PLANNING AND DECISION AIDS-I:Methods of Forecasting, Benchmarking

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Principles of Management MGT503

Lesson 7.20

PLANNING AND DECISION AIDS-I

This session and the one follows shall introduce the planning tools and techniques that managers have at

their disposal to assist them in performing the management functions. Management Science or Operation

Research is a management perspective aimed at increased decision effectiveness by use of sophisticated

mathematical models and statistical methods.

TECHNIQUES FOR ASSESSING THE ENVIRONMENT

Several techniques have been developed to assist managers in assessing the organization's environment.

Environmental scanning

Environmental scanning is the screening of large amounts of information to anticipate and interpret

changes in the environment. It's used by both large and small organizations, and research has shown that

companies with advanced environmental scanning systems increased their profits and revenue growth.

SWOT analysis is an analysis of an organization's strengths, weaknesses, opportunities, and threats. It

brings together the internal and external environmental analyses in order to identify a strategic niche the

organization might exploit.

Competitor intelligence is an environmental scanning activity that seeks to identify who competitors are,

what they are doing, and how their actions will affect the organization.

Another type of environmental scanning is global scanning in which managers assess the changes and

trends in the global environment.

Environmental scanning provides the foundation for developing forecasts, which are predictions

of outcomes.

There are three categories of forecasting techniques.

Quantitative forecasting applies a set of mathematical rules to a series of past data to predict

outcomes.

Qualitative forecasting uses the judgment and opinions of knowledgeable individuals to predict

outcomes.

Judgmental forecasting

Forecasting

Forecasting is the process of predicting changing conditions and future events that may significantly affect

the business of an organization.

Forecasting is important to both planning and decision making.

Forecasting is used in a variety of areas such as: production planning, budgeting,

strategic planning, sales analysis, inventory control, marketing planning, logistics

planning, and purchasing among others.

It's important to look at forecasting effectiveness. Forecasting techniques are most accurate when the

environment is not rapidly changing.

Some suggestions for improving forecasting effectiveness are as follows:

Use simple forecasting techniques.

Compare every forecast with "no change."

Don't rely on a single forecasting method.

Don't assume that you can accurately identify turning points in a trend.

Shorten the length of the forecasts.

Forecasting is a managerial skill and can be practiced and improved.

Principles of Management MGT503

Methods of Forecasting

Quantitative forecasting relies on numerical data and mathematical model to predict

future conditions. There are two types of quantitative forecasting most frequently used.

Time-series methods used historical data to develop forecasts of the future.

The underlying assumption is that patterns exist and that the future will

resemble the past.

Time-series methods do not in themselves predict the impact of present

or future actions that managers might take to bring about change.

A trend reflects a long-range general movement is either an upward or a

downward direction.

A seasonal pattern indicates upward or downward changes that coincide

with particular points within a given year.

A cyclical pattern involves changes at particular points in time that span

longer than a year.

Time-series are more valuable for predicting broad environmental factors

than in predicting the impact of present or future actions.

Because time-series rely on past trends there can be a danger in their use if

environmental changes are disregarded.

Explanatory or causal models attempt to identify the major variables that are

related to or have caused particular past conditions and then use current measures

of those variables (predictors) to predict future conditions.

Explanatory models allow managers to assess the probable impact of

changes in the predictors.

Regression models are equations that express the fluctuations in the

variable being forecasted in terms of fluctuations among one or more other

variables.

Econometric models are systems of simultaneous multiple regression

equations involving several predictor variables used to identify and measure

relationships or interrelationships that exist in the economy.

Leading indicators are variables that tend to be correlate with the

phenomenon of major interest but also tend to occur in advance of the

phenomenon.

Technological, or Qualitative, Forecasting is aimed primarily at predicting long-term

trends in technology and other important aspects of the environment

The focus is upon longer-term issues that are less amenable to numerical analysis as quantitative

approaches.

The Delphi method and Scenario analysis can be used as techniques.

Judgmental Forecasting relies mainly on individual judgments or committee agreements

regarding future conditions.

Judgmental forecasting methods are highly susceptible to bias.

The jury of executive opinion is one of the two judgmental forecasting model. It

is a means of forecasting in which organization executives hold a meeting and

estimate, as a group, a forecast for a particular item.

The Sales-force composite is a means of forecasting that is used mainly to

predict future sales and typically involves obtaining the views of various

salespeople, sales managers, and/or distributors regarding the sales outlook.

Principles of Management MGT503

The choice of which forecasting method to use depends upon the needs within particular forecasting

situations.

Quantitative forecasting methods:

have a short-to-medium time horizon

require a short period of time if a method is developed

often have high development costs

are high in accuracy in identifying patterns

are low in accuracy in predicting turning points for time series, but

medium for other methods.

Are difficult to understand

Technological forecasting methods:

have a medium-to-long time horizon

require a medium-to-long time

have medium development costs

are of medium accuracy in identifying patterns

are of medium accuracy in predicting turning points

are easily understood.

Judgmental forecasting methods:

have a short-to-long time horizon

require a short time

have low development costs

are of medium-to-high accuracy in identifying patterns

are of low accuracy in predicting turning points

are easily understood

Benchmarking

Benchmarking is the search for the best practices among competitors or non-competitors that lead to

their superior performance.

The benchmarking process typically follows four steps.

A benchmarking planning team is formed. The team's initial task is to identify what is to be

benchmarked, identify comparative organizations, and determine data collection methods.

The team collects internal and external data.

The data is analyzed to identify performance gaps and to determine the cause of the difference.

An action plan is prepared and implemented.

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