MARKET AND DEMAND ANALYSIS

Collection of Secondary Information

Demand Forecasting

Situational Analysis and Specifications of Objectives

Characterization of the Market

Conduct of Market Survey

Market Planning
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SITUATIONAL ANALYSIS AND SPECIFICATIONS OF OBJECTIVES

COLLECTION OF SECONDARY INFORMATION

General Sources of Secondary Information Industry Specific Sources of Secondary Information Evaluation of Secondary Information

1. Indian Economic Survey 2. Indian Basic Facts 3. Reports of Export Working Groups on Various Industries 4. Census of Manufacturing Industries 5. Indian Statistical Yearbook 6. Monthly Statistical Bulletin 7. Annual Report of RBI 8. Annual Reports and Accounts of the Companies Listed on the Stock Exchange 9. Annual Reports of the Various Associations of Manufacturers
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SECONDARY SOURCES OF DATA

CONDUCT OF MARKET SURVEY

Census Survey Sample Survey Steps in a Sample Survey
Define the Target Population Select the Sampling Scheme and Sample Size Develop the Questionnaire Recruit and Train the Field Investigators Obtain Information as Per the Questionnaire from the Sample of Respondents Scrutinizes the Information Gathered Analyze and interpret the Information

CONDUCT OF MARKET SURVEY

Some Problems
Heterogeneity of the Country Multiplicity of the Languages Design of Questionnaire

CHARACTERISATION OF THE MARKET

Effective Demand in the Past and Present Production + Imports Exports Change in stock level Breakdown of Demand
Nature of Product Consumer Groups Geographical Division
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CHARACTERISATION OF THE MARKET

Price Methods of Distribution and Sales Promotion Consumers Supply and Competition Government Policy

Forecasting
Predicting the future Qualitative forecast methods
subjective

Quantitative forecast methods

based on mathematical formulas
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Types of Forecasting Methods

Depend on
time frame demand behavior causes of behavior

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Time Frame
Indicates how far into the future is forecast
Short- to mid-range forecast
typically encompasses the immediate future daily up to two years

Long-range forecast
usually encompasses a period of time longer than two years

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Demand Behavior
Trend
a gradual, long-term up or down movement of demand

Random variations
movements in demand that do not follow a pattern

Cycle
an up-and-down repetitive movement in demand

Seasonal pattern
an up-and-down repetitive movement in demand occurring periodically
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Causes of Behavior
Analytical Cause effect relationship basis Quantitative Explicit

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DEMAND FORECASTING
Qualitative Methods
These methods rely essentially on the judgment of experts to translate qualitative information into quantitative estimates Used to generate forecasts if historical data are not available (e.g., introduction of new product) The important qualitative methods are:
Jury of Executive Method Delphi Method
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JURY OF EXECUTIVE OPINION METHOD

Rationale
Upper-level management has best information on latest product developments and future product launches

Approach
Small group of upper-level managers collectively develop forecasts Opinion of Group

Main advantages
Combine knowledge and expertise from various functional areas People who have best information on future developments generate the forecasts
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JURY OF EXECUTIVE OPINION METHOD

Main drawbacks
Expensive No individual responsibility for forecast quality Risk that few people dominate the group Subjective Reliability is questionable

Typical applications
Short-term and medium-term demand forecasting
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DELPHI METHOD
Rationale
Eliciting the opinions of a group of experts with the help of mail survey Anonymous written responses encourage honesty and avoid that a group of experts are dominated by only a few members
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DELPHI METHOD
Approach
Coordinator Sends Initial Questionnaire Each expert writes response (anonymous) Coordinator performs analysis

Coordinator sends updated questionnaire

No

Consensus reached?

Yes

Coordinator summarizes forecast

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DELPHI METHOD
Main advantages
Generate consensus Can forecast long-term trend without availability of historical data

Main drawbacks
Slow process Experts are not accountable for their responses Little evidence that reliable long-term forecasts can be generated with Delphi or other methods

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DELPHI METHOD
Typical application
Long-term forecasting Technology forecasting

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TIME SERIES PROJECTION METHODS

These methods generate forecasts on the basis of an analysis of the historical time series. Assume that what has occurred in the past will continue to occur in the future Relate the forecast to only one factor - time The important time series projection methods are:
Trend Projection Method Exponential Smoothing Method Moving Average Method
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Linear Trend Line

y = a + bx
where a = intercept of the relationship b = slope of the line x = time period y = forecast for demand for period x xy b = nxy a = y - x x2 b nx2 where n = number of periods x x = = mean of the x values n y y = n = mean of the y values
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Least Squares Example

x(PERIOD) 1 2 3 4 5 6 7 8 9 10 11 12 78 y(DEMAND) 73 40 41 37 45 50 43 47 56 52 55 54 557 xy 73 80 123 148 225 300 301 376 504 520 605 648 3867 x2 1 4 9 16 25 36 49 64 81 100 121 144 650
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Least Squares Example (cont.)

78 = 6.5 12 557 y = = 46.42 12 xy - nxy 3867 - (12)(6.5)(46.42) b = = =1.72 2 2 2 x - nx 650 - 12(6.5) x = a = y - bx = 46.42 - (1.72)(6.5) = 35.2
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Linear trend line y = 35.2 + 1.72x Forecast for period 13 y = 35.2 + 1.72(13) = 57.56 units
70 60 Actual 50

Demand

40 30 20 10 0 | 1 | 2 | 3 | 4 | 5 | | 6 7 Period | 8 | 9 | 10 | 11 | 12 | 13
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Linear trend line

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Trend Projection Method Advantages It uses all observations The straight line is derived by statistical procedure A measure of goodness fit is available
Disadvantages

More complicated The results are valid only when certain conditions are satisfied
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Exponential Smoothing

Averaging method Weights most recent data more strongly Reacts more to recent changes Widely used, accurate method

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Exponential Smoothing (cont.)

Ft +1 = Dt + (1 - )Ft
where: Ft +1 = forecast for next period Dt = actual demand for present period Ft = previously determined forecast for present period = weighting factor, smoothing constant
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Effect of Smoothing Constant

0.0 1.0 If = 0.20, then Ft +1 = 0.20 Dt + 0.80 Ft If = 0, then Ft +1 = 0 Dt + 1 Ft = Ft
Forecast does not reflect recent data

If = 1, then Ft +1 = 1 Dt + 0 Ft = Dt
Forecast based only on most recent data
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Exponential Smoothing (=0.30)

PERIOD DEMAND 1 2 3 4 5 6 7 MONTH Jan Feb Mar Apr May Jun Jul 37 40 41 37 45 50
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F2 = D1 + (1 - )F1 = (0.30)(37) + (0.70)(37) = 37 F3 = D2 + (1 - )F2 = (0.30)(40) + (0.70)(37) = 37.9 F13 = D12 + (1 - )F12 = (0.30)(54) + (0.70)(50.84) = 51.79

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Exponential Smoothing (cont.)

PERIOD 1 2 3 4 5 6 7 8 9 10 11 12 13 MONTH Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan DEMAND 37 40 41 37 45 50 43 47 56 52 55 54 FORECAST, Ft +1 ( = 0.3) ( = 0.5) 37.00 37.90 38.83 38.28 40.29 43.20 43.14 44.30 47.81 49.06 50.84 51.79 37.00 38.50 39.75 38.37 41.68 45.84 44.42 45.71 50.85 51.42 53.21 53.61

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Exponential Smoothing (cont.)

70 60 50 40 Actual = 0.50

Orders

30 20 10 0 | 1 | 2 | 3 | 4 | 5 | 6 Month | 7 | 8 | 9 | 10 | 11

= 0.30

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| 13
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Moving Average
Naive forecast
demand in current period is used as next periods forecast

Simple moving average

uses average demand for a fixed sequence of periods stable demand with no pronounced behavioral patterns

Weighted moving average

weights are assigned to most recent data
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Moving Average: Nave Approach

MONTH Jan Feb Mar Apr May June July Aug Sept Oct Nov ORDERS PER MONTH 120 90 100 75 110 50 75 130 110 90 FORECAST 120 90 100 75 110 50 75 130 110 90

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Simple Moving Average

MAn =
where n Di

1 Di i=
n

= number of periods in the moving average = demand in period i

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3-month Simple Moving Average

ORDERS MONTH Jan MONTH Feb Mar Apr May June July PER 120 90 100 75 110 50 75 MOVING AVERAGE 103.3 88.3 95.0 78.3 78.3 85.0 105.0 110.0

1 Di i=
MA3 = = 3 90 + 110 + 130 3

= 110 orders for Nov

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5-month Simple Moving Average

ORDERS MONTH Jan MONTH Feb Mar Apr May June July PER 120 90 100 75 110 50 75 MOVING AVERAGE 99.0 85.0 82.0 88.0 95.0 91.0

1 Di i=
MA5 = = 5 90 + 110 + 130+75+50 5 = 91 orders for Nov

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Smoothing Effects
150 125 100 5-month

Orders

75 50 25 0 | Jan | Feb | Mar Actual | | | | Apr May June July Month | | Aug Sept | Oct | Nov
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3-month

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Weighted Moving Average

Adjusts moving average method to more closely reflect data fluctuations
WMAn = Wi Di i=1
i=1
n

where

Wi = the weight for period i,

between 0 and 100 percent

Wi = 1.00
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Weighted Moving Average Example

MONTH August September October November Forecast WEIGHT 17% 33% 50% DATA 130 110 90

WMA3 = 1 Wi Di i=

= (0.50)(90) + (0.33)(110) + (0.17)(130) = 103.4 orders

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CAUSAL METHODS
Causal methods seek to develop forecasts on the basis of cause-effects relationships specified in an explicit, quantitative manner.
Chain Ratio Method Consumption Level Method End Use Method Leading Indicator Method Econometric Method

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CHAIN RATIO METHOD

Market Potential for heated coats in the U.S.:
Population (U) = 280,000,000 Proportion of U that are age over 16 (A) = 75% Proportion of A that are men (M) = 50% Proportion of M that have incomes over $65k (I) = 50% Proportion of I that live in cold states (C) = 50% Proportion of C that ski regularly (S) = 10% Proportion of S that are fashion conscious (F) = 30% Proportion of F that are early adopters (E) = 10% Average number of ski coats purchased per year (Y) = .5 coats Average price per coat (P) = $ 200 43

CHAIN RATIO METHOD

Market Potential for heated coats in the U.S.: Market Sales Potential = UxAxMxIxCxSxFxExY = 280 Million x 0.75 x 0.50 x 0.50 x 0.50 x 0.10 x 0.30 x 0.10 x200 = $7.88 Million
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CONSUMPTION METHOD

LEVEL

This method is used for those products that are directly consumed. This method measures the consumption level on the basis of elasticity coefficients. The important ones are

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CONSUMPTION METHOD

LEVEL

Income Elasticity: This reflects the responsiveness of demand to variations in income. It is calculated as: E1 = [Q2 - Q1/ I2- I1] * [I1+I2/ Q2 +Q1] Where E1 = Income elasticity of demand Q1 = quantity demanded in the base year Q2 = quantity demanded in the following year I1 = income level in the base year I2 = income level in the following year 46

CONSUMPTION METHOD

LEVEL

Price Elasticity: This reflects the responsiveness of demand to variations in price. It is calculated as: EP = [Q2 - Q1/ P2- P1] * [P1+P2/ Q2 +Q1] Where EP = Price elasticity of demand Q1 = quantity demanded in the base year Q2 = quantity demanded in the following year P1 = price level in the base year P2 = price level in the following year 47

END USE METHOD

Suitable for estimating demand for intermediate products Also called as consumption coefficient method Steps 1. Identify the possible uses of the products 2. Define the consumption coefficient of the product for various uses 3. Project the output levels for the consuming industries 4. Derive the demand for the project
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END USE METHOD

This method forecasts the demand based on the consumption coefficient of the various uses of the product. Projected Demand for Indchem
Consumption Coefficient Alpha Beta Kappa Gamma 2.0 1.2 0.8 0.5 Projected Output in Year X 10,000 15,000 20,000 30,000 Total Projected Demand for Indchem in Year X 20,000 18,000 16,000 15,000 69,000
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LEADING INDICATOR METHOD

This method uses the changes in the leading indicators to predict the changes in the lagging indicators. Two basic steps:
1. Identify the appropriate leading indicator(s) 2. Establish the relationship between the leading indicator(s) and the variable to forecast.
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ECONOMETRIC METHOD
An advanced forecasting tool, it is a mathematical expression of economic relationships derived from economic theory. Economic variables incorporated in the model 1. Single Equation Model Dt = a0 + a1 Pt + a2 Nt Where
Dt = demand for a certain product in year t. Pt = price of the product in year t. Nt = income in year t.
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ECONOMETRIC METHOD
2. Simultaneous equation method GNPt = Gt + It + Ct It = a0 + a1 GNPt Ct = b0 + b1 GNPt Where GNPt = gross national product for year t. Gt = Governmental purchase for year t. It = Gross investment for year t. Ct= Consumption for year t.
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ECONOMETRIC METHOD
Advantages The process sharpens the understanding of complex cause effect relationships This method provides basis for testing assumptions Disadvantages It is expensive and data demanding To forecast the behaviour of dependant variable, one needs the projected values of independent variables
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UNCERTANITIES IN DEMAND FORECASTING

Data about past and present markets.
Lack of standardization:- product, price, quantity, cost, income. Few observations Influence of abnormal factors:- war, natural calamity

Methods of forecasting
Inability to handle unquantifiable factors Unrealistic assumptions Excessive data requirement

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UNCERTANITIES IN DEMAND FORECASTING

Environmental changes
Technological changes Shift in government policy Developments on the international scene Discovery of new source of raw material Vagaries of monsoon

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COPING WITH UNCERTAINTIES

Conduct analysis with data based on uniform and standard definitions. Ignore the abnormal or out-of-ordinary observations. Critically evaluate the assumptions Adjust the projections. Monitor the environment. Consider likely alternative scenarios. Conduct sensitivity analysis

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Market planning
Current marketing situation - Market, Competition, Distribution, PEST. Opportunity and issue analysis - SWOT Objectives- Break even, % market share Marketing strategy- target segment, positioning, 4 Ps Action program- Quarter 1, Q2, Q3.

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