FORECASTING AND DECISION-MAKING

UNIT-2

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 According to Glueck,
“Forecasting is the formal process
of predicting future events that
will significantly affect the
functioning of the enterprise”

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 FEATURES OF FORECASTING

• Forecasting is concerned with future event. It defines the

probability of happening of future events.
• It is done by analyzing the past and present events relevant
to the functioning of the enterprise.
• It has become a specialized activity where in several
techniques are available for predicting the future.
• Forecasts are made on the basis of data collected from within
and outside the organization.
• The quality of forecast depends on the reliability of
information.
• It may be made for long term or short term.
• Forecasts can be of several types.
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 IMPORTANCE OF FORECASTING
• Key to planning.

• Means of coordination.

• Basis for control.

• Executive development.

• Facing environmental challenges.

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 LIMITATIONS OF FORECASTING

• Based on assumptions.

• Not absolute truth.

• Time-consuming and expensive.

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 PROCESS OF FORECASTING

• Developing the ground work. : the real problem about which

the forecasting is to be done and the purpose of forecasting
should be made clear.

• Estimating future trends :

• Comparing the Actual with estimated result.

• Refining the forecast.

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 FORECASTING TECHNIQUE
FORECASTING TECHNIQUE

Qualitative technique
Quantitative Historical analog
Time series analysis

Regression analysis Business barometer.

Extrapolation Panel consensus method

Econometric models Delphi technique

Input–output Analysis Morphological Analysis

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• Time series analysis : in this method historical series of data is
decomposed into various components, viz., trend, seasonal variations.
After the original data are adjusted for seasonal and cyclical variations, a
trend line can be fitted by using the method of least squares. E.g. demand
can be known.
• Extrapolation : it is based on time series but it does not isolate the
effect of various types of change . It is assumed that there is a constant
and stable pattern of movements in the data. on the basis of past
behaviour of data, a trend curve is established. E.g. sales of a company
during the last three years.
• Regression analysis : this method attempts to find out the relative
movement of two or more interrelated series. It is used to estimate the
changes in one variable as a result of specified changes in other variables.
correlation between advertising expenditure and sales volume.
• Input –Output analysis : under this method, input requirement or
out put is estimated on the basis of known relationship between input
and output.
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 Con….
• Econometric models: Mathematical models are used to express in
quantitative terms the inter- relationship among different variables.
simultaneous equation.

• Historical Analogy : here forecast is based on some analogous conditions

elsewhere in the past. The economic situation of a country can be
forecasted by making comparison with another country which has
already gone through that stage.

• Business barometers : are the index numbers used to predict the

directions in which the economy is moving. The assumption here is that
past pattern tend to repeat themselves in future. Index of industrial
production.

• Panel Consensus Method : a panel of experts in the area is prepared.

The opinions of these experts are combined and averaged.
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 Con…..
• Delphi technique : the minds of experts in the concerned area are
probed systematically. But there is no face to face contact between them.
They are kept apart and their identity is kept secret from one another.
Their opinions are solicited through written answer to a carefully
prepared questionnaire.

• Morphological analysis : it is used mainly to forecast technological

changes. It consist of identifying the relevant dimensions of the object,
listing all varieties and combination of these dimensions and finding
practical applications for them. e.g. uses of transistor.

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 DECISION - MAKING
Allen defines decision making as “the
work a manager performs to arrive at
conclusions and judgement”

Haynes and Massie “decision- making is a

process of selection from a set of alternative
course of action which is thought to fulfill the
objective of the decision problem more
satisfactorily than others.”

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 Characteristics of decision - making
• Decision making is a goal oriented activity.
• It is a process of selection from amongst alternative course of
action.
• It is a conscious and human process.
• It involves commitment in the face of uncertainty.
• It is a complex mental exercise involving use of careful
thinking and deliberation, analysis and verification.
• It is both an art and a science.
• It can be both positive and negative.
• It involves time dimension and time lag.
• It is situational.
• It is an ongoing activity.
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 TYPES OF MANAGERIAL DECISIONS
• Organizational and Personal decision :
• organizational decisions are those which an executive takes in his official
capacity and on behalf of the organization. Authority can be delegated to
others.

– Personal decision :are those which an executive takes in his

individual capacity and not as a member of the organization.

• Routine and Strategic decisions :

• routine or tactical decisions are of a repetitive or recurring nature. They
cover a short term period and affect only a small segment of the
organization.

– Strategic or basics decisions involve long term commitments, large

investment of funds and are of permanent nature. E.g. setting up of a
new plant or development of new product .

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 Con….
• Programmed and Non programmed decisions :
• programmed decision are of a repetitive nature for which systematic
procedures already exist in the organization. It need not be treated as
unique case. employee is absent without leave.

– Non- programmed decisions : they deal with unexpected and

unprecedented situation no standard (set) procedures can be designed
for them

• Policy and Operating decision :

• Policy decisions are of fundamental nature as they affect the whole
organization. they set forth the basic goals and direction for the
enterprise. they are generally taken at the top level.

– Operating decisions : Are made for executing policy decision.

They are made by lower level executives at the point where the work
is carried out. Concerned with day to day operations.
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 Con….
• Individual and group decision :
• Individual decision taken by a single individual are called
individual decision.

– Group decision are those taken by a group of person it is

consider better because the knowledge and imagination of
a group is better than that of an individual.

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 PROCESS OF DECISION - MAKING

Developing Selecting
Defining Analyzing alternatives Evaluating the Implementing
the
the problem the problem solutions alternatives the decision
Best
alternative

Feedback and follow up

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 FACTORS INVOLVED IN DECISION – MAKING :

TANGIBLE INTANGIBLE FACTORS

FACTORS EMPLOYEE MORALE
FIXED COST

OPERATINGCOST. RATE OF TECHNICAL

CHANGE

PROFITS.
QUALITY OF LABOUR
RELATION
MAN-HOURS.

MACHINE – HOURS. CONSUMER

BEHAVIOUR

QUANTITY OF OUT PUT.

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 CONDITIONS OF DECISION MAKING
In order to make correct decisions the decision maker must know
the conditions under which decisions are to be made and implemented.

Three types of decision situation can be identified.

• Certainty : the condition of certainty a manager has a complete

knowledge of the decision making environment.

• Risk : organizational decision are made under the conditions of risk.

Information available is incomplete. Result or out come are not known
but will probably fall within a certain range of out come.

• Uncertainty : conditions of uncertainty exist when the probabilities of

occurrence of various out comes are not known

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BOUNDED RATIONALITY IN DECISION MAKING

A decision is said to be rational when appropriate means are

selected to achieve the desired ends. Rationality may be defined as the
capacity for objective and intelligent action.

SEVERAL CONDITIONS MUST BE SATISFIED FOR A RATIONAL

SELECTION :
• The decision maker must have a definite goal.

• The decision maker must have clear understanding of course by which the
defined goals could be achieved.

• He must have the ability to analyze and evaluate alternatives.

• He must be willing to optimize by choosing the alternatives that best

satisfies the goal.
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 LIMITS ON RATIONALITY
• A decision is made for future and its out come always takes place in some
future period.

• Decisions are made to achieve some goals.

• All alternatives of reaching the goals are known due to limitations

regarding data collection.

• There is lack of complete knowledge as regards outcomes of alternative

solutions.

• Several human limitations introduce subjectivity in decision making. E.g.

memory, reasoning, objectivity, perception.

• Decisions have generally to be made within limited time and resources.

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 TECHNIQUES OF DECISION-MAKING
• Marginal Analysis : This involves comparison of additional revenue
from additional costs to find the point where the cost resulting from the
addition of one more unit (marginal costs) is equal to the benefit
(marginal revenue) there from.

• Cost effective analysis : It is a technique for choosing from among

alternatives to identify a preferred choice when objective are less specific.
Also known as cost benefit analysis.

• Risk analysis : under condition of uncertainty it becomes necessary to

determine the nature and size of the risk involved.

• Linear programming : it is a technique for determining the optimum

combination of limited resources to minimize cost or maximize profits.

• Operations research : it involves scientific analysis of decision

problems it facilities decision- making by supplying quantitative
information to the decision maker. E.g. probability theory, game theory,
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 Con…
• Simulation : simulation is based on the probability factor.
Random numbers are assigned to each likely event
depending on the probability of its happening. This enables
one to determine the cost and benefit of each course of
action.

• Brainstorming : under this technique a small group of

persons are stimulated to creative thinking. A problem is
posed and ideas are invited. The best ideas are selected.

• Delphi technique : a panel of experts is appointed who are

physically separated and unknown to each other. These
suggestions are complied and composite feedback is provided
to panel members for inviting further suggestions.
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• Decision tree : it is a graphic method used for identifying the available
alternatives and the risk and the out come associated with each
alternative. Four important components of a decision tree are :
– Decision point represented by a square.
– A chance point represented by circle.
– A branch flowing from the chance point represented by a line.
– A pay off associated with each branch.
High sale 2.25 lakes
Improve existing
product
Low sales
1.75lakhs

Add new product

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 PROBLEMS IN DECISION MAKING
• Indecisiveness : some managers tend to be indecisive. They
cannot come to a conclusion easily due to the fear of its outcome or as a
matter of habit. They are problem solvers and tend to avoid or postpone
decision until the last moment.
• Time pressure :

• Lack of information.

• Confusing symptoms with causes.

• Failure to evaluate correctly.

• Lack of follow through.

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 KEY TO SUCCESS IN DECISION - MAKING
• Be problem oriented not just solution oriented.

• Set decision making goals.

• Always check the accuracy of the information.

• Don’t be afraid to develop innovative alternatives.

• Be flexible.

• Gain commitment for decision at an early stage.

• Evaluate and follow up the decision.

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