Instruction. This is a collaborative work.

Discuss with your groupmates about this case and engage

with each other in your reflective analysis. In your analysis you may relate/cite other examples that
had happened in the Philippine setting. Submit your work individually. Please write your Group
number in your Case Study.

Case 3_RISKS IN DEMAND FORECASTING

Demand forecasting faces two major risks of grossly overestimating or underestimating demand.
One risk arises from entirely unforeseen events, such as war, political upheavals, or natural disasters. The
second risk arises from inadequate analysis of the market. For example, between 1983 and 1984, 67 new
types of personal computers were introduced in the US market and most computer companies forecasted
growth of shipments to be twice as large as those that actually took place. This led to many computer
companies going out of business by 1986. Computer companies based their forecast of rapid growth on
the fact that there were more than 50 million white-collar workers in the United States in 1983 but only
8million PCs. More careful market analysis, however would have shown that two-thirds of white collar
workers either did require a PC on their jobs or were already connected with inexpensive terminals to
mainframe computers.

Another example is provided by the petroleum industry which invested over 500$ billion
worldwide between 1980 and 1981 in the expectation that demand would grow from 52 million barrels
of oil per day in 1979 to 60 million barrels by 1985 and that this would result in petroleum prices rising 50
percent. Instead, because of increased energy efficiency, the demand for petroleum declined 46million
barrels per day by 1986 and this resulted in the collapse of petroleum prices and huge losses in drilling,
production, refining and shipping investments. Still another example of a costly but avoidable forecasting
error was committed by video-game companies, which projected explosive growth based on the very
small 10 percent overall market penetration in the United States. More careful analysis with available
data, however, would have shown that 75 percent of upper-income families with children between the
ages 6 and 15 (the main target market for video games) already had video games.

All these costly forecasting errors could possibly have been avoided by (1) carefully defining the
market for the product to include all potential users of the product and considering the possibility of
product substitution, (2) dividing the total industry demand into its main components and analysing each
component separately, (3) forecasting the main drivers or users of the product in each segment of the
market and projecting how likely they are likely to change in the future, and (4) conducting sensitivity
analyses of how the forecast would be affected by changes in any of the assumptions on which the
forecast is based. Although uncertainties will remain, a manager that follows the above fourtold approach
is more likely to be able to anticipate major changes in the demand for his product and to make better
forecast.

Source: “Four steps to Forecast Total Market Demand”, Harvard Business Review, July-August 1988, pp. 28-37.