Table of Content:-
- Environmental Forecasting Meaning
- Environmental Forecasting Definition
- Characteristics of Environmental Forecasting
- Process of Environmental Forecasting
- Approaches of Environmental Forecasting
Environmental Forecasting Meaning
Forecasting is the process of estimating the relevant possibilities of the future, based on the analysis of past and present behaviour. The future cannot be probed unless one knows how the events occurred in the past and how are they occurring presently. Therefore, the past and present analysis of events provides information about their future occurrences. Since forecasting may require the use of various statistical techniques, some people equate this analysis with statistical analysis.
Environmental Forecasting Definition
According to Neter and Wasserman, “Business forecasting refers to the statistical analysis of the past and current movement in the given time series so as to obtain clues about the future pattern of those movements”.
According to Louis A. Allen, “Forecasting is a systematic attempt to probe the future by inference from known facts”.
Environmental forecasting involves the development of plausible projections about the direction, scope, speed and intensity of environmental change. Its purpose is to predict changes. It is a technique whereby managers attempt to predict the future characteristics of the organisational environment and hence make decisions today that will help the firm deal with the environment of tomorrow.
Characteristics of Environmental Forecasting
1) Pivotal Role in an Organisation
Planning is the backbone of the effective functioning of an organisation. Many organisations have failed because of incorrect or lack of forecasting. The reason is that planning is based on proper forecasting.
According to Louis A. Allen, “A systematic attempt to probe the future by inference from known facts helps integrate all management planning so that unified overall plans can be developed into which divisional and departmental plans can mesh”.
2) Development of a Business
A business is established in order to achieve specified objectives. The specified objectives can be achieved by performing certain activities. The performance of these activities depends upon proper forecasting. Therefore, the development of a business organisation is completely based on forecasting.
3) Implementation of Project
Many entrepreneurs implement a project on the basis of their experience Forecasting helps an entrepreneur to gain experience and ensures his success. In this way, forecasting is an important factor which enables the entrepreneur to get success.
4) Primacy to Planning
Planning decides the future course of action. Planning cannot be done without forecasting. The information required for planning is supplied by forecasting. So, forecasting is the primacy of planning.
Forecasting helps the management executives in effective coordination indirectly. Forecasting helps to gather information about internal and external factors. Thus, collected information provides a basis for coordination.
6) Effective Control
Management executives can ascertain the strength and weaknesses of sub-ordinates or employees through forecasting. Then the manager can take suitable action against the sub-ordinates. So, forecasting can provide satisfactory information for exercising effective control.
7) Key to Success
All business organisations are facing risks. Success is the reward for facing risks and functioning under uncertainties. Risks and uncertainties could be reduced with the help of forecasting. Forecasting provides clues about risks and uncertainties. The management executives can save the business and achieve success by taking suitable actions. Therefore, forecasting is a key to success.
Process of Environmental Forecasting
The forecasting period may be short-term or long-term. In either case, certain steps have to be passed through while making the forecast.
These steps have been briefly discussed below:
Step 1: Systematic Study of Past Trends in Economy, Industry and Products
The manager has to develop a solid framework by identifying and investigating the strategic factors that will serve as the foundation for future projections. It involves the study of the economy, industry, products and company in the past and discovering relations between them.
Step 2: Estimating Future Courses of Business Operation
On the basis of a Systematic Study of Past Trends in the Economy, Industry and Products Estimating Future Courses of Business Operation the information gathered from analysing the past, the manager projects future business with the help of statistical techniques.
Step 3: Collection of Results
All the information can be collected. Relevant records are prepared and maintained to collect the results. Nothing can be omitted and irrelevant information can be avoided while collecting the results.
Step 4: Comparison of Results
To determine deviations, the results are compared i.e., the estimated results are compared with the actual results. If there are significant deviations between the estimation and actual results, the reasons for such deviations can be investigated. This will help the management to estimate the future (forecasting).
Step 5: Refining the Forecast
The forecast can be refined in light of deviations which appear to be more realistic. If any factors or conditions have changed during the period under study then those factors or conditions have to be taken into consideration for future estimation. In this way, the forecast can be improved and refined.
Approaches of Environmental Forecasting
A company can forecast sales by using either a “top-down” or “bottom-up” approach which is explained as follows:
1) Top-Down Approach
In this approach, the forecast is done at the corporate level or the strategic level. It starts with a forecasting of general economic conditions. It forecasts gross national product, consumer and wholesale interest rates, price index, unemployment level, government expenditures, etc., and estimates the market potential of the product for the entire industry. Then, it determines the current market share and forecasts the success of its product in the market. This forecast is used for operational planning and budgeting for future programmes.
2) Bottom-Up Approach
In this approach, management follows a two-step procedure:
i) Generate estimates of future demand by acquiring information from segments of the market or from organisational units (salespeople or branches) in the company.
ii) Add the individual estimates to get one total forecast.
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