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Borrowing from Scenario-Based Planning

Action Plan: Conservative Scenario Second round of management lay-offs Expand cost campaign to tier 2 Reallocate sales staff back to Market A . Recalibrate inventory targets based on updated demand plan Cancel capital equipment orders

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Borrowing from Scenario-Based Planning

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  1. Action Plan: Conservative Scenario • Second round of management lay-offs • Expand cost campaign to tier 2 • Reallocate sales staff back to Market A . • Recalibrate inventory targets based on updated demand plan • Cancel capital equipment orders • Channel R&D investment into incremental innovation; cancel new product development Borrowing from Scenario-Based Planning Companies are adopting short-range scenario planning as a way to help the business visualize a response under varying conditions Typical Short-Range Scenario-Based Planning Process 1. Corporate Finance provides a range of scenarios, and works with business unit finance to isolate critical business drivers, which indicate a scenario is playing out. 2. Corporate finance provides clear operating environment guidelines for each scenario and works with the business to develop a narrative built on the prevailing risks and opportunities. Scenarios Under Consideration Outlook: 12–18 months Conservative: Decline Continues through 2010 Mid-Range: 2010 Performance Flattens Out Optimistic: Economy bottoms in 2009 Direct Business Drivers (Triggers) Housing Starts (millions of units): 2008A: 0.9; 2009E: 0.57; 2010E: 0.5-0.6 Non-Residential Construction V%: 2008A: (16); 2009E: (19); 2010E: (15)–(10) Economic Environment GDP Growth % Unemployment % CPI Retail Sales Narrative—Risks and Opportunities • Regulatory/Legislative: Likely shifts • Markets: Volumes and competitor action • Capital Needs: Investment headroom in this scenario • Labor: Union activity in this environment • Other “Macro”: Cost structure, volume implications in a deflationary environment • Short-range scenario-based planning focuses on a series of possible business decisions that a management team would need to take under specific business conditions, rather than the creation of a broad world view imagining the business in a range of futures. • Considering short-term upside and downside scenarios also helps business managers test the suitability of their current action plans and decide if capital investments, cost structure, capital structure, current inventory etc. are appropriate in more than one circumstance. 3. To prevent over-analysis, scenario-based planning reviews are generally more qualitative in nature, with an emphasis on pressure-testing the action plans, not financial accuracy. 1

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