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Forecasting as a Strategic Decision-Making Tool: A Review and Discussion with Emphasis on Marketing Management 426 features. It is, however, not surprising that environment is unlikely to stay unchanged and constant. Even the biggest organisations in the world may have a limited power to control these changes. Therefore, it is more sensible for companies to attempt to predict the direction and effects of these changes and to adopt and position themselves respectively. At this very point, forecasting has a role in predicting the changes in social, economic, and technological environment, which are discussed below separately. First, the role and use of forecasting for strategic purposes in internal environment of business are discussed with respect to various functional areas of business. Marketing Forecasting aims at predicting the future. By forecasting, it can be established more accurate goals and objectives, and, in turn, the strategies and tactics for reaching these objectives. Forecasting helps determine markets for products, plan corporate strategy, decide on distribution channels, price products and services, decide on product features, and determine profit and sales potential for products, determine advertising and sales promotion budgets within the strategic context. In other words, sales forecasting includes decisions in almost all aspects of marketing plans [see Cohen, 1987: 115]. Development of marketing competencies is particularly important in creating competitive advantage. The following three key decision areas are considered to be ‘central’ to strategic marketing management and to the development of marketing competencies. First, the design of marketing mix (price, promotion, product, place) that determines how the company will compete in these target markets: The marketing mix elements are a wide-range of application areas for the forecasting function both for strategic and functional management. Forecasting function can be applied to each of the elements of the marketing mix in order to achieve the specific objectives of these elements. It is well-known how important it is to determine the right price for a specific market segment, which is one of the most particular factors for the success of a particular product and, of course, marketing activities. The price prediction for a specific market segment may have to be made for analysing various scenarios, on which strategic decisions (e.g. product launch) can be based. It can also be utilised forecasting for strategic decisions for the other elements of marketing mix such as place (e.g. the selection of distribution centres). A wrong strategic decision may make a firm to incur considerable and long-lasting costs that could remove the big part of the competitive advantages created by other functional and strategic areas of the firm. Second, marketing managers may have to choose between markets or market segments. The selection of a target market segment determines where the company will compete. Market segmentation and the choice of market segment both are major strategic marketing decisions. The choice of decision might be judgemental or model-based. No matter the method of choice is, it has to include a forecasting procedure (at least, in mind). This choice decision may be about the market share, sales, and the future state of it. Frank (1974) discussed the factors that affect market segmentation and their effects on sales forecasting. Which classifiers including socio-economic, life-cycle, or locational characteristics besides personality and demographic variables, which are the main segment classifiers, should be established is one of the main problems regarding the market segmentation issue. The relevant weights and significance of these factors can be established and determined with the forecasting function; so that a better segmentation can be made possible. There exist clear examples that show the significance of the estimate of the right market segment. Apple computer example is an interesting one in this matter. It was first thought that home computer market had a good potential and was big enough to sustain the computer industry. It focused on that segment of the market in order to have leadership position but later it found out that, in fact, the market segment was not big enough to support continuous sales. On the other hand, IBM concentrated on the business segment and became the market leader in this segment in 1990’s. Besides other factors, Apple’s wrong estimate of the market size led it to the marketing decisions, which then became quite difficult to recover. With a good
427 Cihat Polat forecasting practice, such a wrong positioning and market segmentation decision could be avoided easily. Third, advertising media selection, which refers to the prediction of the media to be used, is another decision area within the marketing function. At the product launch phase, the success of the advertising media may become crucially important in delivering the projected messages to the consumer target. The substantial amount of money spent during the introduction phase of a product and a likely failure of a company’s substantial product (e.g. the contribution of a wrong decision regarding the media selection) makes the choice of advertising media selection highly critical. In this regard, the evaluation of the performance of various advertising media and the prediction of the best media, in terms of its consequences, can be considered as a strategic process for marketing decisions. Fourth, the design of marketing mix is, at large, a forecasting practice, by which marketing management attempts to predict the best available options (for each of the marketing mix elements, which are product, place, price, and promotion) for a given mix or estimates that a specific set of assumptions will hold for a set of alternative mixes. Therefore, the decisions related to each of the marketing mix elements unquestionably include a sort of, judgmental or statistical, forecasting activity. Based on the market potential, marketing management may utilize forecasting function in allocation decisions (of marketing budget and effort) between/to the marketing mix elements that it can develop profitable marketing plans and programs for the products and services offered. The same is valid for pricing decisions, channel selection decisions (e.g. facility location decisions including sales office or warehouse) and promotion decisions (e.g. advertising and management of sales force) (see Schendel, 1974: 4-85). Positioning 4 strategy is another marketing decision area where forecasting has a substantial contribution. Forecasting can be utilised in determining the market potential for a specific market segment before any positioning strategy is applied to. There are already many applications of forecasting to market potential in practice. These forecasts form a sort of strategic information in the choice of right market segment to focus on and in the selection of right marketing mix for it. Forecasting literature has focused extensively on the forecasts of market potential 5 , market growth, and market share. Cohen (1987: 115-140) discussed how to forecast market potential and sales forecasting with different forecasting techniques with relation to a marketing plan. Schendel (1974) discussed how to estimate market potential for established (old) products, the benefits of practising market potential, and the estimation methods in detail. Market potential has a useful and significant role for allocation decisions and market planning. The importance of forecasting function here is that the demand response is a function of assumptions and forecasts that must be made about environmental conditions and competitive marketing programs (see Schendel: 4-82). The degree of variability for the demand for a specific product/product group may deeply affect the outcome for the market potential and, in turn, the entire marketing plans and strategies. Forecasting may determine the variability of demand and enhance the validity of assumptions for the marketing plans and strategies. The stage of a product in its life cycle is important in determining the type of strategies to be applied and the product life cycle (PLC) model retains its appeal as a planning tool to assist corporate and marketing managers shape strategy and tactics (Wong, 1994: 104). The factors that may affect the next stage of the patterns (e.g. trend) that the product may follow in the PLC model can also be determined. Company managers may investigate and detect the factors (variables) that may affect every next phase in the PLC. Consequently, forecasting can help determine demand and strategies along with the PLC including new product launch decisions. 4 Based on two principles of marketing strategy: (1) the choice of target segments that a company decides to focus on and (2) the design of the marketing mix to create a differential advantage that defines how the company will compete with rivals in each segment. 5 “Market potential is the maximum demand response possible for a given group of customers within a well-defined geographic area for a given product or service over a specified period of time under well-defined competitive and environmental conditions.” (Schendel, 1974, pg. 4-81)
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