IB Business Management HL 4.3 Sales Forecasting Topic Practice

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.

Production of oil is suffering because oil is a fossil fuel and worldwide demand for petroleum and other oil products is declining as part of a major trend towards reducing carbon emissions. Oil fields have passed their peak production levels, meaning production costs are increasing. MM is reducing operations in Alberta in response to concerns about impacts on indigenous peoples and the environment. MM is trying to improve its image by developing energy-efficient production methods, supporting research into more efficient uses of energy, offsetting carbon emissions by funding reforestation and other environmental projects, researching diversification into alternative fuels such as hydrogen, and strengthening ethical values throughout the business, particularly in oil production. The demand for palladium has been falling over the last 20 years. Governments are discouraging the use of diesel and petrol cars for environmental reasons, and sales of electric cars, which do not use palladium, are increasing. Although palladium from MM’s South African mine is highly profitable, cash flow can be a problem. MM’s gold mine in Egypt has technical problems and some areas are unsafe, with a risk of flooding if heavy rains fall. Some lorry drivers have threatened strike action because of safety and pay issues. MM is exploring ways to reduce costs. The fastest growing section of the mining industry is lithium extraction. The current rapid growth in demand for lithium has been caused by increased use of lithium-ion batteries, which are essential for electric vehicles, smartphones and other electronic equipment. MM’s board sees opportunities for major growth in this sector, but members disagree about whether to seek a license for a new lithium mine, take over an existing lithium producer or enter a joint venture.

M M uses just-in-time (JIT) production in its Oil Production Division.

The long-term demand for oil is usually predictable, and production is reliable unless major problems occur. In 2020, however, there was an unexpected decrease in demand for oil. Uncertainties in the world economy and responses to climate change now make predictions more difficult.
M M has prepared a sales forecast for its oil production for 2022 and 2023 (Table 2).

§ calculated using a four-quarter moving average based on six years of historic data
† calculated by comparing actual sales with a four-quarter moving average

In 2020, M M had some major problems:
- A catastrophic fire occurred at one of its oilfields.
- The gold mine in Egypt collapsed, trapping 23 miners.
- It experienced a cyber-attack on its computer network.
- An earthquake in Chile damaged the country's transport system.

In response to these problems, M M had to rely on its contingency planning and its crisis management procedures.

JG Mining (JG) wants to buy MM's tar sands mining operation for $50 million, but the board of directors are divided. MM recently invested $15 million in their tar sands operation in addition to the original $\$ 30$ million set-up cost in 1986 . Production is at designed capacity, and, although the long-term average rate of return (ARR) for the tar sands operation is below those of most of MM's other investments, it provides a reliable source of income. However, M M has difficulty selling sulphur, a by-product of tar sands production.

Employees at the tar sands operation are against selling the operation to JG. However, the income from the sale would help M M finance other investments, such as lithium mining, and the sale could help improve MM's corporate image. MM's Finance Director, Ethan, estimates that the net present value (NPV) of the tar sands operation is $46 million.

With reference to Table 2, explain one benefit and one limitation for M M of using sales forecasting.

Predicting the future
Traditional secondary research to identify trends, to forecast and to provide data about seasonal and cyclical variation is increasingly outdated, particularly as many products are sold through e-commerce.
Today online forecasting is becoming popular. Google ${ }^{\mathrm{TM}}$ 's chief economist has found a correlation between sales of products (such as cars and holidays) and levels of online Google ${ }^{\mathrm{TM}}$ searches for information about those products.
To make market predictions, market researchers are increasingly using social media* to collect online messages in order to understand consumers' moods. They use web-based data to build a "real time" measure of consumer emotions and preferences and then use the results for predicting consumers' behaviour. Some companies such as Coca Cola ${ }^{\circledR}$, Starbucks ${ }^{\circledR}$ and Disney already use social media for online market research.
Dr Bollen of Indiana University, United States, found that:
- Twitter users' collective mood changes coincide with national events.
- A correlation exists between trends in national mood (expressed in millions of Twitter messages) and changes in share prices. Three days after an increase in anxiety levels, share prices tend to fall (although it is unclear why this happens).
- Investors use social media to guide their decisions.
Users of social media share information online about feelings and purchasing intentions. They are unconcerned by market researchers using software such as "Wise Window" to follow them constantly in order to forecast demand.
Technologically advanced software can recognize sarcasm, double meanings and cultural references. However, interpreting slang expressions remains a challenge.
Mr Watts, an Internet researcher at Yahoo!(R), said that to be useful, a forecasting technique must add something new to what is already known. The use of social media will only add value to forecasting if other sources of information are limited. He warned that sophisticated methods based on the analysis of Twitter messages, blog postings or Facebook ${ }^{(\mathbb{R})}$ pages have limitations.
* social media: refers to various forms of relatively new electronic technologies that allow individuals, groups and organizations to communicate with one another. The communication is "virtual" (across the world wide web and through electronic transmission) and is typically interactive. One frequent feature is the ability of a participant to pass on a communication it has received to other persons, groups, or organizations.