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Lecture Overview
Introduction Time and Forecasting Forecasting Techniques Quantitative Qualitative Selecting and Applying the Techniques Forecasting in Action Using Forecasts to Inform Planning Making the Move From Analysis to Planning Strategic Intent Goals and Objectives Gap Analysis Market Targeting
INTRODUCTION
a) b) This session will deal with the use of forecasting to support marketing decisions. In the previous sessions we have looked at the process of analysis; ie understanding the current situation in which the organisation finds itself. If the organisation is to plan effectively, it has now to develop a view of the future. This is where forecasting comes into planning in an attempt to know the future. Basically there are two views of the future; The future will be incrementally the same as the past. This assumption is often made for businesses operating in mature markets, selling to customers who are quite conservative (ie late majority and laggards). The future here is extrapolated from the past. The alternative view is that the future will be radically different. This assumption often is used for new businesses working in the high tech sector with products that have short life cycles and customers who are innovators and early adopters. It leads to the use of forecasting techniques that take little account of the past, relying instead on envisaging conditions some point in the future.
Forecasting consists of a number of techniques that can be used independently of each other or in combination, depending on the situation. Forecasting is used to provide quantified estimates on what marketing objectives and plans can be based. Forecasts used in marketing planning usually cover such variables as the size of the market, levels of demand for a particular product or service, competitors likely shares of the market and rates of adoption or market growth. Some entrepreneurs ignore all sound advice and go on their own gut instinct the conditions felt right. Successes here make good tabloid press, but rarely are we told of the failures of which there are many more. Basing investment decisions on instinct alone is a lottery, a high risk strategy, and one that doesnt constitute good business practice. Ask yourself, if it was your money what would you do? Stakeholders, banks etc, want more; more in the way of investigating the future to provide forecasts, not guesses.
Medium term
Long term
Example:
Short term
Millennium Dome
The Dome was open for 1 year to provide a focal point for the celebration in the UK. The forecasts needed to be focused on the short term base around asking the questions such as, What the visitor numbers will be? How much will they pay to attend? How far will they be prepared to travel What events will attract and affect visitor numbers?
Medium/Long
The medium /long term forecasting needed to focus around what will happen to the building after its use in year 2000. What can the building be used for? What are the long term effects on the locality? Will the travel infrastructure support long term development? Will the people be prepared to live and work in the area?
FORECASTING TECHNIQUES
Forecasting is not marketing research. Research seeks to understand past and current events and to gather information about customer perceptions of the future. For longer term, more strategic issues, where information is less readily available or reliable, marketing research is of less value and forecasting is required. There are two common approaches or techniques to forecasting, as shown below;
Forecasting
Quantitative
Qualitative
Quantitative
There are 2 main techniques to consider, trend extrapolation and modelling each of which seeks to answer questions such as, how many will sell, for how much, what is the potential market size? This is considered to be hard information. Trend extrapolation also known as time series analysis this technique uses statistics to examine past trends in the market and to extrapolate the trend into the future. It works well when the trend is estimated and follows a pattern. This technique views the future as incrementally the same as the past.
A brief example of how a trend line can be obtained is provided over. A trend can be calculated in many different ways weekly, monthly, quarterly bases may be used. Moving averages or centred averages can be applied to the figures. The schedule and the graph over illustrates the technique of time series using a centred four point moving average to identify a trend in visitor numbers to an attraction.
Year
Quarter
Visitors
Moving average
Seasonal variation
2002
5800
9000
35200 8800 8900 36000 9000 9100 36800 9200 9300 -2700 +5300 -2900
6000
14400
2003
6600
37600
2 9800 38400 3 4 6800 15200
9400
9500 9600 + 300
Trend
Q1
Q2
2002
Q3
Q4
Q1
Q2
2003
Q3
Q4
Trend Extrapolation
Add the following visitor numbers to those already shown below and extrapolate the trend Year Qrt Visitors MAT Moving Av Centred Av Seasonal Av 2004 1 7100 2 10000 3 7300 4 15600 2005 1 7500 2 11000 3 7500 4 16300 2006 1 7800 2 11600 3 8000 4 17000 Now produce a line drawing showing actual visitor numbers on a chart and plot the tend line. What can it tell you
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As can be seen from the schedule, the visitor numbers are listed by quarter. They are then averaged on a moving annual basis and a quarterly moving average is calculated. Then a centred moving average is produced. This is the trend and on the basis of these figures it is increasing by 200 visitors every quarter. Another important figure is the seasonal variation. This is a pattern which repeats itself year after year. The seasonal variation is expressed as a + or value. To calculate the forecast for the first quarter of 2004 the figures would be the trend for quarter 2 (2003) of 9500 plus 200 for each of the quarters 3 (2003), 4 (2003) 1 (2004) = 10100 minus the seasonal variation of -2700 = 7400. Future forecasts would follow the same pattern. Modelling A model is a representation of the situation in which a number of variables are present and whose outcome is determined by the values and interactions of these variables. The technique usually allows various assumptions and scenarios to be modelled and tested (ie What if scenario) by specifying different values for certain variables. The UK government uses complex economic models to predict future trends by examining a range of economic variables such as, disposable income, demographics etc. If a model is built to predict the impact on demand for a product given price changes, sales and profit can be deduced.
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Qualitative
This technique answers such questions as what are peoples attitudes towards a product/brand? Will people change their existing habits? How will their tastes change? Several techniques can be used here in providing what can be described as soft information. Expert Opinion An individual considered to be an expert who predicts events. This is a high risk approach since it often involves personal judgement. Consensus or judgement Forecasting This technique uses a panel of experts who produce a judgement or forecast. The problem with this is that group thinking often leads to individual views dominating others. Delphi Method Similar to the above but uses experts who work independently to each other. Their views are all shared via a series of rounds in which judgements are refined based on others views until a consensus is reached. Scenario Planning This is a process for identifying a number of possible futures., rather than a single view. It is usually made up of a group of managers who define the scenarios they consider possible and proceed through set stages to identify the variables and critical issues. The technique is valuable in situations where there is high uncertainty and complexity with only limited linkage to the past.
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Market Sensing
This is not so much a technique than a way in which information is interpreted and understood, not the way its is gathered. It is similar to scenario planning in that it focuses on managers understanding of the market place in which they will operate. Market sensing however, examines the way in which managers develop new ways of looking at the outside world, in order to improve the way they develop marketing strategies and deliver marketing programmes. Market sensing is about developing the skills of key managers. War Games Borrowed from the military again this is not really a forecasting technique, in that a team of managers take on the role of a competitor. Having been given information they are asked to identify the decisions and courses of action that one or more competitors would take. Building competitive advantage by identifying a new market or customer need is a key aspect of long term planning. Pharmaceutical companies, for example, take several years to develop and test a new drug. The choice of which products to develop is decided by the long term view of the industry and health issues in 20 years time. This cannot be undertaken by marketing research. Forecasting techniques therefore help organisations identify patterns and estimates of demand from afar and provide the foundation for planning and developing marketing actions and decisions.
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The nature of the forecast needed The time horizon it has to cover The degree of stability or rate of change of the environment The probability of significant events or shocks The degree of complexity of the environment and the factors considered in arriving at a forecast
We can of course evaluate the accuracy of the forecast on which a plan is based by comparing actual market or sales data against the forecast at the end of the forecasted period. Nb: Despite all the techniques available, inevitably the future can remain largely uncertain
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Forecasting in action
Lets review the setting up of a coffee shop and assessing future possible demand and see some of these techniques in action To start, we may need data on commuter numbers passing the shop site. We could count people passing over a series of days to get the data or we could secure passenger numbers from city research or transport surveys (if available). We could then calculate, by observation of a sample, the % of people buying coffee on arrival at the station. Lets say we obtained the following DATA; * average numbers of passengers per week day 14000 * observation of coffee buying passengers 5% We can now calculate the potential market to be 5% of 14000 or 700 customers per week day. This is the potential market size, as shown in the graph over.
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A more robust forecast however would come from looking at passenger flows each week day as well as over a period of time and then use averages to predict the market size.
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Mon Tues Wed Thur Fri Sat Sun
no of Communters coffee buying - 5%
Here patterns can be seen to emerge over a quarter and a simple analysis will help us predict current fluctuations in demand.
90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1 3 5 7 9 11 13 Commuters Coffee market
Here we have added a trend line showing the moving average to the likely flow of commuters over a quarter.
70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1 4 7 10 13 16 19
Trend
Commuters Coffee market Expon. (Commuters)
The average is up and down but the overall trend is shown to be down. This trend could be a worry for any future investment in the coffee shop. However, the trend may be simply seasonal.
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Activity
Staying with the coffee shop:
1. What trends would you expect to see over the year when measuring commuter traffic volumes? What are the peak-demand times?
2. What fluctuations would you expect to see in coffee buying patterns, over the week and during the day?
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A forecast of demand, sales or market share over time will incorporate conclusions drawn from the analysis of the current situation and even views of experts about the future. There are a whole host of factors that can affect demand or sales projections, either from outside the business or within it as listed below. External Factors Seasons Holidays Special events Competition, direct/indirect Productivity changes Family structures Births and deaths Fashion and styles Population changes Political events Weather Internal Factors Product changes, style, quality Service changes, type, quality Shortages in production capability Shortages in inventory Shortages in working capital Promotional effort changes Sales motivation schemes Price changes Distribution methods Credit policy changes
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A word of warning because of the type of variables that can affect a forecast, I would caution prudence. Very often an expert opinion or quantitative data analysis may suggest say, a 10% uplift in sales for the next 2 years. A cautious forecaster may decide to include a contingency by adding 10% and then taking back 5%. This process is called sensitivity analysis. Remember once a forecast has been made and accepted, they become the bedrock on which objectives for the plan are set and strategies developed. Not surprising so much effort is placed on obtaining as accurate a forecast as possible.
Seasonal variation in the trend would highlight the need for more data over a year in this case. This would enable us to apply classical decomposition of the data and plot trends by holiday fluctuation, as well as track the impact of the seasons (ie weather) on buying coffee volumes. If it was your money you were about to invest which approach would you wish to adopt?
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STRATEGIC INTENT
Before the organisation can determine its strategy, it needs to establish some boundaries around its area of operation so as to be able to define the future direction of the business. Such definitions seek to answer the question,
While it might seem a simple question to answer, ask yourself what business is P&O Ferries in? Is it in the business of passenger and freight, floating hotels, or holidays? The answer to this question is not so straightforward requiring considerable thought and discussion the outcome of which will determine what the companys strategy will be and how it will operate.
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Mission
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For any mission or vision to be regarded by staff as of value it needs to * * * Be credible Be Unique Be Specific Employees have to believe and take ownership of it Must represent the host organisation and its stakeholders not just anybody Specify the core capabilities of the organisation
Motivate
Some statements tend to be rather generic, phases such as we will provide excellent quality and customer service are commonplace. The trend today is to make mission statements more specific and offer greater meaning and ownership to employees. It should reflect the drivers of the external environment, the needs of the stakeholders and define a future direction.
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There are 4 main sources of influence acting upon the core meaning behind an organisations existence. Johnson and Scholes refer to these as: Corporate Governance To whom should the organisation be accountable and within what regulatory framework should executive decisions be overseen and reviewed. Some groups that the organisation is meant to serve, such as shareholders can be very remote from the managers actually running the company. Thus the regulatory framework acts to constrain management freedom and protect the rights of stakeholders. Stakeholders These include such groups as customers, suppliers, shareholders, employees, financiers and the wider social community. Like it or not, in reality the interests of one of the groups is furthered more than the others. Business Ethics An ethical dimension often affects the mission and objectives that an organisation can fulfil. This normally relates to the organisations social responsibility to stakeholder groups. Cultural Contrast The aspects of mission that are prioritised will reflect the cultural environment that surrounds the organisation.
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Mission Statements
Examples of mission statements are given below (neither are exhaustive) The Scottish Power Mission Statement To be recognised as a highly rated utility based company trading in electricity, other utility and related markets providing excellent quality and service to customers and above average total returns to investors. GLYNDWRs Mission Statement GlyndwIs mission is to provide quality higher education and research in a welcoming, friendly and supportive environment to meet individual, local , national and international needs. Glyndwrs vision is to be: a market led, student centred university of international significance that is open to all. To make a significant impact on the economic well being of North East Wales. To provide vocational and multi-vocational higher education. To create and ever widening community of learning. To act as an agent of social cohesion.
Activity Please review the above statements and comment on whether they reflect the true values and beliefs of the organisations, employees, the community, supplier and customers etc. From your general knowledge of Glyndwr and experiences as a customer, discuss the extent to which you feel the university is facilitating its mission.
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In this regard it is stressed that objectives must be SMART. Specific Measurable Aspirational Realistic Timescaled clearly stated so all understand whats required tangible targets that can be measured high enough to challenge and motivate individuals, but not so high as to demoralise achievable targets based on thorough strategic analysis all objectives need to be timescaled to measure performance against a set deadline
Example:
To achieve 10% annual growth in earning share To achieve 20-25% return on equity To achieve 27% return on capital employed
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Druker suggests there are a number of key areas which an organisation should develop objectives. Market Standing - Relates to the organisations success in the market. Objectives can be a statement of the total sales or the market share the organisation seeks. Innovation - Relates to targets set for innovation in product and service development, cost reduction, financing, operational performance, human resource and management of information. Productivity - Objectives can be set for the productive use of resources ie the number of items produced from say a machine, or the number of tables served by each waiter. A reduction in waiting times for hospital appointments etc. Physical and Financial Resources - Deals with acquisition and use of resources Profitability - A range of targets can be established for financial return including earnings per share, ROCE profit per sale etc. Employee Performance - Specific performance criteria can be set against which actual achievement can be measured ie sales targets, production output per hour. Nb: There are dangers for organisations here who see objectives as one of the above areas as over-riding. A machine tool manufacturer Komatsu concentrated so much on competitive positioning objectives that its main concern became its position relative to its main competitor, Caterpillor. As a result Komatsu ignored emerging areas where there were opportunities for growth. This began to lead to decline in the organisations profitability until corrective action was taken (Pearce and Robinson, 1997).
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Hierarchy of Objectives Objectives cascade down through the organisation structure effectively forming a hierarchy of objectives. The hotel example provided demonstrates how the objective and strategy at one level leads to an objective and strategy at other levels. Level Example: Objectives Edinburgh Hotel Strategy Corporate Increase gross operating profit by 30% in 3 years. By becoming the market leader in luxury hotel market in Edinburgh with a 25% market share. By providing the best facilities for key market segments. By providing the best standards of service By gaining greater awareness for the hotel facilities. By building an informal restaurant By refurbishing the hotel to higher standards By adding a fitness club By improving bus facilities By retraining staff By providing motivational customer care schemes By promoting new restaurant By re-launching hotel
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Corporate Objectives
At the corporate level objectives relate to the organisations overall direction in terms of its general attitude towards growth. At this higher level, managers of the Edinburgh Hotel are likely to be concerned with long term profitability objectives ( not for profit organisations may be concerned with the efficient use of resources). In the example, the hotel is concerned with increasing operating profit by 30% in 3 years. The strategic method proposed to achieve the objective is by growing its market share to 25% of the Edinburgh market. At this corporate level expanding market share becomes a strategy for achieving the organisations principal objective. Marketing Objective/ Functional At this level expanding market share becomes an objective. Each functional area, Finance, HRM, Operations and Marketing will develop a strategy to support this objective. In terms of the marketing function it is concerned with product/services that should be sold into markets. In the example, the marketing function strategies are to provide the best facilities in Edinburgh for key market segments, provide the best standards of service and ensure they are adequately promoted. Operational Objectives At this level the functional level of marketing strategy becomes the objective. Strategies have to be developed for each element of the marketing mix to support these operational objectives
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The hierarchy of objectives ensures at each level, the objectives that are developed are consistent with the objectives above them. However, there has to be a strong co-ordination between functional areas otherwise conflicting actions may be taken as each functional area conducts independent actions in order to fulfil their objectives.
Example; in order to fulfil the hotels corporate objectives of 30% increase in profitability over the coming 3 years, marketing could develop strategies to increase sales in order to meet this objective. At the same time hotel operations could be operating at optimum capacity for the bulk of the days in the week and so any increase at these times would increase its costs. Without co-ordination and communication functional areas can effectively work against each other.
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2.
Internal perspective
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4. Financial perspective
An organisations ability to create value is inextricably linked to its capacity to continually improve through innovation and learning This allows an organisation to see how the business looks from the shareholders point of view. Financial performance measures the success not only of its strategy but its implementation.
The great thing about the balanced scorecard is it provides consistency between objectives. However, it also widens the view managers have of the business rather than simply focusing on financial measures.
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The BSC is cascaded down through the organisation in order to focus employees on the key business goals. It has three levels, the highest is the strategy review card, next is the operations review card and the third is the business unit card. This cascading ensures that strategic objectives are translated into everyday tasks and that employees can see how their everyday activities contribute towards the companys long-term goals.
At the business level, CSFs were developed for each perspective of the BSC (along with examples); Financial Customers Processes Competence profit, income from operations working capital rank in customer survey, market share, repeat order rates, complaints, brand index % reduction in process cycle time, order response times, capacity utilisation leadership competence, training days per employee, % of patents protected
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1. 2. 3. 4. 5. 6.
As a result of cascading the BSC down from the corporate level to the business unit level, 6 key indicators were identified; Profitable growth (drives the financial perspective) Customer delight (drives the customer perspective) Employee satisfaction (drives the customer perspective) Drive to operational excellence (drives the process perspective) Organisational development (drives the competence perspective) IT support (drives the competence perspective) These BSC metrics are used each quarter to review the performance of each business unit. In order to share the results, Philips Electronics employs a traffic-light reporting system to indicate how actual performance compares with targets ( green- meeting target, yellow in line performance, red below target). This highly visible system is easily interpreted by staff. The implementation of the BSC has enabled Philips Electronics to identify their CFS and translate these into operational plans, where employees can see how their everyday activities contribute towards company goals. Source : adapted from Gumbus, 2002
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GAP ANALYSIS
The process of analysis and evaluation effectively establishes the current situation that the company finds itself in and allows forecasts to be made of how the company will perform in the future. The mission/objectives set by an organisation allows it to project what the companys actual performance will need to be to achieve those objectives. It is at this point that the organisation can calculate the gap between these two points. A valuable technique for setting objectives and realigning these positions is called Gap Analysis This simple technique identifies the gap between where the organisation is now and where it wants to be as illustrated over
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Sales (M)
Corporate Objective
Strategic Gap
Corporate Forecast
years
In the example, a business has to fill the gap between its current forecasted sales and the corporate objective. Using forecasting techniques it has developed a forecast showing how demand is growing, but if the organisation wants more represented by the divide then marketing strategy has decide how to fill the gap.
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MARKET TARGETING
This is a process of selecting markets around which organisations will concentrate their market objectives. It builds on segmentation analysis by identifying the selection criteria and use of models for selecting the appropriate markets to target. Target Marketing Process Market targeting is part of a wider strategic process called target marketing. First developed by Phillip Kotler it is a 3 stage process of identifying market segments, evaluating and selecting markets to serve and finally developing a position for each segment selected. A key principal of marketing is that not all customers are the same. By grouping customers into clusters or segments, each with its own common set of characteristics (i.e. age, sex, income, location, business type etc) an organisation can focus on those groups that are most attractive. The target marketing process allows us to do just that as shown over.
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Stage 2
Market Targeting
Evaluate commercial attractiveness of each segment. Select one or more segments. Direction
Stage 3
Product Positioning
Develop detailed product positioning for selected market segment. Develop a marketing mix for each segment selected. Strategy (to be discussed later)
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The definition of market is a useful technique for marketing planning. If a company is unhappy with its sales performance it can do 1 of 4 things.
Attempt to attract a greater % of its target market Expand into other available markets Lower its prices to expand the size of the available market Try and grow the potential market (via advertising and selling etc) What are target markets? A key challenge facing Glyndwr is to decide which products and customer segments to focus on (i.e. target markets) An analysis could divide Glyndwrs market several ways such as; Product Segment - Academic business, engineering, science, health, sport, research etc. Non-academic areas catering, accommodation, facility hire. - NVQ/foundation, graduate, post-graduate, professional. - groups of customers defined by need characteristic (i.e. fulltime, part-time, corporate, domestic, international).
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Business Area
Domestic F/T International F/T Part-time Corporate International
Foundation
Graduate
Postgraduate
* * * * *
*
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Identify which of these target market segments are most appropriate for NEWI to keep, develop or let go. Several portfolio models can be used here: G.E. Screen - Relates to industry attractiveness and business strengths. Shell Directional Policy Matrix - Relates to prospects for sector profitability and organisational capabilities. Abell and Hammond Opportunity Matrix - Relates to market attractiveness and competitive position.
The Opportunity Matrix This approach requires us to determine the criteria for assessing each market segment on the basis of market attractiveness and competitive position. The following has been provided as a guide for Glyndwr which has been used to draw up an Opportunity Matrix.
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Competitive Position Criteria Market share Relative capabilities Brand awareness Strengths and weaknesses
The above criteria can be used to assess each market segment, such as; domestic, full and part time students locally and nationally, international students, corporate students etc. Where possible you would score each market using the criteria for plotting the results on a matrix. However, as in most cases we do not have sufficient data to enable us to plot all of the above in a quantitative way, and so a qualitative element of subjectivity is inevitable, as shown over.
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Market attractiveness
Medium
Domestic P/T
Key
Low
High overall attractiveness
Local Corporate
You are now in a position to use the guidance provided in this type of model to make your selection of target markets for Glyndwr. You can also use the matrix to justify your decisions. High overall attractiveness Medium attractiveness Low overall attractiveness Invest and nurture Maintain growth and manage earnings Harvest and withdraw
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