Forecasting External Environmental Elements

Strategic decision-making requires anticipation of and preparation for the future. One way to plan is through forecasting. Accurate forecasting of external environmental elements is essential for successful strategic management. To identify future environmental changes, opportunities, and threats, take the steps outlined below.

1. Select the environmental variables that are critical to your firm.

When analyzing environmental variables, try to select key variables that are most likely to foster sharp growth or decline in the marketplace. One such variable is population trends, which not only can cause disorder in the business environment but also can activate other major changes in the economic, social, and political environments.

2. Identify appropriate sources of data.

To make accurate forecasts, you need accurate and up-to-date information about your company's external environment. Although trade and scholarly publications are important sources, you also should obtain raw data from formal research if time and money permit.

3. Evaluate the available forecasting techniques and make forecasts.

There are five major techniques you can use to conduct environmental forecasting. When choosing a forecasting technique, you need to consider several factors, including the nature and importance of the forecast, the cost and time involved, the amount and accuracy of available data, and the skills and concerns of people involved. The five forecasting techniques are:

  1. Economic forecasts, which are primarily concerned with remote factors, such as general economic conditions, the consumer price index, wage rates, and productivity
  2. Economic models, which employ complex simultaneous regression equations to relate economic events to areas of corporate activity
  3. Social forecasts, which involve analysis of population, housing, social security, health, education, income, and expendituresP
  4. Political forecasts, which take into account a broad range of political factors
  5. Technological forecasts, which attempt to predict changes in technology and estimate their impact on an organization's operation.

4. Integrate the results into the strategic management process.

If the forecast identifies any gaps or inconsistencies between your company's desired position and its present position, you can respond with plans and actions.

5. Monitor the forecasts.

To ensure that you are on the right track with strategic planning, continue to monitor those environmental variables you identified in Step 1, and note any dramatic shifts that can provide opportunities or threats to your company.

By forecasting elements of your company's external environment, you will be able to identify those factors that may be necessary for your company's future success, to formulate or reformulate your company's basic mission, and to design strategies that can help your company achieve its goals and objectives.