Planning as mentioned in the title can help to identify what might be required in the future, and to estimate how many are likely to be required in a given time period. However, in the case of innovative products forecasting is difficult as the products and markets may not be well defined.
The most appropriate choice of forecasting method will depend on:
- what we are trying to forecast;
- rate of technological and market change;
- availability and accuracy of information;
- company’s planning horizon:
- the resources available for forecasting
In practice there will be a trade-off between the cost and accuracy of a forecast. The more common methods of forecasting such as trend extrapolation and time series are of limited use for new products, because of the lack of past data. The main factors driving demand for a given product, and therefore provide some estimate of future demand, given data on the underlying drivers.
For example, the likely demand for the next generation of digital phones in terms of rate of economic growth, price relative to competing systems, rate of new business formation, and so on. Thus the reliability of the forecast depends a great deal on selecting the right variables in the first place. The advantage of regression is that, unlike simple extrapolation or time series analysis the forecast is based on cause and effect relations. Econometric models are simply bundles of regression equations including their interrelationship. However, regression analysis is of little use where future values of an explanatory value are unknown or where the relationship between the explanatory and forecast variables may change.
Leading indicators can improve the reliability of forecasts, and are useful guideposts to future trends in some sectors, In both cases there is a historical relationship between two trends. For example, new business start-ups might be a leading indicator of the demand for fax machines in six months’ time. Similarly business users of mobile telephones may be an example for subsequent patterns of domestic use.
Such normative techniques are useful for estimating the future demand or existing products, or extensions of existing products, but are of limited utility in the case of radical new products. Exploratory forecasting in contrast, attempts to explore the range of future possibilities. The most common methods are:
- Customer and market surveys
- Expert opinion
Most companies conduct customer surveys of some sort. In consumer markets this can be problematic simply because customers are unable to articulate their future needs. For example, market research would not have been very helpful to Sony in the development of the first domestic video cassette recorder or personal stereo. In industrial markets customers tend to be better equipped to communicate their future requirements. Consequently, in industrial markets innovations often originate from customers. Companies can also consult their direct sales force, but these may not always be the best guide to future customer requirements. Information is often filtered in terms of existing products and services, and biased in terms of current sales performance rather than long term development potential.
Brainstorming aims to solve specific problems or to identify new product or services. Typically, a small group of experts is gathered together and allowed to interact. A chairman records all suggestions without comment or criticism. The aim is to identify but not evaluate as many opportunities or solutions as possible. Finally, members of the group vote on the different suggestions. The best results are obtained when representatives from different areas are present, but this can be difficult to manage. Brainstorming does not produce a forecast as such but can provide useful input to other types of forecasting.
The opinion of outside experts is useful where there is a great deal of uncertainty or for long time horizons. The relevant experts may include suppliers, dealers, customers, consultants, and academics. A postal survey of expert opinion is obtained on what the future key issues will be, and the likelihood of the developments. The response is then analysed and the same sample of experts resurveyed with a new, more focused questionnaire. This procedure is repeated until some convergence of opinion is observed or conversely if no consensus is reached. In Europe, governments and transnational agencies use Delphi studies to help formulate policy. In Japan, large companies and the government routinely survey expert opinion in order to reach some consensus in those areas with the greatest potential for long term development.
The future events which are likely to affect the indicators are identified. These are used to construct the best, worst and most likely future scenarios. Finally, the company assesses the impact of each scenario on its business. The goal is to plan for the outcome with the greatest impact, or better still, retain sufficient flexibility to respond to several different scenarios. Scenario development is a key part of the long term planning process in those sectors characterized by high capital investment, long lead times and significant environmental uncertainty such as energy aerospace and telecommunications.