The three primary approaches used in qualitative forecasting are the expert opinion approach, the Delphi method, and the market survey approach. Show
The expert opinion approach is simple and easy to implement. For example, for many of the stand-alone, one-time activities that take place in a project, an opinion based forecast is all that is either necessary or desirable. The opinion of the person who is most knowledgeable in that field is sought. Furthermore, if a project is brand new, the likes of which have never been seen before and for which no historical data is available, then the only recourse for a project manager is to seek the opinion of an expert to get a forecast or an estimate regarding the concerned event or activity. The disadvantage of relying on the opinion of a single expert is the inherent element of bias. Further, larger issues in the project may arise where an opinion based forecast of a single expert may be not be adequate. This can occur with forecasts involving such things as the timing of the introduction of a new technology into the market place or a change in public behavior as these could have a significant bearing on the decision to start a project or the timing of market entry. When a new product is introduced it can become a guessing game as to how the market will respond and how and when competitors might respond. Answers to questions such as these may require the opinions of several experts, perhaps across a range of subjects, not simply an opinion from those closest to the job. In such cases, the Delphi method may an appropriate forecasting method. Devised by the Rand Corporation in the U.S., the Delphi technique is a popular method of qualitative forecasting that generates a view of the future by using the knowledge of experts in particular fields. The name derives from the ancient Greek Oracle of Delphi that was supposed to foretell the future. The steps of the Delphi method are as follows:
Results of Delphi studies are given in the form of timescales and probability levels for the feature being forecast. Some large corporations have used the method for assessing long term trends and the development strategies that may be open. Research by the Rand Corporation indicates that with current technologies and trends, the Delphi panel does tend to move towards a consensus view which is generally correct, but there tends to be less accuracy when forecasting new developments. On occasions, no consensus view is obtained after several rounds. The market survey approach is the third qualitative approach that can be used to generate forecasts of project events. This approach involves surveying past customers or potential customers about any plans they may be considering the future. The project organization's marketing staff is perhaps the ideal source to obtain such information because of their direct contact with customers. In addition, the marketing staff, along with the procurement staff, which is in direct contact with suppliers, can also provide market intelligence reports regarding competitors who are contemplating new projects or new technologies. Qualitative forecasting techniques are based on human judgment. It revolves around the knowledge of customer journey, market research, experts’ opinion, or senior industry leaders’ experience in the field. It is more subjective, intuitive, and experiential than other forecasting techniques. Read ahead to learn more about the most common qualitative techniques used in businesses. In our previous post – ‘fundamentals of business forecasting’, we talked about two types of forecasting techniques, i.e., qualitative, and quantitative. Here, we elaborate on the types, applications, and limitations of qualitative forecasting techniques. Businesses employ various qualitative forecasting techniques, individually or in combination, to generate better strategies and direct business tasks such as production, demand planning, marketing, and sales. Types of qualitative forecasting techniquesQualitative forecasting techniques are subjective, intuitive, and experiential where the industry experts apply their business knowledge and experience. The commonly used qualitative forecasting techniques are Delphi, Market research, Panel consensus, and Visionary forecast. Qualitative forecasting techniquesDelphi Technique:The main objective of the Delphi technique is to construct consensus forecasts from a group in a structured manner. The technique involves a repeated cycle of questionnaires presented to a panel of select experts. The independent answers provided by the expert team are then forwarded to the facilitator to analyze and summarize the opinions. Highlights of Delphi methodA few of the highlights of this method include
Steps involved in the Delphi techniqueIt is a simple technique, typically involving the following steps:
These repeated rounds of questionnaires allow a consensus to be reached. A visual representation of the Delphi methodWhen to use the Delphi technique?Delphi technique is recommended when the problem at hand needs collective and subjective decisions. It can be used to:
Limitations of Delphi methodDelphi is time-consuming and laborious for both facilitators and experts. It may lead to loss of consistency or distraction between rounds as it demands long-term and continuous commitment. Market ResearchMarket research is a popular qualitative forecasting method used in business. It forecasts future demand through consumer surveys and questionnaires. Businesses apply this technique to gain valuable insights from consumers when, for example, introducing a new product into the market. It differs from the Delphi technique because public opinions are considered here to glean insights, and not just those of experts. Market research methodologies also change according to evolving market challenges. Highlights of market research methodSome of the highlights of market research are that it
Steps involved in market researchThe typical steps involved in market research are:
When to conduct market research?When business professionals need to estimate the size of the market, define potential customers, understand the reasons behind low sales or low profitability, or support company growth. Market research helps to understand customers’ pain points, target future markets, control inventory for low-volume products, and forecast margins. Limitations of market research methodThe results of Market research may not be always accurate because the consumers’ behaviors are uncertain. Additionally, this methodology demands extensive research, and qualified & experienced specialists, both of which require significant time and money to obtain. Panel consensus methodPanel consensus is a qualitative forecasting technique that brings all the internal experts of an organization together for an open discussion about a product or service. Anyone may speak up, and the meeting will end when a consensus is reached. The accuracy of the forecast is ex post facto verified against actual sales data. It is also known by other terminologies such as forecasting averaging, model averaging, ensemble averaging, or expert aggregation. This method differs from Delphi or market research in involving only the experts internal to the organization. Highlights of panel consensus
Steps involved in consensus forecastingThe process typically involves
When to use the Panel consensus method?Panel consensus process can be undertaken periodically for a set of narrowly defined variables. The forecast acts as an estimator of risk or ‘less likely’ scenarios. It can be used for
Limitations of panel consensus methodThe drawback of this method is that it relies on experience and personal opinion. It may lead to bias in the final forecasts as this is a ‘top-down’ method. The cost is high, and it cannot be used granularly for each product, but can be used to forecast an overall demand. Visionary forecastingIn contrast to using group think, visionary forecasting is usually based on the individual opinion or judgement of an experienced and respected individual in the field. In this method, a set of future scenarios is usually determined by the “visionary” based on past events. It is therefore based on subjective guesswork and somewhat non-scientific. Highlights of visionary forecastVisionary forecasting is characterized by “vision” of the expert being consulted. It incorporates intuitive judgment, opinions, and subjective probability estimates. The company’s senior professionals are encouraged to predict new product development by observing past events and developments. Steps involved in visionary forecastingVisionary forecasting is a fairly straightforward process that typically involves
When to use visionary forecast?The visionary forecasting technique is best used when there is a lack of historical data. It is used to estimate new trends in new and unique market conditions. Limitations of visionary forecastAn individual’s judgment may lead to confirmation bias. A decision-maker may seek evidence that only validates their beliefs while ignoring the evidence that support differing conclusions. Combining qualitative forecasting techniquesIt should be evident by now that no forecasting technique is appropriate for every industry or situation. Studies suggest that combining the individual forecast methodologies brings more accuracy and acts as a compensatory mechanism to overcome the deficiency in any particular technique. Choosing complementary methods eliminates the shortcomings of one technique by substituting it with the advantages of another. ConclusionQualitative forecasting techniques help organizations to reduce ambiguity in data, predict changes in sales patterns, and customer behaviors. It gives the team required flexibility when using soft data. Qualitative forecasting techniques, individually or in combination, enables organizations to analyze the current scenario, recognize changing trends in the market, and to connect that information to potential future strategies. |