JOURNAL
twinkle22
352DP-Ch-11.pptChapter 11
Sales Forecasting and Financial Analysis
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Commonly Used Forecasting Techniques
Figure 11.2
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|
Technique |
Time Horizon |
Cost |
Comments |
|
Simple Regression |
Short |
Low |
Easy to learn |
|
Multiple Regression |
Short-medium |
Moderate |
More difficult to learn and interpret |
|
Econometric Analysis |
Short-medium |
Moderate to high |
Complex |
|
Simple time series |
Short |
Very low |
Easy to learn |
|
Advanced time series (e.g., smoothing) |
Short-medium |
Low to high, depending on method |
Can be difficult to learn but results are easy to interpret |
|
Jury of executive opinion |
Medium |
Low |
Interpret with caution |
|
Scenario writing |
Medium-long |
Moderately high |
Can be complex |
|
Delphi probe |
Long |
Moderately high |
Difficult to learn and interpret |
Financial Analysis for NPD is Difficult
- Target users don’t know facts.
- If they know they might not tell us.
- Poor execution of market research.
- Market dynamics.
- Uncertainties about marketing support.
- Biased internal attitudes.
- Poor accounting.
- Rushing products to market.
- Basing forecasts on history.
- Technology revolutions.
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Forecasting Satellite Radio Demand by Expert Opinion
- In 2000: forecast for 2007 was 36 million subscribers.
- In 2001: forecast revised to 16 million.
- By end of 2006: actual number of subscribers = 11 million.
Source: Sarah McBride, “Until Recently Full Of Promise, Satellite Radio Runs Into Static,” Wall Street Journal, August 15, 2006, pp. A1-A9.
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Forecasting Satellite Radio Sales with ATAR + Concept Test Purchase Intentions
- In 2000, 213 million vehicles in U.S.
- 95% availability, 40% awareness.
- Market potential = 213 million x 95% x 40% = 81 million.
- Assume half can afford satellite radio = 40.5 million.
- Percentage that will be among the first to try the new technology = 16%.
- Forecast for first year = 40.5 million x 16% = 6.4 million.
- Projected yearly growth rate = 10%.
- Assuming this growth rate, by end of 2006, expected total sales = about 10 million.
- Note: not too far from the attained number = 11 million!
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Top 2-Box Purchase Intention Forecasting
- Example: hand cleanser from Chapter 9:
- Definitely buy = 5%
- Probably buy = 36%
- Based on history, calibrate:
- 80% of “definitelies” actually buy
- 33% of “probablies” actually buy
- Forecasted market share = (0.8)(5%) + (0.33)(36%) = 16%.
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Top 2-Box Purchase Intention Forecasting (continued)
- The 16% forecast assumes 100% awareness and 100% channel availability.
- Adjust to account for less awareness and availability. E.g.,
- 60% of the market is aware of the product
- 50% channel availability
- market share is recalculated to 16% x (0.6)x(0.5%) = 4.8%.
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Forecasting Sales Using A-T-A-R Model
- Assume awareness = 90% and availability = 67%.
- Trial rate = 16% (16% of the market that is aware of the product and has it available tries it at least once).
- RS = proportion who switch to new product = 70%.
- Rr = proportion who repeat purchase the new product = 60%.
- Rt = Long-run repeat purchase = RS /(1+Rs-Rr) = 63.6%.
- Market Share = T x Rt x Awareness x Availability =
16% x 63.6% x 90% x 67% = 6.14%.
The following bar chart shows this procedure graphically.
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A-T-A-R Model Results:
Bar Chart Format
Figure 11.3
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The Life Cycle of Assessment
Figure 11.5
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Calculating New Product’s
Required Rate of Return
Risk
% Return
Reqd. Rate
of Return
Cost of
Capital
Avg. Risk
of Firm
Risk on
Proposed
Product
Figure 11.6
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NPD Real-Options Analysis Assessment
Data:
- Startup costs in Year 0: $70,000.
- The cash flows for Years 1 through 4 are estimated to be $40,000 in a high-demand scenario, or $10,000 in a low-demand scenario.
- The probabilities of a high- or low-demand scenario are both 50 percent.
- The product concept could be abandoned after Year 1, and the equipment could be sold for $38,000.
- Discount rate = 12%.
Figure 11.7
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NPD Real-Options Analysis (continued)
Cash flow in Year 1 for each demand scenario:
Cash flow in Year 1 if option taken to abandon project and equipment is sold:
Therefore the project would be abandoned after Year 1.
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| Demand | Year 1 | Year 2 | Year 3 | Year 4 | Total |
| High | 40,000 | 40,000/(1.12) = 35,714 | 40,000/(1.12)2 = 31,888 | 40,000/(1.12)3 = 28,471 | $136,073 |
| Low | 10,000 | 10,000/(1.12) = 8,929 | 10,000/(1.12)2 = 7,972 | 10,000/(1.12)3 = 7,118 | $34,018 |
| Demand | Year 1 | Take Option to Abandon and Sell Equipment | Total |
| Low | 10,000 | 38,000 | $48,000 |
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NPD Real-Options Analysis (continued)
Now assess NPV for each demand scenario, assuming project is abandoned after Year 1 if demand is low.
Expected value of investment is:
(0.5)($51,494) + (0.5)(-27,143) = $12,176
Since this expected value is greater than zero, the firm should make the investment.
Source: Edward Nelling, "Options and the Analysis of Technology Projects," in V. K. Narayanan and Gina C. O'Connor (eds.), Encyclopedia of Technology & Innovation Management, Chichester, UK: John Wiley, 2010, Chapter 8.
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| Demand | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Total |
| High | -70,000 | 40,000/(1.12) = 35,714 | 40,000/(1.12)2 = 31,888 | 40,000/(1.12)3 = 28,471 | 40,000/(1.12)4 = 25,421 | $51,494 |
| Low | -70,000 | 48,000/(1.12) = 42,857 | -$27,143 |
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Hurdle Rates on Returns and Other Measures
Figure 11.8
Explanation: the hurdles should reflect a product’s purpose,
or assignment. Example: we might accept a very low
share increase for an item that simply capitalized on our
existing market position.
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Hurdle Rate
Product
Strategic Role or Purpose
Sales
Return on Investment
Market Share Increase
A
Combat competitive entry
$3,000,000
10%
0 Points
B
Establish foothold in new market
$2,000,000
17%
15 Points
C
Capitalize on existing markets
$1,000,000
12%
1 Point
Concept Evaluation Checklist
Strategic Fit
Does the concept fit with corporate vision?
Customer Fit
Does the concept allow the customer to better meet consumer needs?
Consumer Fit
Does the concept satisfy an unmet consumer need?
Market Attractiveness
Is the concept unique relative to competition?
Technical Feasibility
Is the concept feasible and protectable?
Financial Returns
Will the project break even soon?
Source: Erika B. Seamon, “Achieving Growth Through an Innovative Culture,” in P. Belliveau, A. Griffin, and S. M. Somermeyer, The PDMA Handbook 3 For New Product Development, Wiley, 2004, Ch. 1.
Figure 11.10
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Technique Time Horizon Cost Comments
Simple Regression Short Low Easy to learn
Multiple Regression Short-medium Moderate More difficult to
learn and interpret
Econometric
Analysis
Short-medium Moderate to high Complex
Simple time series Short Very low Easy to learn
Advanced time
series (e.g.,
smoothing)
Short-medium Low to high,
depending on
method
Can be difficult to
learn but results are
easy to interpret
Jury of executive
opinion
Medium Low Interpret with
caution
Scenario writing Medium-long Moderately high Can be complex
Delphi probe Long Moderately high Difficult to learn
and interpret
Hurdle Rate
Product
Strategic Role or Purpose
Sales
Return on
Investment
Market Share
Increase
A
Combat competitive entry
$3,000,000
10%
0 Points
B
Establish foothold in new
market
$2,000,000
17%
15 Points
C
Capitalize on existing
markets
$1,000,000
12%
1 Point
