Situational Analysis

1. Situational Analysis Understanding the Market Definition and Measurement

2. 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.

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

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

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

6. Marketing Definition Thirst Broad Milk Soda Coffee Tea Juice Ground Whole Bean Instant Coffee Bag Narrow Folger’s Starbuck’s Millstone Gevalia

7. A strategic marketing definition should... • Identify opportunities. • Identify the served market.

8. 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.

9. 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

10. 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

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

12. 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.

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

14. 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

15. 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

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

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

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

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

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

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

22. 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.

23. 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.

24. 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

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

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

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

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

29. 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%

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

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

32. Interpreting MDI (continued) • MDI 33-67 • Growth is possible, but need to offer more product variations and lower prices; expanded distribution.

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