IB Business Management HL 4.3.1 Sales forecasting

[Maximum number: 4]

Music Mania (MM)

Music Mania (MM) is an independent store selling new and used music compact discs (CDs), DVD films and music vinyl records. It is a sole trader business owned by André, who has 25 years of experience in the retail and music business. M M has loyal customers but its total revenue is falling. The store currently has a low market share in DVDs and vinyl records.
André decided to conduct some primary and secondary market research, as the entertainment industry is changing rapidly. He discovered that:
- the market for DVDs is in rapid decline
- CD sales are declining slowly but new releases still sell well
- MM has had to stock computer games, which are selling out very quickly, and the sales of new vinyl records are growing slowly.
André is accustomed to variations in sales but the current sales forecasts are, in his experience, the most worrying. He has decided to create an e-commerce website to increase his sales of new and used vinyl records and CDs. André is also aware that new free online music streaming and gaming sites are being launched.
André has only limited internal sources of finance to set up the website. Two new tactics to ensure future success for M M being considered are:
- to stop selling DVDs
- to increase below-the-line promotional spending on vinyl records.

Explain one advantage and one disadvantage for M M of using sales forecasting.

One advantage of using sales forecasting is that it will allow a firm such as M M to look at future sales forecasts of its product portfolio and make changes where necessary. This will save the business considerable expense, stocking costs and influence future cash flow needs. Forecasting allows M M to plan ahead and can also impact on human resource planning and finance needs if cash flow forecasts indicate that there may be a shortage. There is evidence form the case study that MM's product portfolio revenue streams are changing. M M is experiencing changing sales of all of its stock so is planning by using forecasts, André can avoid over stocking and tying up valuable capital in unsold DVDs or CDs for example or can transfer more resources towards the fast selling computer games. Decision making at M M may be more accurate. To be forewarned is to be forearmed.

Disadvantages for M M are linked to the inevitable fact that sales forecasts are merely that - future predictions are based on past data, which, given the existence of external factors some of which are mentioned in the stimulus and unexpected events, cannot be fully accurate. There is evidence from the stimulus that André expects sales to be variable (possible cyclical or seasonal variations) and even with all relevant future economic and social data at his disposal, forecasts can still be widely inaccurate. For example, vinyl record sales are expected to rise but what if another musical format is created within the next five years? André also has considerable experience in this industry and is aware that sales are changing rapidly. Sales forecasts may be out of date by the time the data has been collected if they are every month or quarter. Sales forecasts in this context may be of little value to M M in such a fast changing industry.

Mark as 2+2.
[2] cannot be awarded per advantage / disadvantage if the response lacks either explanation and/or application.

For example:
- For an identification or a description of an advantage / disadvantage with or without application [1].
- For explanation of an advantage / disadvantage with no application [1].
- For explanation of an advantage / disadvantage and application [2].

Candidates are expected to show some understanding of sales forecasting methods.

IB Business Management HL 4.3.1 Sales forecasting Question Bank

Exam points

4.3.1 (HL)—Sales forecasting question 1