WRITTEN

Assignment REPORT
on the topic:
in BA107:

PHILIPPINE BUSINESS ENVIRONMENT

Submitted by: Jessica E. Laran

Environmental forecasting

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 Introduction:

After collecting relevant information on environmental factors to be

analyzed, forecasting of their likely behaviour in many cases is required
as information collected shows the present pattern. For this purpose
forecasting is required which has become the general pattern throughout
the world. Forecasting is the process of estimating the relevant events of
future, based on the analysis of their past and present behaviour.

Definition:

Estimating the intensity, nature, and timing of the external forces that
may effect the performance of a firm, disrupt its plans, or force a
change in its strategies.

Need / importance of environmental forecasting:

Today, changes are rapid and too frequent and in a way quite
necessary for overall growth of economy. There have been quantum
changes from 1970 onwards and today in the business world anything
that is consistent is only change. In the times to come when changes
would predatory, it would be crucial for managers to invent new ways
of surviving in the ever changing business environment. They would
have to build up build up the capacity of the firm to face the onslaught
of changes by being more agile and flexible for adapting themselves to
changes. They would have to find out new ways of creating
opportunities of profitability and growth. New rules of business will
have to be written to meet over-increasing expectations of drivers of

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business. To be prepared for such on going eventualities, managers
will have to prepare themselves for really understanding the remote
and the immediate environments of business and mechanisms of
changes that affect their industry.

The changes have not only affected smaller companies but also the
giants of various industries. In fact the organizational models those
are available with us today for giant companies prove as their
handicap in their process of adaptation due to their large inertia and
consequent slower response towards changes in environment. Hence
there is an urgent need for companies shed-off extra inertia and
develop agility since these large corporations will also be involved in
the transition process. For example: the situation that the automobile
industry is facing today is due to incorrect business environment
forecasting for which many giants are paying a price through under-
utilized manufacturing capacity, piling up of inventories and the
locked up capital and operating cash.

Forecasting does not promise flexibility, it enhances the capability of

reacting faster at low costs.

Use of Forecasts

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Plans are often confused with forecasts. Plans are sets of actions to help
deal with the future. Forecasting (or predicting) is concerned with
determining what the future will be. A plan is an input to the forecasting
model. If the forecasts arc undesirable, then one might change the plan,
which, in turn, could change the forecast. The point to remember is that
good plans depend on good forecasts. In practice, forecasts are
sometimes used to motivate people. More properly, people should be
motivated by plans (e.g., “meet this plan. And we will pay you a bonus of
25 percent”). Decisions have often been made, before any formal
forecasting has been done. In such cases, the forecast serves little
purpose other than to annoy people if it conflicts with their decision or
to please them if it supports their decision. For the forecast to be used
effectively, it should be prepared before decisions arc made. Not only the
expected outcome, but also other likely outcomes (such as the best and
worst outcomes) should be forecast. If the worst outcome poses too much
risk, forecasts should be made for alternative interventions.

Which Area  and Why Use Forecasts:

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Forecasts are needed for marketing, production, purchasing, manpower,
and financial planning. Further, top management needs forecasts for
planning and implementing long-term strategic objectives and planning
for capital expenditures.

1. Marketing managers use sales forecasts to determine

optimal sales force allocations, set sales goals, and plan
promotions and advertising. Market share, prices, and
trends in new product development are also required.
2. Production planners need forecasts in order to: schedule
production activities, order materials, establish inventory
levels and plan shipments.
3. In planning for capital investments, predictions about
future economic activity are required so that returns or
cash inflows accruing from the investment may be
estimated. Forecasts are needed for money and credit
conditions and interest rates so that the cash needs of the
firm may be met at the lowest possible cost. Forecasts also
must be made for interest rates, to support the acquisition of
new capital, the collection of accounts receivable to help in
planning working capital needs, and capital equipment
expenditure rates to help balance the flow of funds in the
organization.
4. Sound predictions of foreign exchange rates are
increasingly important to managers of multinational
companies.
5. Long-term forecasts are needed for the planning of
changes in the company’s capital structure. Decisions on

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 issuing stock or debt to maintain the desired financial
structure require forecasts of money and credit conditions.
6. The personnel department requires a number of forecasts
in planning for human resources. Workers must be hired,
trained, and provided with benefits that are competitive
with those available in the firm’s labor market. Also, trends
that affect such variables as labor turnover, retirement age,
absenteeism, and tardiness need to be forecast for planning
and decision making.
7. Managers of nonprofit institutions and public
administrators also must make forecasts for budgeting
purposes. Hospital administrators forecast the healthcare
needs of the community. In order to do this efficiently, a
projection has to be made of: growth in absolute size of
population, changes in the number of people in various age
groupings, and varying medical needs these different age
groups will have.
8. Universities forecast student enrollments, cost of
operations, and, in many cases, the funds to be provided by
tuition and by government appropriations.
9. The service sector, which today accounts for two-thirds of
the U.S. gross domestic product, including banks, insurance
companies, restaurants, and cruise ships, needs various
projections for its operational and long-term strategic
planning. The bank has to forecast: Demands of various
loans and deposits Money and credit conditions so that it
can determine the cost of money it lends.

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 Common Features and Assumptions Inherent in Forecasting:

As pointed out, forecasting techniques are quite different from each

other. But four features and assumptions underlie the business of
forecasting. They are:

 Forecasting techniques generally assume that the same

underlying causal relationship that existed in the past will continue to
prevail in the future. In other words, most of our techniques are based
on historical data.
 Forecasts are rarely perfect. Therefore, for planning purposes,
allowances should be made for inaccuracies. For example, the company
should always maintain a safety stock in anticipation of a sudden
depletion of inventory.
 Forecast accuracy decreases as the time period covered by the
forecast (i.e., the time horizon) increases. Generally speaking, a long-
term forecast tends to be more inaccurate than a short-term forecast
because of the greater uncertainty.
 Forecasts for groups of items tend to be more accurate than
forecasts for individual items, because forecasting errors among items in
a group tend to cancel each other out. For example, industry forecasting
is more accurate than individual firm forecasting.

Selection of Forecasting Method:

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The choice of a forecasting technique is influenced significantly by the
stage of the product life cycle and sometimes by the firm or industry for
which a decision is being made. In the beginning of the product life
cycle, relatively small expenditures are made for research and market
investigation.

During the first phase of product introduction, these expenditures start

to increase. In the rapid growth stage, considerable amounts of money
are involved in the decisions, so a high level of accuracy is desirable.
After the product has entered the maturity stage, the decisions are more
routine, involving marketing and manufacturing. These are important
considerations when determining the appropriate sales forecast
technique.

After evaluating the particular stages of the product and firm and
industry life cycles, a further probe is necessary. Instead of selecting a
forecasting technique by using whatever seems applicable, decision
makers should determine what is appropriate.

Some of the techniques are quite simple and rather inexpensive to

develop and use. Others are extremely complex, require significant
amounts of time to develop, and may be quite expensive. Some are best
suited for short-term projections, others for intermediate- or long-term
forecasts.

What technique or techniques to select depends on six criteria:

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What is the cost associated with developing the forecasting model,
compared with potential gains resulting from its use? The choice is one
of benefit-cost trade-off.

 How complicated are the relationships that are being

forecasted?
 Is it for short-run or long-run purposes?
 How much accuracy is desired?
 Is there a minimum tolerance level of errors?
 How much data are available? Techniques vary in the amount
of data they require.

 
Quantitative models work superbly as long as little or no systematic
change in the environment takes place. When patterns or relationships
do change, by themselves, the objective models are of little use.

It is here where the qualitative approach, based on human judgment, is

indispensable. Because judgmental forecasting also bases forecasts on
observation of existing trends, they too are subject to a number of
shortcomings. The advantage, however, is that they can identify
systematic change more quickly and interpret better the effect of such
change on the future.

Techniques of forecasting

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  Econometric Models:

Econometric models use information about causal relationships to make

forecasts. The causal relationships should be specified by using domain
knowledge (i.e., information that a manager has about the problem).
Well established theories should also be used: thus, we know that income
should, in most cases, be positively related to demand for an item, and
price should he negatively related. Given a description of the product
and market, we can also use prior research to determine the
approximate magnitude of the relationship. So if a community makes it
more expensive to pollute, one would expect less pollution if the plan is
properly designed, and perhaps more graft if the plan is poorly
designed. Theory or domain knowledge can he used to identify key
variables, specify the direction and form of the relationships, and set
limits on the values that coefficients may take.

While extrapolations assume that everything continues as in the past,

econometric models assume only that the relationships will remain
constant. Given an estimate of the relationship of the causal variables to
the dependent variable, one must forecast changes in the causal
variables in order to calculate a forecast for the variable of interest.

Econometric methods arc most useful where

(1) Large changes are expected;

(2) A priori information about relationships is strong;

(3) Good data are available; and

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(4) Causal factors arc easier to forecast than the variable of interest.
These conditions are often encountered in forecasting

One of the major advantages of econometric methods, in comparison

with other forecasting methods, is that alternate interventions can be
compared with one another. In effect, one is comparing results in an
objective way with an attempt to hold all other influences constant.

The technology for econometric methods has become much more

complicated since the least-absolute value method was introduced in
1757, followed by the least-squares method in 1805. But highly complex
procedures are not easily understood by decision makers. Worse, little
validation research has been conducted on complex procedures. What
has been done suggests that complexity seldom leads to improved
accuracy.

 Expert Systems:

Expert systems seem ideal for cases involving environmental forecasting.

One can draw upon the expertise of the best experts. If econometric
models have been developed, the resulting information about
relationships could be incorporated into the expert system. Further
refinements could he made by quantifying experts’ rules by judgmental
bootstrapping. Information about citizen responses could be
incorporated by using conjoint studies. Thus, expert systems allow for
the systematic and explicit integration of all extant knowledge about a
situation. Expert systems are being used for a variety of problems.
Unfortunately, information about the predictive validity of expert
systems is limited but positive.

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 Extrapolation:

Extrapolation involves making statistical projections using only the

historical values for a time series; it is an appropriate tool to use when
the factors will continue to operate as they have in the past.
Furthermore, if one has little understanding of the causal factors, it
might be best to use extrapolation.

Extrapolation has some useful characteristics. For one thing, it is fairly

reliable. If agreement can be reached on the definition and length of the
time series and on the statistical procedure, the same forecast will be
achieved irrespective of who makes the forecast. Extrapolation can also
be relatively simple and inexpensive. The opportunities for the
introduction of biases in extrapolation are limited. Perhaps the major
potential source of bias is that extrapolative forecasts can differ
substantially depending on the time period examined. This bias can be
reduced by selecting long time series and by comparing forecasts when
different starting and ending points are used. Another source of bias
associated with extrapolative forecasts involves the selection of the
extrapolation method. To combat this bias, one should use simple, easily
understood methods and preferably more than one method.

 Judgmental Methods:
Judgmental forecasting involves methods that process information by
experts, rather than by quantitative methods. The experts might have
access to data, and their approach might be structured, but the final
forecasts arc the result of some process that goes on in their heads.

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Before discussing tools that aid judgmental forecasting, it is important to
mention one tool that is widely used and well accepted, but which
typically harms accuracy and leads to an unwarranted gain in
confidence. The culprit is the traditional (unstructured) group meeting.
Besides the biases inherent in unstructured meetings (such as the
influence of the boss), the group’s information is likely to be poorly used.
Judgmental forecasts are susceptible to various biases. To reduce
biases, one should select unbiased experts (i.e., those who have nothing
to gain from a forecast that is either too high or too low). In addition,
care should be given to how the forecasting problem is formulated.
Questions should be structured to use the judges’ knowledge most
effectively, pre-tested to ensure that the experts understand them, and
worded in different ways to see if that affects the forecasts. Such
procedures are particularly important when forecasting sensitive issues,
such as the effects of global warming. The use of structured procedures
can greatly improve the accuracy of judgmental forecasts. Structure is
easy to apply and involves only modest costs. I discuss four structured
judgmental procedures that should be of interest for environmental
forecasting: (1) role playing, which uses subjects to act out relevant
interactions to determine what they would do when affected by an
intervention; (2) intention surveys, which use statements by key
participants in the system about what they expect to do given certain
trends or interventions; (3) Delphi. Which uses expert judgment to
forecast trends or the effects of intervention: and (4) analogies, where
experts try to generalize from similar situations. Brief attention is given
to conjoint analysis and to judgmental bootstrapping.

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 Role Playing

Role playing involves asking subjects to adopt the viewpoints of groups

in a negotiation situation and having them act out the interactions. When
the interactions of conflicting groups are important to the outcome, role
playing provides a way to simulate this interaction. If new and important
interventions would lead to behaviors that are dependent upon the
interactions among decision makers, then role playing is likely to be
more relevant than intentions. With intentions, decision makers would
have to predict what they would do initially, how they would modify their
decisions in reaction to the decisions made by others, how others would
respond to this reaction, and so on. This chain of events is often too
complex for the respondent, so it makes sense to act it out.

To use role playing to forecast the outcome of an intervention, such as a

tax on air pollution, one would write short descriptions of the problem
and of the roles of key decision makers. Different materials can be
prepared to test alternative interventions. These guidelines should be
followed:

- Use props to make the situation realistic.

- Select subjects who can act the role (interestingly, the selection of
subjects does not seem to be a critical aspect for the accuracy of role
playing)

- Subjects should receive their roles before they receive any information
about the situation, and they should not step out of their roles.

- Subjects should act as they would act if they were actually in such a
role

- Subjects should improvise as needed.

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Forecasts would be based on the outcomes of the role-playing sessions.
Ideally, possible outcomes can be identified in advance. However, if the
range of possible outcomes is uncertain, one should leave the materials
open-ended and ask research assistants to code the outcome, of the role
-playing sessions. If the session does not lead to an outcome, one can ask
the players to predict what would have happened had it continued to a
conclusion. The standard error of this estimate can then be obtained by
using the formula for the standard error of a proportion, with the
number of role-playing sessions as the sample size. Prediction intervals
would be expected to be larger than this estimate because of possible
response biases.

 Intention Surveys:
Intention studies are surveys of individuals about what actions they plan
to lake in a given situation or, if lacking a plan, what they expect to do.
Such surveys are useful for predicting the outcomes of interventions.
When a situation depends on the decisions of many people (such as with
the trash collection for a community), surveys arc much more expensive
than Delphi. However, they provide the perspective of those who will
actually be making decisions. In addition, one could have presented this
situation to consumers and asked them how they would respond.

Tools for surveys have been improving since the 1936. When
interventions would create large changes and where the behavior of
decision makers is dependent upon decisions by others, respondents may
find it difficult to predict how they would behave. Surveys are of less
value in such cases. Given all the ways that intentions or expectations

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may be wrong, it should not be surprising to find that sampling error
alone provides a poor way to estimate prediction intervals.

 Delphi:

Delphi involves the use of experts to make independent anonymous

forecasts. Delphi goes beyond expert surveys in that it is conducted for
two or more rounds. After the first round of forecasts, each expert
receives a Quantitative summary of the group’s forecasts. In addition,
anonymous explanations of their choices might be provided by the
experts. Typically, two rounds are sufficient; however, if the cost
associated with error is high, conducting three or four rounds may be
worthwhile. Delphi is usually conducted by mail and honoraria are paid
to the participating experts. The primary criterion for the selection of
experts for a Delphi panel is that they be unbiased. Delphi requires only
a few experts. The number of experts should be at least five but seldom
more than 20. Delphi studies can be relatively inexpensive to conduct.
This approach may be much less expensive than surveys that obtain
information of individuals’ intentions or expectations. Delphi is relevant
when data are lacking, the quality of the data are poor, or experts
disagree with one another. As a result, Delphi is applicable when new
interventions arc proposed or where a trend has recently undergone a
shock. Nevertheless, judgments tend to be too conservative in the face of
rapid change. In particular, judgment underestimates exponential
growth and exponential growth is common in environmental problems.

This type of method is useful and quite effective for long-range

forecasting. The technique is done by questionnaire format and
eliminates the disadvantages of group think. There is no committee or
debate. The experts are not influenced by peer pressure to forecast a

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certain way, as the answer is not intended to be reached by consensus or
unanimity. Low reliability is cited as the main disadvantage of the
Delphi method, as well as lack of consensus from the returns

 Analogies:
To forecast the outcome of interventions, it is common for experts to
search for cases where similar Interventions have been conducted at
different times or in different geographic areas and then to generalize
from them.

 Conjoint Analysis:
Conjoint analysts can be used to predict what strategy would be
accepted. For example, one could propose different possible plans that
would have various effects. The effects could be varied according to an
experimental design. Once a model is developed, predictions can be
made for changes in the design.

 Judgmental Bootstrapping:

Experts could be asked to predict the reactions to various possible

interventions. A model could then be developed by regressing these
predictions on the various elements of the intervention.

 Business barometers:

In physical science, a barometer is used to measure the atmospheric

pressure. In the same way, index numbers are used to measure the stage

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of economy between two or more periods. These index numbers are the
device to study the trend, seasonal fluctuations, cyclical movements and
irregular fluctuations. These index numbers, when used in conjunction
with one another or combined with one or more, provide indications as
to the direction in which the economy is heading. Thus, with the help of
business activity index numbers, it becomes easy to forecast the future
course of action. However, it should be borne in mind that business
barometers have their own limitations and they are not sure road to
success.

 Time series analysis:

It involves decomposition of historical series into various components,

viz., trend, seasonal variations, cyclical variations and random
variations. Time series analysis uses index numbers but it is different
from barometric technique, the future is predicted from the indicating
series which serve as barometers of economic change. In time series
analysis, the future is taken as some sort of an extension of the past.
However, time series analysis should be used as a basis for forecasting
when data are available for a long period of time and tendencies
disclosed by trend and seasonal factors are fairly clear and stable.

 Regression analysis:

Regression analysis is meant to disclose the relative movements of two

or more inter related series. It is used to estimate the changes in one
variable as a result of specified changes in other variable or variables.
In economic and business situations, there is multiple causation and a
number of factors affect a business phenomenon simultaneously.
Regression analysis helps in isolating the effects of such factors to a

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great extent. Generally the regression and correlation analysis is used
for processing the statistical data and deriving a generalized
mathematical relationship which, subject to a certain error, can be used
for forecasting the expected values of the dependent variables in future if
the values of independent variables are known.

 Survey method:

Field surveys can be conducted to gather information on the intensions

of the concerned people; for example information can be collected
through surveys about the likely expenditures of consumers on various
items. Both quantitative and qualitative information can be collected.
Such information may throw useful light on the attitudes of the
consumers in regard to various items of expenditure and consumption.
On the basis of such survey, demand for various goods can be projected.
To limit the cost and time, the survey may be restricted to a sample from
the prospective consumers. Survey method is suitable for forecasting
demand both of existing and new products.

Limitations of forecasting

No doubt forecasting is an essential ingredient, but it should not be

concluded that forecasting is the only element which goes into planning
and other areas of the organizational process. Forecasting provides
base for assuming the behaviours of certain events which may not be
fully true because forecasting has the following limitations:

1. based on assumptions:

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Forecasting is based on certain assumptions. It merely suggests that
if an event has happened this way in the past, it will happen that way
in the future. The basic assumption behind this is that events do not
change haphazardly and speedily but change on a regular pattern.
This assumption may not hold good. In fact there are various factors
which go into determining the occurrence of an event. The behaviour
of all these factors may not be similar. A change in a particular
factor may be so unpredictable and important that it may affect the
total business situation.

2. not absolute truth:

Forecasts are not always true; they merely indicate the trend of
future happenings. This is so because the factors which are taken into
account for making forecasts are affected by human factor which is
highly unpredictable. Various techniques of forecasting suggest the
relationship among various known facts. They can project the future
trends but cannot guarantee that this would happen in future. More is
the period of forecasting, higher is the degree of forecasting, higher
is the degree of error. Therefore it has been commented that “the
only thing you can be sure about any forecast is that it will contain
some error.”

3. time and cost factor:

Time and cost factor is also an important aspect of forecasting. While

the above factors speak of limitations inherent in forecasting, time
and cost factor suggests the degree to which an organization will go
for formal forecasting. For making forecast of any event, certain
information and data are required. Some of these may be in highly

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disorganized form; some may be in qualitative form. The collection of
information and conversion of qualitative data into quantitative ones
involves lot of time and money. Therefore managers have to trade off
between the cost involved in forecasting and resultant benefits. This
is the reason why most of the smaller organizations do not go for
formal system of forecasting.

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 Bibliography:

1. Prasad, L.M. Strategic Management. New Delhi. Sultan Chand &

Sons, 2009.
2. Cherunilam, Francis. Business Environment. Mumbai. Himalaya
Publishing House, 2008.
3. Lomash, Sukal and Mishra, P.K. Business Policy and Strategic
Management. New Delhi. Vikas Publishing House, 2007.
4. Internet

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