Assignment on the topic:

Submitted by: Sindhu S.M

Roll number: 0930

Submitted to: Mrs. Bharathi karanth

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 Content

SI.NO PARTICULARS PAGE NO.

1 Introduction 3

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

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 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 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

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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.

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.

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 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 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.

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 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.

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

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 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 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

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 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.

Common Features and Assumptions Inherent in Forecasting:

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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:

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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.

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.

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 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?

• 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.

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 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 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

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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.

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.

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 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 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

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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 to be poorly
used. Judgmental forecasts are susceptible to various biases. To

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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

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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 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

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- 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 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.

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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 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

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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

 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

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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 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:

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

 Survey method:

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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:

1. based on assumptions:

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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,

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time and cost factor suggests the degree to which an organization
will go for formal 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.

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3. Lomash, Sukal and Mishra, P.K. Business Policy and Strategic
Management. New Delhi. Vikas Publishing House, 2007.
4. Internet

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