The three main business divisions of the company are FedEx Express, FedEx Services, FedEx Freight and FedEx Ground. The growth rate the company declined from 7.8% in 2008 to 2.1% in 2009. The following sections will discuss the environmental condition of the industry and trend of growth of the industry and the other economic and non-economic factors, which may affect the operations of the company.

Scenario Analysis

Scenario analysis is used by companies to understand the evolutionary process of industries in order to understand the markets. It is useful in understanding the threats and opportunities that companies may have in an industry and how they provide flexibility to managers. In the following section, the essay will present a scenario analysis of FedEx. FedEx operates in express logistics and freight transportation market. The scenario analysis will present features regarding the main threats and opportunities that the environment holds for the company.

Opportunities Facing the Industry

Logistics Market growth: The logistics market in the US is expected to increase to a value of $271.2 billion in 2010 and will face an increase of 18.6 percent since 2007. According to the prediction, the logistics market in the US is expected to face a compound annual growth rate of 3.5% in 2007-2012. Thus, the market for express logistics in the US logistics market is expected to grow tremendously. Therefore, FedEx is expected to face a high rate of growth being one of the leading players in the market and it will help the company to grow further.

Population Growth: The population of the US is growing at a rate of 0.90% with the present population being 307,982,386 in 2009. A growing population indicates a growing market expanse for the company, which is a trend that is expected to provide opportunity for the company in the future.

GDP Growth of US: The US economy in the third of 2009 has shown an increase in real gross domestic product (GDP) by 3.5%. The annual GDP of the company has been $14,441.4 billion. Thus, the economy has been experiencing a constant growth. Thus with the growth of the economy the companies operating within the economy are expected to reap the profit of it.

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Inflation: The inflation in the country has been going down and has experienced a negative growth rate for a long time. Since 2006, there has been a constant decline in inflation and the maximum fall was in 2007 when it fell by 16.4%. A low rate of inflation is a boon for the company, as it will help in the operations of the company.

Interest Rate: The US interest rate was reduced to 0.13 points presently. It has declined from 0.38% last year to this rate in order to increase money flow in the economy. The decline of interest rate was a measure to boost consumer demand for goods and services, which had declined considerable in the economy due to low consumer trust index.

Foreign Currency: The US dollars in 2009 underwent drastic fluctuations, which affected the company’s operating profit. In 2008, on the contrary, foreign currency fluctuations had a positive effect on the profit of the company. The fluctuations are expected to stable down in near future and are expected to affect the company positively. However, in the foreign exchange, fluctuations are expected to stabilize and the US dollar will become stronger in the near future.

Fuel Prices: The trend of prices of fuel is expected to increase as they had increased throughout the phase of 2008-09. Fluctuations in fuel prices are expected to affect the profit and sales of the FedEx. There is an expectation of the fuel prices to stabilize in the future, which has affected the share prices of FedEx. Therefore, this also provides an opportunity to the company in term so developing in the future.

Emerging Markets: With globalization, there has been an expansion of market for the company. The emerging market in countries like China provides immense opportunity for FedEx and its operations. According to a report by DuPont, emerging markets sales is expected to grow to $13 billion in 2012. The entry into this market provides immense opportunity for the company.

Threats facing FedEx

In this section, we will discuss the threats that the company faces from its immediate environment. This analysis will show the deterrent factors in the economy that had curbed the growth of the company.

Recession in US: The economy had been adversely affected due to global recession, which had crippled businesses in various sectors. FedEx too had faced problems from the recession. As the transportation and business, service markets both highly competitive; the market demand is highly elastic indicating a high degree of price sensitivity. This trend of elastic demand had been furthered by the non-macro economic growth phase of the economy. Thus, pricing in the industry has to be extremely competitive and service reliability has to be increased. It is expected that in future, due to competitive pressure, a price war may be expected. In such a situation, FedEx’s growth prospects will be seriously hampered.

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Unionization of Labor: Labor unions have always tried to unionize labor in working for FedEx. A change in the labor policy, which is preemptive, may increase the threat from unions. The US government is expected to bring about changes in the labor laws, which is expected to make it easier for Unions to organize the labor body of the company. This may increase the operating cost of the company, and the flexibility of the operations of the company.

Technology: One of the biggest threats that the company faces is due to the growing importance and adoption of internet. Trends in growth of email have progressively substituted the mailing industry largely. Technological advancements like SMS, broadband, email, etc. have had negative effect on the traditional mail service. This has been worse in urban areas. For instance, earlier banks used to send bank statement to customers through mail, now due to the coming of electronic banking system, the traditional methods have been done away with. Further other electronic devices like fax, telephone, scanners, etc. has reduced the volume of mailing through traditional means. Thus, advancement in technology in the communications arena has had a negative effect on FedEx’s revenue and is expected to continue doing so.

Increase in transportation cost: The prices of fuel have been increasing constantly. The main increases have been seen in gasoline prices, refined fuel, etc. the prices of crude oil are projected to increase prices of all petroleum products. Due to the increase in oil prices, there is expected to be a rise in the aviation fuel prices. In the past year, fuel costs have increase by 30%, which are expected to affect the company bottom line.

Two Scenarios

Two scenarios, which are most expectedly going to affect the growth of the company, are recession in US and Technology. Recession has affected the economy hard, by reducing the growth rate of the country wherein the percent change rate of growth in 2009 fell by 45%. There has been increase in inflation and unemployment. There were massive layoffs and reduction consumer demand. All this led to an adverse economic condition for any industry. Thus, this is a strong affect on the economy. In the future, the economic recession is expected to reduce, increasing the probability of brighter market conditions. We may expect this best-case scenario with the reduction of the recession and renewed market demand.

Technological advancements will continue. Research and development has been continuously been used to increase the advancement of internet and the other devices. With technological advancement, the scenario for FedEx will become bleaker in the future with more advanced technologies. This is the worst-case scenario facing the company.

Conclusion

The scenario analysis shows that there has been increased pressure from the environment on the operations of FedEx. The company faces opportunities from strong economy, low inflation and strong currency, and expansion into emerging economies. However, there are threats that the company faces from different areas of environment, like new technology, labor unions, recession, and volatile fuel cost. Two of the uncertainties, which may have the worst effect on the operations of the company, are recession and technology. Technological threat is expected to increase in future while recession being a temporary phase will erase in near future and bring back the strength in the economy.

References

Bloomberg. (2009). Market Data. Web.

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Bureau of Economic Analysis. (2009). National Economic Accounts. Web.

Datamonitor. (2008). FedEx Corporation. New York. Company Profile. Web.

Datamonitor. (2008). Logistics in the United States. NEw York. Web.

FedEx. (2009). FedEx Annual Report. Web.

Grant, R. M. (2005). Contemporary strategy analysis. Oxford, UK: Wiley-Blackwell.

MarketWatch. (2009). Updates, advisories and surprises. Web.

U.S. Census Bureau. (2009). U.S. and World Population. Web.

Zieminski, N. (2009). FedEx shares jump on improved outlook. Web.

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