TOPIC II.

Strategic Management: an overview

A strategy is a set of actions that managers take to increase their company’s

performance relative to rivals. If a company’s strategy does result in superior performance, it
is said to have a competitive advantage. Superior performance is typically thought of in terms
of one company’s profitability relative to that of other companies in the same or a similar kind
of business or industry.
*Profitability is the return that a company makes on the capital invested in the enterprise.
*Competitive Advantage is the advantage over rivals achieved when a company’s profitability
is greater than the average profitability of all firms in its industry.

Strategic management process

Strategic management is synonymous with the term strategic planning. Strategic

planning is more often used in the business world, while the former is often used in academia.
Strategic management is sometimes used to refer to formulating, implementing, and evaluating
strategy, while strategic planning covering only strategy formulation. The purpose of strategic
management is to explore and create new and different opportunities for tomorrow; long-range
planning, in contrast, tries to capitalize for tomorrow the data of today.

Strategic management is known as the art and science of the formulation,

implementation, and evaluation of cross-functional decisions that allow a company to attain its
objectives. It focuses on integrating management, operations, finance/accounting, production,
marketing, research and development, and information systems for organizational success.

Strategy formulation, implementation, and evaluation activities happen at three

hierarchical levels in a large organization: corporate, divisional or strategic business unit, and
functional. By promoting communication and interaction among managers and employees
across levels, strategic management helps a company operate as a competitive team.

Environmental scan is the first stage of strategic management. An environmental scan

is an ongoing process and organizations are always refining the way a particular business
through the process. It reinforces productive strategic plans and policies that can be
implemented to make the organization get the maximum use of the business environment they
are in.
An environment scan covers all the external and internal factors or influences that
impact the operation of a business. It can be classified into the macro environment and the
micro environment. Environmental scanning is a tool that not only helps the business finds its
strengths in its current environment but it also finds the weaknesses of competitors, identifies
new markets, potential customers, up and coming technological platforms, and trends.

In the environmental scan, SWOT analysis are used as framework to examine the
environment to improve the viability of a certain company. The organization needs to look at
all influences of the company and this environmental scan makes them aware and prepare them
to be adaptive from the environment, and it allows the organization to easily respond and react
to the changes of both internal and external business environment.
 A SWOT analysis is one instrument that makes it easier to examine every area of your
business’ strengths, weaknesses, opportunities, and threats. The aim is not just to make a list—
it is to use that list to help you determine how to maximize your strengths and opportunities,
and mitigate the risks linked to your weaknesses and threats to your business. This will help
the organization to distinguish its objectives.
External opportunities and external threats indicate economic, demographic,
cultural, social, environmental, political, legal, governmental, technological, and competitive
trends and situations that could significantly benefit or harm an organization in the future.
Opportunities and threats are generally beyond the control of the organization—that is why it
is external.
Internal strengths and internal weaknesses are controllable activities of the
organization that are done especially well or poorly. They exist in the management, marketing,
finance/accounting, production/operations, research and development, and management
information systems activities of a business. Determining and evaluating organizational
strengths and weaknesses in the functional areas of a business is a critical strategic-
management activity. Organizations focus on strategies that optimize internal strengths and
eliminate internal weaknesses. Strengths and weaknesses are identified relative to competitors.

Defining the organization’s purpose, mission, and objectives

All organizations have a unique purpose and reason for existence. This uniqueness is
express in vision and mission statements. It should be short, preferably one sentence, and as
many managers as possible have participated into creating the statement for ownership and
accountability.
A Purpose is to create a plan, roadmap or guideline for your business to attain success.
A vision statement answers the main question “What do we want to become?”
Example:
“To be the dominant number one in branded eat-out in the Philippines” -Jollibee
Meanwhile, Mission statement is a declaration of an organization’s “reason for
existence”. It answers the question “what is our business?”
Example:
“To serve the great tasting food, bringing the joy of eating to everyone.” - Jollibee
 Identifying the clear corporate vision and mission will help the organization
comprehend its purpose. As the first step in strategic management, the vision and mission
statements provide direction for all planning activities.
10 Benefits of Having a Clear Mission and Vision

1. Achieves clarity of purpose among all managers and employees.

2. Gives a basis for all other strategic planning activities, including the internal and
external assessment, establishing objectives, developing strategies, choosing among
alternative strategies, devising policies, establishing organizational structure, allocating
resources, and evaluating performance.
3. Provides a focal point for all stakeholders of the firm.
4. Resolves divergent views among managers.
5. Promotes a sense of shared expectations among all managers and employees.
6. Projects a sense of worth and intent to all stakeholders.
7. Projects an organized, motivated organization worthy of support.
8. Achieves higher organizational performance.
9. Achieves synergy among all managers and employees.

Well-crafted vision and mission statements are important for formulating, implementing,
and evaluating strategy. Without clear statements of vision and mission, a company’s short-
term actions can be counterproductive to long-term interests.
OBJECTIVES
Long-term objectives are referred to as specific end-results that an organization seeks
to reach in pursuing its basic mission. Long-term means more than one year. Objectives are
crucial for organizational success because they provide direction; help in evaluation; promote
synergy; determine priorities; focus coordination; and give a basis for effective planning,
organizing, leading, and controlling activities. Objectives must be SMART - specific/clear,
measurable, attainable, relevant, and timebound.
Annual objectives are short-term accomplishments that organizations must attain to
reach long-term objectives. Like long-term objectives, annual objectives should also be
SMART.

Selecting a Strategy

Strategic Management does not only help an organization in creating strategies, but to
assist the organization in selecting which strategies fit in every situation.
In selecting a strategy, there are many things to consider. We articulate the vision and
mission of the organization, determine the stakeholders, and identify and assess the strengths
and weaknesses, as well as the opportunities and threats of the company. Upon following this
process, the organization would then be able to define its competitive advantage. This could
lead us to attaining the short-term and long-term objectives of the company.
Generating and Selecting Strategies by Nadeem Kureshi (2021):
a. Infinite number of possible actions and an infinite number of ways to implement
those actions
⚫ A practicable set of attractive alternative strategies must be developed, examined,
prioritized, and selected.
Strategic Alternatives are not usually set when the organization is in great condition.
However, if the organization is not performing well that it requires re-structuring, strategic
alternatives are used.
⚫ The advantages and disadvantages, trade-offs, costs, and benefits of these strategies must
be identified.
There should be a high-level of awareness of the gains and losses that a company might
acquire.
b. Involve managers and employees who were involved in the previous steps, and
make internal and external audits information available.
Gather people who can and should contribute, and collate every necessary information to
assess the strategies proposed.
c. Creativity is encouraged throughout the process.
The idea of the participants shall be created, and the alternative strategies they propose shall
be considered and discussed further.
d. The strategies should be ranked in order of attractiveness by involved
participants.
To ensure accurate outcome in the decision-making process, the group can use the
following scale as a basis: 1 - should not be implemented, 2 - possibly should be implemented,
3 - probably should be implemented, and 4 - definitely should be implemented.
e. Prioritize list of best strategies that reflects the collective wisdom of the group.
Those alternative strategies that has been selected by the group shall be prioritized.
After selecting strategies, a company shall execute the best strategies to achieve its
goals while keeping up with the changing business environment.

Model of the Strategic Management Process

 The Fred David’s Model of Strategic management Process is comprised of three stages,
known as strategy formulation, strategy implementation and strategy evaluation.
Strategy formulation consists of creating a vision and mission, determining an
organization’s external environment analysis (opportunities and threats), identifying internal
environment analysis (strengths and weaknesses), developing long-term objectives,
establishing alternative strategies, and determining particular strategies to pursue. Strategy-
formulation issues consist identifying what new businesses to pursue, what businesses to give
up, how to allocate resources, whether to enter international markets, expand operations or
diversify, whether to merge or form a joint venture. This strategic decision cause major
multifunctional consequences and long-lasting effects on an organization. Top managers are in
the best position to understand fully the effects of strategy-formulation decisions; they have
the authority to allocate the resources necessary for implementation.
Strategy implementation is often referred to as the “action stage” of strategic
management. It includes mobilizing employees and managers to act on formulated strategies.
Every department must provide answers to questions, such as, “What must be done to execute
our part of the organization’s strategy?” and “How can we effectively get the job done?” This
phase needs personal discipline, commitment, and sacrifice. It requires a company to create
annual objectives, develop policies, culture, developing an effective organizational structure,
strategizing marketing efforts, preparing budgets, implementing and utilizing information
systems, linking employee compensation to organizational performance, practices that
motivate employees, and commit resources so that formulated strategies can be implemented.
Strategy-implementation activities affect all managers and employees in an organization.
Strategy evaluation is the last phase in strategic management. Managers are required to
know when specific strategies are not working well; strategy evaluation is the answer to getting
this information. Three fundamental strategy-evaluation activities are (1) reviewing external
and internal factors that are the bases for current strategies, (2) measuring performance, and (3)
taking corrective actions. Strategy evaluation is needed because success today is no guarantee
of success tomorrow!

Strategic management and planning; its purpose, methods used; the effect of the external
environment on planning: understanding and managing risk.

Strategic management encompasses the entire process of accomplishing that goal,

from strategy to execution. Controlling the strategic plan's action plans, projects, and lifecycle
is critical to achieving your company's long-term goals.
Strategic management process is continuous and evolves as the organizational goals
and objectives change. Organizations engage in strategic management to ensure that they adapt
to trends and external changes such as globalization.
Three Phases of Strategic Management:
• Think – Thinking comprises both an external assessment and an internal assessment.
• Plan – This is where strategic planning comes into play.
• Act – Executing your strategic
The purpose of the strategic management process is to assist the firm in achieving long-
term strategic market competition. SMP adds value to a company by concentrating on and
analyzing opportunities and risks, then exploiting the business's strengths and weaknesses to
help it survive, develop, and expand. A strategic management method can assist a company in
doing this.
Five Steps to Reach the Desired Result More Effectively:
1. Goal Setting or Vision Creation.
2. Analysis.
3. Strategy Formulation.
4. Implementation or Execution.
5. Control and Evaluation.
Strategic planning is the process through which an organization's executives outline their
vision for the future and determine the aims and objectives of their company. The process
involves determining the order in which those objectives should be achieved so that the
organization may achieve its stated vision. It provides a blueprint for achieving organization’s
goals.
Strategic planning typically represents mid- to long-term goals with a life span of three to
five years, though it can go longer. This is different than business planning, which typically
focuses on short-term, tactical goals, such as how a budget is divided up. The time covered by
a business plan can range from several months to several years.
Strategic planning seeks to guarantee that workers and other stakeholders are all working
toward a single objective and that their energy, focus, and resources are all directed in that
direction. Agreements are reached on the direction the organization wishes to go and how each
contributor can help to make that happen. A strategic plan frequently spells out how the success
of the strategy will be assessed, in addition to the overarching aim and how they will get there.
The following four aspects of strategy development are worth attention:
1. The Mission. Strategic planning starts with a mission that offers a company a sense of
purpose and direction.
2. The Goals. Strategic planning involves selecting goals. Most planning uses SMART
goals – specific, measurable, achievable, realistic and time-bound -- or other objectively
measurable goals.
3. Alignment With Short-Term Goals. Strategic planning relates directly to short-term,
tactical business planning and can help business leaders with everyday decision-making
that better aligns with business strategy.
4. Evaluation and Revision. Strategic planning helps business leaders periodically
evaluate progress against the plan and make changes or adjustments in response to
changing conditions.

External Environment Factors

The business cannot control the eternal environment factors but can respond to change
if needed; that is why it is external. The major problem for a business is reacting early to
changes in the external environment, which depends on how quickly any changes are
recognized. Some external environmental factors are reported daily in the media and managers
have considerable information on which to develop strategic plans. However, some external
factors may be challenging to determine, mainly if the pace of change is slow or hidden from
view.
Economic factors
 Businesses and the economy have a mutual connection. Hence, the success of a business
results in a more robust economy, whereas a healthy economy allows businesses to develop
quickly. The economic environment refers to all the external economic factors that affect the
buying behavior and spending patterns of consumers and businesses and therefore affect the
performance of a company. These factors are frequently beyond a company's control and may
be either large-scale or small-scale.
For example, inflation, recessions, tax rates, increases in interest rates, and a high level
of unemployment will decline the consumption of non-essential goods and services.
While businesses can't stabilize their economic environment, nevertheless, they can assess
economic conditions before deciding to enter a particular market or seek other strategies.
• Know how to improve your financial performance and discover areas to boost your
finances.
• Perform a SWOT analysis to investigate your current situation.
• Employ business planning mechanisms and resources to guarantee your business plan
reflects how you'll operate cycles of economic downturns.

Social factors

Social factors affecting business planning refer to changes in consumer preferences,

behavior, or perspective that might influence sales, earnings, returns, and revenues. For
instance, these days, consumers are focusing more on environmental problems such as climate
change and pollution. Thus, this compels and pressures companies to embrace eco-friendly
solutions for their business production and waste disposal.

Social influence also incorporates the ethical side of a business, such as how a business
treats its stakeholders (e.g., employees, suppliers, and customers). An ethical business is one
that regards the needs of all its individuals, not just its owners.

For their employees, they must ensure work-life balance as well as their physical and
emotional well-being. For their suppliers, they must adhere to the agreed contract and
reimburse suppliers within the agreed time. For their customers, they must deliver quality
products at a reasonable price.

Technological factors

Technology is used considerably in businesses, from production to product selling and

customer support. Technology authorizes a business to be efficient while achieving more
productivity, which, in the long run, can result in a competitive advantage. Businesses will risk
losing market share if they do not adjust adequately and quickly to technological change.
Environmental factors

Environmental influence refers to changes in the physical environment, such as weather

conditions, pollution, and climate change, that might affect business planning and operations.

On the other hand, many businesses have embraced eco-friendly solutions to mitigate
their environmental impacts. Some examples include:
 ➢ Recycling packaging
➢ Offsetting carbon footprint
➢ Introducing energy-saving plans
➢ Adopting more energy-efficient equipment
➢ Switching to fair-trade suppliers.

Competitive factors

Competitive factors refer to the result of competitions in the market environment. The effect
can be derived from price, product, or business strategy changes. The strength of business
competition is a continuously changing factor in the external environment. Not only will the
competition be recurring, but it will also transform business strategies, product lines, and prices.
Usually, such changes are not predicted, and business leaders must be cautious about competitors'
actions.

Therefore, a company can develop competitive advantages to avoid the impact of

competitive influence. A business can gain a competitive advantage by investing in a reasonable
labor force, excellent customer support, quality products and services, or a reputable brand image.
Thus, it will allow the company to outperform its competitors.

Legal Factors

Legal factors in a business environment are defined as law-related subjects and

proceedings that the business must consider to operate seamlessly. Government taxes, among
other regulatory standards, are being imposed to foster economic growth and safeguard
consumers from exploitation and other illegal factors. Before establishing or operating a
business accordingly, it is crucial to understand the function of tax measures and legal aspects
concerning business in determining how your business is concerned.

Distinguishing among corporate, business, and functional level strategies.

 1. Corporate Level Strategy
- uppermost level of strategy made by top-level management which sets the
overall direction of the organization. It addresses the question of what business
are we in?

4 Components of Corporate Strategy

● Visioning
○ involves setting the high-level direction of the organization—namely, the
vision, mission, and corporate values

● Objective Setting
○ involves defining specific and measurable outcomes you want to achieve over
a chosen time frame

● Resource Allocation
○ the practice of allocating human and capital resources to support objectives

● Strategic Trade-Offs
○ an essential part of corporate strategic planning since companies can’t always
take advantage of all feasible opportunities

Types Of Corporate Strategy

● Stability Strategy
○ a strategy that tries to keep an organization’s existing activities going without
making any significant changes in direction

● Expansion/Growth Strategy
○ aims to increase sales, assets, profits, or a combination of the three

● Retrenchment Strategy
○ Both stability and expansion strategies are in aggressive nature but retrenchment
is a defensive nature of strategy.
○ a business approach that tries to diminish a company’s size or diversity.

● Combination/Mixed strategy
○ a firm is said to be implementing a combination strategy if it uses stability,
expansion, and retrenchment strategies in its many strategic business units at
the same time.

2. Business Level Strategy

- are concerned specifically with the strategic planning and execution of
initiatives in order to set and steer the direction for an individual business unit.
The Key Focus Areas for Business Level Strategies:
Core Competencies
- are the elements of a business that differentiate that business in the market, and
provide value to customers

Customers
- concerned with the nature of the customers, both current and potential, which
interact with the business.

“The words who, what and how can be used to develop this understanding.”

Types of Business Level Strategies

a. Cost Leadership/Cost Reduction Strategy
- a step in producing goods or services with attributes that customers find
acceptable at a lower cost than competitors.

b. Differentiation Strategy
- emphasize the development and marketing of products in a manner that provides
greater value to customers.

c. Focus/Niche Strategy
- entails producing goods or services that cater to the needs of a specific
competitive segment.

d. Integrated low cost/differentiation

- the optimal approach may be a hybrid strategy, emphasizing both low cost, as
well as differentiation.

3. Functional
- aim to deal with the question of how do we support the business-level strategy?

Types of Functional Level Strategies

Here are typical examples of functional-level strategies:
● Human Resources Strategy
○ outline how the organization will manage its human resources to achieve its
strategic goals.
● Financial strategy
○ highlights how finances will align with company goals for growth and
innovation.
● Research & Development Strategy
○ specify how R&D contributes to corporate strategy by developing competencies
through new products, services, and business models.
 ● Marketing Strategy
○ its primary goal should be to generate demand for the company’s products and
services.
● Production Strategy
○ focus on supply chain management, operation planning, and overall
manufacturing system.

The relationship between different levels of strategy

The strategy levels you choose to employ in your organization will depend on the size
and structure of your company.

Why functional strategies should be closely tied to corporate strategy?

As the corporate strategy defines the direction of the business and what it wants to
achieve, the functional strategy explains how to support the execution of corporate goals and
objectives.

Strategic Managers
- managers are the lynch pin in the strategy-making process. It is individual
managers who must take responsibility for formulating strategies to attain a
competitive advantage and putting those strategies into effect.
- two main types of managers: general managers, who bear responsibility for
the overall performance of the company or for one of its major self-contained
subunits or divisions, and functional managers, who are responsible for
supervising a particular function, that is, a task, activity, or operation, like
accounting, marketing, Research & Development, information technology, or
logistics.
A company is a collection of functions or departments that work together to bring a
particular product or service to the market. If a company provides several different kinds of
products or services, it often duplicates these functions and creates a series of self-contained
divisions (each of which contains its own set of functions) to manage each different product or
service.
 This is an organization of a multidivisional company, that is, a company that competes
in several different businesses and has created a separate self- contained division to manage
each of these. There are three main levels of management: corporate, business, and functional.
General managers are found at the first two of these levels, but their strategic roles differ
depending on their sphere of responsibility.
The corporate level of management consists of the chief executive officer (CEO), other
senior executives, the board of directors, and corporate staff. These individuals occupy the apex
of decision making within the organization. The CEO is the principal general manager. In
consultation with other senior executives, the role of corporate- level managers is to oversee
the development of strategies for the whole organization. This role includes defining the goals
of the organization, determining what businesses it should be in, allocating resources among
the different businesses, formulating and implementing strategies that span individual
businesses, and providing leadership for the entire organization. Corporate- level managers
also provide a link between the people who oversee the strategic development of a fi rm and
those who own it (the shareholders). Corporate- level managers, and particularly the CEO, can
be viewed as the agents of shareholders.4 It is their responsibility to ensure that the corporate
and business strategies that the company pursues are consistent with maximizing profitability
and profit growth.
A business unit is a self-contained division (with its own functions—for example,
finance, purchasing, production, and marketing departments) that provides a product or service
for a particular market. The principal general manager at the business level, or the business-
level manager, is the head of the division. The strategic role of these managers is to translate
the general statements of direction and intent that come from the corporate level into concrete
strategies for individual businesses. Thus, corporate- level general managers are concerned
with strategies that span individual businesses, whereas business-level general managers are
concerned with strategies that are specific to a particular business.
Functional-level managers are responsible for the specific business functions or
operations (human resources, purchasing, product development, customer service, etc.) that
constitute a company or one of its divisions. Thus, a functional manager’s sphere of
responsibility is generally confined to one organizational activity, whereas general managers
oversee the operation of a whole company or division. Although they are not responsible for
the overall performance of the organization, functional managers nevertheless have a major
strategic role: to develop functional strategies in their area that help fulfill the strategic
objectives set by business- and corporate- level general managers.

Forecasting the future for nations, industries, organizations and the workforce for
changes, developments and opportunities.

DEFINITION: FORECASTING
• estimation or prediction of a future happening or condition
• Forecasting is a systematic guessing of the future course of events
• Forecasting provides a basis for planning.
• Forecasting includes both assessing the future and making provision for it. As a result,
planning cannot be done without forecasting. Thus, forecasting is the projection of
future events (or conditions) in the environment in which plans operate.
FEATURES OF FORECASTING
➢ It is concerned with the future events
 ➢ It is necessary for planning process
➢ The impact of future events has to be considered in the planning process
➢ It is a guessing of future events
➢ It considers all the factors which affect organizational functions
➢ Personal observation also helps forecasting

Forecasting the future is an essential tool for nations, industries, organizations, and
organizations to plan for changes, development, and opportunities.
1. Planning for Future Opportunities
Forecasting allows nations and organizations to plan for future opportunities. By
predicting future trends, such as shifts in technology or changes in consumer behavior,
nations and organizations can prepare to take advantage of these opportunities.
2. Anticipating and Managing Risks
Forecasting can also help nations and organizations anticipate and manage risks. By
predicting potential challenges, such as economic downturns or natural disasters,
nations and organizations can develop strategies to mitigate these risks and ensure
business continuity.
3. Enhancing Decision-Making
Forecasting provides decision-makers with valuable information that can inform
strategic decision-making. By understanding future trends and potential challenges,
decision-makers can make more informed decisions that are better aligned with the
future needs and opportunities of their organizations or nations.
4. Developing Effective Policies
Forecasting is also important in developing effective policies that support long-term
growth and development. By predicting future trends, policymakers can develop
policies that are better aligned with future needs and opportunities.
5. Driving Innovation
Finally, forecasting can drive innovation. By predicting future trends, nations and
organizations can identify opportunities for innovation and develop new products,
services, or technologies that meet future needs and demands.
Overall, forecasting the future is crucial for nations and organizations to plan for
changes, development, and opportunities. By anticipating future trends and challenges,
decision-makers can make more informed decisions, develop effective policies, and drive
innovation.
FORECASTING THE NATION
Economic forecasting is used as a process of attempting to predict the future condition
of the economy of a country. Government officials and business managers use economic
forecasts to determine fiscal and monetary policies and plan future operating activities.
Economic forecasts are geared toward predicting quarterly or annual GDP growth rates,
the top-level macro number upon which many businesses and governments base their
decisions with respect to investments and other important policies that impact aggregate
economic activity.
FORECASTING THE INDUSTRIES
Industry analysis, as a form of market assessment, is crucial because it helps a business
understand market conditions. It helps them forecast demand and supply and, consequently,
financial returns from the business. It indicates the competitiveness of the industry and
costs associated with entering and exiting the industry. It is very important when planning
a small business. Analysis helps to identify which stage an industry is currently in; whether
it is still growing and there is scope to reap benefits or has reached its saturation point.
With a very detailed study of the industry, entrepreneurs can get a stronghold on the
operations of the industry and may discover untapped opportunities. It is also important to
understand that industry analysis is somewhat subjective and does not always guarantee
success. It may happen that incorrect interpretation of data leads entrepreneurs to a wrong
path or into making wrong decisions. Hence, it becomes important to collect data carefully.
FORECASTING THE WORKFORCE
Workforce forecasting helps you predict your company’s workload so you can ensure
you have the correct number of staff, at the necessary time(s) to handle the amount of work,
whether that be for day-to-day operations or unusual situations. Although the process can
be complicated, it will help deliver both long- and short-term business goals.
The forecasting process can aid your organization in many ways, including:
➢ Help you understand the workforce across your organization.
➢ Reduce the possible risk of staffing shortages.
➢ Examine current staffing skill sets to compare them with future needs.
➢ Determine new organizational structures for better workforce deployment in the
future.
➢ Streamline recruitment strategy.
➢ Improve business decisions and achieve company goals

FORECASTING IN BUSINESS
• Business forecasting refers to the process of predicting future market conditions by
using business intelligence tools and forecasting methods to analyze historical data.
• Forecasting helps companies to make future plans using the available information.
Another purpose of forecasting is anticipating expenses and allocating budgets.
• Business forecasting can be either qualitative or quantitative. Quantitative business
forecasting relies on subject matter experts and market research while quantitative
business forecasting focuses only on data analysis.
Quantitative Forecasting
Quantitative forecasting is applicable when there is accurate past data available to
predict the probability of future events. This method pulls patterns from the data that allow
for more probable outcomes. The data used in quantitative forecasting can include in-house
data such as sales numbers and professionally gathered data such as census statistics.
Generally, quantitative forecasting seeks to connect different variables in order to establish
cause and effect relationships that can be exploited to benefit the business.
Qualitative Forecasting
Qualitative forecasting is based on the opinion and judgment of consumers and experts.
This business forecasting method is useful if you have insufficient historical data to make
any statistically relevant conclusions. In such cases, an expert can help piece together the
known bits of data you do have to try to make a qualitative prediction from that known
information.
 Qualitative business forecasting is also useful when little is known about the future in
your industry. Relying on historical data is useless if that data is not relevant to the
uncharted future you are approaching. This can be the case in innovative industries, or if
there’s a new constraint entering the market that has never occurred before such as new tax
law.
Importance of Business Forecasting
1. Pivotal role in an organization
Many organizations have failed because of lack of forecasting or faulty
forecasting. The reason is that planning is based on accurate forecasting.
2. Development of a business
The performance of specified objectives depends upon the proper forecasting. So
the development of a business or an organization is fully based on the forecasting.
3. Coordination
Forecasting helps to collect the information about the internal and external factors.
Thus, collected information provides a basis for coordination
4. Effective control
Management executive can ascertain the strength and weaknesses of subordinates
or employees through forecasting
5. Key to success
All business organizations are facing risks. Forecasting provides clues and reduce
risks and uncertainties. The management executives can save the business and get
success by taking appropriate action.
6. Implementation of project
Many entrepreneurs implement a project on the basis of their experience.
Forecasting helps an entrepreneur to gain experience and ensures him success.
7. Primacy to planning
The information required for planning is supplied by forecasting. So, forecasting
is the primacy to the planning.
Business forecasting is critical for businesses whenever the future is uncertain or
whenever an important strategic business decision is being made. The more the business
can focus on the probable outcome, the more success the organization has as it moves
forward.
While you’re not going to have a clear, unobscured vision of the future by using
business forecasting, it can provide you with insight into probable future trends to give your
organization an advantage. Even a small step can be a great leap forward in the highly
competitive world of business. By combining statistical and econometric models with
experience, skill and objectivity, business forecasting is a formidable tool for any
organization looking for a competitive advantage.
Elements of Business Forecasting
1. Develop the Basis: Before you can start forecasting, you must develop a system to
investigate the current economic situation around you. That includes your industry and
its present position as well as its popular products to better estimate sales and general
business operations.
2. Estimating Future Business Operations: Now comes the estimation of future
conditions, such as the course that future events are likely to take in your industry.
 Again, this is based on collected data to help with quantitative estimates for the scale
of operations in the future.
3. Regulating Forecasts: Whatever your forecast is, it must be compared to actual results.
This is the only way to find deviations from the norm. Then the reasons for those
deviations must be figured out, so actions can be taken to correct those deviations in
the future.
4. Reviewing Forecasting Process: By reviewing the deviations between forecasts and
actual performance data, improvements are made in the process, allowing you to refine
and review the information for accuracy.
6 Most common types of business forecasts:
1. General business forecasting
A general business forecast is used to determine the overall business climate for a future
date, and can be widely applied and useful for many different businesses and industries.
Used for: Determining overall market conditions and the impact of the environmental
factors in which your business operates
2. Financial forecasting
Financial forecasting is about getting a clear picture of where your company is headed.
It includes weighing assets and liabilities, accounts payable and account receivable,
operating costs, capital structure, and cash flow, and general market conditions.
Used for: Tracking the future trajectory of your company as a whole.
3. Accounting forecast
An accounting forecast is the practice of predicting the future costs which will be
incurred by your company, using past and present data to estimate how much your business
will pay for raw materials, inventory, man hours, utilities and rent, insurance, and more.
Used for: Determining future operating costs for your business.
4. Demand forecasting
Your demand forecast will go hand in hand with a sales forecast, as demand forecasts
will predict what the market needs or wants and a sales forecast will predict how your
business will be able to capitalize on those needs with sales.
Used for: Determining market and customer demand for a good or service in the future.
5. Sales forecasting
A sales forecast estimates future sale, whether overall or of a specific product or service
within your business offerings, based on sales data. Sales forecasting allows your business
to anticipate the future needs for workforce, resources, cash flow, inventory, and
investment capital. A sales forecast will show the sales revenue your company might expect
over the next month, quarter, or year of a sales cycle.
Used for: Predicting your sales for a future period of time, and estimating growth and cash
flow.
6. Capital forecasting
 A capital forecast is based on current and future assets and liabilities, as well as
predictions for liquid capital and cash flow estimates.
Capital forecasting is tricky, and not as reliable as other forecasts simply because it
involves guessing at a number of factors. Capital may involve the following factors:
➢ Cash & savings
➢ Assets
➢ Accounts receivable
➢ Revenue
➢ Investment funding
➢ Lines of credit
Used for: Predicting available capital for a future date or event.

ADVANTAGES:
➢ Effective handling of uncertainty
➢ Better labor relations
➢ Balanced work load
➢ Minimization in the fluctuations of production
➢ Better use of production facilities
➢ Better material management
➢ Better customer service
➢ Better utilization of capital and resources
➢ Better design of facilities and production system
➢ Helping businesses plan for future growth, strategies, etc.
➢ Identify new opportunities for growth
➢ Help businesses make smarter, more informed decisions

LIMITATIONS:
➢ Forecasting is to be made on the basis of certain assumptions and human judgments
which yield can sometimes yield to wrong result
➢ It cannot be considered as a scientific method for guessing future events
➢ It does not specify any concrete relationship between past and future events
➢ It requires high degree of skill
➢ It needs adequate reliable information so difficult to collect reliable information
➢ Heavy cost and time consuming