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Strategic forecasting is a type of management tool that is often employed by business owners as well as investors and even economic advisors. The goal of this type of forecasting is to analyze all relevant data regarding what will take place if a particular course of action is implemented. While the range of factors that may be involved will be slightly different depending on the setting and circumstances, there are a few broad considerations that will apply in just about every scenario.
With strategic forecasting, there is a need to address which changes will come about as the result of the decision. This means predicting what will happen soon after the action is implemented, as well as is likely to occur a year or even five years down the road. In order to accomplish this, taking the time to gather data on all relevant factors first, then developing scenarios based on those factors, will often help to forecast the outcomes and make it easier to decide of that course of action is in fact the most practical decision.
One way to understand strategic forecasting is to consider a business owner who is thinking about expanding the company’s work force. The motivation is to position the company so that it can produce more goods or services, and hopefully generate more revenue for the operation. Before choosing to hire any new employees, the owner will consider the current market for the products offered, how the economy will affect the demand for the products in the next year to five years, and the total cost of training new employees, purchasing additional equipment, and absorbing the costs of additional raw materials. Should the strategic forecasting indicate that the market is not likely to support the increased production, then the additional costs cannot be justified and the company should remain as is. Without taking the time to engage in this type of forecasting, the owner could have spent a great deal of money and been unable to recoup the investment, ultimately damaging the company.
In like manner, an investor can employ the basics of strategic forecasting in order to decide if a given investment is really a sound choice. For example, a venture capitalist will consider the opportunity to fund a new business venture, but not before creating a forecast of what is most likely to happen with that business over time. Factors such as the type of products produced, the potential to capture market share, and even the impact of anticipated shifts in the economy on the buying habits of consumers will be taken into account. Should the forecast indicate a reasonable chance of the venture becoming profitable and staying that way for an appreciable period of time, then the investor can move forward with the investment. If the forecast indicates a high probability of failure, the investor may want to seek other opportunities.