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Sales forecast errors for new product projects
Sales Forecast Errors for New Product Projects Blair Little and Roger A. More
It is difficult to uvoid errors in sales forecasts for new industriul products, especially when the forecasts are made at the new product screening stage. But if managers are aware that a forecast is likely to be in serious error, they can tuke steps to deal with the uncertainty. A research project analyzed 185 new product projects to develop four mujor indicators of sales forecast error. The indicators can be derivedfor specific firms from typical project screening questions and can be used to alert new product managers to speciul development problems that may be present.
It is not easy to forecast accurately the annual sales of an industrial product line even for one year in the future. Even more difficult is the forecast of first year sales for a new industrial product, especially when the forecast must be made at the initial screening stage of a new product project. The uncertainty associated with forecasting new product sales leads very often to mood swinging feelings of optimism and pessimism by forecasters, and to attempts to guess what will encourage or discourage those associated with the project or who will evaluate the project. One division manager in a machine tool firm confided that with every new product proposal presented to him, he first automatically cut the sales forecast in half and @ Elsevier North-Holland,
Inc., 1978
Industrial Marketing Management
then proceeded with his evaluation. He didn’t, of course, want to reveal his discounting rule to those doing the proposing, because, first, they might simply inflate future sales forecasts, and second, they might feel he didn’t have confidence in their abilities to achieve what they forecast. Such hedging is not uncommon and may seem inevitable to some, but it can confuse those who must operate and manage the new product process and it can interfere with good new product decision-making. Moreover, for some projects, it isn’t necessary to hedge on forecasts. It would be a better practice to identify in advance those projects where uncertainty is such that sales forecasts are likely to be far off the mark and to deal directly with the uncertainty. The problem is to pick out the projects where sales forecasts are prone to error. Fortunately, there are error indicators that are visible at the time the initial sales forecast is made in the early stages of a new product project. New products, as a rule, have to pass a screen before significant resources are allocated to their development.
The research upon which this article is based was funded by the Department of Industry, Trade and Commerce (Canada) and by the Fund For Excellence, School of Business Adminstration, University of Western Ontario, London, Canada.
49
7, 49-53 (1978) 0019-8501/78/0007-0049/$01.25
The screen usually includes a series of questions to assess the suitability of the proposed new product to the firm. Certain of the questions on the typical new product screen can reveal whether the initial sales forecast is likely to be close to accurate or in serious error. That is not to say that the indicators can reduce the error in the initial sales forecast-only that they can identify when errors are likely to be large. Once the uncertainty in the forecast is highlighted, however, specific steps can be taken to handle it. THE STUDY Indicators of sales forecast error were developed from a study of the new product experiences of a large number of firms. Differences between the actual sales results of a new product and the forecast of sales made at the initial screening stage were related to several subjective project assessments of the kind that managers normally make at the screening stage. The study analyzed 185 new product projects in 114 industrial goods firms in a range of industries in Canada [ 11. The projects represented a cross-section of new product activity in Canada-many small projects, many minor modifications, a few large projects, a few with significant new technological or functional features. Even with the variety of firms and new product circumstances, there were important indicators that seemed to be generally applicable.
their existing product lines. When the industrial market situation is similar, they have at hand more market information with which to make the assessment of demand and to evaluate distribution channels and competition. They also can count more certainly on the capacity of the firm to deal successfully with a familiar market when the new product is launched. There are many dimensions on which the similarity of the marketing task can be judged. As indicators of sales forecast error, some dimensions were expected to be more significant than others. Those we expected to be most significant were the dimensions which describe the market and those which describe the marketing mix. Hence, we asked managers to assess the similarity of the new product on the following eight dimensions: potential customers competitors distribution channels personal selling task
We measured the eight dimensions of marketing task similarity by asking managers to think of the new product situation at the initial screening stage and to complete a questions such as the series of typical screening following: l
BLAIR LITTLE IS professor of business admrnistration, University of Western Ontario. His research and publications have dealt with the management of new product development and marketing. He is a consultant to firms in North and South America and Europe on problems of marketing and corporate plannrng.
ROGER A. MORE is assistant professor of business administration, University of Western Ontario, where he teaches marketing research and industrial marketing. His research and consulting have focused on new product screening and the analysis of risk in new product projects He IS a consultant to a number of firms on problems of marketing and management development.
50
This product will be distributed to potential customers -through present distributors -mostly through present distributors -partly through new distributors -equally between new and present distributors -mostly through new distributors -entirely through new distributors -or we will sell direct
THERESEARCHAPPROACH It is logical to assume that managers would perform better on those tasks that are familiar to them. Sales forecasters, similarly, would be expected to be more accurate when the new product situation they are facing is similar to the situation they encounter when marketing
after-sales service task advertising task product characteristics product technology
.
Compared to existing company products, will be
this product
-a slight modification of an existing company product -a moderate modification of an existing company product -a major modification of an existing company product -for the most part a new product to the company -a completely new product to the company We related managers’ responses on the similarity questions to the error in the initial sales forecast for each new product project-that is, to the difference between the product’s actual first year sales and the forecast of first year sales that was made at the pre-development screening stage of the project. Discriminant analysis was used
to identify the most significant of the similarity dimensions. When the marketing of a new product involved a large number of decisions with a large number of alternatives, we expected the complexity of the situation would lead to large errors in sales forecasts. We attempted to derive such measures of complexity by examining a) the risk buyers faced in adopting the new product; b) the competitive advantage inherent in the new product, and c) the difficulty of obtaining distribution. The notion of complexity turned out to be difficult to capture. Although we found some relationships in the expected directions, we did not establish any strong error indicators among the complexity dimensions. The concept of the complexity of the marketing task may be worth pursuing further since it is intuitively appealing as a possible determinant of error. UNFAMILIARITY
BREEDS
ERRORS
Since the projects studied were from a cross-section of new product activity in industry, many were of the everyday product line extension variety and hence represented very familiar market situations for many were no spectacular breakthrough managers-there products. It was not too surprising, therefore, that in 44 percent of the projects, the error in the sales forecast was 20 percent or less. (The error was calculated as a percentage of the forecast.) In 36 percent of the projects, however, the error was greater than 70 percent-an error level with potentially serious consequences for decisions on product development expenditures. The analysis showed that, .as expected, on all eight dimensions of marketing task similarity, the more that the anticipated marketing tasks in a new product situation were similar to existing tasks, the less error there was likely to be in the initial screening stage sales forecast. The converse, of course, is that errors are very likely to be high in situations where the market is unfamiliar. Three dimensions were particularly good indicators that forecast errors were likely to occur. A fourth indicator was imbedded in the effects of the first three and could still be identified separately. The strongest indicator that a sales forecast might be in error was the degree of similarity of the distribution channels for the new product. In two-thirds of the projects, managers anticipated that the product would move entirely through present distributors. But if it didn’t, then an accurate sales forecast was hard to come by. A change
in distribution channels means more than a change in the intermediate customer for the product. It usually involves selling the product to final customers in different businesses. Whenever an industrial company is separated from its market by external channels of distribution, it loses the market information that comes from direct customer contact. When the product is new, the loss tends to widen the gap between forecast and actual sales. An anticipated change in distributors, therefore, is a signal that there could be important and unfamiliar market problems and a likelihood of high sales forecast error. It is not easy to define degrees of newness of a product in comparison with existing company products, but it is useful to try because newer products tend to lead managers to make greater sales forecast errors. In fact, product newness is the second most important error indicator. In 45 percent of the projects, the product was rated as a slight or moderate modification of an existing company product. As the rating moved toward major modification and finally to a completely new product to the company, (just 6 percent of th e projects) the likelihood of forecast error increased markedly. New products, even with minor newness, trigger changes in nearly all parts of the marketing task and changes in customer and competitive behavior. Even if the change is minor in each part of the marketing task, the sum of the many changes adds to uncertainty and forecast difficulty. The third important error indicator had a complicated relationship to sales forecasting. When the technology on which the new product was to be based had been used to a small degree or not at all in previous products-that is, when the product technology was new to the firm-the errors in the sales forecast were high. To some extent, new technology could contribute to the relationship between product newness and forecast error (there was some correlation between the two dimensions, as might be expected). But technological newness of the product also had its own strong error signal. When a firm is working with product technology that is unfamiliar, what seems to change is not just the market situation the product will encounter but the orientation of the firm to the market. When the product technology was new to the firm, the amount and type of market assessment performed was quite inappropriate to the situation-more so than when the product technology was familiar [2]. It may be that when managers advance their product technology, their expectations for the technology swamp other perspectives. Or, it may be that 51
firms involved in advancing their product technology to an important degree are technically oriented and regu-
REFINING
larly ignore market considerations. In any event, when product technology is unfamiliar. it is an indicator that the sales forecast will likely be in serious error. Underlying several of the eight dimensions of similar-
Error indicators are helpful to managers as a warning signal, but they would be even more helpful if the likely
ity in the marketing
task is the similarity
of customers
for
the new product. Sales forecast errors are ultimately errors in estimating what customers will buy. It is usually easier to make the estimate for the customers you know than for customers you haven’t yet sold to. Our research shows that the more of the expected market for the new product that comes from new customers, the greater is the likelihood of sales forecast error. Some new customers, however, may be just like old customers-same business, same buying processexcept that they formerly bought from competitors. So new customers are not as strong an error signal as new distributors, for example. New customers do become a fairly strong indicator of very high errors, though, when the product is expected to be sold mostly or only to customers that are new to the firm.
THE VALUE OF INDICATORS When a manager knows that a sales forecast for a new product is likely to be in serious error, he or she can deal directly and analytically with the uncertainty of the forecast. In the first place, a wide range of revenue estimates can be used in profit calculations in order to display the financial risk in the project so that more cautious stepby-step planning might be done to improve the development process. Secondly, the product development group and the marketing manager can be alerted to the special market problems that the error indicators imply. There is often a tendency to underestimate the marketing adjustments that a new product requires, but a special signal can give more impetus to marketing preparations. Finally, a signal that a forecast is likely to be in error should also be a signal for extra marketing research to improve market knowledge. A number of the managers of projects with high sales forecast error were very confident that their estimate was correct and they did little or no market assessment during the development period to improve the estimate. If they had been given a signal that said that in spite of this confidence their forecast was likely to be seriously in error, they might have been prompted to seek more market information and consequently make better new product decisions.
52
THE INDICATORS
magnitude of the error could be signaled. The development of such a refinement seems possible. In an exploratory study, an equation was derived from the data reported in this study and a probability calculation was applied forecast
that would classify a given new product sales as a high error project (an error greater than 20
percent) or a low error project 131. With further refinement of the dimensions of similarity and complexity of the marketing task, with a narrower industry sample and with other improvements, the classification procedure could be more precise than was possible in the exploratory study. With increased precision, it could become a valuable step in the determination of the risk in a project. One of the sources of sales forecast error not taken into account by this study was the newness of the production task to the firm. A new product often requires the development of new production processes and sometimes the development of completely new facilities. If the development and debugging of the production process is delayed, initial quality levels can be lower than expected, deliveries can be late and, as a consequent, sales forecasts can be missed. It may be, then, that unfamiliarity of the production process is related to sales forecast errors and can be used as an error indicator. This study did not attempt to evaluate the quality of the procedure used to generate the initial sales forecast. Nor did it attempt to evaluate the quality of the marketing effort at the time of the product launch. Both of these marketing functions as well as other product development functions can vary tremendously from firm to firm. The level of forecast error, therefore, is not simply a question of the similarity of the marketing task to past operations. In a large sample study, the effects of the quality of execution of new product activity can often be assumed to cancel out randomly. For the individual firm, however, the effects of other factors are specific to the firm. Instead of using the general indicators developed in this study, managers in individual firms may wish to develop their own indicators from their own experiences.
USE OF THE INDICATORS For most firms, the general indicators developed in this study are good signals that an initial forecast is likely to have a serious error. The application of the procedure developed in this study is straightforward:
1. Develop a series of five-point similarity questions much like those used in this study, or use the eight dimensions of similarity presented in this article and a five-point scale for each that ranges from similar to dissimilar. 2. At the initial screening stage of a new product, rate the product’s anticipated similarity to existing products and existing marketing operations. 3 . Take special note of the marketing dimensions that _ are given a dissimilar rating. The more dissimilar ratings there are, the more likely there will be a large sales forecast error. Quite apart from the error indications, dissimilar ratings point to special marketing problems the product will encounter. 4. Raise a warning flag if the four critical indicators are encountered. There is likely to be a very large sales forecast error if the product is expected to be a. very different from existing products. b. distributed through new channels. c. based on technology that is new to the firm. d. sold mostly or entirely to new customers.
It is inevitable that sales forecasts, even those developed with the best of care and competence, will be in error. Poor handling of the forecast uncertainty can lead to poor new product decisions. Failure to spot forecast errors until after the product is launched can lead to financial disaster. It is better to identify error situations in advance and deal with them directly. REFERENCES For a detailed description of the research methodology of this and related studies, see More,
Roger A.,
Sales Forecast Uncertainty
in Industrial
New Product Screening, unpublished Ph.D. theai\, University of Western Ontario,
1974; and Little,
Blair,
The Development
of New Industrial
Producta in Canada: A Summary of Research Program at Western, School of Busines\ Administration,
University of Western Ontario.
Little, Blair, New Technology and the Role of Marketing, No.
180. School of Business Administration,
Ontario, August,
1977.
working paper
University
of Western
1977.
More, Roger A. and Little, Blair, Discriminant Analysis of Sales Forecast Uncertainty
in New Industrial Product Situations, unpublished research
paper, School of Business Administration,
University
of Western On-
tario.
53
It is difficult to uvoid errors in sales forecasts for new industriul products, especially when the forecasts are made at the new product screening stage. But if managers are aware that a forecast is likely to be in serious error, they can tuke steps to deal with the uncertainty. A research project analyzed 185 new product projects to develop four mujor indicators of sales forecast error. The indicators can be derivedfor specific firms from typical project screening questions and can be used to alert new product managers to speciul development problems that may be present.
It is not easy to forecast accurately the annual sales of an industrial product line even for one year in the future. Even more difficult is the forecast of first year sales for a new industrial product, especially when the forecast must be made at the initial screening stage of a new product project. The uncertainty associated with forecasting new product sales leads very often to mood swinging feelings of optimism and pessimism by forecasters, and to attempts to guess what will encourage or discourage those associated with the project or who will evaluate the project. One division manager in a machine tool firm confided that with every new product proposal presented to him, he first automatically cut the sales forecast in half and @ Elsevier North-Holland,
Inc., 1978
Industrial Marketing Management
then proceeded with his evaluation. He didn’t, of course, want to reveal his discounting rule to those doing the proposing, because, first, they might simply inflate future sales forecasts, and second, they might feel he didn’t have confidence in their abilities to achieve what they forecast. Such hedging is not uncommon and may seem inevitable to some, but it can confuse those who must operate and manage the new product process and it can interfere with good new product decision-making. Moreover, for some projects, it isn’t necessary to hedge on forecasts. It would be a better practice to identify in advance those projects where uncertainty is such that sales forecasts are likely to be far off the mark and to deal directly with the uncertainty. The problem is to pick out the projects where sales forecasts are prone to error. Fortunately, there are error indicators that are visible at the time the initial sales forecast is made in the early stages of a new product project. New products, as a rule, have to pass a screen before significant resources are allocated to their development.
The research upon which this article is based was funded by the Department of Industry, Trade and Commerce (Canada) and by the Fund For Excellence, School of Business Adminstration, University of Western Ontario, London, Canada.
49
7, 49-53 (1978) 0019-8501/78/0007-0049/$01.25
The screen usually includes a series of questions to assess the suitability of the proposed new product to the firm. Certain of the questions on the typical new product screen can reveal whether the initial sales forecast is likely to be close to accurate or in serious error. That is not to say that the indicators can reduce the error in the initial sales forecast-only that they can identify when errors are likely to be large. Once the uncertainty in the forecast is highlighted, however, specific steps can be taken to handle it. THE STUDY Indicators of sales forecast error were developed from a study of the new product experiences of a large number of firms. Differences between the actual sales results of a new product and the forecast of sales made at the initial screening stage were related to several subjective project assessments of the kind that managers normally make at the screening stage. The study analyzed 185 new product projects in 114 industrial goods firms in a range of industries in Canada [ 11. The projects represented a cross-section of new product activity in Canada-many small projects, many minor modifications, a few large projects, a few with significant new technological or functional features. Even with the variety of firms and new product circumstances, there were important indicators that seemed to be generally applicable.
their existing product lines. When the industrial market situation is similar, they have at hand more market information with which to make the assessment of demand and to evaluate distribution channels and competition. They also can count more certainly on the capacity of the firm to deal successfully with a familiar market when the new product is launched. There are many dimensions on which the similarity of the marketing task can be judged. As indicators of sales forecast error, some dimensions were expected to be more significant than others. Those we expected to be most significant were the dimensions which describe the market and those which describe the marketing mix. Hence, we asked managers to assess the similarity of the new product on the following eight dimensions: potential customers competitors distribution channels personal selling task
We measured the eight dimensions of marketing task similarity by asking managers to think of the new product situation at the initial screening stage and to complete a questions such as the series of typical screening following: l
BLAIR LITTLE IS professor of business admrnistration, University of Western Ontario. His research and publications have dealt with the management of new product development and marketing. He is a consultant to firms in North and South America and Europe on problems of marketing and corporate plannrng.
ROGER A. MORE is assistant professor of business administration, University of Western Ontario, where he teaches marketing research and industrial marketing. His research and consulting have focused on new product screening and the analysis of risk in new product projects He IS a consultant to a number of firms on problems of marketing and management development.
50
This product will be distributed to potential customers -through present distributors -mostly through present distributors -partly through new distributors -equally between new and present distributors -mostly through new distributors -entirely through new distributors -or we will sell direct
THERESEARCHAPPROACH It is logical to assume that managers would perform better on those tasks that are familiar to them. Sales forecasters, similarly, would be expected to be more accurate when the new product situation they are facing is similar to the situation they encounter when marketing
after-sales service task advertising task product characteristics product technology
.
Compared to existing company products, will be
this product
-a slight modification of an existing company product -a moderate modification of an existing company product -a major modification of an existing company product -for the most part a new product to the company -a completely new product to the company We related managers’ responses on the similarity questions to the error in the initial sales forecast for each new product project-that is, to the difference between the product’s actual first year sales and the forecast of first year sales that was made at the pre-development screening stage of the project. Discriminant analysis was used
to identify the most significant of the similarity dimensions. When the marketing of a new product involved a large number of decisions with a large number of alternatives, we expected the complexity of the situation would lead to large errors in sales forecasts. We attempted to derive such measures of complexity by examining a) the risk buyers faced in adopting the new product; b) the competitive advantage inherent in the new product, and c) the difficulty of obtaining distribution. The notion of complexity turned out to be difficult to capture. Although we found some relationships in the expected directions, we did not establish any strong error indicators among the complexity dimensions. The concept of the complexity of the marketing task may be worth pursuing further since it is intuitively appealing as a possible determinant of error. UNFAMILIARITY
BREEDS
ERRORS
Since the projects studied were from a cross-section of new product activity in industry, many were of the everyday product line extension variety and hence represented very familiar market situations for many were no spectacular breakthrough managers-there products. It was not too surprising, therefore, that in 44 percent of the projects, the error in the sales forecast was 20 percent or less. (The error was calculated as a percentage of the forecast.) In 36 percent of the projects, however, the error was greater than 70 percent-an error level with potentially serious consequences for decisions on product development expenditures. The analysis showed that, .as expected, on all eight dimensions of marketing task similarity, the more that the anticipated marketing tasks in a new product situation were similar to existing tasks, the less error there was likely to be in the initial screening stage sales forecast. The converse, of course, is that errors are very likely to be high in situations where the market is unfamiliar. Three dimensions were particularly good indicators that forecast errors were likely to occur. A fourth indicator was imbedded in the effects of the first three and could still be identified separately. The strongest indicator that a sales forecast might be in error was the degree of similarity of the distribution channels for the new product. In two-thirds of the projects, managers anticipated that the product would move entirely through present distributors. But if it didn’t, then an accurate sales forecast was hard to come by. A change
in distribution channels means more than a change in the intermediate customer for the product. It usually involves selling the product to final customers in different businesses. Whenever an industrial company is separated from its market by external channels of distribution, it loses the market information that comes from direct customer contact. When the product is new, the loss tends to widen the gap between forecast and actual sales. An anticipated change in distributors, therefore, is a signal that there could be important and unfamiliar market problems and a likelihood of high sales forecast error. It is not easy to define degrees of newness of a product in comparison with existing company products, but it is useful to try because newer products tend to lead managers to make greater sales forecast errors. In fact, product newness is the second most important error indicator. In 45 percent of the projects, the product was rated as a slight or moderate modification of an existing company product. As the rating moved toward major modification and finally to a completely new product to the company, (just 6 percent of th e projects) the likelihood of forecast error increased markedly. New products, even with minor newness, trigger changes in nearly all parts of the marketing task and changes in customer and competitive behavior. Even if the change is minor in each part of the marketing task, the sum of the many changes adds to uncertainty and forecast difficulty. The third important error indicator had a complicated relationship to sales forecasting. When the technology on which the new product was to be based had been used to a small degree or not at all in previous products-that is, when the product technology was new to the firm-the errors in the sales forecast were high. To some extent, new technology could contribute to the relationship between product newness and forecast error (there was some correlation between the two dimensions, as might be expected). But technological newness of the product also had its own strong error signal. When a firm is working with product technology that is unfamiliar, what seems to change is not just the market situation the product will encounter but the orientation of the firm to the market. When the product technology was new to the firm, the amount and type of market assessment performed was quite inappropriate to the situation-more so than when the product technology was familiar [2]. It may be that when managers advance their product technology, their expectations for the technology swamp other perspectives. Or, it may be that 51
firms involved in advancing their product technology to an important degree are technically oriented and regu-
REFINING
larly ignore market considerations. In any event, when product technology is unfamiliar. it is an indicator that the sales forecast will likely be in serious error. Underlying several of the eight dimensions of similar-
Error indicators are helpful to managers as a warning signal, but they would be even more helpful if the likely
ity in the marketing
task is the similarity
of customers
for
the new product. Sales forecast errors are ultimately errors in estimating what customers will buy. It is usually easier to make the estimate for the customers you know than for customers you haven’t yet sold to. Our research shows that the more of the expected market for the new product that comes from new customers, the greater is the likelihood of sales forecast error. Some new customers, however, may be just like old customers-same business, same buying processexcept that they formerly bought from competitors. So new customers are not as strong an error signal as new distributors, for example. New customers do become a fairly strong indicator of very high errors, though, when the product is expected to be sold mostly or only to customers that are new to the firm.
THE VALUE OF INDICATORS When a manager knows that a sales forecast for a new product is likely to be in serious error, he or she can deal directly and analytically with the uncertainty of the forecast. In the first place, a wide range of revenue estimates can be used in profit calculations in order to display the financial risk in the project so that more cautious stepby-step planning might be done to improve the development process. Secondly, the product development group and the marketing manager can be alerted to the special market problems that the error indicators imply. There is often a tendency to underestimate the marketing adjustments that a new product requires, but a special signal can give more impetus to marketing preparations. Finally, a signal that a forecast is likely to be in error should also be a signal for extra marketing research to improve market knowledge. A number of the managers of projects with high sales forecast error were very confident that their estimate was correct and they did little or no market assessment during the development period to improve the estimate. If they had been given a signal that said that in spite of this confidence their forecast was likely to be seriously in error, they might have been prompted to seek more market information and consequently make better new product decisions.
52
THE INDICATORS
magnitude of the error could be signaled. The development of such a refinement seems possible. In an exploratory study, an equation was derived from the data reported in this study and a probability calculation was applied forecast
that would classify a given new product sales as a high error project (an error greater than 20
percent) or a low error project 131. With further refinement of the dimensions of similarity and complexity of the marketing task, with a narrower industry sample and with other improvements, the classification procedure could be more precise than was possible in the exploratory study. With increased precision, it could become a valuable step in the determination of the risk in a project. One of the sources of sales forecast error not taken into account by this study was the newness of the production task to the firm. A new product often requires the development of new production processes and sometimes the development of completely new facilities. If the development and debugging of the production process is delayed, initial quality levels can be lower than expected, deliveries can be late and, as a consequent, sales forecasts can be missed. It may be, then, that unfamiliarity of the production process is related to sales forecast errors and can be used as an error indicator. This study did not attempt to evaluate the quality of the procedure used to generate the initial sales forecast. Nor did it attempt to evaluate the quality of the marketing effort at the time of the product launch. Both of these marketing functions as well as other product development functions can vary tremendously from firm to firm. The level of forecast error, therefore, is not simply a question of the similarity of the marketing task to past operations. In a large sample study, the effects of the quality of execution of new product activity can often be assumed to cancel out randomly. For the individual firm, however, the effects of other factors are specific to the firm. Instead of using the general indicators developed in this study, managers in individual firms may wish to develop their own indicators from their own experiences.
USE OF THE INDICATORS For most firms, the general indicators developed in this study are good signals that an initial forecast is likely to have a serious error. The application of the procedure developed in this study is straightforward:
1. Develop a series of five-point similarity questions much like those used in this study, or use the eight dimensions of similarity presented in this article and a five-point scale for each that ranges from similar to dissimilar. 2. At the initial screening stage of a new product, rate the product’s anticipated similarity to existing products and existing marketing operations. 3 . Take special note of the marketing dimensions that _ are given a dissimilar rating. The more dissimilar ratings there are, the more likely there will be a large sales forecast error. Quite apart from the error indications, dissimilar ratings point to special marketing problems the product will encounter. 4. Raise a warning flag if the four critical indicators are encountered. There is likely to be a very large sales forecast error if the product is expected to be a. very different from existing products. b. distributed through new channels. c. based on technology that is new to the firm. d. sold mostly or entirely to new customers.
It is inevitable that sales forecasts, even those developed with the best of care and competence, will be in error. Poor handling of the forecast uncertainty can lead to poor new product decisions. Failure to spot forecast errors until after the product is launched can lead to financial disaster. It is better to identify error situations in advance and deal with them directly. REFERENCES For a detailed description of the research methodology of this and related studies, see More,
Roger A.,
Sales Forecast Uncertainty
in Industrial
New Product Screening, unpublished Ph.D. theai\, University of Western Ontario,
1974; and Little,
Blair,
The Development
of New Industrial
Producta in Canada: A Summary of Research Program at Western, School of Busines\ Administration,
University of Western Ontario.
Little, Blair, New Technology and the Role of Marketing, No.
180. School of Business Administration,
Ontario, August,
1977.
working paper
University
of Western
1977.
More, Roger A. and Little, Blair, Discriminant Analysis of Sales Forecast Uncertainty
in New Industrial Product Situations, unpublished research
paper, School of Business Administration,
University
of Western On-
tario.
53