Managerial Economics

Risks in Demand Forecasting

• Demand forecasting faces two types of risks:1.Grossly Overestimating • This risk arises from entirely unforeseen

events such as war, political upheavals or natural disasters.

2.Underestimating demand.• This risks arises from inadequate analysis of

market.• Example of personal computers and

petroleum industry

• If we come closer no one saw the recession of 2001.

• Until several months it officially started in March 2001.

• The consensus forecasting in December 2001 was for a growth rate of real GDP in the united states of 0.4 percent in the first quarter of 2002,as compared with the actual growth of 5.6 percent.

• Recent studies shows that forecasting is not possible in most of the sectors and areas of the business sector.

• Managers should prepare for different various outcomes.

• Steps to reduce error in forecasting1. Carefully defining the market for the product.2. Dividing total industry demand into its main

components and analyzing each component separately.

3. Forecasting the main users of the product.4. Conducting sensitivity analyses.

Forecasting the Number of McDonald’s Restaurants

Worldwide

• Since 1955, they have been providing the world’s favorite food.

• With time the competition increased that lowered the profit margins.

• By 2010, there were more McDonald’s restaurants aboard (18,000) than in the United States (14,000).

• Fortune magazine estimated the total number of restaurants that McDonald's could build in each country if its tastes were similar to US tastes.

Country Number of Restaurants in 1993

Number of restaurants in 2002

Minimum Market Potential

Japan 1,070 3,822 6,100

Canada 694 1,223 1,023

Britain 550 1,010 1,724

Germany 535 1,152 3,235

Australia 411 715 526

France 314 913 2,237

China 23 430 784

• Some countries in which McDonalds is hardly present are estimated to be able to sustain a large number of its restaurants.

• Example of India.• Fortunes estimates were based on the

assumptions that tastes in the rest of the world were same as US.

• Tastes are unlikely to ever become the same, and so these can be regarded only as rough “guesstimates”.

• In 2011 they predicated that by the end of the decade total restaurants will reach 50,000.