Unit 4 - project management unit 4 PDF

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UNIT 4: MARKET AND DEMAND ANALYSIS

Contents 4.0 Aims and Objectives 4.1 Introduction 4.2 Situational Analysis & Specification of Objectives 4.3 Collection of Secondary Information 4.4 Conduct of Market Survey 4.5 Characterization of the Market 4.5.1

Effective Demand in the Past and Present

4.5.2

Breakdown of Demand

4.5.3

Price

4.5.4

Method of Distribution and Sales Promotion

4.5.5

Consumers

4.5.6

Supply and Competition

4.5.7

Government Policy

4.6 Demand Forecasting 4.7 Summary 4.8 Answer to Check Your Progress Exercise

4.0 AIMS AND OBJECTIVES After reading this unit you should be able to: -

understand what market and demand analysis mean

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understand how to undertake market and demand analysis

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identify various elements of market and demand analysis

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identify the various techniques used for forecasting demand.

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4.1 INTRODUCTION In most cases, the first step in project analysis is to estimate the potential size of the market proposed for to be manufactured. To put it differently, market and demand analysis is concerned with two broad issues; what is the likely aggregate demand for the product? What share of the market will the project enjoy? These are very important questions in project analysis. Because it calls for in-depth study and assessment of various factors like patterns of consumption, growth, income and price elasticity of demand, composition of the market, nature of competition, availability of substitute so on and so forth. Yet, in many cases project feasibility studies seems to make a short shrift of market and demand analysis. It is not uncommon to find cursory statement like "the market is attractive" or "the demand is expected to exceed supply". Given the importance of market and demand analysis, it should be carried out in an orderly and systematic manner. The key step in such analysis are as follows: -

Situational analysis and specification of objectives

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Collection of secondary information

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Conduct market survey

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Characterization of the market

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Demand forecasting

4.2 SITUATIONAL ANALYSIS AND SPECIFICATION OF OBJECTIVES In order to get a 'feel' for the relationship between the product and its market, the project analyst may informally talk to customer competitors, middlemen, and others in the industry. Wherever possible, he may look at the experiences of the company to learn about the preferences and punishing power of customers, actions and strategies of competitors. If such a situational analysis generate enough data to measure the market and enable us to have a clear picture over projected demand and revenue, a formal study need not be carried out, particularly when time and cost consideration so suggest. In most cases, of course a formal study of market and demand is warranted.

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To illustrate, suppose that a small but technological competent firm has developed an air cooler based on a new principle that appears to offer several advantage over the conventional (former) air cooler. The chief executive of the firm needs information about where and how to market the new air cooler. The objectives of market and demand analysis in this case may be to answer the following questions: -

Who are the buyers of air cooler?

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What is the total current demand for air cooler?

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How is the demand temporarily distributed (pattern of sales over the year) and geographically?

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What is the break-up of demand for air coolers of different size?

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What prices will the customers be willing to pay for the improved air cooler?

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How can potential customers be convinced about the superiority of the new cooler?

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What price and warranty will ensure its acceptance?

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What channel of distribution are most suited for the air cooler? What trade margin will induce distributors to carry it?

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What are the prospects of immediate sales?

4.3 COLLECTION OF SECONDARY INFORMATION In order to answer the questions listed while delineating the objective of the market study, information may be obtained from secondary and/or primary sources. Secondary information is information that has been gathered in some other context and is already available. Primary information, on the other hand, represents those information which are collected for the first time to meet the specific purpose on hand. Secondary information provides the base and the starting point for market and demand analysis. It indicates what is known and often provides leads and cues for gathering primary information required for further analysis. The important source of secondary information useful for market and demand analysis in Ethiopia are mentioned below. 

census of Ethiopia



national sample survey reports



statistical abstracts

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

annual survey of industries/agriculture and export



economic survey



annual report by national bank of Ethiopia



bulletin on import and export

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other publications

4.4 CONDUCT OF MARKET SURVEY For undertaking a market survey there is a need to have a sample, which represents the entire market. Thus, sampling is the process of drawing a limited number of subjects from a larger population or universe. Since, the researcher cannot survey the entire universe or population that they are interested, they usually draw a sample of subjects from the population for investigation.

Steps in a Sample Survey Typically a sample survey consists of the following steps: 1. Define the target population: in defining the target population the important terms should be carefully and unambiguously defined. The target population may be divided into various segments which may have differing characteristics. For example, all television owners may be divided into three to four income bracket. 2. Select the sampling scheme and sample size: there are several sampling schemes, simple random sampling, cluster sampling, sequential sampling, stratified sampling, systematic sampling and non-probability sampling. Each scheme has its advantage and limitations. The sample size, other things being equal, has a bearing on the reliability of the estimates – the larger the sample the greater reliability. 3. Develop the questionnaire: the questionnaire is the principal instrument for eliciting information from the sample of the respondent. The effectiveness of the questionnaire as a device for eliciting the desired information depends on its length, the type of questions, and the wording of questions. Developing the questionnaire require a thorough understanding of the product, and its usage, imagination, insights into human behavior, appreciation of subtle linguistic nuances, and familiarity with the tools of descriptive and inferential statistics to be used later for analysis.

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Since the quality of the questionnaire has an important bearing on the results of market survey, the questionnaire should be tried out in a pilot survey and modified in the light of problems/ difficulties noted. 4. Recruit and Train the Field Investigators: recruiting and training of field investigators must be planned well since it can be time consuming. Great care must be taken for recruiting the right kind of investigators and imparting the proper kind of training to them. 5. Obtain information as per the questionnaire from the sample respondent: respondent may be interviewed personally, telephonically, or by mail for obtaining information. Personal interview ensure a high rate of responses. They are, however, expensive and likely to result in biased responses because of the presence of the presence of the interviewer. Mail survey are economical and evoke fairly candid responses. The response rate, however, is often law. telephonic interview, common in western countries have very limited applicability in Ethiopia because telephone tarrifs are high and low telephone connection. 6. Scrutinize the information gathered: information gathered should be thoroughly scrutinized to eliminate data which is internally inconsistent and which is of dubious validity. Sometimes data inconsistencies may revealed only after some analysis. information gathered in the the survey need need to be 7. Analyze and Interpret the Information: information analyzed and interpreted with care and imagination. After tabulating it as per a plan of analysis, suitable statistical investigation may be conducted, wherever possible and necessary. For the purpose of statistical analysis, a variety of methods are available. They may be divided into two broad categories; parametric and non parametric methods. Parametric methods assumes that the available or the attribute under study conforms to some unknown distribution. Non-parametric methods do not presuppose any particular participation. Results of data based on sample survey will have to be extrapolated to the target population. Here it should be noted that the results of the market survey can be affected by:

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i) non representative ness of sample ii) imprecision and inadequacies in the questions, iii) failure of the respondent to comprehend the questions iv) deliberate distortion in the answer given by the respondent v) checking on the part of the investigators vi) slip shod scrutiny of data vii) incorrect and inappropriate analysis and interpretation of data.

4.5 CHARACTERISTICS OF THE MARKET Based on the information gathered from secondary sources and through the market survey, the market for the product may be described in terms of the following: 

Effective demand in the past and present



Breakdown of demand



Price



Methods of distribution and sales promotion



Consumers



Supply and competition



Government policy

4.5.1 Effective Demand in Past and Present To gauge the effective demand in the past and present, the starting point typically is apparent consumption which is defined as: Production + Imports – Exports – Changes in Stock Level In a competitive market, effective demand and apparent consumption are equal. however, in most of the developing countries, where competitive markets do not exist for a variety of products due to exchange restrictions and controls on production and distribution. The figure of apparent consumption may have to be adjusted for market imperfections.

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4.5.2 Breakdown of Demand To get a deeper insight into the nature of demand, the aggregate (total) market demand may be broken down into demand for different segments of the market. Market segments may be defined by (a) nature of product, (b) consumer good and (c) geographical division. 

Nature of product: one generic name of subsumes many different products: for example, commercial vehicles covers trucks and buses of various capacities and so on and so forth.



Consumer groups: consumers of product may be divided divided into industrial consumers and domestic consumers. Industrial consumers may be sub divided industry wise. Domestic consumers may be further divided into different income groups.



Geographical divisions: a geographical breakdown of consumers, particularly for products which have a small value to weight relationship and products which require regular, efficient after sales services is helpful.

Why is segmental analysis required? Segmental information is helpful because the nature of demand tends to vary from one segment to another (the demand form consumers in high brackets may not be sensitive to price variation) and different marketing strategies may be appropriate to different market segments.

4.5.3 Price Price statistics must be gathered along with statistics pertaining to physical quantities. It may be helpful to distinguish the following types of prices. i) manufacturer's price quoted as FOB (Free on board) price or CIF (Cost, insurance and freight) price ii) landed price for imported goods iii) average wholesale price, and iv) average retail price

4.5.4 Method of Distribution and Sales Promotion The method of distribution may vary with the nature of product. Capital goods, industrial raw materials or intermediates, and consumer products tend to have differing distribution channels. Further, for a given product, distribution methods may vary. Likewise, methods 48

used for sales promotion (advertising, discount gift schemes etc) may vary from product to product. The method of distribution and sales promotion employed presently and their rationale must be specified. Such a study may explain certain patterns of consumption and highlight the difficulties that may be encountered in marketing the proposed products.

4.5.5 Consumers Consumers may be categorized along two dimensions as follows:

Demographic and Sociological

Attitudinal

Age

Preference

Sex

Intentions

Income

Habits

Profession

Attitudes

Residence

Responses

Social background

4.5.6 Supply and Competition It is necessary to know the existing source of supply and whether they are foreign or domestic. For domestic sources of supply, information along the following lines may be gathered location, present production capacity, planned expansion, capacity utilization level, bottlenecks in production and cost structure. Competition from substitute and near substitute should be special because almost any product may be replaced by some other product may be replace by some other product as a result of relative charges in price, quality, availability, promotional effort and so on.

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4.5.7 Government Policy The role of government in influencing the demand and market for a product may be significant. Governmental plans, policies, legislation and fiats which have a bearing on the market and demand of the product under examination should be spelt out. These are reflected in: production target in national plans, import and export trade controls, import duties, export incentives, excise duties, sales tax, industrial licensing, preferential purchase, credit controls, financial regulation and subsidies/penalties of various kinds.

4.6 DEMAND FORECASTING After gathering information about various aspects of the market and demand from primary and secondary sources, an attempt may be made to estimate future demand. A wide range of forecasting method is available to the market analyst. This may be broadly divided into two categories: qualitative and quantitative methods. A.

Qualitative Methods

These methods rely essentially on the judgment of experts to translate qualitative information into quantitative estimate. The important qualitative methods are: 

Jury of executive opinion method: very popular in practice, this method calls for the pooling of views of a group of executive on expected future sales and combining them into sales estimates.



Delphi method: this this method method involves involves converting converting the the views views of of aa group group of of experts, experts, who who do not interact face to face into a forecast through an iterative process.

B.

Quantitative Methods

This method broadly comprises of two techniques of forecasting demand: these are time series projection and causal methods. 

Time series projection methods: this method generates forecasts on the basis of an analysis of the historical time series. The important time series projection methods are as follows: o Trend projection method: very popular in practice, this method involves in extrapolating the past trend on to the future. 50

o Exponential smoothing method: in exponential smoothing, forecasts are modified in the light of observed phenomena. o Moving average method: according to this method, the forecast for next period represents a simple arithmetic, average or a weighted arithmetic average of the last few observation. 

Causal methods: more more analytical analytical than than the the preceding preceding method, method, causal causal method method seeks seeks to to develop forecast on the basis of cause-effect relationships specified in an explicit, quantitative manner. The causal method comprises of: o Chain ratio method: a simple analytical approach, this methods calls for applying a series of factors for developing a demand forecast. o Consumption level method: useful for a product that is directly consumed, this method estimate consumption level on the basis of elasticity coefficient, the important ones being the income elasticity of demand and the price elasticity of demand. o End use method: suitable for intermediate products, the end use method develops demand forecasts on the basis of the consumption coefficient of the product for the various uses. o Leading indicator method: according to this method, observed changes in leading indicators are used to predict the change in lagging variables. o Economic methods: perhaps the most sophisticated forecasting tool, the econometric method involves estimating quantitative relationship derived from economic theory.

Check Your Progress Exercise 1.

What are the various steps or elements in market and demand analysis?

___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________

2.

What are the basic objectives for undertaking market and demand analysis?

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___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ 3.

Discuss the steps taken to conduct sample survey and factors, which affects the results of the market survey.

___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ 4.

What are the different factors, which affects market and demand analysis?

___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ 5.

Why are demand forecasting become necessary?

___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ 6.

Discuss the two methods of forecasting demand how it could be applied?

___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________

4.8 SUMMARY Given the im...