ENVIRONMENT ANALYSIS – FORECASTING

OVERVIEW

Objective

! To discuss the various forecasting techniques available.

FORECASTING

FORECASTING
TECHNIQUES

! Time series
! Analogy method
! Uncertainty
! Delphi
! Brainstorming
! Scenario planning
! Advantages and disadvantages
! Strategic life-cycle

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1 FORECASTING TECHNIQUES

1.1 Introduction

These are used in the planning process to predict, for example, stakeholders’
expectations, likely performance, environmental developments and the possible effects
of adopting alternative strategies.

2.1 Time series analysis

Extrapolation is the most usual method of forecasting. It is based on the assumption

that the course of events will continue in the same direction and with unvarying speed
(or with steadily growing or diminishing speed – a logarithmic extrapolation).

The basis of an extrapolation will be knowledge on the recent development of the

phenomenon. You will need at least two (although usually you have more) sequential
observations made at known points of time. The observations are usually recorded as
quantitative variables, measured with any type of scale. In other words, your material
consists of a time series.

If you have more than two observations, you have the option of choosing the number of
observations that you will base the extrapolation on. If you feel that the very last
observations have better predicting capacity than the earlier ones, you may prefer to
disregard the earlier observations. An alternative is to give more weight to the later
observations than to the earlier ones. If you decide to use a large number of
observations (in other words, you are extrapolating the trend) you will probably wish to
make the calculations with a regression analysis program.

Sometimes common sense, research, or other source of general knowledge tells you
that the evolution that you are forecasting is subject to pre-set limits or laws which
dictate not the nearest events but rather a more distant future. You may, for example,
be studying the growth of a plant knowing that the steady growth will eventually reach
an end. If that is the case, you may combine two forecasting methods: you extrapolate
just the nearest values, while basing the forecast of the later values on a general law.

Typical examples of such long-term developments are:

! The s-curve is usual if the growth has natural limits, as is the case with
plants, and with the natural resources of the earth.

! the “catastrophe curve” describes the end of a development which has had a
smooth, gradual start but is nevertheless eventually expected to reach a
complete extinction, perhaps an abrupt one.

Besides extrapolating quantitative variables, like above, the study may be qualitative
or verbal, like many of the socio-economical trends that Naisbitt describes in the book
Megatrends (1982). Another example is the trends in the fashions of clothing.

2.2 Analogy method

All the best forecasting methods utilize some kind of model that is assumed to portray
relations between the various aspects, attributes, and variables of the predicted events.

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One method of acquiring such a model is borrowing it from a “foreign” system. You
must have good reasons to believe that both systems will behave in the same way. You
then select a foreign system that has reached a relatively “later” or “more mature” stage
in development than the “home” system you are forecasting (this is the crucial point in
the logic). Usually the foreign system, or its environment, has several features that
differ from the one to be predicted, to the detriment of the credibility of your
prediction. So you will probably have to make a number of corrections. A typical
difference between the systems concerns their size (besides the obvious difference that
the “foreign” system has been measured in the past and the “home” system is to be
continued into the future).

Typical instances of the analogy method are forecasts of national economies. The
foreign system is taken from the USA. or any other “developed” country, and this
model is then applied to predict the national economy of a “less developed” country.
Typical variables predicted this way relate to industrial production, the Gross National
Product, and to figures describing consumption like the number of cars and the amount
of traffic.

You can use the analogy method even when your models are qualitative. An example
of this is Alvin Toffler's book The third wave (1980), where the wave analogy is used
to describe the evolution from agricultural to industrial society, and later to the
information society. Oswald Spengler, in the book Untergang des Abendlandes,
explains how the ancient cultures of Egypt, Rome and many other countries unfolded
as plants or animals which were born, grew, flourished, declined, and died; Spengler
made the prediction that Western culture would analogically follow the same pattern.

2.3 Uncertainty

There are not too many methods for predicting the reliability of your predictions. One
of the best is triangulation: making parallel forecasts with different methods if it is
possible. If different methods lead to dissimilar forecasts, it gives an idea of the range
of the uncertainty.

Sensitivity analysis is another method which, however, works only with numerical
models. Most forecasting methods allow you to calculate what the result will be if one
of your starting assumptions or one item in the input data is varied. Or, if you believe
that you know the probable error of one of your assumptions, you may use this
knowledge to calculate the probable error of the resulting forecast.

Once the researcher has developed for himself an approximation of the likelihood of
the forecast, the next task is to disclose this likelihood to his public as well. Many
usual methods of presenting the forecast (like diagrams) are very exact, indeed their
very exactness often badly corresponds to the uncertainty of the forecast. Instead, the
researcher should select such a presentation of the forecast which gives the right
impression of the degree of uncertainty. There are, indeed, a number of methods which
can be used to describe the probable error or likelihood of a forecast:

! The likely variation. This is the normal fashion when using the Delphi
method which nearly always produces a large set of different prophecies
made with various methods. If the questions in the Delphi questionnaire are
quantitative, you will also be able to calculate an expression for the
dispersion of the responses, eg their range. Sometimes, it will also be
possible to calculate the probability that the factual outcome will not exceed
the range.

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! A fuzzy curve. This can be accomplished by drawing the curve as a thick

line or by free hand.

! A fuzzy scale. For example, the Club of Rome deliberately chose to omit the
vertical scales of the variables and also made the horizontal scale somewhat
vague (consisting of just the values 1900 and 2100). This was because they
wanted to indicate that the numerical values were approximate.

! Verbal explanation, even when the forecast has been quantitative, can be
used to describe the likelihood of the forecast. The drawback is that people
have quite differing notions of what is meant by “probable” or “likely”, for
example.

! Parallel scenarios. Parallel scenarios are quite easy to fabricate if you have
a mathematical model as basis for the forecast: all that is needed is to feed in
the model several alternative sets of data. For example, the Club of Rome
made a series of scenarios by feeding different data into the single causal
model of the pertinent relations.

2.4 The Delphi technique

The most primitive method of forecasting is guessing. The result may be rated
acceptable if the person making the guess is an expert in the matter. An important
thing to note is that guessing is the only method where we can make use of tacit
knowledge that the specialist has not been able to express as exact words or numbers.

The best method for eliciting such a forecast from the expert is the unstructured
interview. The method of interviewing allows you to inquire into the reasons and
explanations for the presented forecast, which you might also choose to criticise and
thus try to reach an improved forecast. When interviewing an expert you may also
learn something that you can later use if you prefer to construct your own forecasts
with other methods.

You can sometimes obtain names and addresses of experts who live far away and
whom it would be difficult to interview. To consult such experts, you may resort to a
questionnaire instead of an interview. If you wish to question several persons
simultaneously, you may consider using the Delphi method.

In the Delphi method, the researcher directs identical questions to a group of experts,
asking them to give their guesses on the future development of the specified topic. In
the next step, the researcher makes a summary of all the replies he has received, sends
this to the respondents and asks if any expert wants to revise his original response.

As it is difficult to make summaries of other than quantitative responses, the questions

that are used in the Delphi process are usually quantitative, eg “What will the price of
crude oil be in 20 years?” On the basis of this type of response, the researcher will be
able to calculate eg the mean and the range. One advantage of the method is that you
can readily use the range as a measure of the reliability of the forecast. Of course,
nothing prevents researchers from using qualitative or any other type of questioning if
the nature of the research so requires.

If the respondents are amenable to the extra effort, they may be asked to justify their
opinion, especially if it differs from that of the majority.

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The Delphi procedure is normally repeated until the respondents are no longer willing
to adjust their responses.

The Delphi method is not very reliable. Results of Delphi questionnaires are often later
found to have predicted the real course of events remarkably badly. The majority of
even renowned specialists can make mistakes, and the odd person who is later found to
have predicted right would perhaps never have been elected to the Delphi group of
experts. If you had predicted the collapse of the Berlin wall one year before it
happened, you would probably have been accused of being no expert in politics.

2.5 Brainstorming

A group from all levels of expertise join together to propose solutions to a particular
problem. During discussions, no suggestion is ever ruled out as being “too ridiculous”.
Once solutions have been gathered they are then discussed in full.

The brainstorming group then eliminate the less feasible ideas and use the remaining
for their predictions

2.6 Scenario planning

Pictures are drawn up of possible future situations dependant on various decisions

being made or factors in existence. Management then produce a different version of
the plan for each contingency or combination of contingencies.

Scenario planning may be as simple as having an “optimistic” plan and a “pessimistic”

plan, or may consist of a huge number of detailed plans for likely situations.

2.7 Advantages and disadvantages of forecasting

2.7.1 Advantages

! Processes involved provide and analyse relevant information

! Emphasises the variables
! Better than guesswork

2.7.2 Disadvantages

! Rarely accurate in predicting ultimate outcomes

! Use of statistical/mathematical techniques may imply unachievable accuracy
! Inherent limitations of techniques involved

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2.8 Strategic life cycles

Life cycle analysis (LCA) aims at specifying the consequences of products or services
from-cradle-to-grave. LCA is one of the tools that has received much attention from
both the scientific world and the policy makers. Much effort has been put and is being
put into the development of the LCA methodology and the establishment of LCA
software and databases.

Although the methodology is by no means finalised and a number of important issues

still must be resolved, environmental LCA is currently being standardised within the
ISO framework (ISO series 14040).

The main characteristics of LCA can be formulated as follows:

! LCA is a study of different options to supply a given function. Thus, it links

changes in products (goods and services) in the economy to impacts on the
environment.

! LCA follows a cradle-to-grave approach: all processes connected with the

function, from the extraction of resources until the final disposal of waste, are
being considered. This cradle-to-grave approach may induce companies to
look beyond their gates, or governments to detect unexpected side-effects of
their policies;

! LCA is comprehensive with respect to the environmental interventions and

environmental issues considered. In principle, all environmental issues or
problems connected with the function are specified as resulting from
extractions, emissions and other physical interventions.

! LCA may provide quantitative or qualitative results. With quantitative

results it is easier to identify problematical parts of the life-cycle and to
specify what can be gained by alternative ways to fulfil the function.

The technical framework for the LCA methodology as it is defined in ISO 14040
consists of four phases:

1. Goal and scope definition

2. Inventory analysis
3. Impact assessment
4. Interpretation

These phases are not followed just one after the other. It is an iterative process, which
can be followed in different rounds achieving increasing level of detail (from screening
LCA to full LCA), or which may lead to changes in the first phase because of the
results of the last phase

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FOCUS

You should now be able to:

! understand statistical forecasting techniques

! understand the Delphi technique

! understand scenario planning

! understand strategic life cycles.

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