Forecasting Techniques

Micro environmental and industry scanning and analyses are only marginally useful if all they do is reveal current conditions to be truly useful; such analysis must forecast future trends and changes. Forecasting is a way of estimating the future events that have a major impact on the enterprise. It is a technique whereby managers try to predict the future characteristic of the organizational environment and hence make decisions today that will help the firm deal with the environment of tomorrow. Although forecasting is an inexact science, four techniques can be particularly helpful.: Time Series Analysis , Judgmental Forecasting, Delphi Technique and Multiple Scenarios.

Time series Analysis: This is an empirical procedure in which certain historical trends (such as population growth, technological innovations, changes in incomes etc) are used to predict such variables as a firm’s sales or market share. Because time series analysis projects historical trends into the future its validity depends on the similarity between past trends and future conditions.

Judgmental Forecasting: This is a forecasting technique in which employees, customers, suppliers and/or trade associations serve as a source of qualitative information regarding future trends. For instance sales representatives may be asked to forecast sales growth in various product categories based on their interaction with customers. Survey instruments may be mailed to customers, suppliers or trade associations to obtain their judgments on specific trends.

Delphi Technique: This is a forecasting procedure in which experts in the appropriate field of study are independently questioned about the probability of some event’s occurrence. The responses of experts are compiled and a summary is sent to each expert. This process is repeated until consensus is arrived regarding a particular forecasted event.

Multiple Scenario:

Future events can’t be predicted easily as our assumptions may go wrong, trends may change, events may take a different route altogether or some unexpected thing may change the whole scenario. To overcome these, a manager should formulate several alternative descriptions of future events and trends (called as multiple scenarios).

Other techniques:

Some of the more popular ones in the category include (Bright and Milton) the following:

1) Expert Opinion: Knowledgeable people are selected and asked to assign importance and probability ratings to various possible future developments. The most refined version, the Delphi method, puts experts through rounds of event assessment where they keep refining their assumptions and judgments.
2) Dynamic Modeling: Researchers build sets of equations that attempt to describe the underlying system. The coefficients in the equation are fitted through statistical means. Econometric models of more than three hundred equations, for example are used to forecast changes in the US economy.
3) Cross impact Analysis: Researchers identity set of key trends (those high in importance and/or probability) The question is then put: If event A occurs, what will be the impact on all other trends. The results are then used to build sets of domino chains where one event triggers others.
4) Demand/Hazard Forecasting: researchers identity major events that would greatly affect the firm. Each event is rated for its convergence with several major trends taking place in society and for its appeal to each public group in the society . The higher scoring events are then researched further.

After implementing the environmental analysis process, management should continually evaluate and strive to improve it. The process as pointed out by Certo and Peter should be linked to current planning operations, responsive to the information needs to top management supported by key managers and performed by people who understand the difference between being analysts and being a strategists.

Source: Strategic Management