What were companies expecting
Why do companies’ demand forecasts suddenly seem wrong? Is the per capita consumption number more of an illusion than reality? Most of the demand potential that gets talked about use that as a benchmark, are the right set of numbers being used to derive the per capita demand going forward?
An aggregated number is always only indicative. And so is the per capita income. The demand potential is a function of ruling prices, preferences, and ease of access, not just incomes. With rural roads coming up in a big way, we are expecting significant easing of constraints in access. With inflation easing (albeit temporarily for a year or so) we are again expecting a sanguine environment for consumer demand. However, many consumer products have failed to capture the imagination of the Indian consumer in recent months – and that has to do with products and services designed for the Indian consumer and conditions. For instance, the refrigerator market has just not taken off in India. This is natural given the lack of 24 hour electricity. Or for that matter the various colas have also not done very well despite increasing incomes and acceptance of western lifestyles. Somehow the Indian consumer continues to prefer the fruit-juice walla, chai and chhaachh.
Getting back to demand potential the problem has to do withy how you do it. This is a standard problem – if we forecast product sales only the basis of time trends and only look at 4 to 5 years in the past we will get high numbers during boom time. If there is one thing that MBA schools need to teach on what not to do, it is this. All forecasts have to be done on the basis of expected aggregate economic growth and longer term trends. Also many forecasters forget that there are errors that are statistical and those that are due to poorly specified models. The latter are the most dangerous.
To give you an example, almost every company was planning a 40-100% expansion in the next two years. If that actually occurred, and even if the economy grew at (say) 10% annually, every Indian company would be in the red.
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Tags: demand, forecasting
February 27th, 2009 at 10:24 am
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February 28th, 2009 at 9:00 am
on the dot mostly.
however, it is not about MBAs. in fact B-Schools teach just the opposite.
The malaise spreads across all sections and most of them are vocal.
A lot of this is because of the “noise” created in forums and media and most people do not try to oppose the herd.