Essential Concept 46: Top-down and Bottom-up Approaches | IFT World
101 Concepts for the Level I Exam

# Essential Concept 46: Top-down and Bottom-up Approaches

Top-down approach begins at the economy level, then the industry and finally to the company level. There are two top-down approaches:

Growth relative to GDP growth: In this approach, we:

• Forecast nominal GDP growth rate (can forecast real GDP growth and inflation separately)
• Forecast revenue growth relative to GDP depending on the company’s position in the lifecycle and/or business cycle sensitivity. The forecasted revenue is expressed in two ways:
• As percentage point discounts or premiums. For instance, Pfizer’s revenue is projected to grow at 100 bps above nominal GDP growth rate.
• In relative terms: GDP is forecasted to grow at 4% and Oracle’s revenue is forecasted to grow at a 25% faster rate.

Market growth and market share: In this approach, we:

• Forecast growth rate of relevant market
• Forecast change of company’s market share in the market. For example, assume Tesla is expected to maintain a market share of 1% in the automobile market. If the automobile market is expected to grow to $30 billion in annual revenue, then Tesla’s annual revenue is forecasted to grow to 1% *$30 billion = \$300 million.

Bottom-up approaches begin at the level of the individual company or unit within the company. Examples of bottom-up approaches include:

• Time-series: Forecasts based on historical growth rates or time-series analysis.
• Return on capital: Forecasts based on balance sheet accounts and rates or ratios.
• Capacity-based measure: Forecasts (for example, in retailing) based on same-store sales growth and sales related to new stores.

A hybrid approach combines top-down and bottom-up approaches.

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