LECTURE 9 SALES FORECASTING (1)

Page 1: Lecture Overview

• Lecture 9: Focus on Sales Forecasting and Financial Analysis

Page 2: Difficulties in Financial Analysis for New Products

• Challenges:

  • Target users often lack knowledge or may not disclose information.

  • Poor execution of market research can lead to inaccurate data.

  • Market dynamics create uncertainties, complicating forecasts.

  • Internal attitudes can bias the financial analysis.

  • Inadequate accounting may lead to misjudgment.

  • Rushing products to market can result in flawed forecasting.

  • Dependence on historical data can be misleading in volatile markets.

  • Rapid technological changes introduce unpredictability.

Page 3: Accuracy of Forecasters

• Successful Predictions (1967):

  • Artificial organs available by 1982.

  • Human organ transplants expected by 1987.

  • Credit cards largely replacing currency by 1986.

  • Automation predicted in industries and management decisions by 1987.

  • Lunar landing anticipated by 1970.

  • Urbanization projected with three of four Americans living in cities by 1986.

  • Recreation and entertainment expenditures expected to double by 1986.

Page 4: Misjudgments of Forecasters

• Failed Predictions (1967):

  • Permanent base on the moon was thought possible by 1987.

  • Manned landings on other planets expected by 1980.

  • Urban living largely in high-rises anticipated by 1986.

  • Cars banned from city centers by 1986.

  • Laboratory creation of primitive life expected by 1989.

  • Full-color 3D TV availability globally anticipated.

• Statistic: About two-thirds of forecasts were ultimately accurate.

Page 5: New Product Forecasting Strategies

• Forecasting Based on Market:

  • Current Product Technology:

    • Focus on cost reductions and process improvements.

    • Use sales analysis for forecasting.

  • New Product Technology:

    • Focus on line extensions.

    • Use product line and life cycle analysis for forecasting.

  • New Market Opportunities:

    • Identify new product uses or markets.

    • Utilize customer and market analysis.

    • Forecasting types include scenario analysis for innovative products.

• Source: K. B. Kahn’s contributions in the PDMA Handbook.

Page 6: Solutions for Financial Analysis Problems

• Improvement Strategies:

  • Enhance the process for existing products.

  • Apply life cycle concepts to financial analysis.

  • Reduce reliance on unreliable forecasts.

  • Focus on what is known rather than assumptions.

  • Evaluate the situation rather than just numeric outcomes (e.g., Campbell Soup example).

  • Commit to low-cost development and marketing strategies.

  • Prepare for associated risks in product launches.

  • Avoid a one-size-fits-all approach in financial analyses.

  • Improve financial forecasting methods continually.

Page 7: Sales Forecasting Using Purchase Intentions

• Methodology:

  • Use top-two-box scores from concept testing, adjust accordingly.

  • Scores Breakdown:

    • Definitely buy: 5%

    • Probably buy: 36%

  • Calibrated Actual Buy Rates:

    • 80% of 'definitelies' become purchases.

    • 33% of 'probablies' become purchases.

  • Forecasted Market Share Calculation:

    • Market share = (0.8)(5%) + (0.33)(36%) = 16%.

Page 8: A-T-A-R Model for Sales Forecasting

• Model Assumptions:

  • Assume awareness = 90% and availability = 67%.

  • Trial rate = 16%: proportion of aware and available consumers who try the product.

  • Key Ratios:

    • RS (switching proportion) = 70%.

    • Rr (repeat purchase proportion) = 60%.

  • Calculation for Long-Run Repeat Purchase:

    • Rt = RS / (1 + RS - Rr) = 63.6%.

  • Market Share Calculation:

    • Market Share = Trial x Rt x Awareness x Availability = 16% x 63.6% x 90% x 67% = 6.14%.

Page 9: A-T-A-R Model Results Visualization

• Results Display:

  • Bar chart indicates success rates and proportions based on the A-T-A-R model.

  • Values presented in context of market share outcomes and forecasts.

Page 10: Forecast of Product Diffusion

• Sales Forecasting Over Time (in $000s):

  • Values presented for years indicating projected sales from year 0 to year 10, showcasing growth dynamics.

Page 11: Life Cycle Assessment of Financial Analysis

• Stages of Financial Analysis:

  • 5 Stages:

    1. Concept generation

    2. Concept/project selection

    3. Full screening

    4. Market testing

    5. Evaluation of market life and consumer response.

  • Completeness of Financial Analysis illustrated in life cycle graph (0% to 100%).

Page 12: Concept Evaluation Tools

• Critical Factors for Evaluation:

  • Strategic Fit: Alignment with corporate vision.

  • Customer Fit: Efficacy in meeting consumer needs.

  • Consumer Fit: Addressing unmet needs effectively.

  • Market Attractiveness: Uniqueness in the competitive landscape.

  • Technical Feasibility: Practical and protectable concepts.

  • Financial Returns: Assessment on breaking even in an appropriate time frame.

• Source: Erika B. Seamon on Innovative Culture in New Product Development.