Cause of business waste

One of the chief causes of business waste is the failure to estimate or forecast sales possibilities in order to coordinate these possibilities with production schedules. Production, in the sense of making goods, is not an end of business effort in itself. Goods are manufactured to be sold. Producing or manufacturing goods faster than they can be disposed of to ultimate consumers intensifies competition and usually results in wasteful advertising and "high-pressure" personal salesmanship.

Overemphasis on production

For the past fifty years the processes of making goods have been steadily improved and production costs have been decreased. The standardization of the methods of large-scale production and the application of scientific management to industrial operations have reduced manufacturing costs and lowered the resultant prices to the consumer.

But in many instances the increase in production brought about by scientific management and mass production has been followed by wasteful and frenzied marketing. In such cases the cost of finding new markets and of intensively cultivating old ones has sometimes counterbalanced completely the savings due to the scientific methods of large-scale production.

Efficiencies in manufacturing that are not evaluated in terms of the possibilities of ultimate-consumer sales, may throw an almost impossible task upon a very efficient marketing department. Mismanaged and uncoordinated production may seriously damage or even render entirely futile marketing plans that are correct in principle, accurate and meticulous in detail, and logical and thorough in operation.

Market forecasting as a remedy

The question of what can be done to reduce this sort of waste is all-important. Certainly, American business cannot return to pre-war manufacturing standards. It must maintain the present standards of production efficiency. More than that, it must be prepared to accept the new inventions and the new manufacturing methods and processes that are being developed almost daily.

The most economic solution to this problem is not entirely a high-powered competitive effort to speed up marketing in order to sell all the goods which more efficient factories are able to produce. It is far more a matter of working out a proper coordination between factory output and the carefully determined possibilities of consumer sales. Hence, we have a very definite need for market forecasting.

Present status of market forecasting

The difficulties in the way of accurate market forecasting are many. Very little is available in the form of written records that furnish the results of particular forecasting methods. It will take a long time to build up a body of principles and rules because of the wide variety of factors which are present over any extensive range of product lines. Nevertheless, a considerable amount of experimenting is going on and empirically-determined methods are being used with some degree of success.

Many of these methods are crude and imperfect measures of sales possibilities. Others appear to answer with reasonable adequacy the purposes for which they are intended. In spite of the confusion in the field of market forecasting, the outlook for considerable improvement in methods is good. The necessity for some reasonable method for each product line is growing and is providing the incentive for experimentation.

General principles of forecasting

Any examination of the problem of market forecasting should begin with a statement of elementary but basic rules. These rules or principles must be borne in mind in attempting to evolve a method of market forecasting for a particular product line. As a matter of fact, these simple rules are about the only rules inclusive enough to apply to the problem of market forecasting over the whole range of possible products for which definite methods are necessary. Moreover, these fundamental principles indicate very clearly the limitations of market forecasting in the sense of possibilities of complete accuracy. These rules will be discussed in the following paragraphs. They are stated, in part, in the phraseology adopted by the American Marketing Association.

Accuracy of prediction and pertinent facts

In the first place, it should be plain that an accurate prediction is dependent on knowledge of the pertinent facts, and that the accuracy of the prediction will ordinarily bear a direct relation to the supply of information. This principle emphasizes the necessity for the collection, classification and tabulation of data.

Much of the information that may be desired to serve as a basis for forecasting may be very difficult to obtain. Nevertheless it must be obtained in quantity and consistently. The job of collecting it may be a part of the work of the research department and when it is, there should be the closest and most friendly cooperation between the forecasting personnel and the research personnel. On the other hand, much of this work may be compiling and tabulating data from regularly-published statistical source materials. In such cases, the problem of collection is minimized. However, the ease of securing certain types of statistical information should not be allowed to preclude the collection of additional data which may be pertinent.

Specific factors that cannot be predicted

In the second place, it should be clear that the purely uncontrollable and unforeseeable factors in a future situation cannot be predicted in their application to a specific case. Some margins of safety will be necessary in setting up particular estimates. Any number of special and local conditions such as floods in the Mississippi Valley, unusually cold weather, drought or excessive rains over large geographical areas, abnormal booms like the Florida real estate bubble, transportation tie-ups, strikes in the coal fields, may have a definite effect on individual territories.

Such conditions can hardly be anticipated or predicted by statistical formula. When such factors are already present in a territory, their effect can, of course, be estimated and arbitrary territorial adjustments can be made for them in using the general method of prediction.

The effect of the number of conditioning factors

If sales are influenced by comparatively few factors, the problem of prediction may be relatively simple. The more conditional factors and the more indices there are that relate directly to market possibilities, the less accurate will be the prediction. It is exceedingly difficult to predict the results of the operation of many varied forces. If many of the variables which are used as indices are highly complicated, the task of forecasting may become so intricate as to present a considerable number of opportunities for error.

The assumption of recurrence

All forecasting is based upon the additional principle that a phenomenon which has occurred in the past under certain conditions will occur in the future under similar conditions. A great deal of care must be exercised to make sure that conditions actually are the same whenever the happenings of the past are used as a basis for comparison and identical prediction.

Conditions seldom remain the same for any length of time. Changes, obvious or subtle, usually take place. Consequently, the forecasting personnel must practice constant vigilance in noting changes in old factors and the appearance of new and modifying factors.

The influence of time

Another simple and plain forecasting principle is that the nearer the event is to the time of prediction, the more accurate the prediction is likely to be. Short-term forecasts are far more accurate than long-term estimates because the former do not permit of so many unforeseeable happenings and because on the short-time basis the comparative influences of various factors can be estimated or measured more readily.

Thus, the General Motors Corporation, for instance, prepares a forecast once a month for each of the four succeeding months, and then every day during the current month it calculates its position. It is not possible to forecast accurately very far ahead since sales possibilities depend so largely on concurrent developments within the entire business situation during the intervening period.

In most situations, the long-term forecast will show many errors in its detailed predictions even though it may be reasonably accurate in pointing out general trends.

The course of variations

Still another principle of forecasting is that the more rhythmic the course of events, the more accurate the prediction. In most businesses the sales vary considerably from month to month or from season to season. It is clear that when these variations adhere to some regular or rhythmic course, the problem of prediction is much simpler than when the sales fluctuate widely up and down without rhyme or reason. In the case of automobiles, for example, the spring months always have been the months of heaviest retail purchases. Although automobiles are in service all the year around and although there has been a pronounced trend toward the closed car, these factors have not materially altered the seasonal rhythm of sales.

The forecasting personnel

Finally, the accuracy of market forecasting will depend in very large measure upon the skill, knowledge, and detached point of view of the forecasting personnel. If there is any tendency to err either on the optimistic or the pessimistic side the forecasts will inevitably be inexact. If the forecasting personnel does not possess knowledge and skill, the whole procedure will amount to little more than guesswork.

Certainly, there are enough limitations on the accuracy of market forecasting without imposing the task upon a personnel which is unfitted to attack the problem. The job of forecasting involves the interpretation of data as well as its collection. Only an intelligent and skilful personnel thoroughly conversant with marketing problems and statistical techniques can correlate the various factors and extract logical inferences from confused masses of data.

Basic market units

One of the first and most vital points to be determined in an effort to devise a reasonably accurate system of market forecasting is a definite market unit. Some geographic unit of the total market should be settled upon and recognized as the basic territory upon which forecasts will be built. Sales accomplishments and trends can then be measured within the individual unit. The whole purpose is to establish certain units of area concerning which sales possibilities may be forecast and with which actual sales and sales efforts in terms of expense may be compared.

The evolution of the "trading area."

Political divisions of market territory have, in general, proved to be unsatisfactory market units. The state is too large. It almost always includes several different "markets," each one of which deserves individual study. There is definite need to break the territory down into smaller units. Consequently, many business enterprises are estimating their markets by counties or "trading areas." The tendency in the direction of the use of a trading-area unit is quite pronounced because the manufacturer's unit sales districts have no more respect for county lines than they have for state boundaries. In this age of good roads, widespread automobile ownership, and low cost bus transportation, buyers travel across county and state lines to do their purchasing as they never did in the past. The county, in and of itself, is too small a market unit. The realization of this fact has resulted in a widespread effort to establish trading areas that will not be based primarily upon political boundary lines.

The county and the trading area

However, one fundamental difficulty with the selection of a market unit without regard for political boundary lines is that such a decision may definitely restrict the amount of reliable data which can be collected with respect to the particular unit. Most of the available data that may be desirable in market forecasting, such as population statistics, income tax returns, and the like, is collected and compiled according to political divisions. Fairly complete and reliable statistics, for example, are available with respect to county units.

Accordingly, in the set up of most trading areas, the county unit is utilized as much as possible. In the majority of cases whole counties are included in the various areas but are grouped according to the influence of some particular trading centre. This adherence to the county unit appears advisable in many business enterprises, because of the forecasting importance attached to current influencing market factors such as population, buying power, sales outlets, advertising coverage’s, and similar items. Certainly, where it is held to be necessary to measure these factors statistically and with some frequency, county statistics are essential because they are frequently revised by agencies outside of the individual business enterprise.

Trading areas, of course, have been set up which are not confined to groups of counties but which cut through county lines. Many of these suggested trading areas are carefully worked out and are based upon an accurate compilation of statistical data with respect to purchasing power, population, and the like. Their principal disadvantage, however, is that the compiled data will soon get out of date and that, in many cases, such surveys offer no guarantee of regular revision and reissue.

Different types of studies available

All of the trading area studies which are available, and their number is growing, have their merits and undoubtedly represent helpful and constructive work in supplying market data. Nevertheless, each study has been made up in a different way and for different purposes.

Each study splits the national market into a particular number of areas. Some studies are based on newspaper circulation, some on territories covered by jobbers, and some upon transportation facilities, freight and trucking rates, and geographical characteristics. In some cases state lines have been cut as well as county lines. In other instances, the trading areas fall entirely within the boundaries of the individual states and are composed of a group of counties grouped arbitrarily about a major trading community.

Ready-made areas seldom suitable

No one single set of trading areas can be applied to any considerable range of the product lines and serve for each and all as an effective listing of market units which are basic to reasonably accurate market forecasting. The trading areas for convenience products will differ considerably from those for specialty goods.

The trading areas that are useful to the manufacturer who sells directly to the retailer throughout the nation will differ from the trading areas of the manufacturer who sells directly to the jobber and who desires general jobbing distribution. In most cases, a practical system of trading areas must be worked out for the particular company and for the particular product line concerned. Any delineation of trading areas will not be identical for any extensive range of consumers' goods. The areas for the various products will overlap and usually will not even be concentric about the "mother" trading city.

The individual manufacturer who wishes to devise an accurate system of market forecasting cannot escape logically the necessity of determining his own particular market unit or trading area. The only practical value of a trading area is for the individual business enterprise, seeking to discover potential sales possibilities and to measure its operations against potentials.

Influence of system of distribution

Enough has been said to indicate that the establishment of trading areas is not merely a question of adopting and using ready-made market units, but a highly complex matter of working out areas that fit the seller's own particular problem. Just how this can be accomplished can be stated only in generalities. Obviously, if a manufacturer is selling directly to retailers and through this distributive channel alone, his particular trading areas are fairly easy to determine.

A concern like Swift and Company, which sells direct to the retail trade through about 400 carefully-located branch houses, each one of which has its definite territory, will have a fairly easy problem in setting up marketing areas. The same is true of a manufacturer who markets his goods through exclusive jobbers.

The very fact that individual jobbers are given exclusive selling franchises in their own jobbing territories makes it possible to define marketing areas by allocating the retail customers in each of these areas to the respective jobbers. On the other hand, a manufacturer who has general jobbing distribution and sells through two or more kinds of jobbers faces a much more complicated undertaking. He may, for instance, market his goods through drug jobbers, grocery jobbers, and jobbers or wholesalers who specialize in selling to general stores in country towns.

Since most surveys appear to show that drug jobbing territories are approximately twice as large as grocery jobbing territories, the problem of defining clearly the proper market unit is anything but easy. If, in addition, the manufacturer also sells directly to chain stores, retail buying syndicates, or department stores, in the same territory in which he sells to jobbers, the question of establishing trading areas becomes even more intricate.

Chain stores, for example, will have their own wholesale warehouses from which they distribute to individual stores, and the territories covered from these warehouse centres will not be likely to correspond at all to the usual jobbing areas.

The particular method of distribution used by the individual manufacturer is one of the most important determining or conditioning factors in establishing a logical and usable market unit.

Analysis of present situation necessary

The manufacturer must give considerable thought to his method of distribution as it affects the problem of defining market areas. He should consider the location of the branch warehouses which he has already established and from which he delivers stock to wholesalers, or to retailers, or to both. He should analyse carefully his present sales districts and the field territories which are now being covered by his salesmen. Also, he should give due weight to the location of the branch offices of competing manufacturers and their defined territories.

By cost studies of the general type, he should evaluate his profitable market units of sale and delivery. Moreover, he should give special thought to his market as a whole, to ascertain the size of trading areas that may be practicable. If his distribution is uneven as far as the whole market is concerned, it may be advisable to set up small territories in one part of the country and larger territories in other sections.

Other factors affecting trading areas

Other problem factors of defining trading areas are:

• The nature of the product
• Transportation and physical factors
• Individual salesman and company coverage
• The time required for the average sale
• The need for service
• The nature of the distributors

In the case of products that are bulky the territory surrounding a "mother" trading centre probably will be less extensive than in the case of products of smaller bulk. Transportation may influence the size of the marketing area because of the nature of the product and the railroad and highway facilities available.

Trading areas usually will be smaller in sections of a state where good roads are few in number or where rail facilities are poor. Likewise, the degree in which a particular company has been able to establish itself in a particular territory may affect the size of the trading area. Consideration must be given to the task before the individual salesman in the proposed delineation of an area. Closely connected with this factor is the matter of the time required for an average sale. Some product lines can be sold on a one-call basis but others may require a number of successive solicitations.

Physical conditions, therefore, are not the only factors which limit what the individual salesman can do. The need for rapid and efficient service to the territory is another obvious determining factor affecting the size of a trading area.

Finally, the nature of the wholesale and retail distributors wilt have its influence. A distributor who is progressive and who believes in providing special service and in promoting sales will supply a larger area than a distributor who merely accepts what patronage falls to his lot.

Tools essential to market forecasting

The tools essential to market forecasting are:

• Accurate and comprehensive records of past and current market performance
• Sound but necessarily arbitrary methods for the evaluation of competition
• Proved market indices

The detailed data necessary to provide these forecasting tools will be obtainable in part from the records of the company's operations and in part from external sources. The principal external sources are governmental publications, privately-operated statistical services, financial journals, trade journals, trade associations, mercantile agencies, publishing houses, advertising agencies, newspaper and magazine research departments, addressing companies and directory publishers.

Internal marketing records

The company's internal performance records are of considerable service in the work of market forecasting. Entirely apart from the possibilities of using internal records of accomplishment to measure sales, selling expense and advertising against forecasts to locate the weak spots in market distribution, these records of past and current performances are essential to the verification and correct weighing of individual market indices used in making forecasts. It is seldom possible to get away completely from the experience of past performance.

Many types of marketing statistics should be compiled by the market research department for possible use in forecasting. In general, the marketing records should show:

• Sales by salesmen
• Sales by products including sizes, types, and styles
• Sales by agencies and branches
• Sales by territories, trading areas, towns, cities and counties

These records are fundamental to comparisons with potential accomplishments. Of course, they should be set up in a form suitable for comparing, weighing, and evaluating the specific groups according to details of the forecast. This necessity means usually that they must be reduced to a percentage basis. Many other internal records may also be kept and some of them will have more than an occasional use. Such additional records may include:

• Sales by packages, pounds, yards, gallons, etc., as well as by dollars
• Bulk sales
• Sales under secondary brand names
• Sales under jobbers' or private brand names
• Sales by price ranges
• Sales by jobbers
• Sales directly made to retailers and their possible divisions
• Sales made to profitable customers on a monthly, quarterly, or seasonal basis
• Other record classifications of a miscellaneous type

Since such records cost money to set up and to keep up to date, they should be considered carefully from the viewpoint of necessity and from the standpoint of designing the respective forms and records so that as much as possible of the clerical labour of analysis may be saved.

Use of internal records in forecasting

Perhaps the crudest method of setting up a future sales goal is to increase arbitrarily the performance of the past year. To vary this procedure by using an average performance of several years and then adding a certain percentage of increase is equally crude. Such methods do not forecast actual market possibilities. They set up merely arbitrary goals. Moreover, they assume the continuance of the status quo.

The whole process of increasing from year to year the sales estimates by arbitrary percentages preserves and carries along the weaknesses of previous estimates. Obviously, the records of past performances must be supplemented by other methods if any accurate forecasting is to be attempted. Past performances are useful to forecasting mainly in discovering indices that may be used and in checking the results obtained by combining and weighing indices.

Adjusting for competition

The factor of competition is important to market forecasting but it presents very little opportunity for quantitative measurement. Except in a very few cases, the individual business enterprise cannot measure its several market units with accurate statistical percentages that will represent the sales of each competitor.

To be sure, some companies by reason of their contacts and the activity of their branch sales managers are able to make reasonably close estimates of the volume of business done by their competitors in particular trading areas. If the statistics of the national volume of business that is being done by these competitors are available, considerable use can be made of the territorial estimates.

Usually, however, adjustments for competition cannot be determined exactly, and although care should be exercised in making them they will be somewhat arbitrary in most cases. The severity of competition will vary from territory to territory. This fact constitutes a sound reason why two trading areas having the same sales potentialities in all respects other than with reference to competition, should not be expected to produce the same amount of sales. An allowance must be made for competition even if that allowance is partially arbitrary.

Any method must give weight to the length of time that the particular company has been distributing its products in a trading area, to the aggressiveness and efficiency of the company's own salesmen in the field, and to the degree of advertising support given to the salesmen. In addition, periodic surveys by means of personal interviews with representative distributors in a trading area will provide some basis for estimating the strength of competition.

The market index

From the very beginning of experimentation with market forecasting there has been a widespread search for specific measuring sticks of market possibilities which correspond with variations in sales. If a direct relation can be found between a specific set of statistics and the company's market, the specific set of statistics is called a market index and may be used to indicate market potentialities.

Even in cases where the exact nature of the causal relationship between the index statistics and the market potentialities is not known, any relationship that can be established and occasionally checked may be put to practical use in forecasting. The discovery of reliable market indices is fundamental to accurate forecasting. A considerable amount of trial-and-error experimentation may be necessary, of course, before sound indices are discovered. The nature of the product line has a great deal to do with the relative difficulty in discovering market indices.

The manufacturer of automobiles, for instance, meets almost immediately the suggestion of automobile registrations as a possible index. The seller of electrical appliances has data available on the numbers of wired homes. However, the manufacturer of a kerosene-oil cooking stove may not be able to discover a suitable index with equal ease. In any circumstance, of course, apparent indices must be considered merely tentative until some relationship between them and the product's market is discovered.

No single and uniform index is useful

Many business enterprises adopt and use indiscriminately a single market index such as population, or magazine or daily newspaper circulation, or income tax returns. But no single measure will do for all commodities. As a rule, no single market index will be sufficient to measure accurately the potential market for any individual commodity. It is necessary usually to discover several factors that actually affect the sale of the individual commodity.

Finally, it should be stated that a proved market index or combination of indices can be used by themselves only to forecast the potential market of the industry in various territories. The method of using indices does not predict the market possibilities for the individual company. The percentage of these market possibilities for the industry which can be obtained by a given company must be determined by an arbitrary percentage adjustment for competition.

Public Relations
Activities for public relation
Budgets for public relations
Changing happenings into news
Community relationships
Consumer relationships
Costs for public relations
Effective areas of PR
Functions public relations
Government relationships
Labor relationships
Magazines public relations
Methods of communication
Newspaper public relations
Prestige achievements
Public field relations
Public utilities
Radio, TV and PR
Stockholder relationship
Techniques public relations