Solutions to Assignments
MBA and MBA (Banking & Finance)
MMPC-005: Quantitative Analysis for Managerial Applications
MMPC-005/TMA/JULY/2022
Question No. 2. Why is forecasting so important in business? Explain the application of forecasting for long term decisions.
The future is inherently uncertain and since time immemorial man has made
attempts to unravel the mystery of the future. In the past it was the crystal
gazer or a person allegedly in possession of some supernatural powers who
would make predications about the things-to be-major events or the rise and
fall of kings. In today's world, predictions are being made daily in the realm
of business, industry and politics. Since the operation of any capital
enterprise has a large lead time (1-5 years is typical), it is clear that a factory
conceived today is for some future demand and the whole operation is
dependent on the actual demand coming up to the level projected much
earlier. During this period many circumstances, which might not even have
been imagined, could come up. For instance, there could be development of
other industries, or a major technological breakthrough that may render the
originally conceived product obsolete; or a social upheaval and change-of
government may redefine priorities of growth and development; or an
unusual weather condition like drought or floods may alter completely the
buying potential of the originally conceived market. This is only a partial list
to suggest how uncertainties from a variety of sources can enter to make the
task of prediction of the future extremely difficult.
It is proper at this stage to emphasise the distinction between prediction and
forecasting. Forecasting generally refers to the scientific methodology that
often uses past data along with some well-defined assumptions or 'model' to
come up with a 'forecast' of future demand. In that sense, forecasting is
objective. A prediction is a subjective estimate made by an individual by
using his intuitive 'hunch' which may in fact come out true. But the fact that it
is subjective (A's prediction may be different from B's and C's) and nonrealisable as a Well-documented computer programme (which could be used
by anyone) deprives it of much value. This is not to discount. the role of
intuition or subjectivity in practical decision-making. In fact, for complex
long term decisions, intuitive methods such as the Delphi technique are most
popular. The opinion of a well informed, educated person is likely to be
reliable, reflecting the well-considered contribution of a host of complex
factors in a relationship that may be difficult to explicitly quantify. Often
forecasts are modified based on subjective judgment and experience to obtain
predictions used in planning and decision making.
The primary purpose of forecasting. is to provide valuable information for
planning the design and operation of the enterprise. Planning decisions may
be classified as long term, medium term and short term.
Long term decisions include decisions like plant expansion or. new product
introduction which may require new technologies or a. complete
transformation in social or moral fabric of society. Such decisions are
generally, characterised by lack of quantitative information and absence of
historical data on which to base, the forecast of future events. Intuition and
the collected opinion of. experts in the field generally play a significant role
in developing forecasts for such decisions.
Technological Forecasting
Technological growth is often haphazard, especially in developing countries
like India. This is because Technology seldom evolves and there are frequent
technology transfers -due to imports of knowhow resulting in a leap-frogging
phenomenon. In spite of this, it is generally seen that logarithms of many
technological variables show linear trends with time, showing exponential
growth. Some extrapolations reported by Rohatgi et al. are
• Passenger kms carried by Indian Airlines (Figure I)
• Fertilizer applied per hectare of cropped area (Figure II)
• Demand and supply of petroleum crude (Figure III)
• Installed capacity of electricity generation in millions of KW (figure IV).
Figure I: Passenger Km Carried by Indian Air Lines
Delphi
This is a subjective method relying on the opinion of experts designed to
minimise bias and error of judgment. A Delphi panel consists of a number of
experts with an impartial leader or coordinator who organises the questions.
Specific questions (rather than general opinions) with yes-no or multiple type
answers or specific dates/events are sought from the experts. For instance,
questions could be of the following kind :
• When do you think the petroleum reserves of the country would be
exhausted? (2020,2040, 2060)
• When would the level of pollution in Delhi exceed danger limit? (as
defined by a particular agency)?
• What would the population of India be in 2020, 2040 and 2060?
• When would fibre optics become a commercial viability for
communication?
A summary of the responses of the participants is sent to each expert
participating in the Delphi panel after a statistical analysis. For a forecast of
when an event is likely to happen, the most optimistic and pessimistic
estimates along with a distribution of other responses is given to the
participant. On the basis of this information the experts may like to revise
their earlier estimates and give revised estimates to the coordinator. It may be
mentioned that the identities of the experts are not revealed to each other so
that bias or influence by reputation is kept to a minimum. Also the feedback
response is statistical in nature without revealing who made which forecast.
The Delphi method is an iterative procedure in which revisions are carried
out by the experts till the coordinator gets a stable response.
The method is very efficient, if properly conducted, as it provides a
systematic framework for collecting expert opinion. By virtue of anonymity,
statistical analysis and feedback of results and provision for forecast revision,
results obtained are free of bias and generally reliable. Obviously, the
background of the experts and their knowledge of the field is crucial. This is
where the role of the coordinator in identifying the proper experts is
important.
Opinion Polls
Opinion polls are a very common method of gaining knowledge about
consumer tastes, responses to a new product, popularity of a person or leader,
reactions to an election result or the likely future prime minister after the
impending polls. In any opinion poll two things are of primary importance.
First, the information that is sought and secondly the target population from
whom the information is sought. Both these factors must be kept in mind
while designing the appropriate mechanism for conducting the opinion poll.
Opinion polls may be conducted through
• Personal interviews.
• Circulation of questionnaires.
• Meetings in groups.
• Conferences, seminars and symposia.
The method adopted depends largely on the population, the kind of
information desired and the budget available. For instance, if information
from a very large number of people is to be collected a suitably designed
questionnaire could be mailed to die people concerned. Designing a proper
questionnaire is itself a major task. Care should be taken to avoid ambiguous
questions. Preferably, the responses should be short one word answers or
ticking an appropriate reply from a set of multiple choices. This makes the
questionnaire easy for the respondent to fill and also easy for the analyst to
analyse. For example, the final analysis could be summarised by saying
• 80% of the population expressed opinion A,
• 10% expressed opinion B,
• 5% expressed opinion C,
• 5% expressed no opinion.
Similarly in the context of forecasting of product demand, it is common to
arrive at the sales forecast by aggregating the opinion of area salesmen. The
forecast could be modified based on some kind of rating for each salesman or
an adjustment for environmental uncertainties.
Decisions in the area of future R&D or new technologies too are based on the
opinions of experts. The Delphi method treated in this Section is just an
example of a systematic gathering of opinion of experts in the concerned
field.
The major advantage of opinion polls lies in the fact that a well formed
opinion considers the multifarious subjective and objective factors which
may not even be possible to enumerate explicitly, and yet they may have a
bearing on the concerned forecast or question. Moreover the aggregation of
opinion polls tends to eliminate the bias that is bound to be present in any
subjective, human evaluation. In fact for long term decisions, opinion polls of
opinions of the experts constitute a very reliable method for forecasting and
planning.
