By Paul Hague, Director, B2B International Ltd
The White Paper series from B2B International draws together our thinking on a subject. The White Papers are a vehicle in which we can lay out our thoughts on a subject, hopefully to generate a debate that moves everybody’s thinking forward. This paper considers the subject of forecasting, one of the biggest challenges faced by marketers in this fast changing world.
DIFFERENT TYPES OF FORECASTS
From the marketers point of view, the term forecasts covers many different types including:
Economic Forecasts
At a high level, economic forecasts paint a broad picture of the environment in which a company operates. These forecasts are likely to include a prediction of changes in the gross domestic product (GDP), inflation, unemployment, balance of payments, and possibly a number of other parameters such as money supply, consumer spending, public sector borrowing and so on. The marketer is interested in economic forecasts as a backcloth to a market sector or a company’s position within that sector.
The market researcher is unlikely to become involved in the preparation of economic forecasts as this is the specialized activity of econometricians. In any case, there is little need to do so as the financial press regularly publishes economic forecasts from specialist forecasting organisations (e.g. National Institute of Economic and Social Research), the treasury and the merchant banks.
Environmental Forecasts
A good starting point for forecasting is to examine the environment in which a company sits. This environmental forecast would certainly cover the PESTLE forces which we know as political, economic, social, technological, environmental and legal. These forces vary over time so a key element of this analysis is to consider different scenarios for the present, one year ahead, three years ahead and so on.
Market And Product Forecasts
These are fundamental to the market researcher as they are concerned with specific sectors. The term is generally applied to forecasts of the end-user markets into which products are sold and forecasts for the product itself. The forecast of end-user demand is an important input in the product forecast.
Sales Forecasts
These are a combination of what will happen to a company’s sales as a result of the market environment and what will happen if the company introduces a new level of sales and promotional effort. It is, therefore, partly a statement of intent (a target) and partly a true forecast.
TIME HORIZONS FOR FORECASTS
All forecasts must have a horizon which could be weeks or years. Conventionally, marketers use three important breaks:
• Short-term forecasts concerned with periods up to a year;
• Medium-term forecasts which look beyond a year as far as three years;
• Long-term forecasts which are predictions beyond three years.
The time periods attributed to short, medium and long-term forecasting are entirely arbitrary and have changed over the last few decades. In the late 1960s and early 1970s economies and markets had greater stability and company forecasts stretched to five years. The shock waves created by the Yom Kippur War of 1973 shortened the medium term to two to three years; longer than this would be beyond the realms of reasonable accuracy. Even these periods are changeable within the specific context of companies and their markets. Today we cannot be certain what is around the corner. When asked once what he feared most, Prime Minister Harold Macmillan famously replied: “Events, dear boy, events.” And events tend to be unpredictable such as 9/11 or SARS or Hurricane Katrina or avian flu. In the fast-moving world of electronics, the long-term may be one to two years whereas a manufacturer of chemicals operates in an industry with a longer cycle, so long-term predictions could be pushed out to five years and still maintain acceptable levels of accuracy.
THE ROLE OF FORECASTS INSIDE A COMPANY
Market and sales forecasting play a role in a number of areas of company planning.
Corporate Planning
The forecasts of the economic environment and the market enable the corporate planners to steer the future course of the company. They highlight general opportunities and, just as important, pin-point the blind alleys and areas of decline.
Product And Market Planning
The product and market plans are used to set company objectives and establish budgets for promotion and selling which are needed to achieve goals. Product and market forecasts are action orientated. It is from these that companies plan their entry into new markets, or their withdrawal from those offering limited opportunities. The more detailed the forecast, the more precise the action can be. A forecast of regional growth prospects allows a company to concentrate its efforts where they will pay greatest dividends. Forecasts for sub-groups of products similarly allow detailed planning for each sector.
Sales Planning
The sales plan is based on the forecast of sales which the company believes it can achieve. The sales forecast cannot be viewed in isolation; it represents a share of the total market which can realistically be attained and this, in turn, depends on the strengths and weaknesses of every competing supplier and the level of resources each commits in support of its own sales.
Production Planning
Once agreed and accepted the sales plan becomes the master document on which all other internal company plans depend. The first of these is the production plan which is designed to ensure that productive resources are available to manufacture the product mix. Careful production planning is necessary to ensure good deliveries and productive efficiencies. The production manager may face the difficult choice of whether to produce large quantities in bulk, store them and live with expensive financing and warehousing costs, or to remain flexible, manufacturing to meet orders but paying the penalty of lost economies of scale.
Financial Planning
The production schedule will incur costs, the most important of which are stocks, tooling, machinery and plant. The sales and marketing plan will require money to be spent on promotion, selling, delivery and the clerical processing of orders. The sales forecast affects the flow of cash into the company and if the predicted cash flow cannot be reconciled with predicted costs in the months ahead, loan options must be agreed with banks well in advance to ensure the lowest possible interest charges. Thus the financial plan is drawn up using the sales and production budgets and adding to them the overhead burden necessary to run the business.
Part 2 of this white paper will be published on Friday 11th August
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