This article throws light upon the four main types of forecasting that are related to external environment. The types are: 1. Economic Forecasting 2. Technological Forecasting 3. Forecasts Regarding Government Policies 4. Sales Forecasting.
Type # 1. Economic Forecasting:
It is done to forecast the general economic conditions, like boom or depression, upswing or downswing of the economy. Corresponding to these forecasts, sales and revenues of the business go up or down. In case of depression, timely forecast can prevent the firms from incurring losses.
Various techniques of economic forecasting are as follows:
(a) Extrapolation:
It is the continuity of past into future. Future is considered to be projection of the past. For example, if sales are increasing every year at the rate of 12%, and sales for the current year are lakh, the forecast of sales in the next year will be t one lakh and twelve thousand. These forecasts hold good unless there is unpredictable change in the economic environment.
Limitations:
Unpredicted variations in the economic conditions can affect the organisational plans. Changing growth rates can affect validity of this method.
Suitability:
This method is suitable when changes are slow, e.g., population growth or life expectancy. Long-term forecasts in such cases normally do not fail.
(b) Leads and Lags:
Some factors / indicators precede change in the economic environment; decrease / increase in the stock market indices for example, is an indication of downswing / upswing in the economy. These are known as lead indicators.
Some indicators succeed economic cycles. For example, if the economy is in the state of depression, manufacturing activity will slow down, manufactures will not borrow from the banks, interest rates will go down and consumer spending will also go down. These are the lag indicators.
Limitations:
These indicators are not based on scientific methods of forecasting. They are mere judgements of people who influence the economic activities through guess work.
Suitability:
This method is suitable when economic indicators are applied rationally, scientifically and qualitatively to analyse their impact on changes in the economic cycles. For example, rising share prices indicate upward trend of the economy; increase in the manufacturing activity, public and private investment and increase in consumer spending.
(c) Econometrics:
It applies statistical models to solve business problems. The impact of different variables on the variable sought to be analysed is studied and forecasts are made. For example, if a firm wants to know the impact of changes in production policy or advertising expenditure on sales, it can be found through techniques of econometrics. This model can work under different sets of assumptions; the impact of future certainties and uncertainties can be studied and results can be predicted.
Limitations:
1. Managers should have specialised knowledge of statistics to apply these techniques.
2. If managers do not have this knowledge, they can appoint people who can do this work, in which case it shall be costly.
Suitability:
This technique is useful where policy makers analyse the impact of future changes on their current operations.
Type # 2. Technological Forecasting:
This forecasting analyses the impact of technological changes on the firm. It finds out the rate at which technology is changing, what will be the impact of new machines and equipment’s on existing plant and machinery, should the firm continue with the existing machines or replace them, in case of replacement, should they buy the new machine or take it on lease, what will be the impact of these decisions on profits etc.
This forecasting can be done in two ways:
(a) Exploratory forecasting and
(b) Normative forecasting.
(a) Exploratory forecasting:
Exploratory forecasting projects the future according to predictable technological progress. Firms assume that current technological developments will exist in future also.
Limitations:
This is not an accurate way of forecasting since future is assumed to remain stable, which does not happen. If forecasters do not incorporate the changes in future in their current actions, they may not be able to face these challenges when they occur.
(b) Normative forecasting:
This forecasting discounts future to the present. It presupposes changes in future and equips the firms to face them when they occur. This is an active form of forecasting and enables the enterprises to survive in the changing circumstances.
Limitations:
Though this forecasting fully equips the firms to face challenges, it has only natural inhibitions like, what if the proposed changes do not take place, will the finances be available at the time when required, etc.
To make technological forecasting effective, a technique called Delphi technique was developed by Olaf Helmer and his colleagues at the Rand Corporation. In this technique the problem is selected, i.e., the area where forecasting is done is identified. In this technique, a questionnaire is prepared and mailed to the respondents.
They fill the questionnaire and mail it back to the sender. The results are tabulated and used for designing a revised questionnaire. This is again sent to the respondents along with the original results. This helps them in giving subsequent responses to the questions. The process is repeated until the consensus is achieved on finding solution to the problem.
Since this is a written form of finding solutions to the problems, the respondents express their opinion freely. They are not pressurized by personal biases and prejudices. However, this is a time-consuming method of collecting responses and should be used only if time for making decisions is not a constraint.
Type # 3. Forecasts Regarding Government Policies:
Government policies change from time to time to boost the economy. It may give fiscal incentives (additional depreciation or investment allowance) to promote investment in plant and machinery or some incentives may be withdrawn.
This is done to regulate the national economy, prevent monopoly and promote healthy competition. Changes in Government’s policy and their impact on profits can be predicted through information published in various journals and newspapers.
Type # 4. Sales Forecasting:
The sales forecasts help the firm to retain or increase its share of goods in the market. “The sales forecast is a prediction of expected sales, by product and price, for a number of months or years.” This is done irrespective of the size of the firms.
Internal Environmental Forecasting:
Effective forecasting precedes planning. Besides external factors which affect forecasts, organisations identify their internal environment also in the form of their strengths and weaknesses and analyse their impact on the forecasts.
Two main factors which help in identifying the internal environment are:
1. Human Resources and
2. Non-Human Resources.
1. Human resources:
Human beings convert inputs into outputs and achieve company’s plans. Their competence and skill in distinctive areas of specialisation must be recognised while making corporate plans.
2. Non-human resources:
Plans should focus on financial and non-financial resources that can be optimally used to achieve objectives stated in the plans.