BUSINESS STRATEGY

ASSIGNMENT
Forecasting Techniques

Submitted by: IBALAWANPYNHUN WRIANG

SB19MBHHA002
MBA-HOSPITAL ADMINISTRATION
3rd semester

Submitted to: Dr Bikas Gogoi

ASSOCIATE PROFESSOR,
SCHOOL OF BUSINESS
Discuss the forecasting techniques.
1. Extrapolation
2. Brainstorming
3. Expert opinion
4. Statistical modelling
5. Scenario writing

EXTRAPOLATION:
Extrapolation is the most usual method of forecasting. It is based on the assumption that
present development will continue in the same direction and with unvarying speed (or
alternatively, with steadily growing or diminishing speed, i.e. a logarithmic extrapolation).It
is a method of prediction which assumes that the patterns that existed in the past will continue
on into the future, and that those patterns are regular and can be measured. In other words, the
past is a good indicator of the future.

It is only used for time-series forecasts. For cross-sectional or mixed panel data (time -series
with cross-sectional data), multivariate regression is more appropriate. This methodology is
useful when major changes are not expected; that is, causal factors are expected to remain
constant or when the causal factors of a situation are not clearly understood. It also helps
discourage the introduction of personal biases into the process.

The basis of an extrapolation will be knowledge on the recent development of the

phenomenon. One will need at least two (although usually you have more) sequential
observations made at known points of time. The principle is shown in the figure below:

 start from two or more observations that were made in different points of time (on
moments t= -1 and t= 0, in the diagram),
 note the difference d between them. The difference can be quantitative or qualitative,
 modify the latest observation by implementing (i.e. adding) once more the
difference d, and get thus the forecast (the red line in the diagram).

There is an option of measuring the difference d whether as an absolute or as

a proportional change. Absolute measurement means the same as even development, i.e.
change in constant speed. Proportional measurement, e.g. "10% increase to the preceding
observation" means that the pace of change is increasing (or decreasing). This alternative is
sometimes called "logarithmic extrapolation".

1
Extrapolation is classified into three types, namely

 Linear extrapolation
 Conic extrapolation
 Polynomial Extrapolation

1. Linear Extrapolation

For any linear function, linear extrapolation provides a good result when the point to be
predicted is not too far from the given data. It is usually done by drawing the tangent line
at the endpoint of the given graph and that will be extended beyond the limit.

2. Polynomial Extrapolation

A polynomial curve can be created with the help of entire known data or near the
endpoints. This method is typically done using Lagrange interpolation or Newton’s
system of finite series that provides the data. The final polynomial is used to extrapolate
the data using the associated endpoints.

3. Conic Extrapolation

A conic section can be created with the help of five points nearer to the end of the given
(i.e. known) data. The conic section will curve back on itself if it is a circle or ellipse. But
for parabola or hyperbola, the curve will not back on itself because it is relative to the X-
axis.

Extrapolation Formula: Let us consider the two endpoints in a linear graph (x , y ) and (x ,
1 1 2

y ) where the value of the point “x” is to be extrapolated, and then the extrapolation formula
2

is given as

x−x 1
y ( x) = ( y −y )
x 2−x 1 2 1

Applications: good for developing baseline data. Not as good for assessing the future impacts
of a policy change, unless historic data for a similar policy change is available.

Attributes & Limits - simple, cheap and often as or more accurate that complex theoretical
models.

Process - plot data and observe patterns.

Key: having a good base of data and understanding the pattern within it--easier said than done

Techniques: best fit, ratios, etc

ADVANTAGES OF EXTRAPOLATION:

 A simple method of forecasting.

 Not much data required.

2
  Quick and cheap.

DISADVANTAGES OF EXTRAPOLATION:

 Unreliable if there are significant fluctuations in historical data.

 Assumes past trend will continue into the future – unlikely in many competitive
 business environments.
 Ignores qualitative factors ( e.g. changes in tastes and fashions).

The innate weakness of all extrapolation is that it only can comply with such processes or
forces which already are in operation. It always ignores those new impacts that begin to apply
only in the present or in the future. Often there will be gradually more and more such new
impacts in the future, and in such a case extrapolation can give useful results only for a
relatively short period. Another weakness is that it is almost impossible to assess the probable
error of an extrapolation. A rough notion of it can be obtained by studying the consistency
and homogeneity of the series of the original observations. However, extrapolation is fairly
reliable, relatively simple, and inexpensive. Extrapolation, which assumes that recent and
historical trends will continue, produces large forecast errors if discontinuities occur within
the projected time period; that is, pure extrapolation of time-series assumes that all we need
to know is contained in the historical values of the series being forecasted. If we assume that
past behavior is a good predictor of future behavior, extrapolation is appealing. This makes it
a useful approach when all that is needed are many short-term forecasts.

BRAINSTORMING:
Brainstorming technique is used to forecast demand, especially for new products.
Brainstorming is a popular method for encouraging creative thinking in groups of about five
to eight people (Ivanceivich, 1998). In this method, many experts sit together and each expert
gives his own idea (forecast) and reason for it. One idea leads to many more ideas. The
group of experts will develop much more ideas than one person. Based on these ideas,
demand can be forecasted. Therefore, Brainstorming is a group or individual’s creativity
technique by which efforts are made to find a conclusion for a specific problem by gathering
a list of ideas spontaneously contributed by its member(s).

Good ideas may be combined to form a single better idea, as suggested by the slogan
“1+1=3”. It is believed to stimulate the building of ideas by the process of association. It is
built around four basic guidelines for participants:

 Generate as many ideas as possible.

 Be creative, freewheeling & imaginative.
 Build upon extending or combine earlier ideas,
 Withhold criticism of others’ ideas.

To use brainstorming effectively, one should first gain the group’s agreement to use
brainstorming. Then select a facilitator who:
3
  Encourages quality of ideas
 Encourages wild or potentially unpopular ideas
 Reminds the group not to evaluate (favorably or unfavorably)
 Does not introduce his or her own ideas
 Records all ideas

When people follow the above procedures, brainstorming increases the number of ideas they
suggest in comparison with traditional group meetings. This is because it removes some (but
not all) of the negative effects of the group process.

The success of this technique depends on: each member’s capacity, willingness to hear
thoughts, use the thoughts as a stimulus, spark new ideas of their own, and feel free to
express them. Thus, on the assumption that two heads or more are better than one,
brainstorming is one method for predicting the future by assembling a group of people with
knowledge and interest in a specific problem and encourage free flow of creative comments.
The conditions required for these brainstorming sessions are important (a) No participant may
criticize any idea, regardless of how farfetched it might be; (b) each participant is encouraged
to supplement the comments of others and to provide inputs for future estimates; (c) after
recording the comments during the meeting, a manager may then construct a forecast built on
the variety of ideas from the group.

Graphical representation of Brainstorming:

In the classical approach to brainstorming there are four basic rules. These rules are designed
to reduce social inhibitions among groups members, stimulate idea generation, and increase
overall creativity of the group:

1. Focus on quantity: It is not the quality or practicality that is important – just sheer
number of ideas. It is believed that quantity breeds quality. The greater the chance of
producing a radical and effective solution.
2. Withhold criticism: Any judging at this stage inhibits lateral thinking and may inhibit
some group members from participation.
3. Welcome unusual ideas: New perspectives are welcomes and assumptions suspended.
4. Combine and improve ideas: This also encourages building on the ideas previously
generated. In this case “1+1=3”.

4
Conducting a brainstorming session:

The facilitator leads the brainstorming session and ensures that ground rules are followed.
The steps in a typical session are:

1. A warm-up session, to expose novice participants to the criticism-free environment. A

simple problem is brainstormed
2. The facilitator presents the problem and gives a further explanation if needed
3. The facilitator asks the brainstorming group for their ideas
4. If no ideas are forthcoming, the facilitator suggests a lead to encourage creativity
5. A nominated person (s) captures the ideas in real time – using the words of the person
presenting the idea (to avoid filtering)
6. All participants present their ideas, and the idea collector(s) records them
7. To ensure clarity, participants may elaborate on their ideas
8. When time is up, everyone takes a break (of at least 15 minutes.
9. The facilitator organizes the ideas based on the topic goal and encourages discussion
10. Ideas are grouped and categorized
11. The whole list is reviewed to ensure that everyone understands the ideas
12. Duplicate ideas and obviously infeasible solutions are removed (or parked for use in
another session)
13. The remaining ideas are considered and where possible built upon
14. The group work through the remaining ideas and prioritize possible solutions for
implementation
15. The facilitator thanks all participants and gives each a token of appreciation.

Some of the techniques and vehicles to which brainstorming can be used:

 Classic brainstorming: The group is responsible for focusing its attention on a

problem or question for a limited period of time, no longer than 90 minutes. The
objective is to generate as many solutions as possible. With the group select the five
best ideas, the criteria for judging them and score them on a scale of 1-5. The best
idea is the one with the highest score.
 The Challenge: The problem is exaggerated or made more difficult than it really is
which forces the problem to be addressed from a different perspective and gets the
group to think creatively about solutions.
 What If: Each member of the group is asked to pose a minimum of three “what if?”
questions about the problem/question/topic. For example, the question is, “How do we
reduce employee turnover”, “what if we doubled everyone’s salary?” This technique
enables the consideration of hypothetical solutions that are not part of everyday
thinking.
 Role Playing: Ask colleagues from a different department, other firms or countries
how they would solve the problem. An original solution may be developed by
viewing the problem from a different professional perspective.
 The Wrong Way: Instead of generating ideas or solving problems, the group
deliberately tries to generate poor ideas or ways to make the problem worse. For

5
 example if trying to improve client retention, ask “What could we do to ensure clients
never purchased from us again?” By focusing on poor client service, the focus is on
the issues that matter most to the client, which generate ideas that are better
positioned to solve the problem.
 Metaphors: A metaphor is a word or phrase that symbolizes something other than its
literal meaning. An example of using metaphors when brainstorming is, when seeking
to energize the maintenance team visualize them as a football team, how would you
improve their performance? By applying metaphors, you may gain a fresh perspective
on the problem.
 Word Associations: Instead of generating specific solutions or ideas, the group simply
generates whatever word or phrase that comes to mind. For example, if the group is
discussing ways to improve the interior appearance of the main office, they might
generate words like: “fabric”, “colour”, “paint”, and “texture”. Later these key
phrases can be used to develop action plans.
 Risky Options: This brainstorming technique encourages wild and risky approaches to
problems. Normally members of the group may be afraid to suggest unusual or risky
options because they are overcome by the fear of failure or group criticism. You may
even provide a prize for the riskiest option.
 The Hunter: Group members play “the hunter” by scanning through newspapers,
magazines, literature etc. hunting for random ideas that might have a bearing on the
problem they are trying to solve. This technique can be used equally well with small
groups and individuals.

Advantages of Brainstorming:

There are many advantages of brainstorming such as

 group members are enthusiastic,

 broad level participation,
 group members maintain a strong task orientation,
 new ideas are built upon & extended and
 combined and improved ideas.

Disadvantages of Brainstorming:

The major disadvantages of brainstorming are:

 Members typically feel that the final product is a team solution, not individual,
 Residual fear among some members,
 Creative thoughts are looked down upon,
 Less contribution to group cohesion.
 Only one person can speak at a time.

Brainstorming is most effective with groups of 6-12 people and works best with a varied
group. So, within a firm a brainstorming session should include participants from various

6
departments from across the organization and with different backgrounds (qualifications,
experience etc.). Even when the brainstorm is supposed to be focused on a specific or even
specialist area, outsiders can bring fresh ideas that can inspire the experts. The Brainstorm
should be performed in a relaxed environment. If participants feel free to relax and joke
around, they'll stretch their minds further and therefore produce more creative ideas. A
brainstorming session requires a leader. This person needs to be a good listener, during the
brainstorm session the leader will need to explain the rules, keep control, and ensure the
session stays on track.

EXPERT OPINION:
Expert opinion is an opinion given by an expert, and it can have significant value in
forecasting key policy variables in economics and finance. Expert forecasts can either be
expert opinions, or forecasts based on an econometric model. An expert forecast that is based
on an econometric model is replicable, and can be defined as a replicable expert forecast
(REF), whereas an expert opinion that is not based on an econometric model can be defined
as a non‐replicable expert forecast (Non‐REF). Both REF and Non‐REF may be made
available by an expert regarding a policy variable of interest.

Experts are “people with information about the technology of interest to the forecaster”. The
expert-opinion technique simply assumes that some people have more knowledge than others
about a certain topic; and if you collect this knowledge from a group of experts, the results
will definitely exceed the outcomes collected from one expert. The group of experts can
provide technical, economic, social and/or environmental perspectives that could be difficult
to reach by the forecasters on their own. The expert opinion method is needed the most, when
historical data are insufficient, modelling is difficult and/or a completely new product is
forecasted. In most cases, it is applied when experts in the area under study can be defined
and they are able to contribute. Expert opinion is often necessary in forecasting tasks because
of a lack of appropriate or available information for using statistical procedures.

Expert opinion is often necessary in forecasting tasks because of a lack of appropriate or

available information for using statistical procedures. But how does one get the best forecast
from experts? One solution is to use a structured group technique, such as Delphi, for
eliciting and combining expert judgments. In using the Delphi technique, one controls the
exchange of information between anonymous panelists over a number of rounds (iterations),
taking the average of the estimates on the final round as the group judgment. A number of
principles are developed here to indicate how to conduct structured groups to obtain good
expert judgments. These principles, applied to the conduct of Delphi groups, indicate how
many and what type of experts to use (five to 20 experts with disparate domain knowledge);
how many rounds to use (generally two or three); what type of feedback to employ (average
estimates plus justifications from each expert); how to summarize the final forecast (weight
all experts’ estimates equally); how to word questions (in a balanced way with succinct
definitions free of emotive terms and irrelevant information); and what response modes to use
(frequencies rather than probabilities or odds, with coherence checks when feasible). Delphi
groups are substantially more accurate than individual experts and traditional groups and

7
somewhat more accurate than statistical groups (which are made up of noninteracting
individuals whose judgments are aggregated). Studies support the advantage of Delphi groups
over traditional groups by five to one with one tie, and their advantage over statistical groups
by 12 to two with two ties. We anticipate that by following these principles, forecasters may
be able to use structured groups to harness effectively expert opinion.are made up of
noninteracting individuals whose judgments are aggregated). Studies support the advantage
of Delphi groups over traditional groups by five to one with one tie, and their advantage over
statistical groups by 12 to two with two ties. We anticipate that by following these principles,
forecasters may be able to use structured groups to harness effectively expert opinion.

Expert opinion is similar to executive opinion except that the expert is usually someone
outside the company. Like executive opinion, expert opinion is a tool best used in
conjunction with more quantitative methods. As a sole method of forecasting, however,
expert opinions are often very inaccurate. Just consider how preseason college football
rankings compare with the final standings. The football experts’ predictions are usually not
very accurate.

The expert’s opinions method is used when the organization wants the forecast to be more
accurate and which holds true for the entire industry. This is only possible through the group
of experts who have the complete information on the overall economic environment and the
conditions prevailing in the industry. Hence, people from outside the organization, who are
very close to the market are approached and are required to sit with the company’s executives
and reach to the final forecast.

This method, when employed successfully can give accurate forecasts. However, this also
suffers from the demerits. Firstly, the experts from outside may be reluctant to give the
complete information about the conditions prevailing in the industry. Secondly, the
discussions could be biased that may result in false predictions. Thirdly, the responsibility to
take decisions is distributed on all and hence no single person could be held responsible in
case the forecast proves to be wrong. Finally, a general forecast is made and could not be
readily broken down into the product-wise, month-wise and department-wise forecasts.

STATISTICAL MODELLING:
In simple terms, statistical forecasting implies the use of statistics based on historical data to
project what could happen out in the future. It discovers the underlying patterns in the
history, and uses them to predict the future. This can be done on any quantitative data: Stock
Market results, sales, GDP, Housing sales, etc. 

Types of forecasting statistical models:

1. Time series methods:

Time series methods are forecasting techniques that base the forecast solely on the
demand history of the item you are forecasting. They work by capturing patterns in the
historical data and extrapolating those patterns into the future. Time series methods are
appropriate when you can assume a reasonable amount of continuity between the past and

8
 the future. They are best suited to shorter-term forecasting (for example, projecting out 18
months or less). This is due to their assumption that future patterns and trends will
resemble current patterns and trends. This is a reasonable assumption in the short term but
becomes more tenuous the further out you forecast.

Common Time Series Models:

 Very simple models. Moving averages, “same as last year”, percentage growth and
best-fit line (i.e., regression against time) are all very simple time series models that
can be used to generate forecasts. They can be implemented in a spreadsheet in a
matter of seconds and do not require any statistical expertise on the part of the
forecaster; however, for most business applications these methods are too simple and
more accurate forecasts can almost always be generated using alternative time series
methods.
 Exponential smoothing models. Exponential smoothing is the method of choice for
many corporate forecasters. The models perform well in terms of accuracy, are easy
to apply and can be automated, allowing them to be used for large scale forecasting.
Exponential smoothing models capture and forecast the level of the data along with
different types of trends and seasonal patterns. The models are adaptive and the
forecasts give greater emphasis to the recent history vs. the more distant past.
 Box-Jenkins (ARIMA) models. Box-Jenkins models are similar to exponential
smoothing models in that they are adaptive, can model trends and seasonal patterns,
and can be automated. They differ in that they are based on autocorrelations (patterns
in time) rather than a structural view of level, trend and seasonality. Box-Jenkins
models tend to perform better than exponential smoothing models for longer, more
stable data sets and not as well for noisier, more volatile data.
 Croston’s intermittent demand model. The Croston’s model is specifically designed
for data sets where the demand for any given period is often zero and the exact timing
of the next order is not known. Low-level data (e.g., SKU by customer) or spare parts
often exhibit this kind of demand pattern. This method works by combining a
smoothed estimate of the average demand for periods that have demand with a
smoothed estimate of the average demand interval. The forecasts are not magic (they
won’t tell you when the next order will be placed); however, they often yield a better
forecast for expected demand than other time series approaches.

2. Regression Models:

Dynamic regression models allow you to incorporate causal factors such as prices,
promotions and economic indicators into your forecasts. The models combine standard OLS
(“Ordinary Least Squares”) regression (as offered in Excel) with the ability to use dynamic
terms to capture trend, seasonality and time-phased relationships between variables. The
result is a model that will forecast more accurately than straight time series approaches when
explanatory variables are driving the demand for your products or services and certain other
conditions are met.

9
A well-specified dynamic regression model lends considerable insight into relationships
between variables and allows for “what if” scenarios. For instance, let’s say that your
dynamic regression model includes price as an explanatory variable. By quantifying the
relationship between sales and price, the model allows you to create forecasts under varying
price scenarios. “What if we raise the price?” “What if we lower it?” Generating these
alternative forecasts can help you to determine an effective pricing strategy.

The “what if” analysis described above hints at the biggest drawback to using dynamic
regression. A well-specified dynamic regression model captures the relationship between the
dependent variable (the one you wish to forecast) and one or more independent variables. In
order to generate a forecast, you must supply forecasts for your independent variables. If
these independent variables are under your control (e.g., prices, promotions, etc.) or if they
are leading indicators, this may not be a big issue. If, however, your independent variables
are not under your control (e.g., weather, interest rates, price of materials, competitive
offerings, etc.) then you need to keep in mind that poor forecasts for the independent
variables will lead to poor forecasts for the dependent variable.

Statistical methods can provide a level of automation and accuracy that purely judgmental
methods simply can’t provide on their own. Not only can these models help you identify
recurring patterns and trends in your data, they can also save you tons of time and effort by
automatically forecasting big data sets, and as a result you can direct your focus to where
your judgment counts the most.

SCENARIO WRITING:
When a company’s or industry’s long-term future is far too difficult to predict (whose isn’t!),
it is common for experts in that company or industry to ponder over possible situations in
which the company or industry may find itself in the distant future. The documentation of
these situations – scenarios – is known as scenario writing. Scenario writing seeks to get
managers thinking in terms of possible outcomes at a future time where quantitative
forecasting methods may be inadequate for forecasting. Unfortunately, much literature on this
approach suggests that writing multiple scenarios does not have much better quality over any
of the other judgmental forecasting methods we’ve discussed to date.

Hence, a fundamentally different approach to judgmental forecasting is scenario-based

forecasting. In scenario writing, the forecaster generates different outcomes based on
different starting criteria. The decision-maker then decides on the most likely outcome from
the numerous scenarios presented. Scenario writing typically yields best, worst and middle
options.

Business start-ups often use scenario writing to generate financial projections covering best-,
likely- and worst-case income and expense scenarios, since they don’t have an established
track record to present to funders and potential partners.

10
Thus, the aim of this approach is to generate forecasts based on plausible scenarios. In
contrast to the two previous approaches (Delphi and forecasting by analogy) where the
resulting forecast is intended to be a likely outcome, each scenario-based forecast may have a
low probability of occurrence. The scenarios are generated by considering all possible factors
or drivers, their relative impacts, the interactions between them, and the targets to be forecast.

Building forecasts based on scenarios allows a wide range of possible forecasts to be

generated and some extremes to be identified. For example, it is usual for “best”, “middle”
and “worst” case scenarios to be presented, although many other scenarios will be generated.
Thinking about and documenting these contrasting extremes can lead to early contingency
planning.

With scenario forecasting, decision makers often participate in the generation of scenarios.
While this may lead to some biases, it can ease the communication of the scenario-based
forecasts, and lead to a better understanding of the results. In order for scenario writing to be
an effective forecasting technique, one need to plan the scenarios in question around
uncertainties that lie ahead for the organization. Then, one need a clear plan of action that
they would be able to immediately implement should any of the projected scenarios happen.

With this technique there are eight steps one can follow in order to think strategically about
the scenarios and the planning process:

3. The focal issue within the assumption set.

4. Key factors that are influenced by the focal issue and which influence the focal issue.
5. Any external forces from the focal issue.
6. Critical uncertainties related to the external forces or critical uncertainties.
7. Scenario logics, as they derive from: a) key factors b) external forces or c) critical
uncertainties.
8. Scenarios
9. Implications and options
10. Early indicators, as they relate to the focal issue and the key factors

With this, one will note that a lot of the aspects relate to one another in some way. That is to
say, that scenario writing looks similar to storytelling.

Advantages:

We have the opportunity to think strategically about the things that might happen within our
sales department. Tangentially, we get to make plans that comprise a contingency of sorts,
preparing your sales for the worst and best to come.

Disadvantages:

As is the case with forecast stages, using scenario writing means you need to have one person
within your company who has a keen eye for psychology and for business activity,
particularly within sales. These are more subjective than they are quantitative. That means

11
they function as more of an art form and less of a strict science. This should be used as a way
to complement other data driven methods, rather than relying upon it entirely.

By combining more than one technique, we get the best of both worlds and generate a fuller
picture of what the future brings.

12