Situational Analysis Understanding the Market Definition and Measurement

Market Definition  Three dimensions of definition: Works from broad to narrow. Identifies all possible opportunities, enabling business to be proactive and to anticipate consumer needs.

First Dimension:  Identifies competing product classes serving generic need. Example: Generic need = thirst Competing product classes = milk, soda, coffee, tea, juices, water, etc.

Second Dimension:  Identifies competing product forms within product class. Example: Product class = coffee Competing forms = whole bean, ground, instant, coffee bags, etc.

Third Dimension:  Identifies competing brands within product form. Example: Product form = whole bean Competing brands = Folger’s, Starbuck’s, Millstone, Gevalia, etc.

Marketing Definition Broad Narrow Thirst MilkCoffeeSodaTeaJuice Ground Whole Bean Instant Coffee Bag Folger’sStarbuck’sMillstoneGevalia

A strategic marketing definition should...  Identify opportunities.  Identify the served market.

Basic Types of Market Measurements  Market Potential The maximum sales opportunity that can be achieved by all sellers in the market. Sets upper limit on consumption units.

Measuring Market Potential  MP=N x P x Q MP=market potential N=number of possible buyers P=average selling price Q=average number purchased by each buyer

Example: What’s the market potential for CD’s? Assumptions: Everyone in U.S. > 14 years buys, on average, 4 CD’s per year at ave. price of $14/CD

Measuring Market Potential  Measuring market potential often relies on: Assumptions. Published data (industry publications, gov’t sources). Variables that correlate closely to market potential.

Demand  Market Demand The amount of products currently being purchased from all sellers in the market (i.e., industry sales).  Company Demand The amount of products currently being purchased from a company.

Gaps Between Potential and Demand Market Potential Market Demand Company Demand Primary (Basic) Demand Gap Selective (Company) Demand Gap

Measuring Market Demand  Market demand sets upper limit on sales--i.e., 100% of market share=market demand.  MD= (EC x PA) + (NC x PA) MD=market demand EC=existing customers NC=new customers PA=purchase amount

Example: What is the market demand for the cellular phone market in 2001? Market attracts approx. 5 million new customers/year ≈ 70 mill. MD = (65 mill. X 400 minutes/yr.) + (5 mill. X 200 minutes/yr.) = 27 billion minutes/year

Measuring Company Demand: Sales Forecasting  Forecasts are predictions--they have to be continuously monitored and adjusted.  Different approaches: Top-down forecasting Build-up forecasting

Subjective Forecasting Methods  Utilize opinions of employees, managers, or customers.  Least accurate, although popular to use.  Three different types.

Sales Force Composite  Salespeople project sales volume for customers in their own territory; estimates are aggregated and reviewed at higher management levels.  Benefit:  Disadvantage:

Jury of Executive Opinion  Solicit the judgment of a group of experts or experienced managers to estimate sales.  Benefit:  Disadvantage:

Customer/Industry Surveys  Survey customers to ask them how much they intend to buy in a future period.  Benefit:  Disadvantage:

Extrapolation Methods  Utilizes existing sales data.  Higher accuracy than subjective methods.

Naïve Forecasting  Uses past sales data to forecast future sales, assuming that there will be no changes. Assumes that the best estimate of future sales is the current level of sales. Often used as a standard for comparison with other forecasts.

Moving Average  Compute the average sales volume achieved in recent periods and use the average to predict sales in the next period. Can be a conservative forecast. Can assign different weights to different time periods-- smoothing constants.

Example: Moving Average 1st Qtr 2000 $500K 2nd Qtr 2000 $600K 3rd Qtr 2000 $700K 4th Qtr 2000 $600K 1st Qtr 2001 $633.3K Average = $600K Average = $633.3K Average = $644.4K

Percent Rate of Change  Trend projection.  If sales have been generally increasing, forecasts with this method will be greater than forecasts using other methods.

Example: Percent Rate of Change 1st Qtr 1998 $100K 1st Qtr 1999 $125K % change=25% To predict sales for 1st quarter 2000: Sales = $125K + ($125K x.25) = $125K + $31.25K = $156.25K

Leading Indicators  When sales are influenced by basic changes in the economy, can use leading indicators to predict sales.

Quantitative Methods  Methods that utilize numerical procedures to extend past sales into the future.  Regression.  Time series analysis.

Market Share  Market share index = product awareness x (70%) product attractiveness x (65%) intention to buy x (60%) product availability x (60%) product purchase (50%) = 8%

Market Development Index (MDI)  What’s the potential for the market to develop? MDI= current market demand maximum market potential X 100

Interpreting MDI:  MDI < 33 Considerable market growth potential. Can grow market with high prices and basic benefits.

Interpreting MDI (continued)  MDI Growth is possible, but need to offer more product variations and lower prices; expanded distribution.

Interpreting MDI (continued)  MDI>67 Still room for market growth, but more difficult. Need very customer-focused solutions.