The Business Book

(Joyce) #1


Shares on the stock market are
affected by many factors, including
some that are difficult to predict—
such as world events, severe weather,
and global economic forecasts.

See also: Crisis management 188–89 ■ Balancing long- versus short-termism 190–91 ■ Contingency planning 210 ■
The marketing model 232–33 ■ Lean production 290–93 ■ Time-based management 326–27


uses numerical data such as sales
patterns. Also in this category are
equations that make assumptions
about future sales by drawing
on a company’s historical data, and
market research that indicates the
number of potential customers for
a particular product or service. In
addition, marketers look at external
factors beyond the company’s
control, such as the state of the
economy, and make simulations of
how quantitative forecasts would
be affected by external factors.

Unforeseen circumstances
Even the most carefully planned
forecast can be thrown out by
unforeseen events. In the travel
industry, for example, it is difficult
to predict performance because
factors such as weather and world
events have a significant impact
on customer choices.
The effect of world events can be
seen in the sale of luxury watches to
China. From 2009 to 2011, high-end
watchmakers in Europe enjoyed
growing sales in China, but from
late 2012 a dramatic decline

began—as much as 24 percent in a
single quarter. This was partly due
to a slowdown in China’s economic
growth, which exporters might have
been able to take into account; but
what could not have been expected
was a high-profile incident in the
Communist Party’s crackdown on
corruption. A party official in
Shaanxi province was fired after
images of him wearing various
luxury watches were found on the
Internet; one timepiece was worth
more than $32,000. The story made
front-page news across China in

September 2012. Luxury watches
became publicly associated with
corruption, and demand slumped.

Is forecasting worthwhile?
Management consultant Peter
Drucker was scornful of forecasting.
“We must start out with the premise
that forecasting is ... not worthwhile
beyond the shortest of periods,” he
wrote in Management: Tasks,
Responsibilities, Practices (1973). He
had reason to be wary, having
declared in a 1929 economic journal
that stock prices were bound to
keep rising, just a few weeks before
the Wall Street Crash. International
auditing company KPMG maintains
that most companies produce
unrealistic forecasts that can be off
by up to 13 percent on average.
According to KPMG, better data
management, scenario planning,
and forecasts that are continually
updated rather than made long-term
can increase accuracy. Despite the
difficulty of accurate forecasting, it
remains the primary means by
which marketers drive the business
decisions of a company. ■

Accurate forecasting

Producing an accurate forecast
depends on the company’s
required lead time—the time
from order placement to
customer delivery. The longer
the lead time, the greater the
error in forecasting figures. One
theory holds that if lead times
are reduced by 50 percent,
forecasting errors will also be
reduced by 50 percent.
Since the 1990s management
theorists, including Dr. Edmund
Prater at the University of Texas,
have advocated that forecasting

accuracy can be optimized by
creating a demand-driven supply
chain, which uses information
and technology to shrink lag
times between supply decisions
and actual demand. Thus the
need for forecasting is reduced
when business activities become
more demand driven. For
example, when Wal-Mart asked
stores to place orders every two
weeks rather than monthly,
inventories reduced because
accurate forecasting increased in
line with the shorter time frame.

The only thing we know
about the future is that it
will be different.
Peter Drucker
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