Forecasting Trend Analysis

Learning Outcomes You will be able to: Explain the value of trend analysis to a company Use moving averages to smooth the trend line Extrapolate sales trends Use the trend to estimate future sales Recognise the limitations of sales forecasting

Market research Market knowledge is a necessary basis for decision-making Accuracy is a key factor in using market research data for predicting what might happen in the future A firm may want to know:- Trends in future sales of products How an advertising campaign might affect sales Changes in nature of the market – sales fluctuations

Moving Averages Sales Time

Moving Averages Any data covering a period of time may be subject to underlying trends, e.g. The trend itself Cyclical fluctuations Seasonal fluctuations Random fluctuations Firms want to know what the underlying trend is in order to predict future trends Smoothing out the data can be done using the technique of moving averages

Limitations of Forecasting Forecasting, using extrapolation, assumes that what happened in the past will continue to happen in the future The ‘line of best fit’ is based on average figures, which may not be accurate The prediction does not take any other factors into account

Limitations (cont) There is likely to be a time lag involved – if the trend predicts increases in demand, the firm may have to increase production capacity which takes time How useful a forecast is depends on the stage the product is at in its life cycle – e.g. based on recent sales, the mobile phones market will continue, but is unlikely to increase as it may have reached saturation

Test Marketing The introduction of a product to a certain geographical area in order to assess its likely success or the effectiveness of the marketing methods being used Results are used to make a statistical forecast of future sales

Benefits Relatively accurate prediction of future popularity as results are based on actual purchases by customers in test area Useful way of gauging the popularity of the product without incurring huge expense of a national launch

Drawbacks Can lead to copies being produced by rivals In rapidly changing markets, delay in launching nationally may endanger profit Newness of the product may encourage people to purchase only once, so test market may exaggerate product’s true popularity If attractive special offers accompany test marketing, offers may not be maintained on a national launch

Correlation A statistical technique used to establish the strength of the relationship between two sets of values.

Correlation Positive Negative Perfect Strong/high Weak/low No correlation See page 126

Limitations Past trends do not always continue into the future Correlation changes over time External influences may change over time Internal policies or actions may change Market research used for forecasts may lack reliability Forecasts become more difficult the further they project into the future

Qualitative forecasting Methods of prediction based on personal opinions, often referred to as hunches but influenced by the personal knowledge & experiences of individuals involved in the forecasting

Methods The Delphi/Oracle technique Brainstorming Individual hunch

Why qualitative forecasting? New business, therefore no previous information on which to base predictions No clear statistical indication of future sales – quantitative methods unable to produce a reliable forecasts Trends have changed, therefore unwise to predict on the basis of past statistics Factors influencing sales are not easy to qualify

Limitations of qualitative forecasting Experts may be knowledgeable, but unlikely to understand all aspects of a market Many trends & relationships are broadly consistent over time Easier to persuade a senior manager if your forecast is based on scientific methods Managers may avoid this method to protect themselves from criticism if hunch turns out to be incorrect

Implications of incorrect forecasting Overestimated sales  wasted resources Underestimated sales  lost sales

Forecasts likely to be correct when: Product is well established & market known External factors are predictable Stability in tastes & competitor actions Forecasts are made by, and agreed with, those having day-to-day contact with the market Organisations has undertaken detailed & reliable market research Test marketing and/or backdata gives firm a clear understanding of the market

Use of IT in analysing markets IT based system can complete quantitative forecasting calculations almost instantaneously Time saved enables firm to improve quality of planning Organisations can link sales records to other databases – sudden changes in trends can be detected quickly Improves internal & external communications

Use of IT in analysing markets Use of loyalty cards allows firms to collect information on buying habits of customers Internet or company intranet allows more data to be stored cheaply & accessed more quickly by a wide range of individuals