Reprint: R0707K
The primary goal of forecasting is to identify the full range of possibilities facing a company, society, or the world at large. In this article, Saffo demythologizes the forecasting process to help executives become sophisticated and participative consumers of forecasts, rather than passive absorbers. He illustrates how to use forecasts to at once broaden understanding of possibilities and narrow the decision space within which one must exercise intuition.
The events of 9/11, for example, were a much bigger surprise than they should have been. After all, airliners flown into monuments were the stuff of Tom Clancy novels in the 1990s, and everyone knew that terrorists had a very personal antipathy toward the World Trade Center. So why was 9/11 such a surprise? What can executives do to avoid being blindsided by other such wild cards, be they radical shifts in markets or the seemingly sudden emergence of disruptive technologies?
In describing what forecasters are trying to achieve, Saffo outlines six simple, commonsense rules that smart managers should observe as they embark on a voyage of discovery with professional forecasters. Map a cone of uncertainty, he advises, look for the S curve, embrace the things that don’t fit, hold strong opinions weakly, look back twice as far as you look forward, and know when not to make a forecast.
FAQs
What are the six statistical forecasting methods? Linear Regression, Multiple Linear Regression, Productivity Ratios, Time Series Analysis, Stochastic Analysis. What are the three judgmental forecasting methods? Managerial Estimates, Delphi Technique, Nominal Grouping Technique.
What is the 6th step of forecasting? ›
Step 6: Update the Forecasting
Most people will stop at step 5 and forget all about step 6 which is regularly updating the forecast.
What are the 7 steps in a forecasting system? ›
How to do financial forecasting in 7 steps
- Define the purpose of a financial forecast. ...
- Gather past financial statements and historical data. ...
- Choose a time frame for your forecast. ...
- Choose a financial forecast method. ...
- Document and monitor results. ...
- Analyze financial data. ...
- Repeat based on the previously defined time frame.
The selection of a method depends on many factors—the context of the forecast, the relevance and availability of historical data, the degree of accuracy desirable, the time period to be forecast, the cost/benefit (or value) of the forecast to the company, and the time available for making the analysis.
What are the five 5 steps of forecasting? ›
- Step 1: Problem definition.
- Step 2: Gathering information.
- Step 3: Preliminary exploratory analysis.
- Step 4: Choosing and fitting models.
- Step 5: Using and evaluating a forecasting model.
A '6+6' shows 6 months of actuals and 6 months of forecast. As the year progresses, the forecast for the year should become more accurate the more it comprises actual months and fewer forecast months.
What are the elements of good forecasting? ›
A high-quality forecast features the following characteristics: Accurate: The right forecast is accurate enough to help you make good decisions about plans and how a company can allocate resources. Timely: A good forecast gives you information when needed so that you can respond quickly to changing market conditions.
What are the 4 principles of forecasting? ›
The general principles are to use methods that are (1) structured, (2) quantitative, (3) causal, (4) and simple.
What are effective forecasting techniques? ›
Four of the main forecast methodologies are: the straight-line method, using moving averages, simple linear regression and multiple linear regression. Both the straight-line and moving average methods assume the company's historical results will generally be consistent with future results.
What is the simplest forecasting method? ›
Naïve is one of the simplest forecasting methods. According to it, the one-step-ahead forecast is equal to the most recent actual value: ^yt=yt−1.
When setting up a forecasting process, you will have to set it across four dimensions: granularity, temporality, metrics, and process (I call this the 4-Dimensions Forecasting Framework). We will discuss these dimensions one by one and set up our demand forecasting process based on the decisions you need to make.
What are the 5 forecasting models? ›
5 common types of forecasting models
- Time Series Model: good for analyzing historical data to predict future trends.
- Econometric Model: uses economic indicators and relationships to forecast outcomes.
- Judgmental Forecasting Model: leverages human intuition and expertise.
Four common types of forecasting models
- Time series model.
- Econometric model.
- Judgmental forecasting model.
- The Delphi method.
There are five major statistical methods to consider when conducting statistical analysis: mean, standard deviation, regression, sample size, and hypothesis testing.
How many types of forecasting methods are there? ›
Key Highlights. Four of the main forecast methodologies are: the straight-line method, using moving averages, simple linear regression and multiple linear regression. Both the straight-line and moving average methods assume the company's historical results will generally be consistent with future results.
What are the statistical methods of demand forecasting? ›
The two most famous types of statistical methods are trend projection and regression analysis methods. These are entirely dependent on future demand predictions.
