Week 6

Analyzing the Business Environment

Environmental factors are external effects that cannot be managed are environmental. Because environmental factors cannot be managed they must be anticipated. The ability to predict or "guess" the future state of the environment enables the manager to position the firm defensively against environmental threats or to seize opportunities that are created by the environment.

Forecasts of the business environment can be made in made in several ways, depending upon the purpose and types of data available. Qualitative forecasts or non-statistical analyses include:

Judgment. Perhaps the most common form of business forecasting relies on managerial experience and thinking. This type of forecasting is particularly well suited to situations in which: relationships among variables are not well understood; measurement of important factors are difficult; the business situation is nuanced, or complicated by idiosyncratic circumstances; and, the costs (either time or money) of alternative approaches exceed their benefits.

Delphi and Nominal Group Techniques. These group decision-making approaches draw upon the judgment and expertise of people with special knowledge about the business environment, but employ different techniques to reduce bias and conformity. The Delphi technique utilizes questionnaires or other structured data gathering techniques to solicit input from a panel of experts. Respondents provide data for forecasting. An analyst compiles the data, summarizes the input and returns the summary to the experts. Each expert then reviews this summary and provides a reformulated analysis or completes a second questionnaire. This process of expert input - summarization - and review continues until there is consensus or the analyst feels that a business forecast has sufficiently exploited the input from the panel of experts. Nominal groups reduce group conformity by seeking diverse input from a convened panel that is permitted only structured or no sharing of information among members.

Multiple Scenario Analysis. This forecasting method introduces several alternative descriptions of future events and trends. The method is similar to the traditional "what if" analysis. A typical multiple scenario includes a most likely scenario, optimistic and pessimistic scenarios. Under diverse scenarios, contingency plans are developed. Strictly, this is not so much a forecasting technique as much as it is a recognition that the future has great uncertainty with alternative directions possible. Bogue and Buffa's Corporate Strategic Analysis (1986) is a reference on how scenario analysis can be combined with quantitative and statistical analysis to simulate corporate strategic outcomes under alternative assumptions.

Quantitative analysis of environmental data provides formalized methods to yield forecasts. There are two general quantitative methods used in forecasting: time-series analysis and econometric modeling. Although these methods are beyond the scope of this course, this handout provides a cursory introduction and a simplified understanding of both.

Time-Series Analysis. This is a univariate approach to forecasting, meaning that only one variable is analyzed to predict the future state. Future values of an environmental measure (such as GNP) are extrapolated from its historical observations.

Econometric Models. This is a multi-variate approach to forecasting, meaning that many variables are used to predict the future state of the environment. Because this multiple regression approach considers more information than the univariate time-series analysis, the forecast is usually considered to be superior.