Managers forecast to gauge the future. The purpose of forecasting is to become aware of environmental factors that will affect the business in order to plan for it objectively. The two activities in the forecast step of the planning process are
Predictions force managers to consider the future and analyse factors that will impact it. It also force them to collect and analyse information and identify shortcomings in the planning and control measures used. Try to involve more employees in the forecasting process, because it leads to consistency and better coordination.
Forecasting is done by all managers, but they are often not aware of it. It can be
- conscious or unconscious
- formal or informal
- intuitive or scientific
- sporadic or ongoing
Forecasts done in a scientific way adds more value than intuitive or unconscious projections.
Making predictions can be complicated. There is a vast amount of information available to be organized and analyzed. There are three dimensions to consider and each dimension includes a number of aspects.
Dimensions and Aspects of Forecasting
Two further concepts relating to forecasts is mechanistic and analytical forecasts.
- Mechanistic forecasts assumes that future trends will have the same characteristics than past trends.
- Analytical forecasts determines the causes of past events. The future is then analyzed in terms of these causes.
Analytical forecasting is more accurate than mechanistic forecasting, but much more work.
Fortunately there are techniques to assist in making forecasts. Some techniques are quite complicated (like Multiple Regression) and will not be discussed here. But fortunately there are also easy techniques.
The Delphi Technique
Select a panel of knowledgeable people. Their names is not disclosed to ensure that they don’t influence each other. Each of them does their own predication on the topic. Integrate the predictions and send the overall results back to each of the panelists. They are required to make further predictions about the future. The anonymity of the panel members are still maintained. This process is repeated several times, until there is consensus on the issues.
The purpose of brainstorming is to generate ideas. Choose a knowledgeable group of people and gathered them in a room. You may start with a short briefing on the subject to put it in context. Ask the participants to provide ideas. Write all ideas on a flip chart. The most important aspect is that there should be no arguments about the validity and correctness of the ideas at this stage. The goal is to get the maximum number of ideas without judgement.
The second phase of the process is to categorize the ideas and discuss the validity. Eliminate inaccurate and impractical ideas. Try to reach consensus and arrive at a decision.
Identify and describe trends of the past. Usually numbers, ratios and graphs are used to identify trends. This is a very popular technique because of its simplicity and low cost. The usability is higher in stable environments. The mechanistic type of forecasting relies heavily on this technique.
The best way to do SWOT analysis is to tackle it in the same way as brainstorming. Strengths and weaknesses are systematically identified for the internal environment of the company. Opportunities and threats is identified for the external environment.
There is a thin line between predictions and assumptions. A manager use forecasts to identify the conditions and characteristics of its future environment. They then make assumptions based on the most likely scenarios and work it into the planning process.
Examples of assumptions that is often taken into account in the planning process
- Financials – Inflation, interest rates, taxes and availability of financing.
- Economic – Exchange rates, trends in GDP and economic growth and trends in the balance of payments.
- Labor issues – Unemployment rates, availability of manpower, wage levels and unions.
- Industrial relations – Availability of resources, prices of raw materials.
- Marketing Matters – Demand for end products, demand for value-added products and services and consumer prices.
Hannes Kruger, Management training manual. Written for the Meat Board, Chapter 2