110
How to choose
the best technique-
or combination of
techniques-
to help solve your particular
forecasting dilemma
One thing may be more certain for manag-
ers today than anything else: they have almost too much to
think about and keep in mind in trying to assess problems
realistically and solve them. Some respond by developing
prejudices against any new idea because they don't have
enough time to learn the new concepts properly. Others
throw up their hands and admit they can't judge the idea
with everything else they are handling.
Looking at forecasting at a time when they
may need good forecasts more than ever, many managers
are downplaying their importance. One reason may be
that-like many other things-when forecasts are right,
you don't hear about them. But when they're wrong....
In response to this problem, the authors
have compiled a chart that profiles the 20 most common
forecasting techniques and rates their attributes against 16
important evaluative dimensions. The result is a practical
guide that will help executives sort out their priorities
when choosing a technique and enable them to combine
methods to achieve the best possible results.
Mr Georgoff is professor of marketing at
Florida Atlantic University and chairman of the Depart-
ment of Management, Marketing, and International Busi-
ness. He has published articles and worked as a consultant
to large corporations in the areas of new product market-
ing, marketing planning, market research, and forecasting.
Mr. Murdick is professor of management at
Florida Atlantic University. Previously he worked at the
General Electric Company for 14 years. Well known in the
field of management information systems, he is the author
or coauthor of 18 books on management and marketing,
the most recent of which is MIS: Concepts and Design
(Prentice-Hall, second edition, 1986).
Manager^s
guide to
forecasting
David M. Georgoff and
Robert G. Murdick
Early in 1984, the Houston-based
COMPAQ Computer Corporation, manufacturer of
IBM-compatible microcomputers, faced a decision that
would profoundly affect its future. Recognizing that
IBM would soon introduce its version of the portable
computer and threaten COMPAQ'S dominance in this
profitable market, the company had two options. It
could elect to specialize in this product line and con-
tinue to market its highly regarded portables aggres-
sively, or it could expand market offerings to include
desktop microcomputers. The latter move would force
the year-old company to confront IBM on its home
ground. Moreover, COMPAQ would have to make a
substantial investment in product development and
working capital and expand its organization and manu-
facturing capacity.
COMPAQ'S management faced several
important unknowns, including the potential market's
size, structure, and competitive intensity. Management
recognized that the company's vitality might seriously
erode if it did not expand its product line. If the expan-
sion were successful, COMPAQ might enjoy econo-
mies of scale that could help ensure its survival in a
dynamic and very competitive industry. If COMPAQ'S
market assumptions were incorrect, however, its fu-
ture might be bleak.
Many of today's managers face similar
new market realities and uncertainties. Continually
confronted with issues critical to their companies'
competitive future, they must deal with novel and rap-
idly changing environments. In short, they must judge
a broad range of dissimilar influences.
For more than a decade, new forecast-
ing techniques have theoretically helped managers
evaluate these varied factors. Much of the promise of
Authors' note: We thank Steven C.
Wheelwright for his valuable assistance
in the preparation of this article.

these techniques has been unrealized, however, even
as a quickening succession of related advances have
been overwhelming decision makers with new alter-
natives.
As the number of techniques prolifer-
ates, management also realizes that some of its crucial
assumptions and projections about the economy have
become quite tenuous. Equipped only with a little his-
tory, meager and questionable data, and frail and chang-
ing theoretical tools, the forecaster must nevertheless
make critical decisions about altered futures.
As an example, COMPAQ Computer's
quandary was further complicated because new tech-
nologies, competitors, and products were already trans-
forming a market that had been only recently estab-
lished. COMPAQ'S forecast of the size, direction, and
price trends of the 1984 microcomputer market was
confounded by uncertainties about the market's re-
sponse to several vital factors:
The entry of IBM's new portable
computer.
IBM's 23% price cut in June 1984 and its
potential erosion of margins.
The entry of lap portables introduced by
Hewlett-Packard and Data Ceneral.
The launch of IBM's new PC AT, com-
plicated by unexpected delivery delays
and compatibility problems.
The introduction of desktop computers
by Sperry, NCR, ITT, and AT&T.
Eventually, COMPAQ entered the
desktop segment of the market, even though 1984 was
unforgiving and rampageous. Several large competitors
restricted their programs,- many smaller companies
went into-or to the edge of-receivership. Financially
and competitively, COMPAQ succeeded. During 1984,
sales rose from $111 million to $329 million and earn-
ings increased from $4.7 million to $12.8 million.
The market's dynamics, however, make
such results increasingly difficult to achieve,- positive
and negative events-both expected and unforeseen-
have a decisive effect. Even when managers anticipate
outcomes, grave uncertainties about timing, form, and
impact persist.
Despite the difficulty, the vice president
of marketing and the CEO-the two executives most
directly involved with the decision-demonstrated
what can be done. They used an extended series of con-
sumer and dealer surveys coupled with periodic evalu-
ations of the technology to assess the future market
and to guide the development of products and programs
Guide to forecasting 111
to accommodate the industry's fluid and rapidly evolv-
ing needs. Managers can use forecasting techniques to
help them reach important decisions. A large and fast-
growing body of research deals with the development,
refinement, and evaluation of forecast techniques.
Managers also have greater access to both internal and
external data and can benefit from a multitude of com-
puter software programs on the market, as well as
easier access to computer capabilities for analyzing
these data.
Forecaster's chart
while each technique has strengths and
weaknesses, every forecasting situation is limited by
constraints like time, funds, competencies, or data. Bal-
ancing the advantages and disadvantages of techniques
with regard to a situation's limitations and require-
ments is a formidable but important management task.
We have developed a chart to help exec-
utives decide which technique will be appropriate to
a particular situation; tbe chart groups and profiles a
diverse list of 20 common forecasting approaches and
arrays them against 16 important evaluative dimen-
sions. We list techniques in columns and dimensions
of evaluation in rows. Individual row-column inter-
sections (cells) reflect our view of a technique's char-
acteristics as they apply to each dimension. Brief
descriptions of the forecasting methods are given on
the chart.
We have used different colors to show
which dimensions represent a strength for a particular
technique and which represent its weaknesses. The
strengths are highlighted in color; weaknesses are indi-
cated by a gray cell. Naive extrapolation, for example,
is strong in internal consistency in that it easily re-
flects changes in management decisions. It is weak,
however, in forecast form. It is important to keep these
distinctions in mind when you are using the chart.
The chart is useful in two ways. The
first is in deciding which technique will suit your par-
ticular needs as a forecaster. The second is in deciding
how to combine techniques to further improve the re-
sult. In this section, we discuss the simpler approach;
we talk more about combining methods later.
To use the chart, look at the 16 ques-
tions listed in the first column after the dimensions.
They are the most common questions a manager will
ask when deciding to use a certain forecast. The first
question sets out the various time spans a forecast
would have to cover. Everyone who uses the chart will
have to answer question 1. But each of the following
questions can be answered with a yes or no. If you an-
112
swer no to a question, you don't have to look across
that row.
In responding to question 1, make note
of those techniques whose time span matches your
needs. We have found it easiest for forecasters to write
down the technique's column letter. The row number
of each dimension and the column letter of each tech-
nique are written along the horizontal and vertical axes.
With regard to question 1, for example, if your forecast
horizon is short-term, you can write down the cell let-
ters for naive extrapolation (A), sales-force composite
(B), jury of executive opinion (C), and so forth. But
you would ignore the letters for scenario methods (D),
Delphi technique (E), historical analogy (F), and so on.
The columns you have now listed repre-
sent techniques that are qualified for further consider-
ation. Next read down the column of each of these
techniques and note any gray cells. If these gray cells
are associated with questions to which you have an-
swered yes, then the dimension either precludes use of
the technique or the technique can be used but it has
difficulty accommodating that dimension. Such pre-
cautions will help you determine whether you must-
or wish to-eliminate certain techniques from further
consideration. An arrow in a cell indicates that its eval-
uation is the same as the cell to its left.
After you have answered all the ques-
tions and have a list of surviving techniques, note the
cells that are highlighted in color. Those cells represent
specific strengths of a technique and can guide you in
making a final selection.
In the course of the exercise, you may
have eliminated a technique that you like, have heard
about, or routinely use. You can go back to that one and
compare its strengths and weaknesses with those of
the methods that the chart has indicated would be best
for you. You can then decide whether you would rather
proceed with the technique that the chart indicates
corresponds most closely to your specific requirements
or whether you can accommodate the eliminating fac-
tors in order to use the technique that you initially
favored.
Important considerations
When considering each question, you
should remember some "tricks of the trade" con-,
ceming:
Time horizon. Most managers will
want the forecast results to extend as far into the future
as possible. Too long a period, however, may make the
technique selection process even more confusing
because of the varying abilities of the techniques to ac-
commodate different time spans. In choosing an ex-
Harvard Business Review January-February 1986
tended time horizon, the forecaster increases the com-
plexity, cost, and time required to develop the final
product.
You can break down the time needed to
produce a forecast into development (Dev) and execu-
tion (Ex) time. Development time includes the gather-
ing and entry of data, the modification of programs to
the company's specific requirements, and the start-up
of the system. Execution time is the time it takes to
produce a forecast with a particular technique. Ini-
tially, of course, development time is a significant con-
cern for the forecaster; once the forecast technique is
firmly established, however, execution time is a more
appropriate concern.
Ibchnical sophistication. Experience
shows that computer and mathematical sophistication
is integral to many techniques. Although many execu-
tives have improved their skills in this area, not all
have sharpened their quantitative skills enough to be
comfortable with some of the forecast results a com-
puter will spill out.
Cost. The cost of any technique is gen-
erally more important at the beginning when it is be-
ing developed and installed; after that, any technique's
potential value to a decision maker usually exceeds the
expense of generating an updated forecast.
Data availability. Before choosing a
technique, the forecaster must consider the extensive-
ness, currency, accuracy, and representativeness of the
available data. More data tend to improve accuracy, and
detailed data are more valuable than those presented in
the aggregate. Because a technique's ability to handle
fluctuations is important to a forecast's success, the
manager must match the sensitivity and stability of a
technique to the random and systematic variability
components of a data series.
Variability and consistency of data. Be-
yond changes that might occur in the company's struc-
ture or its environment, the manager must look at the
kind of stable relationships assumed among a model's
independent variables (represented by the "external
stability" dimension). For example, while most histori-
cally oriented quantitative forecasts might use ex-
pected levels of automobile production as a basis for
deterrnining demand for steel, the forecast model may
not reflect changes over time in the average amount of
steel used in automobiles. These relationships some-
times do change, but any variation is usually so gradual
that it will not aiffect a short-term forecast. When the
forecasts are long-term, however, or when the company
expects a substantial change in a vital relationship, the
forecaster should either apply judgment in a quantita-
tive technique or use a qualitative method.
Manager's guide to forecasting
Brief descriptions of methods
Judgment methods
Naive extrapolation:
the application of a simple
assumption about the economic
outcome of the next time period,
or a simple, if subjective, exten-
sion of the results of current
events.
Sales-force composite:
a compilation of estimates by
salespeople (or dealers) of
expected sales in their territo-
ries, adjusted for presumed
biases and expected changes.
Jury of executive opinion:
the consensus of a group of
"experts," often from a variety
of functional areas within a
company
Scenario methods:
smoothly unfolding narratives
that describe an assumed future
expressed through a sequence
of time frames or snapshots.
Delphi technique:
a successive series of estimates
independently developed by a
group of "experts" each mem-
ber of which, at each step in the
process, uses a summary of
the group's previous results to
formulate new estimates.
Historical analogy:
predictions based on elements
of past events that are analo-
gous to the pre.sent situation.
Counting methods
Market testing:
representative buyers' re-
sponses to new offerings, tested
and extrapolated to estimate
the products' future prospects.
Consumer market survey:
attitudinal and purchase
intentions data gathered from
representative buyers.
Industrial market survey:
data similar to consumer sur-
veys but fewer, more knowl-
edgeable subjects sampled,
resulting in more informed
evaluations.
Time series methods
Moving averages:
recent values of the forecast
variables averaged to predict
future outcomes.
Exponential smoothing:
an estimate for the coming
period based on a constantly
weighted combination of
the forecast estimate for the
previous period and the most
recent outcome.
Adaptive filtering:
a derivation of a weighted
combination of actual and esti-
mated outcomes, systematically
altered to reflect data pattern
changes.
Time series extrapolation:
a prediction of outcomes derived
from the future extension of a
least squares function fitted to a
data series that uses time as an
independent variable.

Time series decomposition:
a prediction of expected out-
comes from trend, seasonal,
cyclical, and random compo-
nents, which are isolated from a
data series.
Box-Jenkins:
a complex, computer-based
iterative procedure that
produces an autoregressive,
integrated moving average
model, adjusts for seasonal and
trend factors, estimates appro-
priate weighting parameters,
tests the model, and repeats the
cycle as appropriate.
Association or causal
methods
Correlation methods: Input-output models: Dev = Development
predictions of vaiues based on a matrix model that indicates time
historic patterns of covariation how demand changes in one in-
between variables dustry can directly and cumula- Ex = Execution
tively affect other industries. time
Regression models:
estimates produced from a pre- Indicates
dictive equation derived by strength
minimizing the residual variance
of one or more predictor (inde-
pendent) variable.
Leading indicators:
forecasts generated from one or
more preceding variable that is Indicates
systematically related to the weakness
variable to be predicted.
Econometric models:
outcomes forecast from an inte-
grated system of simultaneous
equations that represent rela-
tionships among elements of the
national economy derived from
combining history and economic
theory.
 Dimensi Dns Questions Judgment methods

Naive Sales-force Jury of Qualitative

extrapolation composite executive
opinion

Scenario Delphi Historical

methods technique analogy

Time Span Is the forecast Present need to Short or Short or Medium or Medium or Medium or
period a: Medium Medium Medium Long Long Long
Present need,
or Short-,
Medium-, or
Long-term
projection?

Urgency Is the forecast Rapid results Forecast can be In-house group Urgency Urgency Forecast can be
needed are a strong assembled, forecasts are seriously com- seriously com- computed
immediately? advantage of combined, and quicker than promises quality promises quality quickly if data
this technique.* adjusted rela- outside experts'. are available;
tively quickly. data gathering
Dev Short Dev Moderate Dev Moderate may cause delay.
Dev Short Dev Short Ex Short to to Long Ex Moderate Dev Moderate
Ex Short Ex Moderate Moderate Ex Moderate to Long Ex Moderate
Frequency Are frequent Can easily Forecast Can accomplish Frequency need Usually used for
forecast accommodate can be quickly quickly. is moderate; one-time fore-
updates frequent compiled, but updates are casts, but they
needed? updates. data collection generally pro- can be revised
restricts rapidity. vided as need as new informa-
arises. fion becomes
available.

Re- Mathematical Are quantita- Minimal Sophistication

sophistication tive skills quantitative level is variable,
source limited? capabilities but some quan-
require- are required. titative skill is
ments desirable.

Computer Are computer Computer Nominal A computer may

capabilities capabilities are processing be helpful.
limited? not essential. does not require
a computer.

Financial Are only limited Very inexpen- Inexpensive to Financial Usually expen- Expense If data are read-
financial sive to implement and requirements sive for thor- depends on ily available,
resources implement and maintain. are nominal for ough efforts. makeup and out-of-pocket
available? maintain. executive affiliation ot costs are
groups; they participants. minimal.
may be higher
for outside
experts.
Input Antecedent Are only limited Some past data Past data Extended his-
past data are required, are helpful but tory is essential.
available? but extended not always
history is not essential. ^
essential.

Variability Does the Has difficulty Does not handle Technique's

primary series adequately fluctuations well extended view
fluctuate handling wide but can accom- dampens
substantially? fluctuations. modate them if impact of short-
the panel meets run influences
frequently. and random
variability.

Internal Are significant Can reflect Significant If changes come Can readily Can accommo- Can crudely
consistency changes in changes. changes are from an internal reflect internal date changes, reflect changes
management frequently not corporate changes. but ease of at best.
decisions transmitted and; group, tech- retlecting them
expected? or realistically nique can read- depends on
reflected. ly reflect them. group's back-
ground.

External Are significant Can reflect Generally has Reflects Reflects Can handle
consistency environmental chanqes. but difficulty realisti- changes well; changes well. changes, but
changes quality can cally reflecting ;echnique com- forecast quality
expected? also vary changes. bines a range of can vary
substanlialiy. expertise. substantially.

External Are significant Often insensi- Usually aware Adapts well to Can accommo-
stability shifts expected tive to shifts. of shifts and can shifts. date shifts
among variable reflect them in crudely.
relationships? the forecast.
—P-

Output Detail Are component Focus can be Can often Can reflect Generally con-
forecasts readily )rovide useful component fined to aggre-
required? restricted. xeakdowns. orecasts, but is gate forecasts.
generally con-
cerned with
aggregate
orecasts.

Accuracy s a high level Often provides Can be very ^ay be most Mot particularly nferential rela-
of accuracy a limited practi- accurafeorsub- accurate accurate, but tionships are
critical? cal level of ecttosubstan- under dynamic usually most often tenuous;
accuracy. iai bias. conditions. accurate when predictions are
lorizons are suspect.
extended and
conditions are
dynamic.
Capability for Should turning Can be very Can readily
reflecting )oints be responsive to adjust if recog-
direction reflected shifts. nized, but long
changes )romptly? ime horizon
often precludes
he need.

Capability for Should turning Apt to miss Early turning Can detect Can only predict
detecting direc- )oints be iden- urning points. )oint identifica- cyclical turning Toncyclical
tion changes ified early? ion can be a points early points very
strength under under dynamic crudely.
dynamic conditions, but w
conditions. ong time hori-
zon often pre-
cludes the need.
Form s an interval or Provides point Can only Only subjec- Technique is n limited situa-
)robabilistrc orecast with )rovide crude, ively deter- subjective, but ions, only an
orecast crude estimated subjectively mined distributions are approximate
critical? ange. determined approximate an inherent part range can be
irobabilistic ange or fre- of technique. urnished.
orecast. quency distribu-
ion is possible.

A B D
Counting methods Time series
methods
Market testing Market survey Moving Exponential Adaptive Time series Time series Box-Jenkins
averages smoothing filtering extrapolation decomposition

Consumer Industrial
market survey market survey

Medium Medium Medium or Long Short. Medium, Present need to Short or Short, Medium, Short or Short. Medium,
or Long Short or Medium or Long Medium or Long
Medium

Substantial lag Method of gath- Rapid resuits Forecast can be Computation is Program setup Operationalizing
Is involved. ering data may are a strong produced quick if data are and data gathering program can
cause a sub- advantage of quickly once available; data may cause delays, take time, but
stantial time lag. this technique. programmed gathering can but once pro- forecast can be
W and past data cause delays. grammed, com- produced
Dev Moderate Dev Moderate are available. Dev Short to putation is quick. quickly.
Ex Long to Ex Long to Dev Short Dev Moderate Moderate Dev Moderate Dev Long
Extended Extended Ex Short Ex Siiort Ex Short Ex Short Ex Moderate
Extended, basi- Depending on Forecast can be
cally used for methodology, systematicaily
one-time fore- frequent up- updated easily.
casts. dates are possi-
ble, but updates
are generally
provided at ex-
tended intervais.
Technical com- Minimal A fundamental A high level of
petencies are quantitative competency understanding
generally capabilities level is required. is required.
needed. are required.
W

A computer is A computer is A computer is A computer is A computer is

generally helpful for repet- essential. helpful for repet- essential.
needed for data itive updating. itive updating.
analysis.

Generally very Generally Moderately If data are Forecast is If data are read- Moderately Acquisition and
expensive. expensive for expensive, readily avail- moderately ily available, expensive to modification
good controls. depending on able, out-of- expensive to out-of-pocket acquire, costs are
controis. pocket costs develop. costs are develop, and expensive.
are minimal. minimal. modify

Past data are Past data very Past history is Only recent Past history is Past history is Past history is
useful but not helpful but not essential. forecasts and essential essential with essential with
essential. essential. current data are although detail some detail detail required.
required once and extent vary. required.
alpha is
determined.

Substantial fluc- Handles fluc- Wide fluctua- Can accommo- Can accommo- Absorbs Wide fluctua- Can isolate and Handles
tuations limit the tuations poorly, tions are date fluctua- date fluctua- random fiuc- tions result in determine the variabiiity
accuracy of but tracking frequently tions with tions with tuations and decreased level of compo- effectively.
projections. improves a significant appropriate suitable alpha. adjusts to sys- confidence in nent effects.
performance. concern. averaging tematic shifts. projected
period. outcomes.

Can reflect Generally If changes are Cannot validly

changes well if cannot validly recognized, reflect changes.
they are incor- reflect changes. adjustments
porated into can be made.
original
research
design.

Seriously weak Ease of han- Reflects Cannot validly Can only mod- Cannot validly Can only mod-
in handling dling changes changes reflect changes. erately reflect reflect changes. erately reflect
changes. depends on indirectly; it is changes with changes with
consumers' frequently very prior trend. prior trend.
awareness and sensitive to
interpretation. them.

Seriously weak Seldom reflects If carefully con- Cannot validly Can only mod- Cannot validly Can only mod-
in accommodat- significant trolled, can han- reflect shifts. erately reflect reflect shifts. erately reflect
ing shifts. shifts. dle shifts weii. shifts with prior shifts with prior
trend. trend.

Handles detail Focus can be

but scope can readily
be limited. restricted.

Provides high- Has limited pre- Can be most Accurate under Generally rates Normally accu- Effectively iso- Frequently the
est accuracy in dictability with accurate stable high in accuracy rate for trends lates idenfifiable most accurate
new product durables, some- approach in condition.s. for short-term and stafionary components. for short-to-
and limited data what better with special cases. forecasts. series. medium-range
conditions. nondurables. forecasts.

Responsive, but Often highly Variable lags Depending Deals very well Very Generally When points are
this is not one of responsive to always exist. on alpha value, with systematic unresponsive. responds identified,
its purposes. demand shifts. can be very shifts in slowly adjusts quickly.
responsive. variables.

Early turning Can be respon- Can be very Cannot Generally A weak predic-
point identifica- sive to turning sensitive to anticipate cannot predict tive ability IS
tion is not a points but turning points. turning points. turning points possible
purpose or usually cannot unless series
capability of this anticipate lags.
technique. them.

Can provide With probability Confidence lim- Generally only Probability

interval sampling, its can be easily provides point range is easily
estimates. accommodates derived based forecast. constructed.
any desired on variability of
fornn. data series

G H 1 J K L M N 0
Association or
Causai methods
Correlation Regression Leading Econometric Input-output
methods models indicators models models

Short, Medium, Short, Medium, Short, Medium. Short, Medium, Medium or Long
or Long or Long or Long or Long

Data evaluation Model formula- Data evaluation Model building Original model
may cause tion takes time, may cause is lengthy, but may require up
delays, but fore- but forecast com- delays, but fore- producing fore- to a year to
cast computa- putation is gulck. cast computa- cast is quick. develop,
tion is quick. Dev Moderate tion is quick. Dev Long to
Dev Moderate to Long Dev Moderate Extended Dev Extended
Ex Short to Ex Shonto Ex Short to Ex Short to Ex Short to
Moderate Moderate Moderate Moderate Moderate
Forecast
can be updated
quickly if data
are available.

A fundamental A high level of

competency understanding
level is required. is required.

A computer is A computer is A computer is

desirable. essential for essential for all
most oases. cases.

If data are on Development

hand, develop- costs are sub-
ment costs are stantial; operat-
moderate. ing costs are
moderate.

Extended Extended
history is help-
ful in initial
detailed history
is required.
7
w development.

Technique is
good if covaria-
tion is high;
May handle
large fluctua-
tions well with
Can readily
adjust to sys-
tematic and ran-
Time lag
further reduces
accuracy.
8
otherwise it is appropriate dom patterns.
poor. independent
variables.

Insensitive Insensitive to Insensitive to Insensitive to

to significant changes, but changes unless changes.
changes unless they can be they are
they are cor- reflected among reflected in the
related with predictor indicators.
predictor variables.
variables.

Highly sensitive Can be modified

Insensitive
unless they are
related to
Handles
changes well
if they are
Sensitive to
changes if they
are retiected in
to relevant
changes.
to reflect
changes.
10
predictor appropriately appropriate
variabies. reflecfed in indicators.
predictor
variabies.

Cannot validly
Predictive accu-
racy is weak-
ened if shifts
reflect shifts
without updafed
11
occur. coefficients.

Focus can be
A restricted
focus might
substantially
readily
restricted,
Genarally con-
fined to aggre-
gate forecasts.
Effectively
reflects demand
by SIC groups.
12
compromise depending on
technique's indicators
predictive used.
accuracy.

Can be accurate Oniy moder- Give spotty With stable

Predictive
accuracy can
vary widely.
if variable rela-
tionships are
ately accurate
under most
performances in
dynamic
reiationships,
predictive accu-
13
stabie and the conditions. env.ronments. racy can be
proportion of very good.
explained vari-
ance is high.

Can adapt
quickly to turn-
ing points.
Sensitive to
changes once 14
they are
identified.

Can predict if relationships Especially Cannot antici-

turning points
only if a iagged
are stabie, can
effectively
effective in fore-
casting cyclical
pate turning
points but can
15
relationship predict turning changes. effectively pre-
exists. points. dict outcomes.

Confidence Probability Confidence Confidence

limits are
provided.
range is easily
constructed.
iimits are
provided.
limits can be
developed.
16

Q R T
 Guide to forecasting 119

Amount of detail necessary. While ag-
gregate forecasts are easy to prepare, the manager will
need specific information (including individual prod-
uct classes, time periods, geographic areas, or product-
market groupings, for example) to determine quotas or
allocate resources. Since forecasts vary widely in their
ahility to handle such detail, the manager may want a
technique that can accurately predict individual com-
ponents and then comhine the results into an overall
picture. Otherwise, the forecaster can use one tech-
nique to provide an overall picture and then use past
patterns or market factors to determine the compo-
nent forecasts.'
Accuracy. While accuracy is a forecast-
er's holy grail, the maximum accuracy one can expect
from a technique must fall within a range hounded hy
the average percentage error of the random component
of a data series. Also, hecause of self-defeating and self-
fulfilling prophecies, accuracy must he judged in light
of the control the company has over the predicted out-
come and within the time and resource constraints im-
posed on the forecaster.
Rememher also that accuracy alone is
not the most important criterion. The forecaster may
wish to forgo some accuracy in favor of, for example, a
technique that signals turning points or provides good
supplemental information.
outcomes. If even remotely accurate, such information
helps the manager determine more explicitly risk expo-
sure, expected outcomes, and likelihood distributions.
Improving the forecast
Because no dramatic breakthroughs in
technique development have occurred during the past
several years, efforts to improve forecasts have shifted
to searching for a better approach to technique selec-
tion. In part, these attempts have explored the strengths
and performance characteristics of various techniques.^
Our chart extends this approach by helping the fore-
caster match different tecliniques' strengths and char-
acteristics to the needs and constraints of the required
forecast.
Managers can improve their
projection in the following ways:
Comhining forecasts.
Simulating a range of input assumptions.
Selectively applying judgment.

Ibming points. Because turning points

represent periods of exceptional opportunity or cau-
tion, the manager will want to analyze whether a tech- Combining forecasts
nique anticipates fundamental shifts. Some techniques
give false turn signals, so the forecaster must keep in The research on combining forecasts to
mind not only a technique's ahility to anticipate achieve improvements (particularly in accuracy) is
changes hut also its propensity to give erroneous infor- extensive, persuasive, and consistent.-^ The results of
mation. combined forecasts greatly surpass most individual
projections, techniques, and analyses by experts. Be-
Form. Final form varies greatly; it is cause top-rated experts and the most popular tech-
always advisahle to use a technique that provides some niques cannot consistently outperform an approach
kind of mean or central value and a range of possihle that combines results, and because the manager can-
not predetermine which experts or techniques will be
superior in any situation, combining forecasts-partic-
ularly with techniques that are dissimilar-offers the
1 For additional discussion, fournal of Marketing Research, manager an assured way of improving quality.
see G. David Hughes, August 1984, p. 290.
"Sales Forecasting Requirements," The forecasting chart can help the
in The Handbook of Forecasting: 3 See Essam Mahmoud, manager select the best combination of techniques.
A Manager's Guide, "Accuracy in Forecasting;
ed. Spyros Makridakis and A Survey,"
As the chart shows, each method has strengths and
Steven C. Wheelwright journal of Forecasting, weaknesses. By carefully matching two or more com-
(New York: April-June 1984, p. 139:
John Wiley & Sons, 1982|, p.l3. Spyros Makridakis and
plementary techniques, the forecaster can offset any
Robert L. Winkler, technique's limitations with the advantages of another,
2 For a discussion of examples, "Averages of Forecasts:
see Spyros Makridakis et al., Some Empirical Results,"
all the while retaining the strengths of the first. Simply
"The Accuracy of Extrapolation Management Science, compare an approach's highlighted cells against those
ITime Series) Methods," September 1983, p. 987, and
Journal of Forecasting, Victor Zamowitz,
of other qualified methods. Various techniques incor-
April-June 1982,p. inland ' "The Accuracy of Individual and Group porate very different underlying notions. Not knowing
Steven P Schnaars, Forecasts from Business Outlook Surveys," which of these will ultimately prove to be most accu-
"Situational Factors Affecting Journal of Forecasting,
Forecast Accuracy," January-March 1984, p. 10. rate in a particular economic environment, forecasters
 120
can add to their awareness of possible outcomes by
evaluating the range and the distribution of the projec-
tions produced hy the various methods."
Simulating various outcomes
The manager can also establish a range
of probable outcomes hy varying the combination and
the levels of inputs of a particular technique. Such sen-
sitivity analysis can underscore the most critical vari-
ables, the range and distribution of expected outcomes,
and the probable outcomes from different assumptions.
Using judgment
while many quantitative forecasts in-
corporate some subjectivity, forecasters should rely
more heavily on the output of a quantitative forecast
than on their own judgment. Forecasting research has
concluded that even simple quantitative techniques
outperform the unstructured intuitive assessments of
experts and that using judgment to adjust the values of
a quantitatively derived forecast will reduce its accu-
racy^ This is so because intuitive predictions are sus-
ceptible to bias and managers are limited in their abil-
ity to process information and maintain consistent
relationships among variables.'
The forecaster should incorporate sub-
jective judgments in dynamic situations when the
quantitative models do not reflect significant intemal
and extemal changes. Even in these cases, the fore-
caster should incorporate the subjective adjustments
as inputs in the model rather than adjusting the mod-
el's final outcome.
When confronted with extended hori-
zons or with novel situations that have limited data
and no historical precedent, judgment or counting
methods should he used. Applying judgment in such
situations, however, should be done on a structured
basis. The forecaster should also employ judgment to
stimulate thought and explore new relationships but,
where possible, quantitative techniques should be in-
corporated to test and support assumptions. The two-
4 See Hillel J. Einhom and spyros Makridakis,
Robin M. Hogarth, "Forecasting and
"Prediction, Diagnosis, Planning: An Evaluation,"
and Causal Thinking," Management Science,
lournal of Forecasting, February 1981, p. 115.
January-March 1982, p. 23.
6 Lennart Sjoberg,
5 For survey articles that "Aided and Unaided Decision Making:
address this issue, Improved Intuitive Judgment,"
see Mahmoud, p. 139; and Journal of Forecasting,
Robin M. Hogarth and October-December 1982, p. 349.
Harvard Business Review January-February 1986
part article on scenario forecasts by Pierre Wack in the
September-October 1985 and November-December
1985 issues of HBR provides a good example of this. ^
Forecasting strategies
[There are] three basic strategies of forecasting....
The deterministic strategy assumes that the pres-
ent has a close causal relation to the future. This is
the strategy that would be used by a cardsharp,
who had stacked the deck of cards, to predict the
deal. In economic forecasting, the strategy would
be used to predict construction expenditures by
a knowledge of construction contract awards
already made.
The symptomatic strategy assumes that present
signs show how the future is developing; such signs
do not "determine" the future but reveal the pro-
cess of change that is already taking place. Thus, a
falling barometer may reveal a coming storm, or a
rising body thermometer an incipient illness. In eco-
nomic forecasting, this strategy calls for the spotting
of "leading indicators"-time series whose move-
ments foreshadow rises or declines in general busi-
ness activity.
The systematic strategy assumes that, though
changes in the real world may seem accidental or
chaotic, careful analysis can reveal certain under-
lying regularities (sometimes called principles,
theories, or laws). The way to find these regulari-
ties is to black out much of reality and hold only to
the abstractions that make up a system, such as a
solar system, or a nuclear system, or an economic
system.
Though the theories that result from this process of
abstraction are "unreal," they may nevertheless
possess the power to affect the real world-pro-
vided, of course, that the theories are sound. The
test of the soundness of a theory is how it measures
up when applied to reality: An atomic explosion con-
firms Einstein's E = me'. Similarly, a price cut that
leads to increased sales confirms the hypothetical
demand curve that no man has ever seen outside
an economics textbook.
To be sure, economic "laws" do not have the con-
sistency of those in the physical sciences. Never-
theless, economic relations or theories, derived from
a study of the past, may be useful tools for predic-
tion, within some acceptable range of probable error.
From
BusinessForecaslIng:
With a Guide to Sources ot
Business Data
by Leonards. Silk and
M. Louise Curtey
(New York:
Random House, 1970), p. 3.
Copyright © 1970
by Random House, inc.
Reprinted with the permission
of the publisher.
Copyright 1986 Harvard Business Publishing. All Rights Reserved. Additional restrictions
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