2-1 © 2006 by Nelson, a division of Thomson Canada Limited 1/12/2016 Slides developed by: Peter Yannopoulos Chapter 2 Defining and Assessing Markets

2-2 © 2006 by Nelson, a division of Thomson Canada Limited Strategic Market It defines the broad, current, and future arena where the firm plans to compete

2-3 © 2006 by Nelson, a division of Thomson Canada Limited Marketing Myopia It occurs when strategic markets are defined narrowly based on pure product definitions

2-4 © 2006 by Nelson, a division of Thomson Canada Limited Multi-Dimensional Market Definition Technologies/ Competencies Functions/ Applications Customer Segments Strategic Market

2-5 © 2006 by Nelson, a division of Thomson Canada Limited Served Market It is a subset of the strategic market It is the part of the strategic market where the firm actively competes for customers It is the part of the strategic market where the firm actively competes for customers

2-6 © 2006 by Nelson, a division of Thomson Canada Limited Served Market Definition Functions/ Applications Customer Segments Technologies/ Competencies Served Market Strategic Market

2-7 Strategic Market Definition of Xerox and Canon in the Early Years Functions/ Applications Customer Segments Xerox’s Strategic Market High Speed Copiers Low-speed Copiers High Price Low Price Small Companies/ Individuals Large Companies Canon’s Strategic Market Xerography Technology/Competencies

2-8 © 2006 by Nelson, a division of Thomson Canada Limited Strategic Market Definition of Xerox and Canon in Recent Years Functions/ Applications Customer Segments Xerox’s and Canon’s Strategic Market High Speed Copiers Low-speed Copiers High Price Low Price Small Companies/ Individuals Large Companies Xerography Technology/ Competencies

2-9 © 2006 by Nelson, a division of Thomson Canada Limited Market Attractiveness Industry Factors Rivalry among current competitors Threat of new products Bargaining power of buyers Bargaining power of suppliers Substitutes Complements Market Factors  Market size  Market growth  Profit margin  Price elasticity  Seasonality  Cyclicality Determinants of Market Attractiveness

2-10 © 2006 by Nelson, a division of Thomson Canada Limited Porter’s Five Forces Framework Rivalry among current competitors Potential entrants Substitutes SuppliersBuyers

2-11 © 2006 by Nelson, a division of Thomson Canada Limited Methods for Defining Markets NAICS System Brand Switching Substitution in Use Managerial Judgement Hierachical Markets Strategic Groups Cross- elasticity of Demand Methods for DefiningMarkets

2-12 © 2006 by Nelson, a division of Thomson Canada Limited Hierarchical Market Definition Ground Beverages CoffeeSoft Drinks Instant InternationalDomestic Brands Industry Product Class Product Category Product Variants Brands

2-13 © 2006 by Nelson, a division of Thomson Canada Limited Matrix of Probabilities of Switching Among Brands A B B Brand C C A

2-14 © 2006 by Nelson, a division of Thomson Canada Limited Methods for Estimating Market Potential The total market potential method The chain ratio method Methods for Estimating Market Potential

2-15 © 2006 by Nelson, a division of Thomson Canada Limited The Total Market Potential Method S = N × Q × P Where: S = Market potential N = Number of potential buyers Q = Average quantity purchased P = Average selling price

2-16 © 2006 by Nelson, a division of Thomson Canada Limited Example – Market Potential for Movies Assume: N = 20,000,000 movie goers Q = 12 times a year P = $10 Then: S = 20,000,000 × 12 × $10 = $2.4 billion

2-17 © 2006 by Nelson, a division of Thomson Canada Limited The Chain Ratio Method Example – Market Potential for Premium Beer Assume:  Total number of all people of drinking age = 21,000,000  10% of people of drinking age prefer premium beer  50% of those who prefer premium beer actually drink premium beer  Premium beer drinkers spend on average $180 on premium beer

2-18 © 2006 by Nelson, a division of Thomson Canada Limited Market Potential for Premium Beer (continued) Total number of people of drinking age 21,000,000 % of people who prefer premium beer.10 % of people who prefer premium beer and actually drink premium beer.50 Total number of people who drink beer 1,050,000 Average amount spent on premium beer $180 Market potential of premium beer $189,000,000