20041 CE Management and Planning Diane Bishton – K229 Planning & Forecasting - Nature & purpose

20042 In this lecture We will Look at what a Forecast is Introduce some Reasons for Forecasting Consider a Model of the Forecasting Process and some Important Strategic Forecasts Finish with an Overview of Forecasting Methods in preparation for the next lecture on techniques

20043 Introduction “Business, more than any other occupation, is a continual dealing with the future; it is continual calculation, an instinctive exercise in foresight” Henry R. Luce Quoted in “Strategic Business Forecasting” (Shim J K, 2000)

20044 What is a Forecast ? A Prediction of some Future state or event May be based on past events, experience, quantitative or qualitative data May involve speculation Short-term normally more realistic than long-term - more uncertain >>> more error

20045 ‘Internal’ & ‘External’ Forecasts Internal - for the individual organisation itself e.g. Sales, equipment down-time, plant utilisation, cash flows External - about the business environment e.g. Exchange rates, consumer expenditure, competitor behaviour

20046 Why forecast ? Without a forecast you have little foundation for planning e.g. Students taking Awards Open Systems, such as a business, need to respond to change & these responses may need some time - even years - to prepare for So why not put what you know to advantage ? - Human memory & hence experience (often supplemented by technology) is a powerful tool for survival “The objective of forecasting is to reduce risk in decision making” (Shim, 2000)

7 A model of the forecasting process (adapted from Bennett 1999, p 80) What needs to be Forecast ? Why, When, Who ? What Forecasting Technique(s) ? Data sources, Research approach Identify Trends & Factors Evaluate information quality Assess the forecast implications Monitor forecast accuracy Objectives Methods Analysis Evaluation

20048 Important Strategic Forecasts - 1 Technology Forecasts New developments in products, processes, infrastructure Long-term management view combined with technology issues Methods - Brainstorming, Delphi Method, technology trends Outcomes - most optimistic, most pessimistic, most likely Approaches - Exploratory - assume steady progress Normative - possible radical change

20049 Important Strategic Forecasts - 2 Sales Forecasts To indicate expected revenue, which in turn suggests necessary materials, labour, plant etc, hence finance Methods - a wide range, but often based on past sales tempered by expected response to advertising, competitor behaviour etc. Examples : Regression Analysis, Moving Averages, Exponentially Weighted Moving Averages, Sales Staff estimates Data sources - past sales trends, market research, trade reports, Govt statistics

Sales Forecasts related to Managerial Functions (from Shim, 2000, p4) Sales Forecast Money & Credit Forecasts Capacity Planning Capital Expenditure Financial Planning Production Planning Marketing Planning Manpower Planning Procurement Planning Project Planning Inventory Planning

11 An Overview of Forecasting Methods (from Shim, 2000, p6) Qualitative - Expert Opinion, Delphi Technique, Sales Force Polling, Consumer Surveys, PERT Derived Quantitative - Time Series (Historical) - Naïve Methods, Moving Averages, Exponential Smoothing, Trend Analysis, Decomposition of Time Series, Box-Jenkins - Associate (Causal) - Simple Regression, Multiple Regression, Econometric Modelling Markov Approach Indirect Method - Market Survey, I/O Analysis, Econometric Indicators

Further References Bennett R (1999) Corporate Strategy 2e Shearer, P. (1994) Business Forecasting & Planning Hemel Hempstead: Prentice Hall Shim Jae K. (2000) Strategic Business Forecasting, revised edition Boca Raton, Florida: St Lucie Press John Galt’s view