Marketing information systems and forecasting by Geoff Lancaster©
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Information is the life blood of successful marketing. It is of great strategic value to marketers, as well as contributing to tactical and more routine operational decision making. Knowing what kind of information to obtain and how to make effective use of it once you have got it, are the key skills of strategic marketing. Such information gives the firm an opportunity to gain competitive advantage over competitors. Armies win wars not necessarily because they have superior military power, but through more effective intelligence gathering procedures. Likewise commercial firms are waging commercial war in a free market competitive economy. They too will have a better chance of ‘winning’ if they have superior intelligence to their competitors.
All aspect of information including its collection, storage, processing, retrieval and use must be managed. The marketing oriented firm needs some form of process to carry out this activity. What is needed is some form of system devoted to the management of the entire information needs of the organisation. Such a system is called a Marketing Information System (MkIS). Marketing research is a component part of an integrated MkIS.
Marketing is the management process that anticipates and delivers customer value more effectively and efficiently than the competition and, in a profit making organisation, does so at an acceptable level of profit. Note the word anticipate. Many markets are dynamic rather than static. The only thing really certain about the future is that it will be different from today. Marketing management needs to anticipate and stay ahead of these changes. Much marketing decision making at the strategic level requires some form of prediction or forecast of likely future conditions across a wide variety of areas. Marketing information systems can be used to provide information for use in a wide range of decision areas. Not all of these involve forecasting. However it would be true to say of any information system or decision support system, that the end product is usually a decision about the future made in the present, often based largely on information about the past. This process by its very nature involves forecasting.
2 Marketing Information Systems
The term ‘system’ often conjures up thoughts of computers in the minds of many people. They incorrectly feel it must be too sophisticated for their business and must require a great deal of technical skill to design and implement. As we shall see such a system can be purely manual. Hence companies of all sizes are carrying out information audits in an attempt to design systems that will meet their information needs and give them a competitive edge. Kotler defines an MkIS as:
‘…. consisting of people, equipment and procedures to gather, sort, analyse, evaluate and distribute needed, timely and accurate information to marketing decision makers.’
A formal MkIS can be of great benefit to any organisation no matter what it’s size or the level of managerial sophistication. It is true today that in many companies an MkIS is operated as part of a computer system. If no computing capability is available, the design and implementation of an MkIS is still possible can be based entirely on a manual system of reference cards and files. Such a system will lack the ease of storage and retrieval of a computer system, but some form of manual system is better than having nothing and leaving the management of information to chance. To manage a business well is to manage its future and this means the management of information (MIS) of which the MkIS is an integral part, which is a valuable resource to be carefully managed as any other resource e.g. human resources and financial resources.
2.1 Component parts of the system
Three of these four component parts or ‘sub systems’ collect and produce information. The forth sub system takes the information provided from the other three parts and processes it, models it and carries out other procedures on the data that adds value to it and enhances its value to marketing decision makers. When most people think of an MkIS they tend to think of marketing research. Of course formally produced marketing research information is valuable to all firms. However formal marketing research is not the only form or source of marketing information. The modern firm needs to gather information from whatever sources it can and needs to make effective use of this information in processing it and in the use made of it. The MkIS is a system that ideally will carry out all of these information functions in a systematic and planned manner. The concept of an integrated marketing information system is shown in Figure 1 together with explanations
Marketing intelligence system Marketing research system
Decision support system MkIS
Internal accounting system Analytical marketing system
Figure 1 Marketing Information System (MkIS)
Internal Accounting System
All firms generate data as part of the general process of carrying out their business. The generation, recording, storage and retrieval of such data is referred as the ‘internal accounting system of the firm’. The term tends to evoke thoughts of financial and cost accounting information. Actually, it refers to all information received and generated by the firm. Perhaps a better name for this system would be the ‘internal documentary system’.
Internally generated and data inwardly received comes in many forms. For example, purchase orders are received by the marketing firm from customers. Delivery notes are generated by the firm, to be signed by the customer on delivery. The time in between the dates on the two documents gives the total order processing time. This can be monitored to make sure pre determined service delivery levels are being adhered to. When defective goods are returned to the marketing firm for whatever reason, a Goods Return Slip is usually generated. Again, this document can be used to monitor quality performance of either internally manufactured goods or goods bought in from other suppliers. Total numbers of goods returned or total number of complaints about goods as a percentage of goods sold provides a measurable standard of performance. Sales force expenses as a percentage of sales, number of telephone enquiries converted into sales, orders for particular products that might indicate seasonal or cyclical demand, are a few of the uses to which internally generated and internally received data can be put for marketing planning, monitoring and control purposes.
The important thing for the management of marketing firms to realise is that such information is available and can be retrieved from within the internal documentary system or ‘internal accounting’ system of the firm with little effort and at small cost. To be of value as a planning, monitoring and control measure management needs to know how to use it effectively.
The Marketing Intelligence System
Firms produce a wealth of information internally through the very process of managing and administering their business. Apart from the official purpose for which such information was generated e.g. sending out invoices, auditing etc, it often remains a neglected marketing resource. There are other information sources that are often under-utilised by marketing management. The type of information we are talking about here is not formally collected marketing research information, but that which is less formally collected, often in a very ad hoc fashion as and when it presents itself. The system that attempts to collect, collate and manage this source of ‘loosely’ collected information is referred to as the ‘Marketing Intelligence System’. Kotler defines the marketing intelligence system in the following manner:
‘A Marketing Intelligence System is a set of procedures and sources used by managers to obtain their everyday information about pertinent developments in the marketing environment’.
In the course of carrying out their business for the firm, members of staff may come across potentially valuable and interesting information. In many firms such information is thought to be of little or no consequence. Often the people who might have access to such information may be of a lower working status within the firm. They do not think that what they have to say would be of interest to the management of their firm. Members of the sales force are out working in the market place every day. Their main business is to keep themselves informed of what is ‘going on’ in terms of developments in the market, competitors products, prices and concessions, in terms of customers and future customers and their future purchasing plans. Salespeople attend conferences and conventions, attend courses, ‘man’ the stands at trade shows and exhibitions, attend sponsored events and assist with hospitality. They make it their business to network effectively with other sales people within the industry. Sales people often posses a wealth of marketing intelligence gathered during the course of their job, but only a small number of firms make full use of this potentially valuable and important source of commercial intelligence. The use of sales personnel to collect and supply marketing intelligence is but one example of the type of information that can make up the firms marketing intelligence system. Vehicle drivers, receptionists, maintenance engineers and others all come into contact with suppliers and/or customers during the course of work and all have the potential to contribute to the marketing intelligence gathering arm of the firm’s MkIS.
The Marketing Research System
This is the final input to the marketing information system. The marketing research system makes use of both secondary data (data that arealready in existence) and primary data (data collected for a specific piece of research for the first time).
Marketing research is already the subject of a separate document, so please refer to this for its description.
The Analytical Marketing System
This sub system of the overall MkIS does not produce any new data. Rather, it takes the data from the other three component parts of the system in the form of input data and enhances its value. Users of the system are able to do this by applying what might be termed ‘management science’ techniques to the data thereby transforming it in to a form that makes it more easily understood and more valuable to the marketing decision maker. The techniques applied to the data by the marketing management scientist are usually statistical in nature and many computer packages are commercially available that can carry out quite sophisticated analysis.
Information collected from formal marketing research, marketing intelligence gathering of internally generated information can be used as input data in a wide variety of forecasting models. Data collected over a period of time can be extrapolated in to the future by the use of time series techniques. The use of such techniques also allows the manager to model seasonality and cyclicality effects. Trend fitting, using the mathematical functions of known ‘curves’ can also be used to forecast sales and model likely future product life cycles. Linear and multiple regression are more sophisticated forecasting techniques that make use of ‘econometric’ procedures.
2.2 Cost - Benefit aspects of MKIS
Ideally a MkIS will have been carefully designed to produce information which is relevant, pertinent and usefully to the users of the system in terms of assisting them in improving their marketing decision making. In fact the entire rationale for a firm adopting a formally designed MkIS is that the system helps members of the marketing team make better decisions or enables them to make decisions faster. Management do not want to go to the time, expense and trouble involved in designing and implementing an MkIS just to make the firm look as if it is ‘up to date’ in adopting the latest marketing ideas. They want the system to generate a financial return.
Information, just like any other ‘product’ has a marginal cost and a marginal value. Theoretically the marketing firm should continue to collect and store information up to the point where the marginal cost of information equals the marginal value.
Managerial decision-making involves forecasting future conditions and such decisions tend to be long-term and strategic in nature rather than operational. Forecasting information helps management to make operational decisions and is important in almost all areas of the firm, but the forecasting of sales is particularly important since it is the base upon which all company plans are built. Forecasting is a specialist process in itself and indeed is the subject of a number of individual textbooks. What is described here is only a simple overview of the process in order that its application to marketing planning can be more fully appreciated.
3.1 Forecasting terminology
In many texts the term ‘forecast’ refers to objective, quantitative techniques and ‘predict’ denotes subjective estimates. Here the terms ‘subjective’ and ‘objective’ forecast will be used.
The development of a forecasting system requires a considerable amount of data to be collected and analysed for usefulness and validity. The company’s ability to acquire relevant data influences which of the wide choice of forecasting techniques should be used, and a forecast will only be as good as the data used in its compilation.
3.2 Data collection
Following the decision about how much time, energy and money is to be spent on the data collection stage of the forecasting process, it has to be decided where to obtain the necessary data. There are two main categories of existing data
- Internal data generated within the company itself, e.g. previous company plans, sales statistics and other internal records.
- Secondary data from external sources e.g. government and trade statistics and published marketing research surveys.
Most forecasting situations use both sources. Data can also be generated expressly for the forecasting task using marketing research, for example a sample survey. This is an expensive way of collecting data and existing data should be looked at first as in some situations, it may be sufficient.
3.3 Objective methods
Objective methods of forecasting are statistical or mathematical in nature. Historical data are analysed to identify a pattern or relationship between variables and this pattern is then extended or extrapolated into the future to make a forecast. Objective methods of forecasting can be classified by considering the underlying models involved. They fall into two categories: time series models and causal models.
Time series models
Time series analysis uses the historical series of only one variable to develop a model for predicting future values. The forecasting situation is treated rather like a ‘black box’, with no attempt made to discover the other factors that might affect its behaviour.
Because time series models treat the variable to be forecast as a function of time only, they are most useful when other conditions are expected to remain relatively constant, most likely true of the short-term rather than the long-term future. Hence such methods are particularly suited to short-term, operational, routine forecasting - usually up to six months or one year ahead of current time.
Time series methods are not very useful when there is no discernible pattern of demand. Their whole purpose is to identify patterns in historical data, model these, and extrapolate them into the future. Such methods are unlikely to be successful in forecasting demand when the historical time series is very erratic. Because it is assumed that future demand is a function only of time, causal factors cannot be taken into consideration. For example, such models would not be able to incorporate the impact of changes in management policy.
Causal models exploit the relationship between the time series of the variable being examined and one or more other time series. If other variables are found to correlate with the variable of interest, a causal model can be constructed incorporating coefficients that give the relative strengths of the various causal factors. For example, the sales of a product may be related to its price, advertising expenditure and the price of competitors’ products. If the forecaster can estimate the relationship between sales and the independent variables, then the forecast values of the independent variables can be used to predict future values of the dependent variable.
Marketing information systems and sales forecasting have been described and it has been shown that in a purposeful, pro-active marketing organisation the acquisition and management of information cannot be left to chance. What required is a formal system devoted to the entire information needs of the organisation.