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McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

CHAPTER ELEVEN SALES FORECASTING AND FINANCIAL ANALYSIS

Why Financial Analysis for New Products is Difficult Target users don’t know. If they know they might not tell us. Poor execution of market research. Market dynamics. Uncertainties about marketing support. Biased internal attitudes. Poor accounting. Rushing products to market. Basing forecasts on history. Technology revolutions.

Forecasters Are Often Right In 1967 they said we would have: Artificial organs in humans by Human organ transplants by Credit cards almost eliminating currency by Automation throughout industry including some managerial decision making by Landing on moon by Three of four Americans living in cities or towns by Expenditures for recreation and entertainment doubled by Figure 11.1

Forecasters Can Be Very Wrong They also said we would have: Permanent base on moon by Manned planetary landings by Most urbanites living in high-rises by Private cars barred from city cores by Primitive life forms created in laboratory by Full color 3D TV globally available. Source: a 1967 forecast by The Futurist journal. Note: about two-thirds of the forecasts were correct! Figure 11.1 (cont’d.)

Commonly Used Forecasting Techniques Figure 11.2

Handling Problems in Financial Analysis Improve your existing new products process. Use the life cycle concept of financial analysis. Reduce dependence on poor forecasts. –Forecast what you know. –Approve situations, not numbers (recall Campbell Soup example) –Commit to low-cost development and marketing. –Be prepared to handle the risks. –Don’t use one standard format for financial analysis. –Improve current financial forecasting methods.

A-T-A-R Model Results: Bar Chart Format Figure 11.3

Bass Model Forecast of Product Diffusion Figure 11.4

The Life Cycle of Assessment Figure 11.5

Calculating New Product’s Required Rate of Return Risk % Return Reqd. Rate of Return Cost of Capital Avg. Risk of Firm Risk on Proposed Product Figure 11.6

Hurdle Rates on Returns and Other Measures Figure 11.8 Explanation: the hurdles should reflect a product’s purpose, or assignment. Example: we might accept a very low share increase for an item that simply capitalized on our existing market position.

Hoechst-U.S. Scoring Model Figure 11.9