Qualitative Forecasting Approaches

Qualitative forecasting methods are based primarily on human judgement. Quantitative

forecasting methods are based primarily on the mathematical modelling of historical data. Here
we provide a brief overview of the most important qualitative forecasting approaches. In many
environments the time horizon is closely linked to the type of forecasting method used. Longer
term and higher level forecasting will often require qualitative forecasting techniques. Such
techniques may vary significantly in how they are applied. We begin with methods that rely on
quantitative analysis to some degree and proceed to the more judgmental methods.

Economic indicators
The tracking of economic time series originated in the US following the great depression of the
1930's. It was realised that monthly, quarterly and annual series on such things as prices,
employment and production were closely related to observed economic activity and business
cycles. Today, over 30 such series are tracked in most developed countries. It was soon realised
that such series were useful for general forecasting by many organisations. Such series provide
the basis for interpretative judgmental forecasting. The term economic indicator is used for an
economic series on which a forecast is based. Leading indicators provide advance warning of
probable change in future economic activity. Coincident indicators reflect current performance in
an economy. Lagging indicators confirm changes previously signalled. The description of a
series in these terms depends to some extent on the nature of the forecast, the business sector
and type of organisation and geographical region. Composite indicators that aggregate a number
of series are also important. The composite of leading indicators is an important series for
signalling major changes in economic activity.

The impact of any economic indicator on demand for specific products or services is sector
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dependent and needs to be judged with care. The Office of National Statistics (ONS) in the UK
gives guidance on the interpretation of economic data series. The National Bureau for Economic
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Research (NBER) is a source for information in the US. Other professional, industry and
academic bodies publish series related to a range of economic phenomena e.g. business
purchasing behaviour, factory gate prices, consumer and business confidence etc. The
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Confederation of British Industry and the Chartered Institute of Purchasing and Supply (CIPS)
report on series related to industrial activity and business confidence. Some of these are
regionalised or sector based and may give good indications of changes and trends on a regional,
sectoral or industry basis.

Market Research

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Office of National Statistics - www.statistics.gov.uk
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Nationa Bureau of Economic Research – www.nber.gov.org
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Confedration of British Industry - www.cbi.org.uk
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Charterd Institute of Purchasing and Supply - www.cips.org

Prof. B L MacCarthy University of Nottingham

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Market research attempts to extract information from a sample of members of a target market in
order to make an inference or judgement about the market population. Often the information that
is sought relates to product preferences e.g. opinions on existing products, opinions on new
products, opinions on competitor products and more general preferences.

Market research may provide sophisticated accurate forecasts on market potential, particularly
before product launch and in the early stages of product introduction. However, expertise is
needed. Studies need to be carefully designed and executed. Market research data needs to be
collected and analysed with care. It requires:
 Decisions on sample size and sample type
 Decisions on the medium and methods to be used for information gathering
 Prior selection of methods for statistical inference and decision making.
There are many sources of expertise and specialist organisations that will assist in market
research. Market research may be costly.

Historical analogy
The basic idea is to link a new product with an assumed analogous product in the past. An
example might be the generation of a forecast of demand for a new mobile phone model using
the known historical pattern on take up of related mobile phone models in the past. Similarly, a
forecast for the likely demand for a product in a new market might be made by analogy with the
known shape of the demand curve for the same product in a mature market. A product that is
rolled out sequentially in different markets over a period of time may generate useful information
during early launches on the likely demand in subsequent launches. We can also attempt to
forecast demand for a new product by analogy with the known demand for a related product.

This type of approach may provide the basis for forecasting on an ad-hoc basis, particularly in
relation to new products and the take up of new technologies for which there may be little or no
previous market experience. Clearly, there are many potential dangers in the historical analogy
approach. However, it may aid understanding and in particular give valuable qualitative
information on the shape of the demand curve that could lead to more sophisticated modelling of
demand subsequently.
Group forecasting methods
Attempting to tap the knowledge, expertise and experience of a group of individuals rather than
relying on a single individual (or output from a computer) is perhaps the most common and
intuitive approach to business forecasting. However, there are problems and pitfalls with group
based forecasting. ‘Group dynamics’ may affect the accuracy of a forecast generated in this way.
Undue weight may be given to the views of dominant individuals. Consensus approaches may
be comforting but may be of course be wrong. Group-based forecasting and planning require
clarity and transparency in approach and may require facilitation to ensure that relevant views
and differences in opinion are addressed and given due weight.

Prof. B L MacCarthy University of Nottingham

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Delphi methods
Techniques exist to survey a group or panel without group interaction. The simplest approach is
a survey, which obtains a numerical forecast and summarises both average and spread. A much
more sophisticated approach is the DELPHI method. In addition to isolating group or panel
members, the forecaster is also remote from the group. Delphi attempts to systematically
evaluate expert judgement on the likelihood of future events. Six steps may be identified:

(1) Establish a panel of experts

(2) Devise a questionnaire to direct experts to the forecasting problem and to elicit their
considered judgement, usually in a quantitative manner.
(3) Evaluate responses by producing a numerical summary. Modal values and extreme
values are highlighted.
(4) Controlled feedback: Make the extremists justify their forecasts and decide whether to
include or exclude extreme values.
(5) Repeat (3) and (4) until a clear, not necessarily unanimous, forecast emerges.
Extremes may persist.
(6) Summarize the results.

There are problems in deciding how many experts to use, how many rounds are appropriate and
when to eliminate extremes. Hence, the technique may be difficult, time consuming and may be
costly. The approach has been shown to be successful in studies of issues that may affect
demand for product and services in the longer term.

Sales force composite forecasts

In many situations, it makes sense to utilise the knowledge and experience of the sales-force to
produce a sales forecast. This is limited for long term forecasting but may be essential for the
short and medium term in many industries. It is popular where there is a complex product mix,
few customers and close contact with customers. It is also important where the sales force has
technical expertise i.e. where they are closely involved in negotiation, quotation, pricing and
specification of products and services.

Clearly, in some situations sales force knowledge is indispensable. However, there are
problems with the approach and many potential sources of errors. There may be a loss of non-
aggregate data, particularly risk information. Bias and inaccuracy may be introduced because of
the links between forecasts, sales objectives and sales targets that may be set based on the
forecast.

Scenario analysis

Prof. B L MacCarthy University of Nottingham

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Scenario analysis techniques attempt to understand and plan for the future rather than producing
'blind' forecasts. They consider not only what may occur in the future but also how different
‘players’ in a market may respond to future scenarios. The approach has its origin in military
strategy planning developed in the 1950's. In this context a scenario is a narrative description of
future conditions and how a business and perhaps its competitors may react to those conditions.
The approach identifies the principal factors that affect the future and, importantly, explores a
number of different future scenarios with some indication of the likelihood of each scenario
occurring. The whole area is closely linked with corporate strategy and planning. The main
benefit of this type of approach is that it acknowledges that different scenarios may be plausible
from a given starting point and starts to consider how an organisation, its suppliers, customers
and competitors may respond in the future.

There is no generally accepted way of constructing scenarios. The Shell Company are well
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known for developing and using scenario techniques for corporate forecasting and planning.
Simulation approaches may also provide a useful aid to scenario planning. A simulation
technique known as Systems Dynamics has been used to assist scenario analysis in some
businesses. Agent-based simulation methods are also showing promise in scenario
development and evaluation.

Quantitative versus Qualitative forecasting – a word of caution

The distinction between qualitative and quantitative is not always clear cut. The assessment of
data will often play a part in qualitative forecasting, for example in examining and trying to predict
the growth of a new market. Market research has been classified here as a qualitative approach
but it often utilises sophisticated statistical sampling and analysis methods and may generate lots
of data. However, the interpretation of a market research study for forecasting and planning will
be based on human judgement in most cases. Human judgement will usually play some part in
quantitative forecasting e.g. in identifying turning points in a time series. Irrespective of the type
of method used, monitoring and tracking of a business forecasting process that generates
forecasts on a regular basis should be based on quantitative analysis.

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Bradfield et al. (2005), The origins and evolution of scenario techniques in long range business
planning, Futures, Vol.3 (8),pp 795-812

Prof. B L MacCarthy University of Nottingham

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