Long term forecasting

Forecasting time horizon can be defined on three categories: short-term, medium-term and long-term.

Long-term forecasts involve purely strategic decision for a time period of about 5-10 years, so the forecasting processes need to cater to these requirements. For example, an organization may be interested in projecting the future technology trends in their business and use it as the basis for developing new products, production technology, and human and other resources.

Confidence in statistical forecasting is dependent upon the time frames for forecasting and the nature of the information being forecast.

Short-term forecast are generally are accurate in policy analysis than are long-term forecasts. Different disciplines permit greater long-range forecasting than others.

Limitation for long-term forecasting horizon – in most cases the available time series forecasting methods are unreliable over a long time span.
Long term forecasting

Sales forecasting

Sales forecasting is defined as a projection into the future of expected demand, given as stated set of environmental conditions. Forecasting is the term used to describe procedures for foretelling the future. An alternative term is ‘prediction’ and most writers use the terms interchangeably.

This is distinguished from the sale plan, which here defined as a set of specified managerial action to be undertaken to meet or exceed the sales forecast.

Since a sales forecast revolves around a specific target market, that market should be defined as precisely as possible. The market description forms the forecasting boundary.

Because the goal of sales forecasting is to make the projections within a defined environment, a key measure of performance is accuracy off the forecast and a key method to explain variances in accuracy is how the environment varied from the one defined.

Sales forecasting must take into account the total market environment; the national and industry market, and the firm’s own performance in its traditional markets.

One sales forecast may cover a period of time that is a year or less, while another may extend over several years. Both short-term and long-term forecasts are needed for a well constructed business plan.
Sales forecasting

What is market potential?

New product forecast can represent different types of estimates. These include market potential sales potential, market forecast, and sales forecast.

Market potential is the total amount of a product that customers will purchase within a specified period at a specific level of industry wide marketing activity. It is therefore a prediction of maximum total market volume under a given set of condition.

Market potential can be stated in terms of dollars or units. A segment’s market potential is affected by economic, sociocultural, and other environmental forces.

Marketers must assume a certain general level of marketing effort in the industry when they estimated market potential.

The total market size represents market potential and is not a sales projection – rarely do produce sales get close to capturing the entire market due to many limitations.

An estimate of the size of the market, combine with information about company’s competitor, will be necessary to calculate the share of the market the company hold, as well as the market shares of the competitors.

Market potential figures are also useful in developing sales forecasts.
What is market potential?

Competition: the factor systematically influence predictability of future

The greater the competition, the more difficult it is to forecast since by their action competitors can use the forecast to change the course of future events, thus invalidating the forecasts.

Attempts to foretell the future are as old as mankind. In competitive marketing, however, such attempts are particularly significant because they can influence those cost and price decisions resulting from the experience curve. In turn, they may impact the company strategy.

The forecast necessary must predict market sales potential. This prediction is based not only in general economic conditions but also on the interplay of total competitive activity – which often cause an explosion of the total market before deciding the individual strengths and weakness of the main competitors in the market place.

Increasing the degree of competition in industry then becomes an ideal or a goal to be aimed for.

In the 1950s, Lipsey and Lancaster proved that greater competition might lead to a loss of welfare in the economy if at least one industry in the economy was not perfectly competitive.

This ‘theory of the second best’ rebutted the general assumption prevalent at the time that greater competition was always good whilst greater monopoly was always bad.
Competition: the factor systematically influence predictability of future

Forecast accuracy : number of item factor

Forecasting is not possible although assessments based on similar past events can be made. It is a factor in the choice of technique. Forecast accuracy has to do with the closeness of a forecasting model’s predictions to the actual data.

The forecasting accuracy increases with the number of observation as well as the level of aggregation.

Forecast of customer demand aggregated over many customer are more accurate since their is a high probability that increased demand from one customer will be compensated by decreased demand from another customer during the same unit tie period.

The larger the number of items involved - while all other things being equal, the more accurate the forecast.

Because of the statistical law of large numbers, the size of forecasting errors and therefore the accuracy decreases as the number of items being forecast increases and vice versa.

Thus, the accuracy of phone calls arriving at a switching station during five minutes interval than the number of HP computers sold in a certain day.

It means that the larger amount of an item’s volume are forecasting, the lower the unexplained variance in comparison to the actual volume being forecast, thus lower the error.
Forecast accuracy : number of item factor