Forecasting Methods for Greater Union Cinema - Case Study Example

Running Head: Forecasting Forecasting: Greater Union Cinema [Client’s Name] [Affiliation] Much of any organization’s success depends highly on its ability to predict the future. The closer the prediction is to what is going to happen, the more favorable the results are for the organization. This is because by knowing what will occur in the future, organizations can prepare its resources, allocate manpower, and strategize its position in the market in anticipation of the projected future, thus gaining a head start against the competition and paving way for success for the organization. However, the future is not that easy to predict. Various factors obscure the possibility of correctly predicting the future as seemingly innocent events taking place in any part of the world can influence various aspects of the human societies in unimaginable ways. Even so, organizations still have to come up with the most likely future situation in order for them to efficiently strategize their way towards success, or to avoid future scenarios that may threaten the stability of the organization (Butler, 2004, p.219). The need to be able to predict the future becomes more apparent as the global economy began to experience massive instability. As the world witnessed how strong and stable companies went bankrupt, the greater the pressures to protect the future of businesses become. Greater Union Cinema is of no exception. As a company offering products and services not necessarily constituting the basic needs of the society, Greater Union Cinema is posed to bigger economic threats since the market can easily collect their resources, using these resources for more meaningful endeavors other than the overwhelming movie experience promised by the company. In other words, Greater Union Cinema must be able to curb the negative effects of the major global economic slowdown and position itself in a situation where it is guaranteed stability in the future (Hills and Jones, 1997, p. 107). This paper will evaluate the position of Greater Union Cinema in the market through its published financial reports and will forecast future scenarios for the company, particularly the trend of the company’s earnings in the four major portfolios using established forecasting tools and methodologies in order to recommend strategic steps for the company to consider in the long run. In order to do this, this paper will analyze the financial disclosures of Amalgamated Holdings Inc (AHL), the mother company of Greater Union Cinema, particularly on the four major types of investment portfolios that the company has, namely: Cinemas, Film Technology, Distribution, and other entertainment-related investments. Unlike companies offering financial services that require extensive and exhaustive forecasting methodologies in order to predict future movements of the investments, Greater Union Cinema will only need one or two forecasting analysis in order to understand the extent of the movement of the company and the possible effects of the changes in its immediate environment. The company needs to be able determine, understand, and interpret the possible scenarios that these various forms of risks can do to harm the company in the long run so that the company can create strategic steps to counter these negative effects. There are many types of forecasting tools that can be used to analyze the possible scenarios for Greater Union Cinema and all the types of forecasting tools can be summarized into three major categories: historical forecasting (or forecasting based on previous available data), baseline forecasting (or forecasting made on a certain reference period), and multiple-scenario forecasting (or forecasting done by integrating every possible scenarios that may come up) (Breeden, 2003). Substantial results can be drawn even if the forecast analysis would only include the historical data of the areas of interest in the company because of the ability of historical data to provide trends that coincide with the microeconomic and macroeconomic changes in the company, the ability of the historical forecast to predict certain movements in the future based on the decisions that the company has previously made, and the ability of the method to allow understanding of the effects of all the internal and external factors to the overall development of the company. In order to provide a forecast for the next couple of years for the company, it is necessary to identify all the relevant trend of the company for the past four years (Culberston and Lee, 2001). The graph below shows the trend of the profitability of the four major investment portfolios of Greater Union Cinema. In the past four years, the company’s investment on its Cinemas (or more appropriately Entertainment) is the only one among its four major investments that has experienced significant growth even when the rest of the company’s investment has been severely affected by the global crisis. As can be seen in the graph, the distribution investment portfolio was discontinued after it accumulated significant losses in the past three years. Although the film technology was earlier identified as a possible source of good income for the Greater Union Cinema, it was not able to produce significant results in the past few years and is in fact affected by the global economic issues. Only the investment on Cinemas has made signify cant progress in the last few years and is totally unaffected by the recent decline in the economic growth. There are many possible explanations for this. Hollywood as well as local producers have created good movies from the period 2005 to 2008 with various remakes of cartoon characters like Batman, Iron Man, Transformers, and Incredible Hulk as well as other good movies ranging from cartoons (Ice Age and Madagascar), funny movies, fantasy movies (Harry Potter and Twilight) and similar blockbuster films. The popularity of these movies attracted moviegoers to watch these movies in the cinemas rather than just download these from the internet. This in turn allows moviegoers to experience the unique environment offered by Greater Union Cinema’s four types of movie houses, thus increasing the patronage of these cinemas and hence, increasing its revenue. In fact, the financial data indicates that a significant portion of the company’s revenue is attributed to local entertainment industry (Hills, and Jones, 1997). The hype created by the major profit-making investment of the company however, did not extend to the other investment portfolios of the mother company. Film technology, distribution, and other forms of investments of the company experienced gradual decline in their profitability since 2005. The sudden peak of the profitability of other types of investments in 2007 is because of the number of “other” assets and investments the company has sold because of their inability to increase the profitability of the company. It is also good to note that the company discontinued its distribution investment portfolio in 2008 because of the inability of the portfolio to hit its financial targets. The graphs above show the relationship between the revenue of the company and the amount it spends for advertising, marketing, and promotion. As can be noted, the relationship between the two resembles an inverse relationship. As the company gradually decreased its expenses on advertising and promotions, the revenue of the company has increased, establishing the inverse relation. There are many ways to interpret this data. First, it is possible that the company is forced to decrease its budget for advertising, marketing, and promotion while at the same time increase its efforts to generate money, hence the inverse relationship between the two activities. Second, it is also possible that the significant increase of the popularity of Greater Union’s promise for unique cinematic experience has increased the cinema attendance of the market that subsequent increase in its advertising budget is no longer necessary. Finally, it is also possible that there is no relationship between the two at all and that the dependence of these two data on each other is non-existent (Jain, 2000). From the interpretations made on the interrelationship of these data, it is highly possible that Amalgamated Holdings Inc, particularly its Greater Union Cinema Business will experience the following: (a) A plateau in the revenues generated from its cinemas, given the volatility of the market; (b) Another investment portfolio will be discontinued because of the inability of the portfolio to become profitable; (c) Significant increase in the overall revenue due to the potential number of businesses that must be sold; and (d) a significant increase in the advertising budget as a reaction to the decline in sales and profitability. In graphical form (Jain, 2000). This forecast is more likely to occur in the next two or three years given that Australia could not manage to recover from the various negative impacts of the global economic recession. It is highly likely that the other investment portfolios of Greater Union Cinema will be liquidated because the company will need to conserve as much funds as it can without hurting the macroeconomic performance of the company. Otherwise, the investors will lose confidence with the company and may withdraw their funds earlier than what was expected (Jain, 2000). If the global economic recession will force average Australian moviegoers to tighten their belts in preparation for the heavier blow, it is most likely that the revenue generated from the company’s cinemas will go into a steady state or worse, will start going downhill. As a way to defend the company from further financial loss, it is highly likely that the management will choose to intensify its marketing and advertising campaigns to increase the volume of its sales and to increase the confidence of their investors (Hanke & Wichem, 2004, p.104). This forecast is made on the assumption that the global economic condition would not recover in the next two or three years which is not a guarantee. Various factors may aid in a miraculous recovery of the economy which may render this forecast void and irrelevant. It is also possible that this forecast has missed some other important factors that need to be reconciled in order to come up with a better, more accurate forecast for Greater Union Cinema. Because of the simplistic approach of this forecast, it is highly unlikely that the events will go as predicted since it did not take into account various factors such as political, security, social, economic, policies, and psychological factors involved in the complex economic issues. Nonetheless, the historical data gathered from the company’s performance based on the historical events that has positive and negative impacts of the company shows that the company’s performance based highly on its ability to cope with the issues confronting the industry (Breeden, 2003). Cause and effect is another technique which can be used by Greater Union Cinema in forecasting. In this technique, the managers involved in forecasting are supposed to assume a cause that determines a certain outcome. For instance, investment in information technology has a direct impact on the sales of the organization. This technique requires data of the factor on which one is concerned as well as determined cause of the factor. In this case, sales is the major factor in which the company is concerned while information technology expenditures is the determined cause of the factor. As a result, when the organization plans to invest more resources on information technology, the sales of the organization are likely to go high thus increasing the profitability of the organization. The cause and effect technique is usually preferable because of being easily quantifiable and relatively stable (Jain, 2000). Figure: Relationship between Sales and Information Technology Expenditure Judgmental forecasting technique is also an important technique since some of the aspects or factors may have no useful historical data. Judgmental technique attempts to give out a reliable forecast where relevant historical data of an element is not available. Judgmental technique is normally utilized to forecast sales for a new product or incase of significant changes in market condition rendering historical data obsolete. Due to the absence of historical data, experts collect alternative data direct in the field. As a result, Greater Union Cinema utilizes judgmental forecasting technique when it introduces a new product (Jain, 2000). The most appropriate forecasting method for Greater Union Cinema given the threat of instability involve a lot of data and information such as consumer behavior, market preference, political and policy-making adjustments and its impact to the company, the company’s capabilities to curb the issues confronting it to its advantage, and a lot more. But even if all these things can be factored in the forecast, there’s still no guarantee that what happens in the future will be the one that is predicted by the analysis. The best thing that the company can hope for is to be able to anticipate future trends and reposition itself in a way that it will gain advantage of the situation (Bails, 1982, p.201). References Bails, D. (1982). Business fluctuations: forecasting techniques and applications. New York: Prentice Hall. Breeden, J. (2003). Portfolio Forecasting Tools: What you Need to Know. RMA Journal. Strategic Analytics. Accessed on July 13, 2009 from http://www.strategicanalytics.com/articles/2003rmaj_forecastingtools.php Butler, W. (2004). Methods and techniques of business forecasting. New York: Prentice Hall. Culberston, S. and Lee B. (2001). Control System Approach to E- commerce Fulfillment.. Journal of Business Forecasting Methods & Systems, 14(1), 1-48. Jain, C. (2000). Which Forecasting Model Should We Use? Journal of Business Forecasting Methods & Systems. 11(1), 12-17. Hanke, J.E. & Wichem, W.D. (2004). Business forecasting. New York: Prentice Hall. Hills, C and Jones, G (1997). Strategic Management. Fourth edition, Houghton Mifflin Company. Read More