European Journal of Scientific Research - EuroJournals

Forecasting as a Strategic Decision-Making Tool: A Review and Discussion with
Emphasis on Marketing Management 436
not be a sensible policy to expand company operations, if it is expected and/or forecast a sharp
economic downturn. Forecasting gives managers the opportunity to reconsider their positions, given
that they timely forecast economic upturns or downturns (or use the forecasts available). Forecasting
literature is rich in providing the studies of forecasting business cycles, also called classical cycle,
which refers to economic fluctuations (see García-Ferrer & Queralt, 1988; Diebold & Rudebusch,
1999; and Sichel, 1993, 1994). Banerji & Hiris (2001) present a framework for analysing and
forecasting cyclical behaviour in economic activity, employment, and inflation. They extend that
framework to foreign trade and important domestic sectors of an economy (e.g. manufacturing,
services, and construction). There also exist examples of growth cycle forecasting studies (see García-
Ferrer et al., 2001). For comparatively shorter-term strategic planning purposes, forecasts and
knowledge of growth cycles 9 can also be very informative and beneficial for strategic managers.
Garcia-Ferrer et al. analyse the growth cycle chronology of the Spanish economy from 1970 to 1998
and propose a method that can be used as a forecasting tool in predicting turning points. Summers
(2001) analyses and forecasts Australia’s economic performance during the Asian crisis with respect to
some economic factors including imports and exports, interest rates, and inflation. Qi (2001) predicts
US recessions with leading indicators (via, relatively a new type of forecasting techniques, e.g. neural
network models). She examines the relevance of various financial and economic indicators and
predicts the probability of a future recession.
Interest Rates: The level of interest is directly related to the level of prices in an economy. It is
important both for consumers and companies. Buyers finance their purchases (e.g. appliances,
mortgages, or automobiles) from financial institutions or sellers and companies use lots of financial
resources from financial institutions or from their suppliers for a variety of reasons (e.g. capital
requirements or raw material purchasing). Therefore, an increase in the interest rates can be considered
as a threat and a decrease as an opportunity for both consumers and companies.
Since interest rates are one of the major factors that directly affects the cost of capital, it is
highly significant for a project’s or a strategy’s success. Forecasting can provide a significant piece of
information in advance to evaluate the relevant strategies and projects. Due to its importance, the study
of interest rates is one of the major subjects in financial economics, which mainly focuses on
understanding the dynamics of interest rates and forecasting the future rates. Summers’ (2001) study of
interest rate forecasts during the Asian crisis in Australia can be presented as an example among,
maybe, thousands of studies in the field.
Currency Exchange Rates: The existence of huge amount of international trade, vast number of
multinational companies, international financial markets, globalisation in trade and finance, borderless
trade opportunities both for consumers and companies (e.g. through Internet) are the realities of the
current time. An increase or decrease in the value of a country’s currency has direct effect on the
volume of its trade (import and export) and finance. All these trade opportunities make the foreign
currency a trade medium itself. The changes in the value of a foreign currency brings new
opportunities and threats for traders and the need to forecast the future value of exchange rates.
There exists a vast literature on forecasting exchange rates. If it is taken the amount of foreign
currency circulating in international area and the size of this forecasting literature in exchange rates
together, the significance of forecasting the future rates can easily be figured out.
Inflation Rates: Inflation is a threat for companies for variety of reasons such as slower economic
growth, more volatile currency rates, a higher interest rates and, as a likely result, a destabilised
economy. In such an economic environment, it is unlikely to have a healthy investment planning and
decision-making.
Because inflation lessens the predictability of future, forecasting can be used as a functional
managerial tool to forecast inflation rates in order to remove or reduce this uncertainty as much as
9 “…, growth cycles represent alternating periods of above and below trend rates of growth and can be seen as short-term
fluctuations around previous peaks and troughs.” (García-Ferrer et al. 2001, pg. 517).