Forecasting and Premising

Introduction

Forecasting is the process of making educated guesses in uncertain situations. Business forecasting is a systematic attempt to look into the future to identify threats and opportunities and successfully achieve goals by developing and implementing well-planned action plans. Business forecasting aids in analysing economic, political, and market information to reduce the risks associated with business decisions and long-term plans. Forecasts force management to think ahead and give planning a singular focus by focusing attention on the future. In business, forecasting entails taking a ‘look ahead’ approach.

Forecasting

Simple electronic spreadsheets, Enterprise Resource Planning (ERP) and Electronic Data Interchange (EDI) networks, advanced supply chain management systems, and other Web-enabled technologies are all used in business forecasting.

Key Elements of Business Forecasting

In a well-known article in the Harvard Business Review, Redfield identified the following essential elements in business forecasting:

1. Developing the groundwork: In the first stage, known and available information about the company’s growth, the industry in which the company is positioned, the expansion of the company’s product lines, and so on is investigated. The primary goal is to lay the groundwork for future projections.
2. Estimating future business: Based on the information gathered, management evaluates the business’s future prospects. Management forecasts trends through a step-by-step approach in which the data is scrutinised and analysed. These predicted patterns should not be regarded as absolute guides to executive action but rather as educated guesses at this stage.
3. Comparing actual and estimated results: At this stage, a periodic comparison of actual and estimated results is performed to avoid risks associated with incorrect forecasting. The projection serves as a measuring tool and aids in investigating substantial variations that result in unexpected gains/losses.
4. Refining the forecast process: The three-step method outlined above assists executives in developing proficiency in creating reliable projections. They can refine, sharpen, and adjust their forecasting techniques over time to meet the changing needs of business.

Factors Influencing Business Forecasts

1. Political stability;
2. Demographic changes;
3. Price levels;
4. Government restrictions and fiscal policy;
5. Job creation, productivity, and national income;
6. Technical environment: Some fields, such as computers, have seen significant changes, and the impact of the rate of development must be highlighted.

The Advantages of Forecasting

The following are some of the benefits of business forecasting:

1. Business forecasting provides crucial facts and pertinent information for successful planning because forecasts are the premises or basic assumptions based on the manager’s planning and decision-making.
2. It aids in bringing a singleness of purpose to planning, which would be difficult to do otherwise.
3. It raises the standard of managerial planning. For example, if a corporation can foresee future customer needs, it can plan and manufacture new items accordingly.
4. Forecasting improves coordination by focusing attention on the future. It contributes to the unity of purpose in planning and objectives.
5. Forecasting aids in reducing costly planning errors.
6. Effective forecasting assists in identifying environmental factors and providing for these issues, however imperfectly. In the absence of business forecasting, individuals and organisations alike are at the mercy of future occurrences.
7. Forecasting also aids in the organization’s preparation for future crises and catastrophes. Through sufficient planning, the organization may protect itself from many, if not all, of these unanticipated developments. Developing essential shock absorbers that protect against economic cycles may be challenging, but their influence can be reasonably appraised and the negative repercussions minimised.
8. It provides critical information about the organization’s weak points, opening the way for adequate control. Once such areas are identified, managers can easily construct checkpoints for effective management and sound planning.

Limitations of Forecasting

Forecasts are only estimates of future conditions, not current position indicators. The future is shrouded in uncertainty. Because of uncertainty, the best possible plan may result in losses and the worst possible plan in profits. Forecasting effectiveness is always severely limited by uncertainty. Forecasting has the following limitations:

1. Past data reliability. Although previous events are used to predict the future, the veracity of these recorded events is questioned.
2. Accurate judgement is required to identify essential components of the forecast, assess data, and select and apply analytical methodologies to problems.
3. Single-figure forecasts may be inadequate since probability must be attached to evaluate the likelihood of the event occurring.
4. A successful forecast is a rare occurrence, frequently occurring for the wrong reasons. Forecasting future occurrences is risky, especially for businesses in highly dynamic and tumultuous environments, so forecasting is useless.
5. Forecasting is heavily reliant on forecasts and assumptions. Guesswork, no matter how well done, cannot eliminate the margin of error or the chance of errors.
6. Forecasting techniques have not yet been fully established, and no foolproof method of predicting the future exists. As a result, forecasting is more an art than a science. Its success is primarily determined by how well it is implemented, how well forecasting techniques are developed, and so on.

Techniques of Forecasting

Many academics have proposed classification schemes for predicting approaches. The categorization that follows is a revision of Gordon’s classification developed over two decades ago:

1. Genius forecasting: This strategy is based on intuition, insight, and chance. Psychics and crystal ball readers are the most extreme examples of brilliant predictions. Their forecasts are entirely based on intuition. Science fiction writers have described new technologies with uncanny precision at times.
2. Trend extrapolation: These strategies study trends and cycles in historical data and then project them to the future using mathematical procedures. They assume that the forces that created the past will continue to work in the future. When developing medium—and long-range forecasts, this is generally a valid assumption. The further out we try to forecast, the less specific the forecast becomes.
3. Consensus methods: Forecasting complicated systems frequently necessitates soliciting expert viewpoints from more than one person. Each is an expert in his or her field, and the final prognosis is formed by synthesising their opinions.
4. Simulation methods: Analogs are used to model complicated systems in simulation approaches. These analogues can take several forms. A wind tunnel for modelling aeroplane performance could be a mechanical analogue. A mathematical analogue would be an equation that predicts an economic metric. A metaphorical analogy could involve comparing human population growth to the growth of a bacteria colony. Game analogues are utilised when the player interactions are symbolic of social interactions.
5. Cross-impact matrix method: Relationships between events and developments are frequently present but are not shown by univariate forecasting tools. The cross-impact matrix method acknowledges that the occurrence of one event might alter the likelihood of other events.
6. Scenario: A scenario is a narrative forecast of possible events. Like the cross-impact matrix approach, it recognises system component interrelationships. The scenario depicts the effect on the other components and the overall system. It is a “script” for specifying the specifics of an unknown future.
7. Decision trees: Decision trees were originally used to explain the structural relationships between various choices. Initially, these trees were displayed as yes/no (dichotomous) options. Decision trees became increasingly complicated as our understanding of feedback loops improved. Their design became the basis for computer flow charts. The figure depicts an example of a decision tree.

      8. Economic Forecasting: Economic forecasting is one of the most popular types of external forecasting. The primary goal of economic forecasting is to predict business fluctuations, which are fluctuations in overall economic activity. These swings affect business success or failure in various ways, depending on the type of the business. Several indicators, including interest rates, stock prices, and the quantity of employment, are routinely used to measure the extent of economic activity in a country. The gross national product, on the other hand, is the most critical metric (GNP). GNP is the value of goods and services generated in a country and has an impact on the conditions of numerous organisations in an economy:

Extrapolation: Extrapolation is the most basic kind of economic forecasting; it is just a projection of the current trend into the future. The figure depicts an example of extrapolation.

Lead and lag method: This method examines the historical behaviour of numerous indicators. The figure depicts an illustration of the lead and lag method.

Econometrics: This is a mathematical method in which the key variables are linked in equations. It can then be projected using the assumptions derived from these equations.

Combining Forecasts

No forecasting technique appears suitable for all scenarios. There is significant evidence that merging separate projections increases forecasting accuracy, and there is also evidence that combining qualitative and quantitative projections affects accuracy. However, research has not yet uncovered the conditions or methodologies for the best forecast combination.

• Difficulties in Forecasting Technology

Clarke refers to our incapacity to predict technological futures as a nerve failure. When a significant technological breakthrough occurs, accepting the ramifications of the discovery requires conviction and guts. Even when the truth is right in front of us, we frequently struggle to embrace its implications.

Clark labels this opposition to change as cowardice, which could be much more profound. In psychology, cognitive dissonance theory has helped us understand that resistance to change is a natural human feature. Forecasting new technology outside our latitudes of acceptance is quite challenging.

According to Clarke, information can sometimes clog the wheels of imagination. His self-proclaimed law represented this belief: ” “When a renowned but elderly scientist says something is conceivable, he is almost probably correct. When someone says something is impossible, he is almost certainly wrong.”

Almost all futurists regard the past as unchangeable, consisting of known facts. We generally believe that there is only one past. When two people tell contradictory stories about the past, we tend to conclude that one is lying or making a mistake.

Premising

Premises are future assumptions that are the foundation for forecasting and planning efforts. According to Koontz and O’Donnell, “premises guide planning.” They describe the stage of an expected future occurrence predicted to occur when plans are implemented. These are the anticipated environmental plans.’

Fitting all of the future complexity together to form a forecast is tricky. A manager should have a framework for forecasting the future. He must identify forecasting ‘objective’ such as:

1. General economic premises are assumptions regarding the overall level of economic activity. Gross National Product (GNP) is widely considered an indication of overall commercial activity.
2. Business premises are a manager’s assumptions about the likelihood of events in his industry.
3. Company premises should begin with a thorough study of the company and its surroundings.

Tangible premises may be expressed in physical and monetary measures, such as labour hours or manufacturing units. Intangible premises are impossible to quantify.

10 Review Questions

1. What is the primary purpose of business forecasting?
2. Identify and describe one key element of business forecasting as outlined by Redfield.
3. How does forecasting aid in managerial planning and decision-making?
4. Name and explain two factors that can influence the accuracy of business forecasts.
5. What are some limitations of forecasting, particularly in dynamic business environments?
6. Describe the “Genius forecasting” technique and provide an example of when it might be used.
7. What is the “Cross-impact matrix method,” and how does it differ from other forecasting techniques?
8. How does economic forecasting differ from other types of forecasting? Provide an example of an economic forecasting method.
9. Explain the challenges associated with forecasting technological advancements, according to Clarke.
10. What are “premises” in the context of forecasting and planning, and why are they important?