Steps in Strategy Formulation Process

Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving the organizational vision. The process of strategy formulation basically involves six main steps. Though these steps do not follow a rigid chronological order, however they are very rational and can be easily followed in this order. 1. Setting Organizations objectives - The key component of any strategy statement is to set the long-term objectives of the organization. It is known that strategy is generally a medium for realization of organizational objectives. Objectives stress the state of being there whereas Strategy stresses upon the process of reaching there. Strategy includes both the fixation of objectives as well the medium to be used to realize those objectives. Thus, strategy is a wider term which believes in the manner of deployment of resources so as to achieve the objectives.

While fixing the organizational objectives, it is essential that the factors which influence the selection of objectives must be analyzed before the selection of objectives. Once the objectives and the factors influencing strategic decisions have been determined, it is easy to take strategic decisions. 2. Evaluating the Organizational Environment - The next step is to evaluate the general economic and industrial environment in which the organization operates. This includes a review of the organizations competitive position. It is essential to conduct a qualitative and quantitative review of an organizations existing product line. The purpose of such a review is to make sure that the factors important for competitive success in the market can be discovered so that the management can identify their own strengths and weaknesses as well as their competitors strengths and weaknesses. After identifying its strengths and weaknesses, an organization must keep a track of competitors moves and actions so as to discover probable opportunities of threats to its market or supply sources. 3. Setting Quantitative Targets - In this step, an organization must practically fix the quantitative target values for some of the organizational objectives. The idea behind this is to compare with long term customers, so as to evaluate the contribution that might be made by various product zones or operating departments. 4. Aiming in context with the divisional plans - In this step, the contributions made by each department or division or product category within the organization is identified and accordingly strategic planning is done for each sub-unit. This requires a careful analysis of macroeconomic trends.

5. Performance Analysis - Performance analysis includes discovering and analyzing the gap between the planned or desired performance. A critical evaluation of the organizations past performance, present condition and the desired future conditions must be done by the organization. This critical evaluation identifies the degree of gap that persists between the actual reality and the long-term aspirations of the organization. An attempt is made by the organization to estimate its probable future condition if the current trends persist. 6. Choice of Strategy - This is the ultimate step in Strategy Formulation. The best course of action is actually chosen after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities.

Forecasting TechniquesPresentation Transcript

1. Forecasting Techniques Interventions required to meet business objectives Anand Subramaniam 2. An ardent supporter of the hometown team should go to a game prepared to take offense, no matter what happens. - Robert Benchley 3. Highlights Forecasting Methods Quantitative Methods Examples Forecast Accuracy / Error Reduction Integrate Sales Forecast / Production CPFR - Collaborative Planning, Forecasting and Replenishment 4. Forecasting Methods 5. Planning Levels 6. Forecast Horizon Trend Exploration Graphical Methods Exponential Smoothing Purchasing Detailed Job Scheduling 1 day ~ I year Short Time Series Regression Staffing Plans Aggregate Production Plan 1 season ~ 2 years Intermediate Economic Demographic Market Information Technology Facility Planning Capacity Planning Product Planning > 5 years Long Methods Applications Horizon Range 7. Major Areas of Forecasting Economic Forecasting Predicts what the general business conditions will be in the future (Eg. Inflation rates, Gross National Product, Tax, Level of employment) Technology Forecasting Predicts the probability and / or possible future developments in technology (Eg. Competitive advantage or firms competitors incorporate into their products and processes) Demand Forecasting Predicts the quantity and timing of demand for a firms products 8. Forecasting Methods Subjective Approach (Qualitative in nature and usually based on the opinions of people) Objective Approach (Quantitative / Mathematical formulations - statistical forecasting) 9. Qualitative Methods Executive Committee Consensus Develop long ~ medium forecast by asking a group of knowledgeable Executives their opinions with regard to future values of the

items being forecasted Presence of a powerful member in the group may prevent reaching consensus Delphi Method Involves a group of Experts who eventually develop a consensus They usually make long range forecasts for future technologies or future sales of a new product Sales Force Composite Sales people are a good source of information with regard to customers future intentions to buy a product Customer Surveys By using a customer survey, a Firm can base its demand forecast on the customers purchasing plans 10. Quantitative Methods Time Series Models (Only independent variable is the time used to analyse 1) Trends, or 2) Seasonal, or 3) Cyclical Factors that influence the demand data) Casual Models (Employ some factors other than Time, when predicting forecast values) 11. Time Series Models Trends Gradual upward or downward movement of data over time Trends reflect changes in population levels, technology, and living standards Long term movement Seasonality Variation that repeats itself at fixed intervals It can be as long as a Year, or as short as a few hours Can correspond to the Seasons of the Year, Holidays, or other special periods Short-term regular and repetitive variations in data Cyclical Has a duration of at least one year. The duration varies from cycle to cycle Long(er) term, requires many years of data to determine its repetitiveness or unusual circumstances (Eg. ups and downs of general business economy, war) Random Variations in demand that cannot be explained by Trends, Seasonality, or Cyclicality Caused by chance 12. Time Series Models Smoothing Models Moving Average (Simple & Weighted) Single Exponential Smoothing Double Exponential Smoothing Decomposition Models Additive Models Multiplicative Models 13. Quantitative Methods - Examples 14. Simple Moving Average F 4 =(650+678+720)/3 =682.67 F 7 =(650+678+720 +785+859+920)/6 =768.67 15. Simple Moving Average 16. Exponential Smoothing Premise determine how much weight to put on recent information versus older information 0 < a < 1 High a such as .7 puts weight on recent demand Low a such as .2 puts weight on many previous periods F t+1 = D t + (1- )F t ( is the smoothing parameter) 17. Exponential Smoothing F 1 =820+(0.5)(820-820)=820 F 3 =820+(0.5)(775-820)=797.75 18. Effect of on Forecast 19. Simple Linear Regression Model 20. Simple Linear Regression Model (Contd) 21. Simple Linear Regression Model (Contd) Y t = 143.5 + 6.3x 135 140 145 150 155 160 165 170 175 180 1 2 3 4 5 Period Sales Sales Forecast 22. Simple Linear Regression Model (Contd) Actual observation (y value) Least squares method minimises the sum of the squared errors (deviations) Time period Values of Dependent Variable Deviation 1 (error) Deviation 5 Deviation 7 Deviation 2 Deviation 6 Deviation 4 Deviation 3 Trend line, y = a + bx ^ 23. Forecast Accuracy / Error Reduction 24. Forecast Accuracy Forecast bias persistent tendency for forecasts to be greater or less than the actual values of a time series Forecast error difference between the actual value and the value that was predicted for a given period 25. Forecast Accuracy (Contd.) where e t = forecast error for Period t A t = actual demand for Period t F t = forecast for Period t 26. Forecast Error Measures Bias indicates on an average basis, whether the forecast is too high (negative bias indicates over forecast) or too low (positive bias indicates under forecast) Mean Absolute Deviation (MAD) indicates on an average basis, how many units the forecast is off from

the actual data Mean Absolute Percent Error (MAPE) indicates on an average basis, how many percent the forecast is off from the actual data Mean Squared Error (MSE) a forecast error measure that penalises large errors proportionally more than small errors 27. Forecast Error Measures Bias = MAD = MSE = MAPE = Standard Deviation () = 28. Mean absolute deviation (MAD) the average absolute forecast error where | e t |= absolute value of the forecast error for Period t n = number of periods of evaluation 29. Mean Absolute Percentage Deviation (MAPE) the average absolute percent error where et = forecast error for Period t n = number of periods of evaluation A t = actual demand for Period t 30. Running Sum of Forecast Errors (RSFE) provides a measure of forecast bias where e t = forecast error for Period t 31. Tracking Signal The ratio of cumulative forecast error to the corresponding value of MAD Used to monitor a forecast 32. Mean Absolute Deviation Month Sales Forecast Abs Error 1 220 n/a 2 250 255 5 3 210 205 5 4 300 320 20 5 325 315 10 40 Note that by itself, the MAD only lets us know the mean error in a set of forecasts. 33. Forecast Error Measures Period Sales (A) Forecast E |E| E 2 |E|/A 1 1600 1650 -50 50 2500 0.0313 2 2200 2010 190 190 36100 0.0864 3 2000 2200 -200 200 40000 0.1000 4 1600 1580 20 20 400 0.0125 5 2500 2480 20 20 400 0.0080 6 3500 3520 -20 20 400 0.0057 7 3300 3310 -10 10 100 0.0030 8 3200 3200 0 0 0 0.0000 9 3900 3850 50 50 2500 0.0128 10 4700 4720 -20 20 400 0.0043 10 -20 580 82800 0.2639 Bias = -2 low/High MAD = 58 MSE = 8280 MAPE= 2.64% 34. Integrate Sales Forecast / Production 35. Forecasting Process Services Collect Data Select Model Plot Data Develop Forecast Check Accuracy Forecast Adjust Forecast Monitor Forecast Sales and Operations Planning Master Scheduling Customer Scheduling Materials Planning Workforce Scheduling Order Scheduling Manufacturing Forecasting 36. Integrate - Sales Forecast & Production 37. CPFR - Collaborative Planning, Forecasting and Replenishment 38. CPFR - Overview Developed by Wal-Mart and Warner-Lambert in 1995 Recognised as a breakthrough business model for planning, forecasting, and replenishment which goes beyond the traditional practice Uses Internet-based technologies to collaborate from planning to execution Creates a direct link between the consumer and the supply chain Improves the quality of the demand signal for the entire supply chain through a constant exchange of information from one end to the other Focuses on information sharing among supply chain trading partners for purposes of planning, forecasting, and inventory replenishment 39. CPFR Model 40. CPFR - Process The plan and the forecast are entered by suppliers and buyers into an Internet accessible system Within established parameters, any of the participating partners is empowered to change the forecast 41. You may have to fight a battle more than once to win it. - Margaret Thatcher

Forecasting is the process of making statements about events whose actual outcomes (typically) have not yet been observed. A commonplace example might be estimation of some variable of

interest at some specified future date. Prediction is a similar, but more general term. Both might refer to formal statistical methods employing time series, cross-sectional or longitudinal data, or alternatively to less formal judgemental methods. Usage can differ between areas of application: for example, in hydrology, the terms "forecast" and "forecasting" are sometimes reserved for estimates of values at certain specific future times, while the term "prediction" is used for more general estimates, such as the number of times floods will occur over a long period. Risk and uncertainty are central to forecasting and prediction; it is generally considered good practice to indicate the degree of uncertainty attaching to forecasts. In any case, the data must be up to date in order for the forecast to be as accurate as possible.[1] Although quantitative analysis can be very precise, it is not always appropriate. Some experts in the field of forecasting have advised against the use of mean square error to compare forecasting methods.[2]

Categories of forecasting methods

[edit] Qualitative vs. quantitative methods

Qualitative forecasting techniques are subjective, based on the opinion and judgment of consumers, experts; appropriate when past data is not available. It is usually applied to intermediate-long range decisions. Examples of qualitative forecasting methods are:[citation needed] informed opinion and judgment, the Delphi method, market research, historical life-cycle analogy. Quantitative forecasting models are used to estimate future demands as a function of past data; appropriate when past data are available. The method is usually applied to short-intermediate range decisions. Examples of quantitative forecasting methods are:[citation needed] last period demand, simple and weighted moving averages (N-Period), simple exponential smoothing, multiplicative seasonal indexes.
[edit] Nave approach

Nave forecasts are the most cost-effective and efficient objective forecasting model, and provide a benchmark against which more sophisticated models can be compared. For stable time series data, this approach says that the forecast for any period equals the previous period's actual value.
[edit] Reference class forecasting

Reference class forecasting was developed by Oxford professor Bent Flyvbjerg to eliminate or reduce bias in forecasting by focusing on distributional information about past, similar outcomes to that being forecasted.[3] Daniel Kahneman, Nobel Prize winner in economics, calls Flyvbjerg's counsel to use reference class forecasting to de-bias forecasts, "the single most important piece of advice regarding how to increase accuracy in forecasting.[4]

[edit] Time series methods

Time series methods use historical data as the basis of estimating future outcomes.

Moving average Weighted moving average Kalman filtering Exponential smoothing Autoregressive moving average (ARMA) Autoregressive integrated moving average (ARIMA) e.g. Box-Jenkins

Extrapolation Linear prediction Trend estimation Growth curve

[edit] Causal / econometric forecasting methods

Some forecasting methods use the assumption that it is possible to identify the underlying factors that might influence the variable that is being forecast. For example, including information about weather conditions might improve the ability of a model to predict umbrella sales. This is a model of seasonality which shows a regular pattern of up and down fluctuations. In addition to weather, seasonality can also be due to holidays and customs such as predicting that sales in college football apparel will be higher during football season as opposed to the off season.[5] Causal forecasting methods are also subject to the discretion of the forecaster. There are several informal methods which do not have strict algorithms, but rather modest and unstructured guidance. One can forecast based on, for example, linear relationships. If one variable is linearly related to the other for a long enough period of time, it may be beneficial to predict such a relationship in the future. This is quite different from the aforementioned model of seasonality whose graph would more closely resemble a sine or cosine wave. The most important factor when performing this operation is using concrete and substantiated data. Forecasting off of another forecast produces inconclusive and possibly erroneous results. Causal methods include:

Regression analysis includes a large group of methods that can be used to predict future values of a variable using information about other variables. These methods include both parametric (linear or non-linear) and non-parametric techniques. Autoregressive moving average with exogenous inputs (ARMAX)[6]

[edit] Judgmental methods

Judgmental forecasting methods incorporate intuitive judgements, opinions and subjective probability estimates.

Composite forecasts Delphi method Forecast by analogy Scenario building Statistical surveys Technology forecasting

[edit] Artificial intelligence methods

Artificial neural networks Group method of data handling Support vector machines

Often these are done today by specialized programs loosely labeled

Data mining Machine Learning Pattern Recognition

[edit] Other methods

Simulation Prediction market Probabilistic forecasting and Ensemble forecasting