Forecasting: Issues & Challenges for Marketing Management

Author(s): Spyros Makridakis and Steven C. Wheelwright

Source: Journal of Marketing , Oct., 1977, Vol. 41, No. 4 (Oct., 1977), pp. 24-38
Published by: Sage Publications, Inc. on behalf of American Marketing Association

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24 / Journal of Marketing, October 1977

Spyros Makridakis and Steven C. Wheelwright

Forecasting: Issues & Challenges

for Marketing Management
A framework for relating the available techniques to specific situations.

orecasting plays an important role in every 1. The first deals with the range of forecasting
major functional area of business management. methodologies available and their characteris-
In the area of marketing however, forecasting is tics. The framework used for this is somewhat
doubly important; not only does it have a central different from those frequently suggested, and
role in marketing itself, but marketing-developed is one that the authors have found to be par-
forecasts play a key role in the planning of produc- ticularly useful for dealing with marketing
tion, finance, and other areas of corporate activity. forecasting problems.
The importance of forecasting has become more2. The second section then builds upon that
widely acknowledged in the recent past due to methodological classification in examining
substantial changes in the economic environment. those issues that relate to the selection of a
The shortages and the increased inflation of the forecasting methodology for a particular situa-
early 1970's, followed by a major recession, have tion. Since any marketing application of fore-
focused renewed attention on forecasting and the casting requires some explicit decision as to
benefits it can provide. the methodology to be used, this is one of the
At the same time, there still exists a substan-
key areas where the marketing manager can
tial gap between applications and what is both exert leverage on the potential effectiveness
desirable and attainable.16, 49, 95~ An examination of
that forecasting can have in his own situation.
the forecasting and marketing literature suggests
3. The third section deals with major issues and
that one of the things that is needed, if the full
challenges that are more broadly based than
potential of forecasting is to be realized, is a struc-
methodological selection questions. These re-
ture for dealing with the issues that the practitioner
late to the organizational, behavioral and
must address. The purpose of this article is to bring
technical characteristics of the environment
together much of what is already known and to
supply a framework that will provide guidance for within which forecasting for marketing must
take place.
the marketer in applying this knowledge to each
situation and in focusing on what additional 4. Building on these key issues and challenges,
knowledge is needed. the fourth section outlines areas of research
Toward this end, the article is divided into that are central to continued improvement in
four sections: forecasting for marketing.

About the Authors

Available
SPYROS MAKRIDAKIS is Professor of Management Methodologies
Science at INSEAD, Fontainebleau, France. There are several dimensions that can be used in
STEVEN C. WHEELWRIGHT is Associate Professor of
grouping existing forecasting methodologies. Many
Business Administration, Graduate School of Busi- of these are technical in their orientation. For ex-
ness Administration, Harvard University, Boston.

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 Forecasting: Issues & Challenges / 25

ample, the distinction between statistical methods To understand the range of forecasting meth-
and non-statistical methods might be considered, odologies available, several aids are at hand. Three
or that between time series methods and causal of these are summarized as part of Exhibit 1:
methods. Still another technical distinction can be
1. First is some understanding of the historical
made between those methods that are quantitative development of different methodologies.
in their orientation and those that are qualitative. Generally, those techniques developed by
A somewhat different framework is that sug- statisticians are quite different in their proper-
gested by Chambers, et al,E101 which is based more ties and in the situations for which they are
on the functional use of forecasting than on the best suited, from those developed by econo-
mathematical characteristics of the techniques. This mists or operations researchers. Exhibit 1 in-
framework uses the marketing concept of the prod- dicates the major field of development for each
uct life-cycle to identify the important characteris- of the various forecasting methodologies and
tics of forecasting situations at different stages in a provides references from the literature that il-
product's development. Those characteristics are lustrates the development of each.
then matched with the characteristics of different
methodologies to determine the methodologies2. A second item of value in understanding
available forecasting methodologies is empiri-
most appropriate for each different stage. While
such a structure provides some insight into the cal research on their frequency and range of
application. Exhibit 1 summarizes the results
range of situations where marketers can take advan-
given in four separate studies. These studies
tage of forecasting and many of the techniques
suggest that there are substantial differences
available, the overlap among methodologies makes
it difficult to progress very far in selecting those among organizations as to their knowledge
most appropriate for various stages in a product's and application of various methodologies, as
development. well as a wide range in the applicability of
those methodologies generally.
Structure for Categorizing 3. A third item of benefit to the practitioner seek-
ing to further develop his own ability at fore-
Based on our own experience in marketing and casting is available literature that provides an
other functional areas, we have found a more tech-
overview of existing methodologies and their
nical structure, like that shown in Exhibit 1, to be characteristics. Exhibit 1 includes several ref-
particularly useful in categorizing forecasting erences that have been chosen because of their
methodologies. emphasis on the significance of meth-
As can be seen from the left-hand side of the
odological characteristics for the forecasting
exhibit, a number of levels can be used in distin-
practitioner. These are to be distinguished
guishing such techniques. The most general dis- from more technical literature that concen-
tinction is between informal forecasting approaches trates on describing the mathematical charac-
and formal forecasting methods. The former are teristics of available methodologies.
based largely on intuitive feel and lack systematic
procedures that would make them easily transfer-
able for application by others. The formal forecast- Matching Situation & Methodology
ing methodologies seek to overcome this weakness
A key reason for seeking to understand a range of
by systematically outlining the steps to be followed methodologies is that the effective utilization of
so that they can be repeatedly applied to obtain
forecasting requires matching the characteristics of
suitable forecasts in a range of situations.
the marketing situation with the characteristics of
At second level, formal methodologies can be
an appropriate methodology. A number of different
divided into those that are qualitative in nature
criteria have been suggested as a basis for making
and those that are quantitative. The quantitative
methods, in turn, can be subdivided into the cate- such a selection decision. These include accuracy,
the time horizon of forecasting, the value of fore-
gories of time series techniques and causal or re-
casting, the availability of data, the type of data
gression techniques. The qualitative segment also
pattern, and the experience of the practitioner at
includes two categories:
forecasting.
* Techniques based on subjective assessment One of the key characteristics of a forecasting
(the judgment of managers). situation that can often be captured in the time
horizon dimension is the type of data pattern.
* Techniques based on the forecasting of tech-
Forecasters have found it useful to distinguish four
nological developments.
main types of pattern: trend, seasonal, cyclical, and

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26 / Journal of Marketing, October 1977

EXHIBIT 1
Approaches to Forecasting

Approaches Short Description Statistics Engineering

Informal Forecasting Ad hoc, judgmental or intuitive methods.

S.. Single and Multiple Variations in dependent variables are explained by

SRegression variations in the independent one(s).

O "c Econometric Models Simultaneous systems of multiple regression equations.

Simple rules such as: forecast equals most recent

actual value or equals last year's same month + 5%.
0

. TLinear, exponential,
Trend Extrapolation S-curve, or other types of
projections.

W Forecasts are obtained by smoothing, averaging, past

S. Exponential Smoothing actual values in a linear or exponential manner.

3. E A time series is "broken" down into trend,

0
O Decomposition seasonability, cyclicality and randomness.
O
Z Forecasts are expressed as a linear combination of
- Filters past actual values. Parameters or model can "adapt" 38, 39
to changes in data.

Z Autoregressive/Moving
Averagesive/ (ARMA), (Box- oving Forecasts are expressed as a linear combination of 6, 98
Averages (ARMA), (Box- 61 98
Jenkins Methodology) past actual values an

o Decision
0 Decision Trees Subjective probabilitie
LL and the approach of Bayesian Statistics is used. 74, 80
.J G
E
SSalesforceA bottom-up approach aggregating salesmen's
c Salesforce estimates
0 W forecasts.
LL U) W
o 0

C > Juries of Executive Marketing, producti

8 Q Opinion prepare forecasts.

C5
Surveys Anticipatory Learning about intentions of potential customers or
Research planes of businesses.

S Exploration Uses today's assured basis of knowledge to broadly

SExplorationassess conditions of the future.
Starts with assessing future goals, needs, desires,
Normative objectives, etc. and works backwards to determine
necessary developments to achieve goals, etc.

. A Immediate (less than one month) B Short (one to three months) C Medium (three months to less than 2 years) D Long (two years

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 Forecasting: Issues & Challenges / 27

Major Field of Development % Usage in Further Time Horizons

Different Surveys Readings of Forecasing
Operations Long Range Practice ofsee
Research Economics Planning Forecasting 15

18, 36 17% 760/ 73, 55, 18, 36

73, 55, 89, 36,

36, 42 65% 42, 43, 19

54, 62 50%

8, 33 36% 40% 62, 64, 54,

55, 96, 8

8, 97, 33 37% 75% 42%

81, 82, 81, 82, 62, 59,

51, 59 55

1, 55, 96, 63,

31, 32

40% 4% 49, 67,

6
66, 54

76, 80, 96 .....

88, 99, 93 48% 74%

88, 48, 37 52% 82% 48, 88, 99

16, 79, 83 37%

34, 48, 26 50%

4, 9, 23, 37,
74
34, 84, 101 50%

Boldface numerals refer to

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28 / Journal of Marketing, October 1977

An Overview of Frequently Used Quantitative Forecasting Methods

The most frequently used time series methods of forecasting are
based on the notion of assigning weights to recent observations of the
item to be forecast (e.g., sales or shipments) and then using the weighted
sum of those observed (actual) values as the forecast. Much of the variety
in available time series methods is simply due to the number of different
approaches for determining the set of weights that will be applied.

Naive Alethods
One of the simplest time series Since the data series for many items An important application of such
methods is Naive I. This method uses that are forecast exhibit a seasonal pat- Naive methods is to use their forecast-
the most recently observed value as atern, a somewhat more sophisticated ing accuracy as a basis for comparing
forecast. Thus, if product demand for method, Naive II, might be applied. alternative approaches. It is not un-
the coming week were to be predicted,This method uses the most recently common to find that one of these
the observed value of demand for the observed value as the basis for the Naive methods may provide adequate
most recent week would be used as forecast, but adjusts it for seasonality.
accuracy for certain situations. It may
This is done by deseasonalizing the
that forecast. This is equivalent to giv- also be the case that more sophisti-
ing a weight of 1.0 to the most recent most recent observation and then re- cated methods (which are usually
observed value and a weight of 0.0 to seasonalizing for the period that muchis to more costly) do not give suffi-
all other observations. be forecast. cient improvement in accuracy over
these methods to justify their use.

AMoving Average
When the time horizon for forecast- recent terms are thereby included in As new observations become avail-
the average.)
ing is fairly short, it is usually the ran-
able, they can be used in the average,
domness element that is major con- For example, if a regional sales man-
making it a "moving" one through
cern. One way to minimize the impactager were forecasting monthly ship- time. It should be noted that when a
of randomness on individual forecasts
ments to a certain geographical region, Moving Average is chosen that has the
is to average several of the past valuesit might be appropriate to use a moving
same number of terms as a complete
rather than using only a single value (as
average involving 12 terms. In forecast- seasonal pattern (for example, 12
we did with the Naive methods). Theing the expected shipments for the
terms if the data are monthly and there
Moving Average approach is one of thenext month, each of the values for the is an annual seasonal pattern), the sea-
simplest ways to reduce the impact ofpast 12 months would be given a sonality is effectively removed in the
randomness. This method consists of
weight of 1/12th and that weightedforecast since an observation for each
weighting N of the recently observed sum would be the forecast. period in the season is included in the
values by 1/N. (Note that the N most average.

Exponential Smoothing
This approach to time series fore- studies of the accuracy of exponential that have been described in the litera-
casting is very similar to the Moving smoothing methods. Additionally, theBuilding on the most basic ap-
ture.
Average approach but does not use a computational characteristics of this proach of simply applying decreasing
constant set of weights for the N most method make it unnecessary to store weights to previous values, these
recent observations. Rather, an expo- all of the past values of the data series variations seek to make adjustments
nentially decreasing set of weights is being forecast. The only data required for such things as trend and seasonal
used so that the more recent values re- are the weight that will be applied to patterns. When such adjustments
ceive more weight than older values. the most recent value (often called are made, they are often referred
This notion of giving greater weight to ALPHA), the most recent forecast and to as higher forms of Exponential
more recent information is one that the most recent actual value. Smoothing.
has strong intuitive appeal for man- There are actually several different
agers and makes sense based on approaches to Exponential Smoothing

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 Forecasting: Issues & Challenges / 29

Auto-Regressive/Moving Average (AR4A4)

The most sophisticated of the single eters are determined is statistical and forecast. For example, if a company
time series approaches to forecasting is done in such a way that the error wanted to forecast its shipments on a
are known as ARMA methods. These (the difference between the actual quarterly basis, only the past values of
follow the same philosophy as the value and the forecast value for any quarterly shipments would be included
methods mentioned above, but use a time period) will be a minimum. This in preparing the forecast. In the ter-
different procedure for determiningmethodology also provides statisticsminology of ARMA methodologies
how many of the past observations about the forecast as well as an ex- such a model would be referred to as
should be included in preparing the pected value for the forecast. autoregressive.
forecast, and in determining the appro- An alternative to the Box and Jen- However, it may be possible to ob-
priate weight values to be applied to kins methodology that would also fall tain more accurate forecasts if past
those observations. into the ARMA class of methodologiesvalues of the forecasting errors are
The most commonly used of this is that of Filtering. These methods areweighted as well. When past values of
class of methods is the procedure de- much like Box-Jenkins; only the means the errors are weighted to obtain a fore-
veloped by Box and Jenkins. This pro- by which the appropriate model (that cast, the model is referred to as a mov-
cedure consists of a set of rules for is, the terms to be included) and the ing average one (not to be confused
identifying the most appropriate ARMA weight values determined are different. with the method, Moving Average, as
model (that is, determining the number ARMA methodologies make a basic described above). Thus, an ARMA
of observations to be included in the extension to the methods described model is one that includes in its
model) and specifying the weights (the
above. In the simpler methods, only weighted terms both past values o
parameter values) to be used in that past values of the variable to be fore-
the variable to be forecast and pas
model. The basis on which the param- cast are weighted in developing the values of the forecast errors.

Multiple Regression
In its simplest form this forecating the forecast is based not only on past
product demand but also such things
methodology can be thought of as avalues of the item being forecast, but as his advertising budget, and perhaps
different way to determine the weightson other variables that are thought to
the price differential between his own
that will be applied to the past valueshave a causal relationship. For ex- product and competitors' products. In
of a variable. However, as normally ample, if a product manager wants tothis way, Multiple Regression allows
used in marketing forecasts, the forecast monthly demand for his prod-one to determine the causal relation-
models are generally Multiple Regres- uct line, he might use Multiple Regres-ship between several variables and the
sion forms that include more than a sion so that his forecast would con- item being forecast.
single variable. In Multiple Regression,
sider not only past observations of

Econometrics
In strict technical terms, regression
several equations to be solved simul- among factors. In a single equation
equations like that described above are
taneously. model, values for each independent
part of econometrics. However, when One of the advantages of Econ-
variable must be specified by the fore-
most managers and practitioners talkometric Models is that the interrela- caster.
about econometrics they are not talk- tionship among the independent The complexity of econometrics add
ing about single regression equations variables in any single equation can be greatly to the cost of such models and
(either simple or multiple) but are talk-
included in other equations and theirmakes them generally attractive only
ing rather about sets of two or morevalues determined simultaneously.
for highly aggregated data (such as
regression equations. Thus, an Econ- This tends to give a mucai better repre-company, industry or national fore-
ometric Model that a company might sentation of reality since it begins tocasts) or for long range projections.
develop of its industry would include capture the complex interrelationships

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30 / Journal of Marketing, October 1977

randomness. In the very short-term randomness is The initial success of econometric models gen
usually the most important of these four. As the erated considerable optimism about their forecast
time horizon is lengthened, seasonality takes on ing performance over the longer term. Unfor
increasing importance, followed by trend. For the nately, however, the 1960's turned out to be a rath
very long-term time horizon, seasonality becomes special period of economic activity. That period in
less important, and trend and cyclical patterns play a cluded 105 months of uninterrupted growth a
primary role. prosperity, longer than any other similar peri
We have found that the time horizon for
since 1850.EP73 The fact that econometric models p
formed
which forecasts are being prepared can often serve well during the 1960's turned out to be
incomplete indication of their level of accura
as a surrogate for many of these criteria including
the type of data pattern. A summary ofwhen available
economic conditions were changing, as in th
methodologies and their appropriateness early and middle 1970's.
for vari-
ous time horizons appears in Exhibit 1. TheseAs would be expected, when structural
time
horizons reflect such correlated characteristics as changes are occurring in the economy, econometric
the value of accuracy in forecasting, the cost of are not superior to time series approaches to
models
various methodologies, the timeliness of their re-
forecasting."'ll Even a study conducted in the stable
sults, and the types of data patterns involved 1960's[873
in the found that econometric models were not
forecasting situation. As a first cut in selecting entirely
a successful in improving accuracy in fore-
forecasting methodology for a marketing situation, casting. In another study, Cooper"143 concluded that
"econometric
Exhibit 1 has proven most useful in practice.[54, 55' 961 models are not, in general, superior
to purely mechanical (time series) methods of fore-
casting." Naylor, et al,[661 made a more extensive
Selecting a Methodology and detailed comparison of alternative methods and
examined the Box-Jenkins approach in contrast to
Every application of forecasting requires an explicit
selection of a methodology to be used, and there the are
Wharton econometric model for the years 1963
through 1967. The results of this study, summarized
a number of major issues that recur repeatedly
in Exhibit 2, indicate that the accuracy of ARMA
when making this selection decision for marketing
situations. These issues cannot be handled with models of the Box-Jenkins type was considerably
the simple framework provided in Exhibit 1. better
Theythan the accuracy of the Wharton economet-
require a much more detailed analysis of theric model for the time period examined.
situa-
tion and a statement of forecasting objectives in A more recent study by Nelsont671 compared
that
econometric
situation. Three of the most important of these (regression) and time series (ARMA)
methods for an even longer time horizon. This
issues and relevant research on them will be con-
sidered in this section: comparison was made usirig the FRB-MIT-PENN
econometric model. Nelson concluded that "the
* Time Series versus Causal methodologies. simple ARMA models are relatively more ro
* Continuation of a Historical Pattern versus with respect to post-sample prediction than
Turning Point forecasting. complex FRB-MIT-PENN models. . . Thus if th
mean squared error were an appropriate measur
* The empirical performance of available meth-
loss, an unweighted assessment clearly indic
odologies as measured by their accuracy.

Causal vs. Time Series

EXHIBIT 2
Comparison of the Wharton Econometric Model
The first of these issues might appear on the surface
with the Box-Jenkins Approach (1963-1967)
to be the most straightforward. The question is
most often asked as to whether a causal method,
Average Absolute Error
such as regression analysis, will give better, more
Items Compared Wharton Box-Jenkins
useful results than a time series method, such as
exponential smoothing or Box-Jenkins. During the Ip (investment in billions) 1.09 0.59
decade of the 1960's and moving into the early P (GNP price deflator in %) 0.22 0.11
1970's, causal or regression methods of forecasting
Un (unemployment in %) 0.186 0.109
became extremely popular, leading Naylor, et al,'631
to suggest that it might be appropriate to label the GNP(in billions) 2.51 2.01
1960's as "The Age of the Large-Scale Econometric Source: Naylor, et al. (66].
Model."

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 Forecasting: Issues & Challenges / 31

that a decision maker would have been best offSudden changes in pattern violate this assumption
relying simply on ARMA predictions in post- and can cause significant deterioration in the accu-
sample periods." racy of a forecasting method.
We are not aware of any studies that reachPatterns can also change in a less dramatic but
conclusions substantially different from those re-
still significant manner. When this happens, the
ported by Nelson, Naylor, Cooper, and others. great majority of forecasting techniques perform
poorly. However, there are some promising excep-
However, the marketing manager faced with select-
tions where adaptation of the parameter values in
ing a forecasting methodology in his own situation
must still deal with the time series versus causal the forecasting model and/or changes in the model
model. The real question is whether the additional
itself are incorporated to allow the methodology to
information provided from causal models is worth deal with changes in the basic pattern.E31, 35, 56, 921
However, the full implications of such approaches
the additional cost. Since the benefits of accuracy,
often felt to justify the additional costs of such and their performance when patterns do not change
methods, do not appear to exist consistently, theiris not well understood as yet.
benefit must lie in the knowledge they give man- An example of pattern change that is familiar
agement of the situation and the interaction of vari-
to many marketers is that of a change in growth
ous factors. rate. For a product that has been growing at 10% a
Since much of what the marketing manager
year, a decline in growth may have disastrous re-
does involves decisions designed to affect sales, thesults for the company as a whole if the change in
value of a causal model is often justified because ofthat pattern is not recognized quickly. If the prod-
the understanding it can provide the manager as touct is one of 10,000 whose demand is forecast by
the causal effect of those decisions on sales perfor-some quantitative method, it will be particularly
mance. However, given a lack of extensive re- difficult to identify such changes in pattern at an
search to support such a claim, it is important thatearly stage. What is needed is establishment of a
each situation be considered on its own merits tracking system as part of the formal forecasting
when trying to decide between a time series tech-procedure so that the build-up in error values can
nique and a causal or regression technique, ratherbe automatically identified and brought to market-
than always going one way or the other. ing management's attention. Some of these control
procedures are straightforward and simply a matter
Continuing Pattern vs. Turning Point of incorporating such measures as an integral part
of the forecasting system.t71, 72, 911
A second major issue in selection, that of determin-
Another situation where predictions are not
ing whether the forecasting problem is one of pre-
being made for continuance of an existing pattern is
dicting a continuing pattern as opposed to predict-
ing a turning point in the pattern, is also related to
that which focuses on a single event. Subjective
and/or informal methods have generally been most
the topic of selecting a methodology for a specific
appropriate in such cases. However, some qualita-
situation. The majority of work that has been done
on forecasting uses accuracy measurements that are
tive techniques are seeking to make such ap-
proaches more systematic and further improve the
designed to evaluate a method's ability to identify
performance of forecasting.Ea30
and predict a continuing pattern in a data series,
rather than to handle turning points in the series.
As many first discovered during the recession of the
Qualitative vs. Quantitative
mid-1970's, the prediction of turning points, while A third issue related to the selection of a methodol-
often difficult, can have a major impact on the firm'sogy for a marketing situation is that of accuracy. A
planning and ability to respond to its environment. major question in the marketer's mind is which
Often, what is required in a specific situation methodology will give the most accurate results.
involves use of one methodology for on-going pre- Although accuracy is not the only criterion for
diction of an existing pattern, than a separateselecting a forecasting method,t961 it is usually given
methodology for tracking turning points. When atop priority and used as a measure that reflects
turning point is identified, a change is then made inseveral other criteria.
the basic methodology being applied. Some of the It is extremely difficult to assess the accuracy
research that has dealt with this subject includesof informal and qualitative forecasting approaches
that reported by McLaughlin and Boyle,[62]'in a way that allows meaningful comparison among
McLaughlin,[601 and Trigg.st91 techniques. This is due to the fact that these meth-
Most quantitative forecasting methods base ods are not standardized in the type of forecasts that
their predictions on the assumption of constancy.

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32 / Journal of Marketing, October 1977

more timely and found to be more accurate than

EXHIBIT 3
naive approaches and even than some sophisticated
Sales Forecast Error Comparison econometric models. In addition, the researchers
(Mean Absolute Deviation)
report that anticipatory surveys done in the mid-
Company Exponential Harmonic Box-
1970's tend to be more accurate on average than
older surveys.
Year IForecast ISmoothing Model IJenkins
One other study that considered the forecast-
1968 5749 5974 5408 4755
ing accuracy of technological methods was that re-
1969 3858 4470 4013 4403
ported by Kiernan.[401 That particular research ex-
1970 4013 2958 2998 3284
amined the performance of airline industry fore-
1971 6033 5657 5311 4785 casts of domestic revenue passenger-miles from
1972 9782 8958 8384 8748
1959 through 1968. The results are summarized
Average 5887 5603 5222 5195 graphically in Exhibit 4. As is evident from the
MAPE* 15.9% 15.1% 14.1% 14.0% graph, the industry continually underestimated the
growth in revenue passenger-miles throughout this
Source: Mabert [491. * Mean Absolute Percentage Error entire period. Since the early 1970's, however, just
the opposite has been true, with industry forecasts
exceeding actual values.
they provide; they rely heavily on the ability of
In this particular instance, the major problem
experts; and they simply provide a general frame-
can be traced to a change from an exponential
work for channeling judgments into a forecast. A
few studies have been reported that deal with in-
EXHIBIT 4
formal and qualitative methods of forecasting and
FAA Six-Year Forecasts & Actual, since 1961
their accuracy. Most often these studies seek (Billions of Domestic Revenue Passenger-Miles)
through comparison to bridge the gap between
such methodologies and more quantitative ap-
85
proaches.
A comparison of qualitative and quantitative
forecasting results has been reported by Mabert.[481 1974
In this instance, the researcher selected a company 75-----------------------
where sales forecasts had been based historically on
Co
opinions of the sales force and corporate executives. w

The accuracy of those forecasts was compared with

45
three different quantitative forecasting methods,
both in terms of mean absolute deviation and mean Ata
z ,
absolute percentage error, as shown in Exhibit 3.
All three of the quantitative methods gave more
accurate results over the five-year time period cov- Cl - -

ered by the study than did the company forecasts. m --

In addition, Mabert found that in terms of timeli- w -

ness and the cost of preparing forecasts, the quan-

titative techniques were more attractive than the
qualitative approaches.
045

Anticipatory Surveys
A major form of marketing forecasts that has re-
ceived considerable attention in the literature is
Actual

that of anticipatory surveys. In one recent study,

Rippe and Wilkinson[791 examined the forecasting
accuracy of the McGraw-Hill Anticipatory Survey 25 e __ - ___
1959 1960 1961 1962 1963 1964 1965 1966 1967 168
Data dealing with investment, sales and capacity. FISCAL YEAR
Those researchers concluded that the McGraw-Hill
data were generally less accurate than the BEA-SECSource: Kiernan [40].
Survey of anticipated investment for a one-year
time horizon. However, the McGraw-Hill data wereLegend: - Actual 7--- Forecasts
mim

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 Forecasting: Issues & Challenges / 33

growth pattern to one best described by an S-curve. smoothing models are generally superior in short-
From the Exhibit, it appears that the forecasts being term forecasting situations, although among these
made throughout the 1960's by the airline industry researchers there was not much agreement as to the
assumed that the mature stage of product demand best specific exponential smoothing model.
would be reached shortly. Then, in the early 1970's,
when the industry finally decided that maturity was Exponential Smoothing vs. Box-Jenkins
not imminent (when it appeared that in fact it was),
Unfortunately, comparisons among alternative de-
forecasts exceeded actual values. These are some of
composition
the dangers of long-term forecasting with which the methods and other techniques of fore-
marketing manager must deal. casting have not been reported in the literature.
However, studies have been published that com-
pare exponential smoothing with Box-Jenkins mod-
Comparing Individual Methodologies
els. Both ReidE783 and Newbold and Grangerl693 con-
Within the category of quantitative forecastingclude that the Box-Jenkins approach of ARMA
methods, several studies have been reported thatmodels gives more accurate results than exponential
compare the relative accuracy of individual meth- smoothing or step-wise regression methods. When
odologies. In the case of regression and econometricthe comparison was made for a single period time
models, both Cooper'41 and Fromm and Kleinl211 horizon, the Box-Jenkins results were found to be
conclude that no single econometric model is the most accurate of the three in 73% of the cases.
overwhelmingly superior to all others. These re- When the lead time for the forecasts was increased
searchers recognize that differences may exist in the to six periods, Box-Jenkins models still gave the
forecasting performance for single items over a lim- best results of the three, but in only 57% of the
ited time horizon but, on the average, these differ- cases. (These results are summarized in Exhibit 5.)
ences and accuracies do not consistently favor one
model over another.
EXHIBIT 5
A comparison of various time series methods
Comparison of Box-Jenkins (B-J), Holt-Winters
in regard to their relative accuracy is more difficult
(H-W) and Stepwise Autoregressive (S-A) Forecasts:
than that done for econometric and regression Percentage of time first named method outper-
models. The difficulties arise because there are forms second for various lead times
many more methods to compare and because dif-
ferent studies have arrived at different and often Lead Times (in time periods)
conflicting conclusions, depending on the situa-
tions examined. Comparisons 1 2 3 4 5 6 7 8

In a study reported by Kirby,L41t three different

B-J: H-W 73% 64% 60% 58% 58% 57% 58% 58%
time series were compared: moving averages,B-J
ex- : S-A 68 70 67 62 62 61 63 63
ponential smoothing, and regression. Kirby found
that in terms of month-to-month forecasting H-W
accu- : S-A 48 50 58 57 55 56 58 59
racy, the exponential smoothing methods per-
Source: Newbold and Granger [69].
formed best. Both moving averages and exponential
smoothing had similar results when the forecasting
horizon was increased to six months or longer. The Several studiesr78' have concluded t
regression model included in that study wasnential
the smoothing can give results that ar
better method for longer term forecasts of one accurate
year as those of the Box-Jenkins me
and
or more. (These results support the use of the time sometimes more so-a result that m
prising to many marketing forecasters.
horizon as a criterion for method selection as shown
in Exhibit 1.) reported by Grofft28' it was concluded th
In a study reported by Levine,l46" the same Jenkins methodology gave results that w
imately equal in accuracy to those ach
three forecasting methods examined by Kirby were
compared. Levine concluded that while thereexponential
was smoothing, or slightly w
same conclusion was also reached by G
an advantage of simplicity associated with the mov-
Ibrahim,124]
ing average method, exponential smoothing offered although this latter study
what limited in that it dealt with onl
the best potential accuracy for short-term forecast-
marketing situation. The fact remains tha
ing. Other studies reported by Gross and Ray,129'
tial smoothing models, extremely sim
Raine,1761 and Krampf'44' have arrived at conclusions
are, compete in accuracy with ARMA models.
similar to those of Levine and Kirby. Essentially,
these researchers have found that exponential

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34 / Journal of Marketing, October 1977

Consequently, knowing that the Box-Jenkins meth- Another technical challenge in forecasting
odology does at least as well as large econometric concerns the inadequacy of available meth-
models may lead one to wonder whether the use of odologies for dealing with turning points in data
econometric models is ever justified. patterns. Since marketing deals extensively with
products that follow what is frequently referred to
as the product life cycle, identification and predic-
Challenges to Greater Effectiveness tion of such turning points is essential if formal
As indicated previously, there are at least three forecasting methodologies are to meet the complete
major areas that represent significant challenges to needs of the marketing manager.
the marketing manager if more effective forecasting Still another technical challenge facing the
is to become a reality. These supersede the question marketing manager is the fact that existing meth-
of selecting a methodology and deal with the practi- odologies suffer from several fixed-form lim-
cal problems of successful forecasting. itations. Formal forecasting methodologies require
that data be available in a specific format (e.g.,
Technical Difficulties reported for each of several time periods of uniform
length and consistent importance).
The first of these challenges deals with what might Generally it is difficult to acquire the data that
be termed technical aspects of the available forecast-
are needed to initiate application of formalized
ing methods. Some of the challenges that the au-
forecasting. Even when they are obtained, the form
thors would include in this category are often that they require and the format of the forecasting
viewed as lack of flexibility on the part of the man-
information that they provide may be very restric-
ager. However, these are actually technical prob- tive to the marketing manager. Marketing managers
lems that need to be overcome in relation to the
who do not use systematic forecasting procedures
methodologies rather than expecting the manager
generally have not defined, as part of their
to adapt his own way of thinking and decision-
decision-making procedures, the collection of his-
making simply to accommodate inflexibility torical
in data for preparation of a forecast, and then
existing techniques. the subsequent use of the forecast in the decision-
One such technical challenge is that when making process. Rather, their procedure tends to be
formalized forecasting is first introduced into a
much more informal and intuitive, necessitating
situation, it requires steps associated with obtain-
substantial changes before formalized meth-
ing a forecast through application of a methodol-odologies can be successfully adopted.
ogy, but does not explicitly alter decision-making
procedures to permit those forecasts to be used ef-
Behavioral Problems
fectively. Thus, forecasting may not necessarily get
the marketing manager to make better decisions.
A second category of challenges confronting the
What it does is require the manager to adapt to themarketing manager seeking to make more effective
fixed form and limitations of the techniques them- use of forecasting are behavioral in nature. Many
behavioral problems associated with quantitative
selves. Clearly, this presents special problems both
in terms of adoption of such formalized meth-
decision-making techniques have been studied in
odologies and in terms of limiting the usefulnessthe of general area of management science.3" 0,751 These
their resultant forecasts. have only recently begun to attract attention from
Several researchers in the marketing area have those focusing on forecasting and its application in
recognized this particular problem and have re- marketing.
sponded to it by developing what might be termed For the marketing manager, an important as-
comprehensive decision-making systems. For ex- pect of behavioral challenge involves the interface
ample, the NEWPROD approach suggested by between preparers of forecasts (specialists) and the
Assmus,[3' as well as work by Massy,i57' Urban,[941 users of forecasts (marketing managers). Literature
and Shoemaker and Staelin,83' have sought to inte- reporting empirical studies of such interactions
grate the preparation of forecasts with the making suggests that what is required is better knowledge,
of specific marketing decisions. Such an integrative respect, and understanding of the role and value
approach to forecasting overcomes many of the that preparers have for users and vice versa. Based
problems that arise when a marketing manager is on this kind of understanding, there is then a need
simply given forecasts and then left to personal for a clear definition of tasks and priorities with
subjective procedures for incorporating those into regard to forecasting applications. A recognition of
the decision-making process. these disparities between the perceptions of pre-
parers and users of the marketing forecast is impor-

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 Forecasting: Issues & Challenges / 35

tant if the full benefits of forecasting are to be

EXHIBIT 6
realized, and if the potential failures in such appli-
cations are to be avoided.E95J Use of Methodologies Given the Forecasting
Status of the Company
An important form of the behavioral chal-
lenges are those caused by characteristics inherent Preparers Placing Company:
in the techniques themselves and in the tasks for Behind Ahead of
which the forecasting is intended. While these mayMethodology Industry Average Industry
appear trivial when stated in an article such as this,
they often become the major roadblock to successful Time Series Smoothing 32.1%* 70.6% 65.9%
applications of forecasting. Box-Jenkins 10.7% 17.6% 31.7%
One such roadblock is the failure to recognize Regression Analysis 39.3% 70.6% 75.6%
that getting started in formalized forecasting, de-
Index Numbers 35.7% 41.2% 41.5%
veloping additional applications to complement
existing forecasting, and transforming an occa- Econometric Models 25.0% 52.9% 63.4%

sional forecast into a routine application are all veryJury of Exec. Opinion 67.9% 84.3% 70.7%
different tasks. The role of the marketing manager Sales Force Composite 50.0% 64.7% 70.7%
is different; the role of the specialist is different;
Customer Expectations 28.6% 47.1% 51.2%
and the needs and requirements for support from
others in the organization are different for each ofOther 17.9% 23.5% 31.7%
these. Many failures in forecasting can be tied sim-* Read: Of the companies olacing them
ply to a failure to recognize the type of situation forecasting, 32.1% use Time Series Sm
involved and the most sensible procedure for han-
Source: Wheelwright and Clarke [95].
dling it.

Clarke,E951 these were iden

Organizational Roadblocks
methodologies actually app
A third category of challenges that must be over- marizes, for firms at three d
come by the marketing manager in order to realize casting experience, the per
effective forecasting are organizational in nature. methodologies. While this r
For example, a roadblock frequently overlooked by nature, more qualitative aspec
those wishing to increase the use of systematic fore- cate that an evolutionary ap
casting is that the benefits of forecasting often ac- suggested for the application
crue to organizational units other than the market- is particularly appropriate in
ing group, and yet the bulk of the forecasting sup- casting.
port must come from marketing. While everyone Understanding the importance of such phases
knows that, in theory, this may work to the good of can have a significant impact on the way in which
the organization, in any given situation it may be forecasting support groups are organized and the
extremely difficult for the marketing manager to type of forecasting resources that are sought. A bet-
give up some of his own scarce resources for such a ter understanding of this aspect in forecasting can
"worthy cause." also aid in its integration with other marketing,
Another organizational issue that frequently planning, and budgeting procedures.
hinders forecasting is the fact that the results used
to measure the performance of forecasting appear
long after the expenditure of the effort for obtaining Directions for Future Research
those forecasts. Even in short-run situations it
While forecasting is always a risky business, those
might take several time periods to build up a his-
familiar with research on other management topics
tory of performance that can be used to evaluate
are aware that the groundwork for such research
that application. Getting managers to adopt for-
usually appears several years before the major im-
malized procedures for forecasting on the promise
pact of its results is felt. Based on existing work and
of some often misunderstood and frequently unbe- the issues and challenges outlined in the literature,
lieved pledge of future good is not an easy task. the need for research that can and should be con-
One of the major areas not understood by ducted in the coming decade can be identified.
many marketing executives seeking to apply fore-
The first and perhaps easiest area to predict
casting is that there are certain stages that organiza-
relates to the need for additional methodologies for
tions go through in the application of forecasting
time series analyses. The present state of develop-
methodologies. In a study by Wheelwright and

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36 / Journal of Marketing, October 1977

ment of time series techniques suggests that severalSpecial Problems

methodologies will be further developed and
There are a number of special problems in market-
applied to marketing problems in the coming de-
cade. Particularly important are the techniques of ing requiring forecasts where existing meth-
filtering, such as those suggested over a decade ago
odologies seem to hold much promise but where
little empirical work has been done. These include
by Kalman,E38W Kalman and Bucy,E391 and others.
Also, while bivariate ARMA techniques are cur- such things as forecasting cumulative demand
rently available, their extension to true multivariate (rather than demand for each of several sequential
time series analysis is likely in the next few time periods), applying forecasting methods to data
years.E6' 551 Finally, additional work is needed to im- series where the periods are not of uniform length
prove existing time series methods, such as devel- or where data values are missing, and mixing quan-
titative methodologies so that a different methodol-
oping computer packages like that suggested by
Makridakis and Wheelwrightl541 and developing ogy is applied when the pattern is stable than when
a turning point is occurring. 541
more automated decision rules for parameter spec-
ification within time series models as suggested by As organizations build their base of experi-
Trigg and Leach,[921 and McClain and Thomas.s58' ence, and the number of marketing managers and
Development of several technological methods specialists with forecasting skill is further ex-
of forecasting would also be particularly useful to panded, it is likely that administrative and pro-
the marketing manager. From the range of qualita- cedural guidelines for effective forecasting also will
tive methods currently available, it would seem that be developed and tested. Much of this work will
the surface of what is possible has only been likely use techniques already available and will seek
scratched. Methods like the CATASTROPHE the- to develop more effective and efficient ways to
utilize those in a wide range of marketing settings.
ory,1?001 as well as other techniques, will undoubt-
edly be more fully developed in the coming decade In conjunction with developments in the
and provide a much wider range of methodologies above areas, it is likely that the literature will begin
for use in marketing. A specific area where theseto focus more on the problem-oriented or applica-
would be especially useful would be in new product side of forecasting, such as sales forecasting,
tions
forecasting. price forecasting, supply forecasting, etc., and less
Another area in which research is likely on
to the development of completely new meth-
odologies.
focus in the coming decade is the integration of This will help to disperse forecasting
knowledge and skills more broadly within market-
qualitative and quantitative forecasts. This integra-
tion is required in order to more fully utilize ing
thedepartments, and will undoubtedly lead to a
judgment of experts (particularly managers) andstronger
the base on which marketing management can
effectively
results of systematic analyses of the environment. use forecasting knowledge.
Some work has already been done in this
area,[4, 5, 481 but more is needed.

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A Public Service of This Magazine
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