Assignment on the topic:

Submitted by: Sindhu S.M

Roll number: 0930

Submitted to: Mrs. Bharathi karanth

1
 Content

SI.NO PARTICULARS PAGE NO.

1 3
Introduction

Definition

Need & importance

2 use of forecasts 5
3 Which area and why 6
to use forecast
4 Features & 8
assumptions
5 Selection of 9
forecasting techniques
6 Techniques of 11
forecasting
7 Limitations of 21
forecasting
8 bibliography 23

Environmental forecasting

Introduction:

After collecting relevant information on environmental factors to be

analyzed, forecasting of their likely behaviour in many cases is required as
information collected shows the present pattern. For this purpose
forecasting is required which has become the general pattern throughout the

2
 world. Forecasting is the process of estimating the relevant events of future,
based on the analysis of their past and present behaviour.

Definition:

Estimating the intensity, nature, and timing of the external forces that may
effect the performance of a firm, disrupt its plans, or force a change in its
strategies.

Need / importance of environmental forecasting:

Today, changes are rapid and too frequent and in a way quite necessary
for overall growth of economy. There have been quantum changes from
1970 onwards and today in the business world anything that is consistent
is only change. In the times to come when changes would predatory, it
would be crucial for managers to invent new ways of surviving in the ever
changing business environment. They would have to build up build up the
capacity of the firm to face the onslaught of changes by being more agile
and flexible for adapting themselves to changes. They would have to find
out new ways of creating opportunities of profitability and growth. New
rules of business will have to be written to meet over-increasing
expectations of drivers of business. To be prepared for such on going
eventualities, managers will have to prepare themselves for really
understanding the remote and the immediate environments of business
and mechanisms of changes that affect their industry.

3
The changes have not only affected smaller companies but also the giants
of various industries. In fact the organizational models those are
available with us today for giant companies prove as their handicap in
their process of adaptation due to their large inertia and consequent
slower response towards changes in environment. Hence there is an
urgent need for companies shed-off extra inertia and develop agility since
these large corporations will also be involved in the transition process.
For example: the situation that the automobile industry is facing today is
due to incorrect business environment forecasting for which many giants
are paying a price through under-utilized manufacturing capacity, piling
up of inventories and the locked up capital and operating cash.

Forecasting does not promise flexibility, it enhances the capability of

reacting faster at low costs.

Use of Forecasts

Plans are often confused with forecasts. Plans are sets of actions to help
deal with the future. Forecasting (or predicting) is concerned with
determining what the future will be. A plan is an input to the forecasting
model. If the forecasts arc undesirable, then one might change the plan,
which, in turn, could change the forecast. The point to remember is that

4
good plans depend on good forecasts. In practice, forecasts are sometimes
used to motivate people. More properly, people should be motivated by
plans (e.g., “meet this plan. And we will pay you a bonus of 25 percent”).
Decisions have often been made, before any formal forecasting has been
done. In such cases, the forecast serves little purpose other than to annoy
people if it conflicts with their decision or to please them if it supports their
decision. For the forecast to be used effectively, it should be prepared before
decisions arc made. Not only the expected outcome, but also other likely
outcomes (such as the best and worst outcomes) should be forecast. If the
worst outcome poses too much risk, forecasts should be made for alternative
interventions.

Which Area and Why Use Forecasts:

Forecasts are needed for marketing, production, purchasing, manpower, and

financial planning. Further, top management needs forecasts for planning
and implementing long-term strategic objectives and planning for capital
expenditures.

5
1. Marketing managers use sales forecasts to determine optimal

sales force allocations, set sales goals, and plan promotions

and advertising. Market share, prices, and trends in new
product development are also required.
2. Production planners need forecasts in order to: schedule

production activities, order materials, establish inventory

levels and plan shipments.
3. In planning for capital investments, predictions about future

economic activity are required so that returns or cash inflows

accruing from the investment may be estimated. Forecasts are
needed for money and credit conditions and interest rates so
that the cash needs of the firm may be met at the lowest
possible cost. Forecasts also must be made for interest rates, to
support the acquisition of new capital, the collection of
accounts receivable to help in planning working capital needs,
and capital equipment expenditure rates to help balance the
flow of funds in the organization.
4. Sound predictions of foreign exchange rates are increasingly

important to managers of multinational companies.

5. Long-term forecasts are needed for the planning of changes

in the company’s capital structure. Decisions on issuing stock

or debt to maintain the desired financial structure require
forecasts of money and credit conditions.
6. The personnel department requires a number of forecasts in

planning for human resources. Workers must be hired,

trained, and provided with benefits that are competitive with
those available in the firm’s labor market. Also, trends that

6
 affect such variables as labor turnover, retirement age,
absenteeism, and tardiness need to be forecast for planning and
decision making.
7. Managers of nonprofit institutions and public administrators

also must make forecasts for budgeting purposes. Hospital

administrators forecast the healthcare needs of the community.
In order to do this efficiently, a projection has to be made of:
growth in absolute size of population, changes in the number of
people in various age groupings, and varying medical needs
these different age groups will have.
8. Universities forecast student enrollments, cost of operations,

and, in many cases, the funds to be provided by tuition and by

government appropriations.
9. The service sector, which today accounts for two-thirds of the

U.S. gross domestic product, including banks, insurance

companies, restaurants, and cruise ships, needs various
projections for its operational and long-term strategic
planning. The bank has to forecast: Demands of various loans
and deposits Money and credit conditions so that it can
determine the cost of money it lends.

7
 Common Features and Assumptions Inherent in Forecasting:

As pointed out, forecasting techniques are quite different from each other.
But four features and assumptions underlie the business of forecasting.
They are:

 Forecasting techniques generally assume that the same underlying causal

relationship that existed in the past will continue to prevail in the future. In
other words, most of our techniques are based on historical data.
 Forecasts are rarely perfect. Therefore, for planning purposes, allowances
should be made for inaccuracies. For example, the company should always
maintain a safety stock in anticipation of a sudden depletion of inventory.
 Forecast accuracy decreases as the time period covered by the forecast (i.e.,
the time horizon) increases. Generally speaking, a long-term forecast tends
to be more inaccurate than a short-term forecast because of the greater
uncertainty.
 Forecasts for groups of items tend to be more accurate than forecasts for
individual items, because forecasting errors among items in a group tend to
cancel each other out. For example, industry forecasting is more accurate
than individual firm forecasting.

Selection of Forecasting Method:

The choice of a forecasting technique is influenced significantly by the stage

of the product life cycle and sometimes by the firm or industry for which a
decision is being made. In the beginning of the product life cycle, relatively
small expenditures are made for research and market investigation.

8
During the first phase of product introduction, these expenditures start to
increase. In the rapid growth stage, considerable amounts of money are
involved in the decisions, so a high level of accuracy is desirable. After the
product has entered the maturity stage, the decisions are more routine,
involving marketing and manufacturing. These are important considerations
when determining the appropriate sales forecast technique.

After evaluating the particular stages of the product and firm and industry
life cycles, a further probe is necessary. Instead of selecting a forecasting
technique by using whatever seems applicable, decision makers should
determine what is appropriate.

Some of the techniques are quite simple and rather inexpensive to develop
and use. Others are extremely complex, require significant amounts of time
to develop, and may be quite expensive. Some are best suited for short-term
projections, others for intermediate- or long-term forecasts.

What technique or techniques to select depends on six criteria:

What is the cost associated with developing the forecasting model,

compared with potential gains resulting from its use? The choice is one of
benefit-cost trade-off.

 How complicated are the relationships that are being forecasted?

 Is it for short-run or long-run purposes?
 How much accuracy is desired?
 Is there a minimum tolerance level of errors?

9
  How much data are available? Techniques vary in the amount of
data they require.

Quantitative models work superbly as long as little or no systematic

change in the environment takes place. When patterns or relationships do
change, by themselves, the objective models are of little use.

It is here where the qualitative approach, based on human judgment, is

indispensable. Because judgmental forecasting also bases forecasts on
observation of existing trends, they too are subject to a number of
shortcomings. The advantage, however, is that they can identify systematic
change more quickly and interpret better the effect of such change on the
future.

Techniques of forecasting

 Econometric Models:

Econometric models use information about causal relationships to make

forecasts. The causal relationships should be specified by using domain
knowledge (i.e., information that a manager has about the problem). Well
established theories should also be used: thus, we know that income should,
in most cases, be positively related to demand for an item, and price should

10
he negatively related. Given a description of the product and market, we can
also use prior research to determine the approximate magnitude of the
relationship. So if a community makes it more expensive to pollute, one
would expect less pollution if the plan is properly designed, and perhaps
more graft if the plan is poorly designed. Theory or domain knowledge can
he used to identify key variables, specify the direction and form of the
relationships, and set limits on the values that coefficients may take.

While extrapolations assume that everything continues as in the past,

econometric models assume only that the relationships will remain constant.
Given an estimate of the relationship of the causal variables to the
dependent variable, one must forecast changes in the causal variables in
order to calculate a forecast for the variable of interest.

Econometric methods arc most useful where

(1) Large changes are expected;

(2) A priori information about relationships is strong;

(3) Good data are available; and

(4) Causal factors arc easier to forecast than the variable of interest. These
conditions are often encountered in forecasting

One of the major advantages of econometric methods, in comparison with

other forecasting methods, is that alternate interventions can be compared
with one another. In effect, one is comparing results in an objective way with
an attempt to hold all other influences constant.

11
The technology for econometric methods has become much more
complicated since the least-absolute value method was introduced in 1757,
followed by the least-squares method in 1805. But highly complex
procedures are not easily understood by decision makers. Worse, little
validation research has been conducted on complex procedures. What has
been done suggests that complexity seldom leads to improved accuracy.

 Expert Systems:

Expert systems seem ideal for cases involving environmental forecasting.

One can draw upon the expertise of the best experts. If econometric models
have been developed, the resulting information about relationships could be
incorporated into the expert system. Further refinements could he made by
quantifying experts’ rules by judgmental bootstrapping. Information about
citizen responses could be incorporated by using conjoint studies. Thus,
expert systems allow for the systematic and explicit integration of all extant
knowledge about a situation. Expert systems are being used for a variety of
problems. Unfortunately, information about the predictive validity of expert
systems is limited but positive.

 Extrapolation:

Extrapolation involves making statistical projections using only the

historical values for a time series; it is an appropriate tool to use when the
factors will continue to operate as they have in the past. Furthermore, if one

12
has little understanding of the causal factors, it might be best to use
extrapolation.

Extrapolation has some useful characteristics. For one thing, it is fairly

reliable. If agreement can be reached on the definition and length of the time
series and on the statistical procedure, the same forecast will be achieved
irrespective of who makes the forecast. Extrapolation can also be relatively
simple and inexpensive. The opportunities for the introduction of biases in
extrapolation are limited. Perhaps the major potential source of bias is that
extrapolative forecasts can differ substantially depending on the time period
examined. This bias can be reduced by selecting long time series and by
comparing forecasts when different starting and ending points are used.
Another source of bias associated with extrapolative forecasts involves the
selection of the extrapolation method. To combat this bias, one should use
simple, easily understood methods and preferably more than one method.

 Judgmental Methods:
Judgmental forecasting involves methods that process information by
experts, rather than by quantitative methods. The experts might have access
to data, and their approach might be structured, but the final forecasts arc
the result of some process that goes on in their heads. Before discussing
tools that aid judgmental forecasting, it is important to mention one tool that
is widely used and well accepted, but which typically harms accuracy and
leads to an unwarranted gain in confidence. The culprit is the traditional
(unstructured) group meeting. Besides the biases inherent in unstructured
meetings (such as the influence of the boss), the group’s information is likely

13
 to be poorly used. Judgmental forecasts are susceptible to various biases. To
reduce biases, one should select unbiased experts (i.e., those who have
nothing to gain from a forecast that is either too high or too low). In
addition, care should be given to how the forecasting problem is formulated.
Questions should be structured to use the judges’ knowledge most
effectively, pre-tested to ensure that the experts understand them, and
worded in different ways to see if that affects the forecasts. Such procedures
are particularly important when forecasting sensitive issues, such as the
effects of global warming. The use of structured procedures can greatly
improve the accuracy of judgmental forecasts. Structure is easy to apply and
involves only modest costs. I discuss four structured judgmental procedures
that should be of interest for environmental forecasting: (1) role playing,
which uses subjects to act out relevant interactions to determine what they
would do when affected by an intervention; (2) intention surveys, which use
statements by key participants in the system about what they expect to do
given certain trends or interventions; (3) Delphi. Which uses expert
judgment to forecast trends or the effects of intervention: and (4) analogies,
where experts try to generalize from similar situations. Brief attention is
given to conjoint analysis and to judgmental bootstrapping.

 Role Playing

Role playing involves asking subjects to adopt the viewpoints of groups in a

negotiation situation and having them act out the interactions. When the
interactions of conflicting groups are important to the outcome, role playing
provides a way to simulate this interaction. If new and important

14
interventions would lead to behaviors that are dependent upon the
interactions among decision makers, then role playing is likely to be more
relevant than intentions. With intentions, decision makers would have to
predict what they would do initially, how they would modify their decisions
in reaction to the decisions made by others, how others would respond to
this reaction, and so on. This chain of events is often too complex for the
respondent, so it makes sense to act it out.

To use role playing to forecast the outcome of an intervention, such as a tax

on air pollution, one would write short descriptions of the problem and of
the roles of key decision makers. Different materials can be prepared to test
alternative interventions. These guidelines should be followed:

- Use props to make the situation realistic.

- Select subjects who can act the role (interestingly, the selection of subjects
does not seem to be a critical aspect for the accuracy of role playing)

- Subjects should receive their roles before they receive any information
about the situation, and they should not step out of their roles.

- Subjects should act as they would act if they were actually in such a role

- Subjects should improvise as needed.

Forecasts would be based on the outcomes of the role-playing sessions.

Ideally, possible outcomes can be identified in advance. However, if the
range of possible outcomes is uncertain, one should leave the materials
open-ended and ask research assistants to code the outcome, of the role
-playing sessions. If the session does not lead to an outcome, one can ask
the players to predict what would have happened had it continued to a
conclusion. The standard error of this estimate can then be obtained by

15
using the formula for the standard error of a proportion, with the number of
role-playing sessions as the sample size. Prediction intervals would be
expected to be larger than this estimate because of possible response biases.

 Intention Surveys:
Intention studies are surveys of individuals about what actions they plan to
lake in a given situation or, if lacking a plan, what they expect to do. Such
surveys are useful for predicting the outcomes of interventions. When a
situation depends on the decisions of many people (such as with the trash
collection for a community), surveys arc much more expensive than Delphi.
However, they provide the perspective of those who will actually be making
decisions. In addition, one could have presented this situation to consumers
and asked them how they would respond.

Tools for surveys have been improving since the 1936. When interventions
would create large changes and where the behavior of decision makers is
dependent upon decisions by others, respondents may find it difficult to
predict how they would behave. Surveys are of less value in such cases.
Given all the ways that intentions or expectations may be wrong, it should
not be surprising to find that sampling error alone provides a poor way to
estimate prediction intervals.

 Delphi:

Delphi involves the use of experts to make independent anonymous

forecasts. Delphi goes beyond expert surveys in that it is conducted for two
or more rounds. After the first round of forecasts, each expert receives a

16
Quantitative summary of the group’s forecasts. In addition, anonymous
explanations of their choices might be provided by the experts. Typically,
two rounds are sufficient; however, if the cost associated with error is high,
conducting three or four rounds may be worthwhile. Delphi is usually
conducted by mail and honoraria are paid to the participating experts. The
primary criterion for the selection of experts for a Delphi panel is that they
be unbiased. Delphi requires only a few experts. The number of experts
should be at least five but seldom more than 20. Delphi studies can be
relatively inexpensive to conduct. This approach may be much less
expensive than surveys that obtain information of individuals’ intentions or
expectations. Delphi is relevant when data are lacking, the quality of the
data are poor, or experts disagree with one another. As a result, Delphi is
applicable when new interventions arc proposed or where a trend has
recently undergone a shock. Nevertheless, judgments tend to be too
conservative in the face of rapid change. In particular, judgment
underestimates exponential growth and exponential growth is common in
environmental problems.

This type of method is useful and quite effective for long-range forecasting.
The technique is done by questionnaire format and eliminates the
disadvantages of group think. There is no committee or debate. The experts
are not influenced by peer pressure to forecast a certain way, as the answer
is not intended to be reached by consensus or unanimity. Low reliability is
cited as the main disadvantage of the Delphi method, as well as lack of
consensus from the returns

17
 Analogies:
To forecast the outcome of interventions, it is common for experts to search
for cases where similar Interventions have been conducted at different times
or in different geographic areas and then to generalize from them.

 Conjoint Analysis:
Conjoint analysts can be used to predict what strategy would be accepted.
For example, one could propose different possible plans that would have
various effects. The effects could be varied according to an experimental
design. Once a model is developed, predictions can be made for changes in
the design.

 Judgmental Bootstrapping:

Experts could be asked to predict the reactions to various possible

interventions. A model could then be developed by regressing these
predictions on the various elements of the intervention.

 Business barometers:

In physical science, a barometer is used to measure the atmospheric

pressure. In the same way, index numbers are used to measure the stage of
economy between two or more periods. These index numbers are the device
to study the trend, seasonal fluctuations, cyclical movements and irregular
fluctuations. These index numbers, when used in conjunction with one
another or combined with one or more, provide indications as to the
direction in which the economy is heading. Thus, with the help of business

18
activity index numbers, it becomes easy to forecast the future course of
action. However, it should be borne in mind that business barometers have
their own limitations and they are not sure road to success.

 Time series analysis:

It involves decomposition of historical series into various components, viz.,

trend, seasonal variations, cyclical variations and random variations. Time
series analysis uses index numbers but it is different from barometric
technique, the future is predicted from the indicating series which serve as
barometers of economic change. In time series analysis, the future is taken
as some sort of an extension of the past. However, time series analysis
should be used as a basis for forecasting when data are available for a long
period of time and tendencies disclosed by trend and seasonal factors are
fairly clear and stable.

 Regression analysis:

Regression analysis is meant to disclose the relative movements of two or

more inter related series. It is used to estimate the changes in one variable
as a result of specified changes in other variable or variables. In economic
and business situations, there is multiple causation and a number of factors
affect a business phenomenon simultaneously. Regression analysis helps in
isolating the effects of such factors to a great extent. Generally the
regression and correlation analysis is used for processing the statistical
data and deriving a generalized mathematical relationship which, subject to
a certain error, can be used for forecasting the expected values of the

19
dependent variables in future if the values of independent variables are
known.

 Survey method:

Field surveys can be conducted to gather information on the intensions of

the concerned people; for example information can be collected through
surveys about the likely expenditures of consumers on various items. Both
quantitative and qualitative information can be collected. Such information
may throw useful light on the attitudes of the consumers in regard to various
items of expenditure and consumption. On the basis of such survey, demand
for various goods can be projected. To limit the cost and time, the survey
may be restricted to a sample from the prospective consumers. Survey
method is suitable for forecasting demand both of existing and new
products.

Limitations of forecasting

No doubt forecasting is an essential ingredient, but it should not be

concluded that forecasting is the only element which goes into planning and
other areas of the organizational process. Forecasting provides base for
assuming the behaviours of certain events which may not be fully true
because forecasting has the following limitations:

20
1. based on assumptions:

Forecasting is based on certain assumptions. It merely suggests that if an

event has happened this way in the past, it will happen that way in the
future. The basic assumption behind this is that events do not change
haphazardly and speedily but change on a regular pattern. This
assumption may not hold good. In fact there are various factors which go
into determining the occurrence of an event. The behaviour of all these
factors may not be similar. A change in a particular factor may be so
unpredictable and important that it may affect the total business
situation.

2. not absolute truth:

Forecasts are not always true; they merely indicate the trend of future
happenings. This is so because the factors which are taken into account
for making forecasts are affected by human factor which is highly
unpredictable. Various techniques of forecasting suggest the relationship
among various known facts. They can project the future trends but cannot
guarantee that this would happen in future. More is the period of
forecasting, higher is the degree of forecasting, higher is the degree of
error. Therefore it has been commented that “the only thing you can be
sure about any forecast is that it will contain some error.”

3. time and cost factor:

Time and cost factor is also an important aspect of forecasting. While the
above factors speak of limitations inherent in forecasting, time and cost
factor suggests the degree to which an organization will go for formal

21
forecasting. For making forecast of any event, certain information and
data are required. Some of these may be in highly disorganized form;
some may be in qualitative form. The collection of information and
conversion of qualitative data into quantitative ones involves lot of time
and money. Therefore managers have to trade off between the cost
involved in forecasting and resultant benefits. This is the reason why
most of the smaller organizations do not go for formal system of
forecasting.

Bibliography:

1. Prasad, L.M. Strategic Management. New Delhi. Sultan Chand &

Sons, 2009.
2. Cherunilam, Francis. Business Environment. Mumbai. Himalaya
Publishing House, 2008.
3. Lomash, Sukal and Mishra, P.K. Business Policy and Strategic
Management. New Delhi. Vikas Publishing House, 2007.
4. Internet

22