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

Milk CoffeeSoda Tea Juice

GroundWholeBean

InstantCoffee

Bag

Folger’s Starbuck’s Millstone Gevalia

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 Qtr2000

$500K

2nd Qtr2000

$600K

3rd Qtr2000

$700K

4th Qtr2000

$600K

1st Qtr2001

$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 Qtr1998

$100K

1st Qtr1999

$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 potentialX 100

Interpreting MDI:

MDI < 33 Considerable market growth potential. Can grow market with high prices and

basic benefits.

Interpreting MDI (continued)

MDI 33-67 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.