After reading this article you will learn about:- 1. Meaning of Forecasting 2. Approaches to Forecasting 3. Benefits 4. Measures to Increase the Effectiveness 5. Process 6. Techniques.
- Meaning of Forecasting in an Organisation
- Approaches to Forecasting in an Organisation
- Benefits of Forecasting in an Organisation
- Measures to Increase the Effectiveness of Forecasting in an Organisation
- Process of Forecasting in an Organisation
- Techniques of Forecasting in an Organisation
1. Meaning of Forecasting:
All organisations operate in the external environment which is dynamic and uncertain. As this environment contains factors which affect business operations, plans should be made keeping into account the impact of these factors on business. The behaviour of these factors keeps changing as they operate in the dynamic environment and, therefore, it has to be protected through forecasts.
Plans should forecast events for efficient working of the organisation. Organisations should analyse the environment through various techniques of forecasting, identify their strengths and weaknesses and formulate the plans.
These forecasts are based on past. Present behaviour of these factors and the probability of their occurrence in future is, to an extent, an extension of how they have been occurring in the past and present, though however, unprecedented changes can always take place. Forecasting is closely associated with planning premises. Premising means formulating plans under a set of assumptions or forecasts which may affect the plans.
Forecasting is a useful tool for planning. For instance, in sales planning, it helps to estimate and forecast market share of a firm. Firms may find it difficult to project sales of their product. Identifying future sales problems is not easy for companies, small or big.
In some cases, it is very difficult to get information about future market sales. Sales forecasting, in such a case, is not just an estimation of sales; it is also matching sales opportunities – actual and potential – with sales planning and procedures.
Forecasting is an important aid in effective and efficient planning. It helps management in reducing its dependence on chance. Forecasting is helpful in better planning based on assumptions about the future course of events.
In the world of uncertainty, future can never be predicted perfectly. Yet, the marketer or the administrator must plan and take decisions using his judgement and estimate about future developments. Sales forecast is an estimate of how much a company can sell with its given resources, sales people and marketing programme.
A forecast requires assessment of two sets of factors:
(a) The outside forces which influence business operations, such as the weather, government activity and competitive behaviour. These forces are uncontrollable;
(b) The internal marketing methods or practices of the firm that are likely to affect its operations, such as product quality, price, advertising, distribution and service.
If forecast is a pre-requisite of planning, it is a planning premise. For example, planning based on future economic conditions of the country is a planning premise. If forecast is made after the plans are put into action, it is not a planning premise. For example, a new machine is purchased and put to use. Forecasts about revenues from this machine is not a planning premise but a mere forecast of the future expectations.
2. Approaches to Forecasting:
These are two approaches to forecasting.
1. Top-down Approach:
In this approach, forecast is done at the corporate level or the strategic level. It starts with a forecast of general economic conditions. It forecasts gross national product, consumer and wholesale price index, interest rates, unemployment level, government expenditures, etc. and estimates the market potential of the product for the entire industry.
Then, it determines its current market share and forecasts success of its product in the market. This forecast is used for operational planning and budgeting the future programmes.
2. Bottom-up Approach:
In this approach, middle and lower-level employees project the business operations in the coming years. For instance, they do customer survey to know what customers want to buy. Such forecasts are made by different sales people which are finally summed up to give the sales forecast.
Usually a questionnaire is mailed or completed through telephonic interview with the prospective customers to make such forecasts. These forecasts are usually reliable for small period of one year.
3. Benefits of Forecasting:
Forecasting has the following benefits:
1. Future oriented:
It enables managers to visualize and discount future to the present. It, thus, improves the quality of planning. Planning is done for future under certain known conditions and forecasting helps in knowing these conditions. It provides knowledge of planning premises with which managers can analyse their strengths and weaknesses and take action to meet the requirements of the future market.
For example, if the TV manufacturers feel that LCD or Plasma televisions will replace the traditional televisions, they should take action to either change their product mix or start manufacturing LCD/Plasma screens. Forecasting, thus, helps in utilizing resources in the best and most profitable business areas.
In the fast changing technological world, businesses may find it difficult to survive if they do not forecast customers’ needs and competitors’ moves.
2. Identification of critical areas:
Forecasting helps in identifying areas that need managerial attention. It saves the company from incurring losses because of bad planning or ill defined objectives. By identifying critical areas of management and forecasting the requirement of different resources like money, men, material etc., managers can formulate better objectives and policies for the organisation. Forecasting, thus, increases organisational and managerial efficiency in terms of framing and implementing organisational plans and policies.
3. Reduces risk:
Though forecasting cannot eliminate risk, it reduces it substantially by estimating the direction in which environmental factors are moving. It helps the organisation survive in the uncertain environment by providing clues about what is going to happen in future.
If managers know in advance about changes in consumer preferences, they will bring required modifications in their product design in order to meet the changed expectations of the consumers. Thus, forecasting cannot stop the future changes from happening but it can prepare the organisations to face them when they occur or avoid them, if they can.
Forecasting involves participation of organisational members of all departments at all levels. It helps in coordinating departmental plans of the organisation at all levels. People in all departments at all levels are actively involved in coordinating business operations with likely future changes predicted as a result of forecasting. Thus, forecasting helps in movement of all the plans in the same direction.
5. Effective management:
By identifying the critical areas of functioning, managers can formulate sound objectives and policies for their organisations. This increases organisational efficiency, effectiveness in achieving the plans, better management and effective goal attainment.
6. Development of executives:
Forecasting develops the mental, conceptual and analytical abilities of executives to do things in planned, systematic and scientific manner. This helps to develop management executives.
4. Measures to Increase the Effectiveness of Forecasting:
Forecasting provides information to facilitate decision-making and planning. In the complex and turbulent environment, forecasts may go wrong and so would the plans based on these forecasts. This may prove hazardous for the company but making plans not based on forecasts is more hazardous.
Forecasting is therefore, necessary. Since future may not behave as predicted and deviations may occur, forecasting skills should improve to reduce the range of errors. This amounts to making forecasting effective.
The following measures can help in increasing the effectiveness of forecasting:
1. Forecasting methods should be simple. Complex methods can confuse data rather than provide meaningful information.
2. Compare forecasts with the situation of “no change”. Changes may not always occur and “no change” situation may prove to be accurate many times.
3. Long range forecasts should not depend upon a single forecasting method. Several forecasting methods should be adopted and average of their results should be used to make predictions.
4. Forecasts should not be made for very long periods. Length of forecasts should be shortened to improve their accuracy. Accuracy of forecasts decreases as the time period of prediction increases.
5. Managerial skill should be improved to make reliable forecasts for planning decisions. Whatever forecasts are made, they should have complete support of the top management to make their implementation effective.
6. Forecasts should be based on facts and figures and not personal biases of the forecaster.
5. Process of Forecasting:
The following steps usually result in effective forecasting:
1. Determine the objective for which forecast is required:
Managers should know the reasons why forecasts are required. If there are rapid changes in the environment, it is necessary to forecast the environmental factors. Past records of the companies provide useful framework to know how effective forecasts have been in the past in making business operations successful.
Unless managers are clear of the reasons why forecasts are required to be made, the right choice of technique and also the right forecasts will not be made. Wrong forecasts lead to wrong business decisions, faulty planning and losses for business organisations.
2. Select the appropriate forecast method:
Depending upon the objective for which forecast is required, managers select the appropriate forecasting technique. These techniques may be quantitative or qualitative in nature. Based on past and present response of companies to environmental variables, these techniques represent future trend or behaviour of business activities. This future behaviour is supposed to be the likely outcome of forecasting method adopted.
3. Compare the actual results:
Though managers put in the best of efforts to forecast the future operations, the forecasts may still go wrong or the environmental changes may take place other than those predicted. In either case, the results or outcomes of forecasts will be different from those projected.
This may require in making new forecasts or changes in plans because of changes in environmental factors. The actual results are, thus, compared with the forecasted results and deviations are detected as soon as possible so that necessary changes can be made in the forecasts or the plans.
4. Review and revise the forecasts:
If the actual results happen to be as projected, these forecasts become the basis for future forecasting. If, however, actual results are different from those projected, the forecasts are reviewed and revised to ensure better outcomes in the next forecasting period.
6. Techniques of Forecasting:
There are a number of techniques through which forecasts can be made. No technique can universally apply in similar business situations. These techniques, singly or in combination, are used depending upon the business situations when they have to be used.
The techniques of forecasting generally fall into two categories:
1. Quantitative Forecasting:
It applies mathematical models to past and present information to predict future outcomes. These techniques are used to have access to hard or quantifiable data. Some of the quantitative techniques are time series analysis, regression models and econometric models.
2. Qualitative Forecasting:
It applies when data are not available or very little data are available. Managers use judgement, intuition, knowledge and skill to make effective forecasts. Some of the qualitative techniques are jury of executive opinion method, sales force composite method and users’ expectation method.
These techniques are used for:
1. External environmental forecasting and
2. Internal environmental forecasting
External Environmental Forecasting:
No firm, large or small, over a period of time, remains in a static condition. It experiences upward or downward swing. Robert C. Turner, an economist, states, “Business forecasting is unavoidable. Every business decision involves a forecast, implicit or explicit, because every business decision pertains to the future. Although business decision makers should neither accept any forecast as infallible nor rely exclusively on it, they would be well advised to give forecasts a significant weight in their own planning.”
Forecasts related to external environment are:
1. Economic forecasting,
2. Technological forecasting,
3. Forecasting regarding Government policies, and
4. Sales forecasting.
Choice of Forecasting Methods:
In practice, no single technique of forecast can apply to make predictions. A combination of different techniques is followed by the forecasters, where positive attributes of all the techniques are unified into a single forecast.
In a joint opinion method to make forecasts, all those concerned with the problem area jointly make judgments and forecasts are made through consensus of opinion. The best forecasting technique is a blend of statistical and industry/group/ industry judgment.
The forecast method should be accurate in terms of predicting results. No method can, however, be 100 per cent accurate. A range of deviations is, therefore, accepted by the forecasters. A range of 5 to 10 per cent is usually accepted by forecasters depending upon the nature of product, market, industry and the forecast.
Forecasting method should be flexible. It should change according to changing environmental conditions. Deviations in actual implementation become the basis of adopting another method of forecasting to make predictions.
Every forecasting method has benefits and costs. Forecasts should adopt a method whose benefits are more than the costs to achieve optimum results.
Forecasts should provide timely information of future behaviour of consumers, sales and industry trends. If forecasts exceed the time for actual sales in the market, they will become inefficient forecasts as costs would exceed the expected revenues. Though they should not relate to very near future, they should cover a period long enough to make rational forecasts.
5. Availability of information and personnel:
Good forecasts depend upon reliable, timely, accurate and comprehensive information about future. Lack of information will lead to wrong estimates and wrong forecasts. Besides availability of information, people who use this information should also be qualified to process the formation to market rational forecasts.
Quality information will not generate quality forecasts if people do not have knowledge to process that information. People, therefore, have to be trained to make best use of information to make accurate forecasts.