BBA Planning Premises Forecasting Study Material Notes

BBA Planning Premises Forecasting Study Material Notes: Concept of planning premises Types of Planning premises External Premises Internal Premises Controllable and Incontrollable Premises Tangible and Intangible Premises Controllable and Uncontrollable Premises Making Premising Effective Selection of Premises for Contingency Planning Communication of Planning Premises Collection of Infomation Concept of Forecasting Important Forecasting Making Forecasting Effective :

MCom I Semester Human Resource Policies Practices Study Material

Planning Premises Forecasting

Managers plan their future course of action taking into consideration the future events which are likely to happen within the organization and its external environment. Since the future events are not known accurately at the time of plan formulation, managers have to make certain assumptions about these, either based on their intuitions or rigorous analysis of the factors responsible for such events. Thus, managers face two types of problems: identifying the factors which are relevant for planning and the method through which the likely future behaviour of these factors can be predicted. The former process is known as premising and the latter process is known as forecasting. This chapter discusses both these issues.

Concept of Planning Premises

The term ‘premise’ refers to a proposition stated or assumed at the beginning of a deed. Using this term in the context of planning. it involves various assumptions on which plans are formulated. Since there are many factors which affect the implementation of a plan, assumptions are made in respect of these factors. Therefore, there will be various assumptions on which a plan is formulated. For example, when a company introduces a new product in the market, it makes assumption that the product will succeed by taking into account the various factors which are likely to affect the product’s success or failure. Weih rich and Koontz have defined planning premises as follows:

Thus, planning premises include both anticipated and known conditions under which plans are formulated. As we shall see later, there are many environmental factors whose likely behaviours are anticipated but there are many internal organisational factors like policies, facilities, etc., which are known at the time of plan formulation.

Planning Premises Forecasting

TYPES OF PLANNING PREMISES

Since there are many factors which are considered in plan formulation, these may be identified in different ways. For example, one way of classifying these is to group these into external and internal premises which is more relevant. Other ways of classification are based on degree of tangibility and degree of controllability of these premises. However, these classifications are not mutually exclusive but overlap. For example, many external premises like rate of economic growth in a country is tangible while the attitudes of its people are intangible. Similarly, many of the external premises may not be controllable but internal premises may be controllable. Therefore, the classification of various planning premises should be seen in this perspective. Let us discuss the various premises

External Premises

External planning premises are the most important elements in plan formulation. These exist in an organisation’s external environment. We have seen in Chapter 4 how external environmental factors affect the operation of a business organisation. Various external factors are grouped into five broad categories: economic, political-legal, technological, sociocultural, and competitive. These factors either present opportunity or threat to an organisation. An opportunity is a favourable condition in the organisation’s environment which enables it to strengthen its position. A threat is an unfavourable condition in the organisation’s environment which causes a risk, or damage, to the organisation’s position For understanding external factors and premising these, environmental analysis is undertaken which is the process through which an organisation monitors and comprehends various environmental factors to identify opportunities and threats that are provided by these factors. Environmental analysis helps in formulation of plans, particularly strategic, long-term plans, in the following ways:

1 The environment changes so fast that new opportunities and threats are created which may result disequilibrium into organisation’s existing equilibrium. Therefore, the strategists have to analyse the environment to determine what factors in the environment present opportunities for greater accomplishment of organisational objectives and what factors in the environment present threats to the organisation’s objective accomplishment so that suitable adjustment in strategies can be made to take maximum benefits.

2. Environmental analysis allows strategists time to anticipate opportunities and plan to take optional responses to these apportunities. Similarly, it helps to develop an early warning system to prevent the threats or to develop strategies which can turn the threats to the organisation’s advantage.

3. Environmental analysis helps strategists to narrow the range of available alternatives and eliminate options that are clearly inconsistent with forecast opportunities or threats. The analysis helps in eliminating unsuitable alternatives and to process most promising alternatives. Thus, it helps strategists to reduce time pressure and to concentrate on those which are more important.

All environmental factors do not affect a particular organisation in the same way. Some factors are more important than others. Therefore, in environmental analysis, different factors are given varying importance in monitoring and analysis as shown by Table 9.1. The results are based on data from 100 companies selected from top 500 companies in India.

Planning Premises Forecasting

Internal Premises

Besides external factors, internal factors of the organisation are also taken into consideration for plan formulation. Various internal premises are related to the events occurring within the organisation like organisation structure, management systems, etc. Such factors may lie in various functions of the organisation such as production/operations, marketing, finance, and personnel and management. These factors may be either strength or weakness of the organisation. A strength is an inherent capability of the organisation which can be used to gain strategic advantages over its competitors. A weakness is an inherent limitation or constraint of the organisation which creates strategic disadvantages to it. Strength and weakness of an organisation can be identified by corporate or organisational analysis which is a process through which managers analyse various factors of the organisation to evaluate their relative strengths and weaknesses so as to meet the opportunities and threats of the environment. Usually, environmental and corporate analyses are combined together to have SWOT analysis (acronym for strength, weakness, opportunity, and threat). Various strengths and weaknesses of an organisation have been described in Table 9.2.

The above internal premises are more relevant for strategic and long-term plans. For operative and short-term plans, long-term plans become planning premises. For example, budget, a short-term plan, is prepared within the overall framework of a long-term plan.

Tangible and Intangible Premises

Various planning premises may be classified as tangible and intangible. Tangible premises re those which can be expressed in quantitative terms like monetary unit, unit of product, hour, machine hour, and so on. For example, sales forecast which provides premise active plans can be expressed in terms of rupees or units of product/s. Intangible for operative of qualitative nature and cannot be translated into quantity. For example, premises are of qualitative nature image of the company in its environment can be expressed in qualitative terms a interpretation has to be drawn from these. In fact, many external and internal factors cannot be meaningfully quantified, and managers have to make decisions on the basis of such intangible premises. This is the real art of managing. Managers are confronted with a variety of qualitative information.

Planning Premises Forecasting

Controllable and Uncontrollable Premises

Planning premises can be classified on the basis of their controllability. Thus, premises may be either controllable or uncontrollable. However, in between these two, there may be semi-controllable premises. Controllable premises are those that can be controlled by an organisation’s actions. Such premises are mostly internal, for example, organisational policies, structure, systems, procedures, etc. Uncontrollable premises are mostly external and cannot be controlled by an organisation’s actions, for example, rate of economic growth, population growth, taxation policy of the government, etc. Semi-controllable premises are those which can be controlled to some extent but not wholly, for example, market share of a company’s products, labour efficiency, labour turnover, product price, etc. These are semi controllable because an organisation has some kind of control over these factors within the overall constraints of external and internal factors. For example, a company can initiate a change in price of its product but this change has to be within a given range. If upward change is too high, it will not be accepted in the market. Similarly, if downward change is too high, it will result in losses. Wren and Voich have viewed that classification of planning premises on the basis of their controllability enables the managers to identify those factors that they must make the best use of those that they can capitalise on, and those that they must avoid.

Most of the companies which undertake long-term planning as a rational approach. develop planning premises which are relevant for this process. Exhibit 9.1 shows the planning premises developed by Hindustan Lever Limited, a multi-product fast-moving consumer goods (FMCG) company, which provide guidelines for its long-term actions.

Planning Premises Forecasting

MAKING PREMISING EFFECTIVE

Many organisational plans fail either because these are not based on relevant and adequate premises or based on false premises. Therefore, adequate attention must be given on developing and utilising planning premises. Though variables—both external and internalthat are taken into consideration to build premises are not static but quite dynamic, managers can adopt certain practices to make premising more effective. Major such practices are as follows:

Selection of Premises

The first step in making premising effective is the selection of premises on the basis of which plans are formulated. We have seen in Chapter 4 that environmental variables are classified into two broad categories based on the type of impact that these variables have on individual organisations. These are general and relevant. It is the relevant environment which must be taken into consideration. For identifying the relevant environment, both external and internal, a manager can put the question, “what factors will influence most the course of plans for which I am responsible?” In order to find out the answer of this question, the manager concerned can construct a matrix by taking two variables: probability of impact of the factors and degree of impact of the factors as given in Table 9.3.

Thus, those factors which fall in the category of critical and high priority must be analysed intensively. The factors under the category of high impact but the probability of impact is low must be kept under watch. However, the determination of the degree of impact or the probability of impact is qualitative and is decided on the basis of personal judgement. There are a number of variables which affect this judgement-managerial philosophy, age of the organisation, size and power of the organisation, and nature of environment.

Collection of Information

Indentification of factors which are significant for setting planning premises leads to a stade at which managers can go for the search of information so as to identify the likely behaviour of these factors. The information collection techniques may vary from verbal method to highly complex forecasting techniques. The individual organizations have to choose the relevant techniques according to their needs and resources. Since Information is the basic source on which planning premises are developed but its collection involves cost, both in terms of time and money, the organisation has to strike a balance between the two. Many relevant information is available from published sources and marketing research and other environmental analysis agencies. However, while using such information, the managers must judge its validity by putting the following questions:

1 Who has collected the information and what was the objective of collecting the information?

2. When was the information collected?

3. How representative was the period in which the information was collected?

4. What was the population and how was the sample selected? To what extent, was the sample representative?

5. How satisfactory was the process of information collection?

6. How was the information analysed?

Planning Premises Forecasting

Premises for Contingency Planning

Planning premises are not constant but dynamic; some change slowly and steadily: others change rapidly and irratically. Therefore, managers should be ready with alternative premises and align their plans accordingly. Managers can do well if they develop alternative scenarios and plans for each scenario. However, developing too many alternative scenarios and contingency plans involves cost. Therefore, in order to balance cost and benefit of alternative scenarios, managers must take four factors into consideration: subject of alternative scenarios and plans, trigger points, number of plans, and details of plans. Subject of contingency plans should be one for which the probability of occurrence is considered to be lower than that which has been selected for action. Various contingency plans may be arranged in this order. Trigger points are those events which have high impact on the outcomes of a chosen plan. Such events may be in the form of change in Government policy, entry of a new forceful competitor, invention of new substitute product, and so on. Volume of contingency plans deals with the number of contingency plans that should be prepared. If there are too many plans, their preparation may provide flexibility but it is costly too. Therefore, contingency plans should be made for really critical events and not for merely troublesome ones. Details of plans deal with the degree of details of contingency plans. Generally, the plan meant for action is prepared in detail. Details of contingency plans are reduced proportionately in the order of their importance and likely occurrence.

Communication of Planning Premises

Mere development of sound planning premises is not sufficient; these must be communicated to those who are involved in planning process at different levels of the organisation. Many successful organisations prepare environmental threat and opportunity profile (ETOP) and strategic advantages profile (SAP) and send these documents to all managers concerned for formulating plans in their own areas. We have seen in Chapter 8 how position papers are prepared and communicated to managers in the process of strategic budgeting. A basic problem which provides hindrance in communication of planning premises is the confidential nature of some information. In order to solve this problem, managers should take adequate care so that confidentiality of information is maintained.

Forecasting

An organisation has to formulate its plans within the limitations of various factors. In order to formulate accurate plans, managers have to find out the likely behaviour of these factors in future. This can done to some extent by making suitable forecast. A major factor in the increased use of systematic planning throughout the world in recent years is the increased effectiveness of forecasting techniques. The effectiveness has been pronounced in two broad areas where forecasting is needed-prediction of broad economic trends and product sales of individual organisations. There has also been development in the entirely new area of forecasting with the prediction of technological development and other types of innovations.

CONCEPT OF FORECASTING

Forecasting is the process of estimating the relevant events of future, based on the analysis of their past and present behaviour. The future cannot be probed unless one knows how the events have occurred in the past and how they are occurring presently. Thus, the past and present analysis of events provides information about their future occurrences. Since forecasting may require the use of various statistical techniques, some persons equate this analysis with statistical analysis. For example, Neter and Wasserman have defined forecasting as follows:

However, it is not necessary that all forecasts require the same type of statistical analysis as suggested above. For example, prediction of technological situation may not require the use of statistics of the sort suggested above. On the basis of the definition, following features of forecasting can be identified:

1 Forecasting relates to future events. This is needed for planning process because it devises future course of action.

2. Forecasting defines the probability of happening of future events. Therefore, happening of future events can be precise only to a certain extent.

3. Forecasting is made by analysing the past and present relevant events, that is, taking those factors which are relevant for the functioning of an organisation.

4. The analysis of various factors may require the use of various statistical tools and techniques. However, personal observations can also help in the process.

Planning Premises Forecasting

Planning and Forecasting: A Comparison

Some persons equate both planning and forecasting because both deal with future phenomena. However, both are different and clear-cut difference can be drawn between the two. The difference lies basically in the scope of two processes. Planning is more comprehensive which includes many sub-processes and elements in order to arrive at decisions. Such decisions may be in terms of what is to be done, how to be done, and when to be done. Commitment of actions is the basic ingredient of planning. Forecasting, on the er hand, involves the estimation of future events and provides parameters to the planning. process may also involve many sub-processes and elements but these are roiect what will happen in future. This may not require any commitment of action help in planning the future course of action. In fact, forecasting is one of the maior ingredients of planning process because planning involves determination of future co of action in the light of forecast made.

There is another difference between planning and forecasting. Since planning involves making comprehensive decisions in the organisation which will determine where the organisation would like to go, a large number of persons are involved in planning process, though major decisions are made at the top level. Forecasting is normally taken at middle or lower level. The work may be entrusted to staff positions which may help in arriving at planning decisions. Forecasting does not involve decision making but helps decision making by providing clue about what is likely to happen in future. Therefore, forecasting activity can be taken by those persons who may not affect whole of the organisation or its major portion by their decisions.

Planning Premises Forecasting

Importance of Forecasting

The need and importance of forecasting is apparent from the key role it plays in management process, particularly in planning process. In fact, every decision in the organisation is based on some sort of forecasting. It helps management in the following ways:

1 Promotion of Organisation. An organisation is established in order to achieve certain objectives which can be achieved by performance of certain activities. What activities should be performed depends on the expected outcome of these activities. Since expected outcome depends on future events and the way in which an activity is being performed, forecasting of future events is of direct relevance in achieving an objective. Thus, even before establishing an organisation, the promoter of the organisation must know how the various factors in the environment will behave over a period of time. A successful promoter is one who can forecast what will happen. In fact, many entrepreneurs project the shape of things to come on the basis of their experience and take the advantages.

2. Key to Planning. Forecasting is an essential ingredient of planning. It is key to planning process. Planning decides the future course of action. However, this future course of action does not take place in vacuum but in certain circumstances and conditions. Unless the managers know these conditions, they cannot go for effective planning or even planning at all. Forecasting generates the planning process. It provides the knowledge of planning premises within which managers can analyse their strengths and weaknesses and can take appropriate actions in advance before actually they are put out of market. Forecasting provides the knowledge about the nature of future conditions. For example, if there is a change in consumers’ preferences for substitute products, managers can take action to combat this problem by changing to suitable mix of products. Suppose while conditions are still prosperous for steel pipe manufacturers but they find that gradually PVC pipes are coming in the market and being cheaper are replacing steel pipes, they can take suitable action to overcome this problem. The steel pipe manufacturers can know that in future demand for steel pipes will go down; they can assess exactly how much market they will lose; they can take action for diversifying their business either by going into manufacturing of PVC pipes or in some other business. At the same time, however, if they find that PVC pipes offer very limited competition and market for steel pipes is also expanding, they can concentrate on the same business. Thus, forecasting will provide where the efforts should be put.

3. Coordination and Control. Forecasting provides the way for effective coordination and control, though indirectly. Forecasting requires information about various external and Internal factors. The information is collected from various internal sources beside the external sources. Thus, almost all units of the organisation are involved in this process which provides interactive opportunities for better unity and coordination in the planning process. Similarly, forecasting can provide relevant information for exercising control. The managers can know their weaknesses in forecasting process and they can take suitable action to overcome these.

4. Success in Organisation. All business organisations are characterised by risk and have to work within the ups and downs of the industry. In fact, profit is the reward for bearing risk and working under uncertainties. The risk depends on the future happenings and forecasting provides help to overcome the problems of uncertainties. Though forecasting does not check the future happenings, it provides clues about those and indicates when the alternative action should be taken. Managers can save their business and face the unfortunate happenings if they know in advance what is going to happen. The business can be saved from the impact of trade cycles. A manager can just work like a navigator. A navigator cannot control the sea tides and other disturbances but he can take his ship at the right path and can save it from these disturbances if he knows them in advance.

Planning Premises Forecasting

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 organisational process. Forecasting provides base for assuming the behaviours of certain events which may not be fully true. Future uncertainties always put limitations on planning. If future could be accurately predicted, managers could plan ahead withput fear that their effort has gone nought. Therefore, managers should be well aware about the limitations of forecasting while using it in arriving at certain decisions. In particular, adequate considerations should be given to the following limitations of forecasting:

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. For example, if the government increases taxes on certain commodities, their substitutes will be in high demand. The changes in tax structure in all cases cannot be forecast. Similarly, war between two countries can change the total business situations. All these events are not subject to precise forecast because these do not depend solely on the assumption that future follows the past.

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 forecast 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 de but cannot guarantee that this would happen in future. More is the period of ting higher is the degree of error. Therefore, it has been commented that “the only he sure about any forecast is that it will contain some error”. Therefore, while ests managers should take this fact into consideration. Time and cost factor is also an important aspect of forecasting

3. Time and Cost Factor. Time and cost factor is also an I speak of limitations inherent in forecasting, time and cost factor using forecasts, managers should take While the above factors speak of limitations suggests the degree to which an organisation will go for formal forecasting. For making forecast of any event, certain information and data are required. Some of these may be in highly disorganised form; some may be in qualitative forin. 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 organisations do not go for formal system of forecasting.

Planning Premises Forecasting

Making Forecasting Effective

Various limitations of forecasting do not suggest that the forecasting results should not be utilised in planning. Rather they suggest that while making the use of forecast, managers should take adequate precautions and adopt practices through which forecasting can be made more effective. For making forecasting more effective, following measures can be adopted:

1 For forecasting, all the possible relevant facts should be collected taking into account the cost involved and the benefits to be accrued.

2. There should be critical analysis of all relevant factors which have high impact on the operation of the organisation.

3. There should be continuous process of monitoring variables which need forecast. When some major events happen in the environment, more intensive search may start to make forecast.

4. Various assumtions in forecasting, particularly where qualitative criteria are applied, should be based on certain facts and not merely on hunches.

5. As far as possible, people involved in making forecast must have thorough understanding of various techniques of forecasting and the situations in which these can be applied.

6. Forecasters should be free from biases. They should emphasise facts and figures and not what they personally feel.

7. There must be genuine support of top management to forecasting which not only facilitates forecasting process but also makes the way for using forecast in planning process.

Planning Premises Forecasting

Steps in Forecasting

Forecasting is a process and, therefore, it proceeds through a series of steps. Depending on the level of formalisation and intensity of forecasting, varying emphasis is put on these steps. These steps are as follows:

1 Developing Groundwork for Forecasting. The first step in forecasting is to develop groundwork for forecasting which involves understanding of why changes are likely to take place both at macro level and micro level. The companies involved in forecasting future trend, generally, take past records as basis which might be available internally if proper information system has been developed. However, a mechanical and purely mathematical forecast based on the past data may not be wothwhile in the fast-changing environment. Therefore, the companies have to take into account various factors which are not reflected In the past data. For example, in post-liberalisation era, the demand for the products has Increased at macro level but because of increased competition, many companies have lost their market share.

2. Estimating Future Business. Based on the past data and identification of events that are likely to affect the future behaviour of the business, the trend for the business as a whole and market share of the companies concerned are determined by using various techniques-qualitative and quantitative. The trend is projected after a step-by-step procedure in which the relevant information is put for close scrutiny and analysis. The business trend which emerges out of this analysis will suggest the likely behaviour which may or may not correspond with actuals. For example, when Government of India prepares its plans, it projects various outcomes at the end of a plan. However, we often find that many outcomes do not match with the proiected ones because of a variety of reasons. Therefore, the projected trend should be used as guideline and not as absolute truth.

3. Comparing Actual and Projected Results. Since there is a likelihood of deviation between actual and projected results, a provision should be made to identify the deviation as quickly as possible so that necessary changes are incorporated in plans. Many companies prepare plans on the basis of certain forecasts but either they modify their plans or abondon these midway because of the changed environmental situations or because of the wrong projection of business trends.

4. Refining the Forecasting Process. The above three steps complete a cycle of forecasting. However, forecasting, being a continuous process and not one-shot action, is preformed continuously with each time, there may be refinement in the forecasting process and, therefore, its outcomes. These above steps help the managers to gain proficiency in making dependable forecasts as the time advances; they are able to refine, sharpen, and adjust the forecasting techniques to meet the changing needs of their business. Since there are many qualitative variables which affect business trends, their interpretation requires considerable experience.

Planning Premises Forecasting

TECHNIQUES OF FORECASTING

There are various methods of forecasting ranging from simple intuitive method to the use of highly complex models. However, no method can be suggested as universally applicable. In fact, most of the forecasts are done by combining various methods. The major forecasting methods are: historical analogy, survey, opinion polls, business barometers, time series analysis, extrapolation, regression analysis, input-output analysis, and econometric models. These techniques can be used for making forecast of any type: economic forecast, sales forecast, and technological forecast. A brief discussion of these is given below.6

1 Historical Analogy Method. Under historical analogy method, forecast in regard to a particular phenomenon is based on some analogous conditions elsewhere in the past. This method is based on the stages of economic development as suggested by Rostow. According to him, an economy has to pass through certain stages before the stage of takeoff and later of high mass consumption. Since this is true for all the economies, the situation of a country can be forecast by making comparison with the advanced countries at a particular stage through which the country is presently passing. For example, if the Indian economy is ready for takeoff which was the condition prevailing in U.S.A. around 1940, the demand for various commodities can be forecast. Similarly, it has been observed that if anything is the economic system of the country. However, this method is more useful for Indicating qualitative change in society. It is often suggested that social analogies have helped in Indicating the trends of changes in the norms of business behaviour in terms of life. Similarly. changes in the norms of business behaviour in terms of attitude of the worker against inequality, etc. find similarities in various countries at various stages of the history of industrial growth. This method, thus, gives broad indication about the future events of general nature.

2. Survey Method. Field surveys can be conducted to gather information on the intentions of the concerned people; for example, information may be collected through surveys about the likely expenditures of consumers on various items. Both quantitative and qualitative information may 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 surveys, 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.

Planning Premises Forecasting

3. Opinion Poll. Opinion poll is conducted to assess the opinion of the knowledgeable persons and experts in the field whose views carry a lot of weight. For example, opinion polls are very popular to predict the outcome of elections in many countries. Similarly, an opinion poll of the sales representatives, wholesalers, or marketing experts may be helpful in formulating demand projections. The opinion poll of technical experts may be helpful in estimating the life of a technology. If opinion polls give widely divergent views, these can be carried a step further in which experts may be called for discussion and explanation of why they are holding a particular view. They may be asked to comment on the views of the others, to revise their views in the context of opposing views, and consensus may emerge. This, then, becomes the estimate of future events.

4. 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 state of economy between two or more periods. These index numbers are the device to study the trends, 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. For example, a rise in the rate of investment now may herald an upswing in the economy and may reflect higher employment and income after some time. Again an upswing in economic activity may lead to higher personal income and expenditure after lag of some period. These lag periods may be difficult to predict precisely but they give some advance signals for likely changes in future. Thus, with the help of business activity index numbers, it becomes comparatively 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. All types of businesses do not follow the general trend but different index numbers have to be prepared for different activities. This is the reason why index numbers are prepared for industry, agriculture, transport, etc.

5. Time Series Analysis. Time series analysis involves decomposition of historical series into its various com ponents, viz., trend, seasonal variations, cyclical variations, and random variations. Time series analysis uses index numbers but it is different from barometric technique. In 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. When the various components of a time series are separated, the variation of a particular phenomenon, the subject under study, say price, can be known over the period of time and projection can be made about future. A trend can be known over the period of time which may be true for future also. 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 the trend and seasonal factors are fairly clear and stable.

6. Extrapolation. Extrapolation is also based on time series because it relies on the behaviours of a series in the past and projects the same trend in future. This method does not isolate the effects of various factors influencing a problem under study but takes into account the totality of their effects and assumes that the effect of these factors is of a constant and stable pattern and would continue as such in future. Since the projection of future is based on past, it is essential that the growth curve of a series is chosen after a very careful study of its past behaviour.

7. Regression Analysis. Regression analysis is meant to disclose the relative movements of two or more interrelated 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. For example, if we know that there is a positive relationship between advertising expenditure and volume of sales or between sales and profit, it is possible to have estimate of the sales on the basis of advertising or of profit on the basis of projected sales, provided other things remain the same.

Regression analysis can be used to build models. These models can be simple taking into account linear relationship between two variables only or complex non-linear relationship having more than two variables. Generally, the regression and correlation analysis is used for processing the statistical data and deriving a generalised 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. For example, if quantity of fertilizers being used presently is known and also the rate at which the annual consumption is increasing, the demand for fertilizers can be predicted for distant future.

8. Input-Output Analysis. Under this method, a forecast of output is based on given input if relationship between input and output is known. Similarly, input requirement can be forecast on the basis of final output with a given input-output relationship. It is because of this mechanism that the technique is known as input-output analysis or end-use technique. The very basis of this technique is that the various sectors of economy are interrelated and such interrelationships are well established. Such relationships are known as coefficients in mathematical terms. For example, coal requirement of the country can be predicted on the basis of its usage rate in various sectors, say industry, transport, household, etc., and on the basis of how the various sectors behave in future. This technique yields sector-wise forecasts and is extensively used in forecasting business events as the data required for its application are easily obtained the formation of these equations relatively easy. The construction of an econometric mod is very expensive, technical, and complicated task, and individual organisations can afford to have such models of their own. They have to rely on aggregate or macro models developed by specialised forecasting agencies or institutes. These aggregate models are, however, useful in making micro level studies by individual organisations.

Planning Premises Forecasting

Scenarios

Scenario (alternative scenarios) technique is used to explore the likelihood of possible future developments and changes and to identify the interactions of uncertain future trends and events. According to Mandel, scenarios constitute an effective device for sensing. interpreting, organising, and bringing to bear diverse information about the future in planning and strategic decision making. Scenarios are generated by experts in the field which are in qualitative form and present this is the way it will be; this is what is going to happen; this is what the situation will be at that future time. The process of scenario construction is as follows:

1 Preparation of Background. The first step is to prepare background on which scenarios may be developed. This is done by assessing overall environmental factors relevant for the industry sector. At this stage, a preliminary model for environmental analysis is prepared which may indicate various industry trends.

2. Selection of Critical Indicators. Out of the various trends identified earlier, critical indicators for the industry sector are selected. A search is made about the future potential events which are likely to affect these trends. At this stage, a Delphi panel (panel of experts), whose expert opinion is credible in evaluating the industry future, is nominated.

3. Establishing Past Behaviour of Indicators. Analysis of past behaviour of each major indicator is made on the basis of data available: reasons for past behaviour are identified; and interview schedule for Delphi panel is prepared.

4. Verification of Potential Future Events. Verification of potential future events affecting the trends is done on the basis of Delphi panel’s expert advice which may be in the form of: (1) evaluation of past trends, (ii) assessment of the potential impact of future events, (itt) assessment of the probability of future events, (iv) forecasting of future events. (u) assumptions for forecasts, and (vi) rationale for projected values.

5. Forecasting the Indicators. After collecting the opinion of Delphi panel, forecast of each major indicator is made on the basis of additional literature which may be available. For this purpose, trend impact analysis (TIA) and cross-impact analysis (CIA) is done. TIA is the analysis of relevant events affecting the major trends. CIA builds into the analysis on the recognition that events impact upon one another and they do not occur independently of each other.

6. Writing of Scenarios. At the last stage, scenarios are written. Usually, there may be more than one scenario as this is done in the context of fluid future environment. These alternative scenarios may be taken into account for establishing environmental opportunities and threats.

Planning Premises Forecasting

SALES FORECASTING: KEY TO PLANNING

An organisation is required to monitor all its relevant environmental factors-economic, political-legal, technical, socio-cultural, and competitive. However, monitoring and forecasting these environmental factors help in arriving at sales forecast, that is, the projected sales in future which acts as base for formulating various plans. Kotler has viewed that companies can prepare as many as 90 different types of sales forecast-five at space level, six at product level, and three at time levels. Space level sales forecast includes at world, national, region, territory, and customers levels; product level sales forecast includes total sales, industry sales, company sales, product line sales, product form sales, and product item sales; and time level sales forecast includes for three periods-short term, intermediate term, and long term. However, not all companies prepare these 90 types of sales forecast. At planning level, most of the companies make sales forecast at two levels industry sales and company sales for varying time periods. At the subsequent stage, various other sales forecasts are made.

Forecasting Industry Sales For a company, the first step is to find out the total industry demand for a product which is the total volume that would be bought by a defined customer group in a defined geographical area and defined time period. Industry demand may be measured for the current period or for the future period.

Estimating Current Demand. Current demand potential for the industry as a whole is the maximum amount of sales that might be available to all the companies in the industry under a given level of industry marketing efforts and given environmental conditions. A common way to estimate the current market potential is the number of buyers multiplying by the number of times they buy the product. For example, industry demand for toothpaste may be calculated by number of families using toothpaste x average number of packets of toothpaste purchased per annum. Both variables are independent. Therefore, both these variables have to be estimated in the light of different factors affecting these. Various industry associations collect such information on monthly and annual basis on the basis of which current demand is known and projection may be made for the extreme near future.

Estimating Future Demand. Estimation of future demand is much more difficult than estimation of current demand because of the change in the nature of factors affecting demand over a period of time. Therefore, these changes have to be taken into account while estimating the demand. This can be estimated by macro economic forecast followed by industry sales forecast. Macro economic forecast is based on the national income or gross domestic product which is used along with other environmental indicators to forecast industry sales. For example, future demand for toothpaste can be measured by estimation of population, level of income, and shift in buying habits of people. All such exercises may be undertaken by the companies concerned themselves in the form of marketing research or they can take the relevant information from the marketing research firms. In India, there are many marketing reserach firms; the two most comprehensive being A C Neilsen and ORG-MARG.

Forecasting Company Sales Company sales forecast is the expected level of company sales based on a chosen marketing plan and an assumed marketing environment. After forecasting industry demand, individual companies forecast their market share in it. Market share of a company is calculated by dividing the company sales by industry sales and the outcome is multiplied by 100 to get percentage. Every company is interested to know its market share to measure its performance vis-a-vis its competitors and to take suitable actions to maintain or increase its market share. Percentage increase in the sales of a company over a period of time is not a true reflection of the performance of the company, it must be compared with the industry demand. For example, if industry demand is increasing by 10 per cent and a company sale is increasing by 7 per cent, the company is losing its market share. The market share data of different companies are compiled by industry associations as well as by marketing research firms. In preparing marketing plans based on company sales forecast, the company may set sales quota.

Sales Quota. A sales quota is the sales goal set for a product line, company division, or sales representative. It is primarily a managerial device for defining and stimulating sales effort. Many companies set sales quota what representatives should sell during a prescribed period say a month or year. The quotas can be set in terms of monetary value, unit volume, or product type. Sales quotas for different territories and representatives are developed from the annual marketing plan which is based on sales forecasting. Generally, the sales quotas are set slightly higher than sales forecast to stimulate the sales force.

Sales quotas are set either by taking up top-down approach or bottom-up approach depending on the practices followed by the individual companies. In top-down approach, the company sets its sales target based on sales forecasting. This target is divided territorywise. Each territory manager divides the territory’s quota among the sales representatives. In bottom-up approach, the process is just the reverse. There are three schools of thought on quota settling–high-quota school, modest-quota school, and variable-quota school. The high-quota school sets quota higher than what most territories or representatives will achieve but that is attainable. The basic objective of high quotas is to spur extra efforts by sales force. The modest-quota school sets the quotas that majority of the sales force can achieve. The basic objective behind this is that the sales force will accept the quotas as fair, attain them, and gain confidence. The variable-quota school believes that individual differences among sales force warrant high quotas for some and modest quotas for others.

Planning Premises Forecasting

KEY CONCEPTS FOR REVIEW

Contingency planning Controllable premises External premises Forecasting Forecasting steps Forecasting techniques Intangible premises Internal premises

Making premising effective Sales forecasting Sales quota Scenarios SWOT analysis Tangible premises Types of premises Uncontrollable premises

Planning Premises Forecasting

DISCUSSION QUESTIONS

1 What do you mean by planning premises? How are they important in formulation and operation of plans?

2. What are the ways in which planning premises are classified? How does a way of classification overlap on another .

Planning Premises Forecasting