There are so many variables that influence the actual outcome of the future that it is often very difficult to predict anything with any degree of confidence.
Firms often use the past as an indication of what they expect to happen in the future. This is known as extrapolation.
Forecasts are also heavily reliant upon market research data and therefore the more accurate this is, the more reliable the prediction of the future.
methods of time series analysis- cyclical analysis
as with trend analysis, long-term figures are used but now the objective is to examine the relationship between demand levels and economic activity.
For example, by asking the question 'what is the relationship between demand for the product or products and the stage in the economic or business cycle?'.
methods of time series analysis- random factor analysis
this method of analysis attempts to explain how unusual or extreme sales figures occur.
For example, if sales of ice cream double for a two-week period, then could this be explained by weather conditions, rather than an effective advertising campaign? Random factor analysis therefore attempts to provide explanations for unusual or abnormal sales activity.
Correlation analysis is a measurement of the strength of the relationship between two variables e.g. the sale of ice cream and the temperature outside.
Businesses can use of this information to identify key influences on demand to try to maximise their sales and profits.
The line of best fit is drawn through the middle of all the data points on a scatter graph, so that the points are evenly distributed on each side of the line.
Qualitative forecasting methods are mainly used when there is a lack of historical data available for a business to conduct quantitative analysis techniques.
Qualitative methods are largely based upon personal opinion and are therefore highly subjective which presents the opportunity for bias in the results.
This is a forecasting method that relies upon a panel of experts chosen by the business.
The Delphi method is based on the principle that forecasts from a structured group of experts are more accurate
The experts answer questions sent to them by the business in the form of a questionnaire.
After each round, the facilitator provides an anonymous summary of the expert's forecasts and their reasons for reaching these forecasts.
A new questionnaire is then issued and the experts are encouraged to revise their answers in light of the results.
After several rounds of this approach, the aim is that the range of answers provided gets smaller as there is growing consensus about the 'correct' answer.
During a brainstorm the collective ideas of a group of people are considered to try and reach agreement about a problem.
All ideas are welcome and none are initially dismissed or any judgements made.
All members of the groups are encouraged to contributeand to be creative in their ideas.
This method works best with groups of varied participants from different areas of a business who can all provide a fresh insight into how to best solve a particular issue or problem.