Forecasting for Strategic Planning in Project Management
Forecasting is a collection of mostly statistical and/or judgmental procedures which aim at
predicting the future based on the available information and/or data (These processes may
include activities such as data collection, data pre-processing and preliminary data analysis,
forecasting method selection, which also involves model selection, model fitting, and diagnostic
checking, and control in a forecasting system in use). In such processes, forecasting has lots of
potentials for strategic level managers including revealing system dynamics, problem
determination, predicting, monitoring, and control.
Forecasting techniques are used by managers to plan future capacity to meet market demand
and to procure the needed inputs to produce this demand at optimum costs. Forecasting models
are used to predict future aspects of business operation. They include averages, moving averages,
weighted moving averages, exponential smoothing, linear trend models, and simple and multiple
regression models.
Forecasting as a Strategic Decision-Making Tool
Surviving in highly competitive markets and adapting to new states require both strategic
thinking and utilizing all the available information about the future, as well as that about the
present. Nevertheless, the information required about the future may not always be readily
available. Even though it is possible to obtain a part of those data and/or information (e.g.
inflation figures, growth forecasts, exchange rates) from external sources, firms mostly produce
and obtain the required data (e.g. the amount of future stocks, cash flows, market shares)
themselves within their own bodies. Moreover, firms, themselves, may also have to produce
some of the external data needed (e.g. inflation rates and exchange rates) for themselves, which
could normally be obtained from external providers otherwise.
Strategic management is applied in three different levels: Corporate, business, and
functional levels. In fact, the functional level management is the main management unit where
the strategies in a company are put into action. In strategy formation, the business and corporate
level managers need and use the information being fed from the functional level. Forecasting
activities can take place anywhere in these three levels based on the managerial needs and
forecasting problems. However, as we get from top to bottom of managerial levels, the more
intensive and more frequent forecasting function is utilized.
On the other hand, strategic decisions mainly focus on creating ‘competitive advantages’
and differ from other daily or operational decisions from several aspects. Some of the
characteristics of strategic decisions are that (i) they are made less frequently than (e.g. daily)
operational decisions; (ii) they are generally more costly (in terms of the decision-making
process e.g. may require longer time and more money, and the alternative costs) to make
compared to other type of decisions; (iii) the consequences may be too severe for the firm; (iv) it
generally requires background work and longer time to make; (v) they may normally require
more and detailed information (e.g. data and (full) analysis of the situations, which may not be a
pre-condition for ordinary daily decisions). The decisions such as market segmentation, new
product development, application of new manufacturing process, selection of a new distribution
channel, and application of a new marketing mix, all can be considered as strategic decisions.
Similarly, the major decisions directed at obtaining substantial cost reductions can significantly
contribute to gaining competitive advantages and, that is why, can be considered as a strategic
type. More specifically, forecasting of costs, market share, sales, inventory, cash flows,
dividends, stock prices, and capacity requirements, which are only some of the internal utility
areas, besides interest rates, inflation rates, and growth rates of economy, which are some of the
external utility areas, all are closely related to strategic decision-making in one way or another.
The operation of the forecasting function, in this sense, is an inter-departmental activity and,
therefore, the development of forecasts (e.g. sales or market potential) should be done by the
inclusion of several parties (e.g. market research manager, sales manager, and production
manager in a company). This is particularly important for especially if the forecasts are used for
strategic (e.g. marketing) planning, integration, and realization of those strategic plans.
Integration of forecasting system to management activities is particularly important in
utilizing the potential of forecasting, which has two main dimensions: (i) the production of the
desired forecasts and (ii) putting them into use. As the first one is related to the forecasting
function, the second one is related to the managerial decision processes. As with any other
decision tools, a failure in utilizing it will make it difficult to achieve the desired objectives,
especially if a particular decision is heavily based on the information from the forecasting system
such as the decisions regarding manufacturing capacity planning based on sales forecasts).
According to Palot, the potential uses of forecasting in strategic decision processes can be
stated as follows:
1. Goal Setting: Strategic planning requires input and the forecasting system in a
company provides the underlying input necessary for the underlying process. Strategic
managers can base their plans on these inputs in determining more realistic and attainable
goals. In other words, forecasts can be taken as benchmarks for determining what are (are
not) possible and achievable goals in a managerial decision context.
2. Firm Performance: The information produced by the forecasting system is
ready-to-use material for measuring the firm performance and whether the predetermined
strategic goals are achieved. Hence, forecasting can be used as a performance
evaluation and a monitoring device in assessing the success of strategic plans. Assume
that company X forecasted its market share to be 25% in a 3 years’ time and determined
all its strategies to attain this market share. At the end of the 3 years period, strategic
management could easily use market share forecast as a benchmark for evaluating to
what extent it achieved its objectives or how well it performed during these last 3 years,
so that it can refine its strategies.
3. Strategy Formulation: Strategy formulation is one of the key processes in
strategic management. Broad range of forecasting processes provides with company
managers the relevant information from procedural and analytical designs so that the
outcomes from various scenarios can be investigated and taken as a ground for such
processes and activities. This would give managers the opportunity to make more
realistic assumptions in their plans and projections and determine alternative strategies
concerning different outcomes of forecast results for the scenarios being considered.
4. Strategy Implementation: Strategy implementation is another key process in
strategic management. The attainability and consistency of strategic objectives are
particularly significant for strategic management levels. The strategic objectives
expressed in clear and objective figures are the key elements in strategy implementation.
Good communication between strategic managers at all levels is a prerequisite for
achieving these objectives, which requires clear, concrete, and understandable messages.
Forecasts produced, in this sense, are a major part of the messages in the communication
between both different levels of strategic and operational managers, and among
themselves, as well.
The same as in the strategy formulation, without the flow of information (and data) from the
top level to the functional level, the opposite of above, the functional level managers would not
know what strategic objectives are pre-determined; in turn, what the functional level objectives
should accordingly be, what functional decisions to make, and what tools to use for monitoring
and control purposes. In other words, without concrete strategic goals accompanied by figures,
which are made more concrete and visible by forecasts, it would be too difficult to implement the
strategies determined.
It was also suggested by Palot that forecasting can be used in two different ways for
strategic purposes:
1. For the realization of strategic decisions in functional and operational levels (e.g.
short-term operational forecasts which should normally be the basic guide in running the
business’ daily operations).
2. For planning strategic decisions directly (e.g. medium term and long term
capacity forecasts based on market potential).
Medium or longer term forecasts can directly be considered for strategic planning purposes
mainly because they have to consider economic, political, social, demographic, and other
relevant external (or internal) characteristics. Good sales forecasts start from forecasting of the
general state of an economy, and goes to forecasting of the specific industry and then to the
market potential and sales for a specific period of time. Within these processes, it is expected that
various scenarios are considered and a different set of forecasts for each scenario is produced.
Here, strategic thinking is an integral part of forecasting for different scenarios and the end
product is a set of information obtained from such processes, made ready to be used for strategic
purposes.
The forecasting function is related to the strategic management context as follows: Strategic
decisions are long-term in nature. Long-term decisions are riskier than short-term decisions due
to an increase in the uncertainty in the long-term. The higher the increase in uncertainty, the
more the managers’ need for information for strategic decision-making. In principle the longer
the time horizon is, the higher the planning requirements are (e.g. capacity planning) in
companies. It is obvious that in such situations the information requirement by management
increases dramatically, especially, if the intention is to make strategic decisions, which makes
forecasting central to strategic decision-making. Cost considerations are another factor that
forces strategic managers to consider forecasting. A forecasting activity with a high accuracy
may be needed especially in major planning and investment decisions based on the forecasts of
market potential or sales where high costs are incurred (e.g. plant expansion and new facilities
construction). The size of the costs or financial resources to be invested may make firms utilize
the forecasting function in making a ground for such decisions.
Reference: Polat, Cihat Forecasting as a Strategic Decision-Making Tool: A Review and
Discussion with Emphasis on Marketing Management, European Journal of Scientific Research,
2008 Volume 20 Number 2, pp.419-442
