Capturing Insights About Market

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Topic 3
Marketing Management (MAR4803) By Kanghyun Yoon

• Capturing Insights About Market

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Issues To Be Discussed

• Consider the following equation to estimate
  company demand
• Di company is demand in product class,
• Si company is share of market,
• D total market volume.
• Lets consider the following issues to understand
  how to capture the marketing insights about the
  market.
• Issue 1 How to define the market or industry?
• The important concepts for this issue are .
• Issue 2 How to evaluate the attractiveness of
  the market or market opportunity?
• The important concepts for this issue are .

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Issue 1 How to Define the Market?
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Defining the Industry or the Market

• Importance of defining an industry or a market
• Ambiguous definition of the industry or the
  market creates uncertainty and ambiguity in both
  market-related statistics such as market share,
  but more importantly provides problems in
  identifying who are competitors.
• Two examples
• Assume that an objective for a notebook computer
  is to gain 10 percent market share. How to
  calculate the market share? Who are our
  competitors?
• Example of Coca Cola
• How to define an industry or a market?
• Industry is defined as .
• Market is defined as .
• Several different terms in defining a market
• Product-industry hierarchy
• Two types of approaches in identifying market
  structure
• Supply-based approach
• Demand-based approach

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Supply-Based Approach

• Key idea of using supply-based approach
• It is based on the objective attributes of the
  firms in the perspective of product substitution.
• As an indicator of substitutability.
• Useful tool North American Industrial
  Classification (NAIC).
• Main factors determining industry structure (IO
  analysis, Scherer 1980)
• Number of sellers and degree of differentiation
• Entry, mobility, and exit barriers
• Cost structure
• Degree of vertical integration
• Degree of globalization
• Five competitive forces useful for assessing the
  industry structure (Porter 1985)
• Threats of intense segment or intra-category
  rivalry
• Threats of new entrants
• Threats of substitute products
• Threats of buyers bargaining power
• Threats of suppliers bargaining power

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Demand-Based Approach

• Key idea of using demand-based approach
• It is based on the customers attitudes and
  behaviors in the customers needs viewpoint.
• Companies are competitors if they are trying to
  satisfy the same customer need or serve the same
  customer group.
• Four types of market for identifying competition
  structure
• Product form or product type competition
• Product class or product category competition
• Generic competition
• Budget competition
• Importance of calculating cross-elasticity of
  demand
• As an indicator of substitutability.

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Market Structure Map

• To succeed in competitive marketplace, companies
  should win customers from competitors, by keeping
  and growing them with the deliver of greater
  value.
• However, remember that consumers are different in
  terms of their needs.
• Companies can only serve some segments in which
  they are in better position than competitors.
  Therefore, each company must divide up the total
  product market, choose the best segments, and
  design strategies for profitability serving
  chosen segments.
• Market structure map allows companies to identify
  possible segments to serve customers who have
  similar needs in this segments.
• Benefits of market structure map
• Be able to segment the total product market.
• Be able to identify consumers needs in the
  chosen segment.
• Be able to identify names of competing brands and
  its current market position (e.g., market leader,
  challenger, follower, and nicher)
• Be able to understand the product line strategy,
  including new product idea.

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Market Structure Map

• The Carbonated Soda Product Market
• Divide it into small segments, using proper
  segmentation criterion.
• Select the target segment for your chosen brand.
• Identify customers needs and your competitors
  in that segment

My brand
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Market Structure Map
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Sources of New Product Idea
Type One
Type Two
Type Three
White color current situation Yellow color New
situation
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Issue 2 How to Measure its Attractiveness?
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Why to Measure Market Demand?

• Once several market opportunities are identified,
  the company must measure or forecast the size,
  growth, and profit potential of each market
  opportunity.
• Why to measure demand size of the market (e.g.,
  market demand)?
• With optimistic estimates, what happens .
• With underestimates of the market demand, what
  happens .
• Consider its major uses of the market demand
  estimate
• To answer what if questions
• To help set budgets
• To make resource allocation decisions over the
  product life cycle
• To set objectives and evaluate performance
• To make market entry/exit decision.
• An important thing to realize
• Total market demand is not a fixed number, but a
  function of marketing expenditure in a given time
  period.
• The market demand function or market response
  function.

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Important Underlying Concepts

• What do they mean by market demand?
• The concept of market demand consists of .
• Depending on the components of market demand,
  five types of demand estimates are worthwhile to
  mention
• Potential market
• Available market
• Qualified available market
• Target market
• Penetrated market
• Three important measures for market (or company)
  demand
• Market (or company) potential
• Market (or company) forecast
• Market (or company) minimum
• So, marketers should measure current market size
  and forecast future demand.

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Measuring Market Demand

• Estimating current market potential
• Total market potential method (Kotler and Keller
  2006 Lilien and Kotler 1983)
• Chain-ratio method (Ackoff 1970)
• Forecasting future demand
• Types of forecasting methods (Lilien and
  Rangaswamy 2007)
• Judgmental method
• Market survey or product analysis
• Time-series method
• Causal method
• Types of information (Kotler and Keller 2006)
• Using info of what people say
• Using info of what people do
• Using info of what people have done

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Estimating Current Market Potential

• Both methods depend on the number of potential
  users or buyers of the product.
• Step 1 Determine the potential buyers or users
  of the product.
• Step 2 Estimate the purchasing or usage rate.
• Step 3 Find the average price of a unit of the
  product.
• Total Market Potential Method
• Q n X q X p
• Q total market potential, n number of buyers
  in the market, q quantity purchased by an
  average buyer per year, and p average price of
  one unit.
• Chain-Ratio Method
• Q Total number of U.S. households
• X the percentage of U.S. households
  containing one or
• more serious amateur photographers
• X the percentage of these household owning a
  personal computer
• X the percentage of PC-owning households
  with enough discretionary
• income to buy Sonys new digital camera.

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Forecasting Future Demand (I)

• Moving Average Method
• Key assumption There is some pattern in the
  values of the variable(s) to be forecast, which
  is represented in the past observations, along
  with random fluctuations or noises.
• Purpose of this smoothing method
• To distinguish the underlying pattern from the
  random noises.
• One way is to average several of the past values
  for this method.
• Historical data are required for the variable(s).
  
• Appropriate for forecasting only one period in
  advance.
• Forecasting with moving averages can be
  represented as
• Steps for using Moving Average Method
• Step 1 Determine how many past values will be
  used (e.g., N).
• Step 2 Calculate the average of the N past
  values and use it as the forecast.

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Forecasting Future Demand (II)

• Regression Method
• Key assumption There is a causal relationship
  between demand as a dependent variable and some
  independent variables.
• Purpose of this smoothing method
• To identify an explanatory or causal model that
  facilitates a better understanding of the
  situation (i.e., underlying structure of the
  causal relationship).
• Using the causal model, provide the forecast of
  the demand.
• Historical data are required for all the
  variable(s).
• Appropriate for providing longer-term prediction.
• An example of linear regression equation form

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Forecasting Future Demand (III)

• Steps for Using Regression Method
• Step 1 Plot demand values over time to identify
  the trend of past demand performances.
• Step 2 Specify a causal relationship with the
  identified relevant variables linear or
  non-linear relationship.
• Identify independent variables such as
  advertising, sales promotion, direct mail
  activities, and so on.
• Step 3 Gather the historical data for both
  dependent and independent variables.
• Step 4 Use the regression command in Excel or
  any statistical program (i.e., SPSS or SAS) to
  estimate the values of the parameters ( a and bs)
  in regression equation.
• Step 5 Prepare the estimated equation - Y â
  b1X1 b2X2.
• Step 6 Prepare the values of X variables and
  plug those into the regression equation to get
  the forecast of Y.

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Reference

• Lilien, Gary L and Arvind Rangaswamy (2007),
  Marketing Engineering Computer-Assisted
  Marekting Analysis and Planning, 2nd ed.,
  Institute for the Study of Business Markets.
• Kotler, Philip and Kevin Lane Keller (2007),
  Marketing Management, 12th ed., Pearson
  Prentice-Hall, New Jersey.
• Kotler, Philip and Gary Armstrong (2004),
  Principles of Marketing, 10th ed., Prentice Hall.
• Lehmann, Donald R. and Russell S. Winer (2005),
  Analysis for Marketing Planning, 6th ed.,
  McGraw-Hill.
• Winer, Russell S. (2007), Marketing Management,
  3rd ed., Pearson Prentice-Hall, New Jersey.
• Zikmund, William G. (2003), Essentials of
  Marketing Research , 2nd ed., Thomson
  South-Western.