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:

• "The Myth of the Hockey Stick"

Symptoms and Implications:

• Technology improvements bring falling prices

• Observers expect industry capacity reduction

• The company believes the industry will be more diplomatic about adding capacity

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.

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.