Forecasting and Scenario
Planning
Forecasting
Both
forecasting and scenario planning are ways to try to envision the future. Traditional forecasting has been primarily
financial, done in Sales and Marketing. But
Engineers also try to forecast where technology is going. It is typical in a company to do both a sales
forecast and a market forecast. The
sales forecast can be based on units or revenue, but the goal is to try to
determine next years or the next five years number of units that will be sold
and the amount of revenue that will be generated. Sales is the lifeblood of any company. A typical sales forecast is done by looking
at historical years and the current year to determine the trend. Are sales increasing or decreasing? More specifically by what amount? This can be determine by fitting the past and
current sales data to a line, as done, for example, by a linear
regression. A linear regression best
fits points to a line. Furthermore, a
linear regression may be used to make particular predictions. If you have an MBA, the various sales
forecasting methods I will now mention you already know: moving averages (2 or 3 month moving averages
as an example), weighted moving average, exponential smoothing, and trend
models such as linear trend projection models (which are basically linear
regression models). If you have
seasonality in your sales data then you will need to compute multiplicative
seasonal indices. Typically a sales
forecast is given and then a worst case scenario is given (a second line) by
tweaking the numbers downward, and a best case scenario is given (a third line)
by tweaking the numbers upward. Market
forecasts are more complicated. They may
try to guess the number of units which may be sold, but also take in
consideration competitive factors, competitive features, industry standards and
trends, market share data (is your market share shrinking or growing?). Technological forecasting is complicated as
well, and ironically probably more qualitative than sales forecasting. Here one needs to look at one's current
technology and try to guess where the technology is going. Competitors may indicate this, as well as
industry trends and even technical work in academia, as well as developing
industry technical standards.
Scenario
Planning
Scenario
planning differs markedly from forecasting.
Here, the forecast is not limited to one or three lines, or to one
future which marketers and technologists believe will come about, but to several
alternative futures. I.e., the point
of scenario planning is that no one knows exactly what will happen, because
there may be future intervening factors which are hard to anticipate, but one
can make a few (three to five) alternative futures and look at the consequences
and rewards and problems associated with each of those future. The point is to plan for any one of those
scenarios, so the future scenario that does obtain doesn't catch you by
surprise. No one plans to fail but most
fail to plan. Many companies have failed
by failing to anticipate changes in the technology and changes in the
market. Examples include Kodak, which
was the biggest camera and analog film seller, which soon became bankrupt due
to their inability to anticipate the digital camera revolution. Another example is stereo manufacturers that
did not anticipate the iPod and the revolution in brought in buying, listen to,
and even recording music digitally.
Scenario Planning can help anticipate changes in customer behavior,
technological developments, or developments such as regulations and industry
standards. One model by which to do
scenario planning is the PEST model:
looking at political, economic, sociological, and technological factors
that may be driving forces or trends that determine the future. Scenario planning looks not only at the
driving forces of the future but the forces behind the driving forces. This may generate a long list of possible
relevant driving forces which can be reduced to those which are critically
relevant. Sometimes critically relevant
factors are put on a scenario cross with one axis indicating a positive or
negative outcome of the factor and the other axis indicating the positive or
negative outcome of the other factor.
This generates four quadrants within which to pursue possible
technological and business strategies.
Advantages and Disadvantages
of Scenario Planning Versus Forecasting.
Advantages
and Disadvantages of Scenario Planning
Scenario
Planning envisions multiple alternative futures so that the company can develop
plans to deal with whatever develops.
This is a strong advantage over forecasting that envisions just one
future, with maybe a worst and best case scenario thrown in. A disadvantage may be that Scenario Planning
may often be much more qualitative than forecasting and hence perhaps less
precise.
Advantages
and Disadvantages of Forecasting
In
sales and marketing, forecasting can be quite quantitative, and hence
precise. However, the precise models may
not anticipate factors that develop in the future which will affect the numbers
and success.
References
Davila, T., Epstein, M.
(2014). The Innovation Paradox. Berrett-Koehler Publishers, Inc., San Francisco, California.
Frum, R. (2013, August 6). Word association of newspapers
scenario planning. Retrieved from the Personal Expert System Web site: http://personalexpertsystem.blogspot.com/2013/08/world-association-of-newspapers.html
Globis.jp. (2014, September 3). Woody Wade:
"Scenario planning" - Thinking differently about future innovation.
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