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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).
437 Cihat Polat possible. Thus, companies can easily adjust their positions based on the forecast inputs. Summers (2001) makes an example of inflation rate forecasts during the Asian crisis in Australia. Junttila (2001) also examines the structural breaks in the economy and forecasts the rate of future inflation (but for short-term) in Finland for the time period of unregulated financial markets from 1987 to 1996. Technological Environment Technological developments also create new opportunities and threats for firms. They create threats because accelerating technological change and developments shortens the life cycle of products and sometimes a new product may become old fashioned or out-dated even before being introduced to the market or a short period of time after being introduced. For many companies, it may be impossible even to follow these developments and make the investment necessary to produce such products. If companies cannot adopt themselves to the new conditions, they can quickly loss their market share or positions. Such accelerating technological changes also bring new opportunities including new manufacturing methods and low cost production opportunities. In industries that require technological know-how and high research and development costs (e.g. microchip companies such as Intel), companies can lead the market and can turn this into a competitive advantage in their industries. In the industries where severe competition exists, mistakes such as delays in adopting new technologies or developing wrong type of products for the market can severely damage companies and their positions in that market. In such circumstances, forecasting plays an important role in analysing the current technological developments and predicting the direction of these changes and their likely effects on companies. Social Environment Similar to the changes in technological environment, the changes in the social environment may also bring some threats and opportunities for companies. For instance, the decline in the tobacco industry in the recent years especially in the developed countries is partially due to the public awareness on the risks of tobacco for health and public pressure on tobacco companies and government bodies. Similarly, an observed increase in the demand for organic foods in the developed countries has been the mostly result of public awareness of genetically modified foods and their risks. As the invent of sweeteners was a new opportunity for many food companies against sugar, the release of information about the fat-giving contents of X brand of potato chips in America in 1997’s created lots of tension for the producing company. Forecasting is, again, put into use to analyse and predict the direction of social changes. Thus, company operations, and strategies as well, (e.g. research and development activities) can be adjusted or build on these analyses. Demographic Environment: Markets are frequently defined in terms of geographic boundaries. Much of the research in marketing is based upon the importance of customer groupings in market segments. The composition of demographic structure of a specific geographic area is of particular importance from marketing point of view. For instance, it simply helps defining market segments and subsets of potential consumers (e.g. in terms of variables influencing purchase behaviour). The changes in the composition of these demographic characteristics can also create threats and opportunities for companies. For a company that operates in the toy industry, an expansion plan through domestic production may not be very sensible in a country such as Netherlands, where the population growth is minimum, while it might be very feasible in another country where the rate of population growth is higher, given that population composition is the only decision factor. In such cases, forecasting is the proper tool to determine the likely demand for their products and the feasibility of their (e.g. investment) plans and strategic decisions.
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