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To what extent will does correlation and extrapolation assist Nintendo in forecasting sales?

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Introduction

To what extent will does correlation and extrapolation assist Nintendo in forecasting sales? (34 marks) Correlation is the relationship between two variables. Extrapolation is related to correlation, as it involves plotting a linear regression curve (also known as a line of best fit) which is based upon how two variables are correlated, and extending the line to predict future values. For Nintendo, a computer game and console manufacturing company, a common example would be the relationship between the level of advertising expenditure and the effect of this on sales of its products. The graph to the left shows a strong positive correlation between sales and advertising, meaning if Nintendo increases its advertising, they can expect to see an increase in sales. Because all values are close to the line, as advertising expenditure increases on the x-axis, sales on the y-axis increase proportionately. The regression line can be extended past the '80' figure (meaning �80million) to predict what sales will be like if they spend �100million or even �900million. The uses of such analysis to Nintendo are to an extent very valuable. ...read more.

Middle

They could gather past data from previous campaigns and plot the values on a scatter graph to see if there is any correlation. This would aid decision making for the management staff - as they could see whether the operation would be profitable on the whole, and ultimately be worth doing. Albeit, this would only be an estimate of the intended benefit, and in reality things are much more complicated. Following on from the previous paragraph, the main downfall of this analysis is the fact it assumes that previous patterns will continue into the future, and doesn't account for qualitative factors. Qualitative means customers opinions and is not numerically measured. This is a huge factor when considering extrapolating for Nintendo, as technological advancements could revitalise the way games consoles are played in this rapidly changing market. A prime example is the growth of online gaming, which Nintendo have not responded to as quickly as its main competitors the x-box and the PS3. Many years ago when online gaming was not as popular, this would have had a minimal impact on sales, but the data today is less reliable and can make predictions redundant if they don't account for such factors and changes in consumer tastes. ...read more.

Conclusion

the validity and accuracy of the forecasts could be destroyed in a few months with a new technological breakthrough from one of Nintendo's competitors. It also depends on how strong the correlation is between the two variables. A weak correlation is likely to have a higher degree of uncertainty than a relationship that is strong. It is up to the businesses marketing team whether to go project values based upon a weak correlation. Outliers or (anomalous results) can also hinder the accuracy of the regression line unless they are ignored, which again is a decision of Nintendo. The level of uncertainty makes me conclude that ultimately such analytical tools are not of use to Nintendo. Ultimately the use depends on all the previously mentioned factors, some which cannot be accounted for. This leads me to take the conclusion that these statistical tools are not of great worth to Nintendo and they should use a fixed point moving average method to smooth out the overall and underlying trends in their forecasts. This will reduce uncertainty and remove some of the disadvantages and problems which is more beneficial for a large firm such as Nintendo. ?? ?? ?? ?? Business Studies Assessment 2 - Adam Denny ...read more.

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Here's what a star student thought of this essay

5 star(s)

Response to the question

The author answers the question fantastically well. As he clearly sets out the pros of using correlation and extrapolation and highlights the cons as well, whilst using his/hers own knowledge of the industry to improve his points. Using own knowledge ...

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Response to the question

The author answers the question fantastically well. As he clearly sets out the pros of using correlation and extrapolation and highlights the cons as well, whilst using his/hers own knowledge of the industry to improve his points. Using own knowledge is very good, for instance the author highlighted the industry as oligopolistic; as it shows you have a good understanding of the topic and that you are ‘keen.’ The essay starts very well, due to the fact he defined the two techniques in the question, whenever you get an essay (can be any essay) always try to define the key terms and assess what the question is asking, which the author does. He concludes the essay, exceptionally, by bringing all the points he/she made in the essay together. In business studies essays it is important to have a balanced approach, so as to seem impartial and neutral, you shouldn’t be trying to force your argument, but to convey the data in a way that forms an argument, this is something the author does very well, as he/she doesn’t just say ‘extrapolation is the best because it can be accurate’ but says that they can be good, but they do have their draw backs (good examples of this in last three paragraphs.)

Level of analysis

The level of analysis was good as well, as the author went in to some depth looking at the pros and cons of each method. Praise is due for not just saying what each method was, as there is a danger in these sorts of questions of describing, but actually analyzing. He improved his analysis substantially by using own knowledge, as it increased the level of depth they could go into. Another good thing to take away from this essay was the author’s use of an imaginary example to help explain some of his/her’s analysis, namely the example of using a bundle promotion. The use of a graph was very good as well as it gave the reader an exact idea of what they were discussing.

Quality of writing

The spelling and grammar was very good. I do not think there were any errors. The layout was fantastic, as each point of analysis was in its own paragraph, doing this is thoroughly recommended, as it makes the essay easier to read. The author uses good connective words as well, which give a good balance to essay, which is vital in business studies/ economics essays, an example of the connective would be: ‘On one side….but on the other.’ This essay received all five stars, for having great analysis, good spelling and grammar, and having a balanced approach.


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