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Forecasting as a Strategic Decision-Making Tool: A Review and Discussion with Emphasis on Marketing Management 428 Forecasting also helps managers determine the timing of entrance to the market. The companies that are ‘first-to-market’ can determine the market potential through forecasting function and can decide whether or not to enter the market. The players that are ‘second-to-market’ can get benefit from forecasting in obtaining the required market information as quick as possible, which is needed for fast investment decisions in order to evaluate if it worth to follow a specific innovator into the market, which is the main character of this type of firms. For the firms launching products into an established market in the late growth phase of the PLC, forecasting provides detailed strategic information about different segments of it. The contribution of forecasting at this stage is particularly important because marketing’s emphasis shifts to segmentation and positioning, which requires a concomitant increase in investment in applications, customs engineering, and product design skills. (Wong, 1994: 107). For the firms planning to enter the market during maturity or later stage, forecasting again provides valuable information about the market potential and the market share that the firm can gain so that it can decide if the assumption of high unit volume sales holds and if it should enter the market based on the forecast results regarding the achievable sales level. Market potential is critically dependent upon general external environmental factors including the state of the economy, levels of disposable personal income, tax levels, etc., and the actions of competitors’ similar products. Therefore, to be able to estimate the market potential, appropriate set of assumptions have to be made about and these uncontrollable variables have to be forecast first. Market share has a central role in strategic marketing planning and is frequently used as a key strategic objective in the development of marketing plans (Ryans, 1987: 135). Since market shares are less sensitive to the impact of growth and seasonal fluctuations, it is a considerable tool for strategic planning of the future. Of course, achieving a higher market share and thus being a market leader is a considerable strategic objective for most of the firms. A market share leader can have comparably lower overall costs due to its greater accumulated experience and its potential for learning by doing, process and product improvements that lead to lower cost, and the reduction of unit costs that come from higher scale of operations, which all give it a considerable competitive power to it. Market power can also accrue to a large market share firm, which enables it in some cases to extract more favourable terms from suppliers or customers (Ryans: 139). Forecasts and judgements of market share are also crucial in resource allocation decisions. Management needs reliable and consistent information in order to take a step towards strategic resource allocation decisions such as protecting the existing market share or achieving a higher market share. The study by Fox & Franses (2001), who attempted to forecast market shares at the brand level with simulation-based models, can be taken as an example of the forecasting studies of market share. Sales prediction is another area in which forecasting is utilised intensively. Sales forecasts refer to an estimate of company sales for a specified future period [Johnson et al., 1994: 191]. Sales forecasting is the most important planning task within any company-large or small [Johnson et al.: 192] and the sales forecast should be one of the company’s most important documents (McLaughlin, 1974: 4-55). Sales forecasts are one of the most widely used areas and have the most functional uses in marketing. There are many reasons for extensive use of forecasting in sales prediction. In addition to the information requirement of the future by management, variability in demand forces firms to exercise sales forecasting practices in order to reduce or remove the risks associated with this uncertainty, provide inputs to various major planning decisions including capacity planning and investment planning. The high functionality of sales forecasting is not only because of its contribution to many marketing related decisions but also because of its importance and contribution to many other decision areas, such as inventory, employment, capacity planning, and distribution, into which sales forecasts provide inputs directly or indirectly. Sales forecasts provide a start point for the assumptions used in various planning activities and for the development of short-term financial control systems. For instance, financial budgets are prepared based on varying levels of production according to which they
429 Cihat Polat show different expense patterns. Also, a firm’s production level is linked closely to its sales output and, thus, the financial budget is dependent upon the sales forecasts [Johnson et al., 1994: 191]. Besides forecasting sales for established goods, predicting sales of a new product has a particular importance for management from strategic point of view. The decisions regarding new products include many uncertainties in addition to those regarding established products (such as the environmental factors that may affect the new product and their weights on it, the uncertainties that may come from pricing decisions made in uncertainty, the resistance that come from competitors, and the uncertainties about the expected perception of customers (see Kelly, 1974: 4-73)). That is why, forecasting new product sales is of particular importance for management when making decisions in uncertainty before a new product is launched into the market. Given that a success in a particular product may deeply affect the strategic position of a company in a specific market, the importance of and the emphasis that should be given to it in order to achieve the desired success by strategic management can easily be understood. Marketing and forecasting literature have given particular importance to the subject. For the sake of our purpose, two studies are mentioned here as an example among many. Kelly (1974) discussed the nature of prediction problems, the sources of information, and techniques for sales level regarding predicting new products in detail. Hsiao et al. (2002) also investigated the role of stated intentions in new product purchase forecasting and developed various models to investigate the role of intentions and explanatory variables in forecasting purchase. They found that a weighted average of stated intentions together with the explanatory variables included are powerful indicators of future purchase behaviour. In short, sales forecasts have many uses in variety of decision areas such as in (i) setting of financial (e.g. capital) and operational (e.g. sales) budgets; and (ii) scheduling of purchasing and production activities and controlling of inventories; and (iii) establishing sales projections and sales quotes, each of which has, direct or indirect, strategic implications, at least, at the operational level, which is where strategic plans are put into action. Price forecasts are another application area of forecasting function. Price forecasts are used frequently in management decisions about marketing strategy, new investments, budgeting, and raw material purchasing. Price forecasting practices have a long history, probably due to its strategic value for management. The more realistic price forecasts are available, the higher the number of implications for management is, including the improved pay off in better decisions regarding marketing strategy, which is probably the most important one. For instance, “a knowledge of pricing trends for various product lines also suggests the most appropriate balance of marketing effort for each product.” Hegeman (1974) reviewed the price forecasting practices and techniques used. Price forecasts are mostly based on appropriate demand and supply curves developed for the products of concern. In order to help reduce the risk and uncertainty in management decisions, a variety of techniques have been developed to deal with the problems associated with supply, demand, and prices for most of which products’ supply and demand curves have never been developed (Hegeman, 1974: 4-286). Due to a large number of uncertain factors in the marketplace, price forecasting becomes a rational behaviour in reducing these uncertainties and price and volume forecasts are required by for all business planning activities. For instance, improved price forecasting can significantly influence budgeting because the forecasts of future product and raw material prices help in making more accurate sales budgets and appreciation of changing production costs, which leads to important potential for inventory savings (see Hegeman: 4-294). The forecasts of tendencies in prices additionally provide a company to adjust its investment plans and activities, providing the greatest payoff to company. The problem is, in fact, rarely whether or nor to forecast, it is whether to forecast systematically or judgemental. In this sense, forecasting is a natural and essential part of strategic marketing management. Manufacturing How long time does it take to design and produce a product for a company and how long does it take for a competitor to imitate and follow such a product in the market? Time plays a critical role,
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