Purpose of Market Analysis

•To determine the attractiveness of a market ( or submarket) to current and potential participants.

Market attractiveness, the firm’s profit potential as measured by the long –term ROI achieved by its participants, will provide important input into the product – market investment decision

•To understand the dynamics of a market

Dimensions of a Market Analysis

• Emerging submarkets

• Actual and potential market and submarket size

• Market and submarket growth

• Market and submarket profitability

• Cost structure

• Distribution systems

• Trends and developments

• Key success factors

Relevance

Emerging Submarkets

SUV

Hybrid

Marketing the Wrong Product

“Having great products is not enough.You need to make what customers want to buy.”

- David Aaker

Brand PreferenceBrand Relevance

SUV

Determine Brands to Consider

Mercedes

Select Brand to Buy

Lexus

BMW

Mercedes

Select Product Category or Subcategory

Customer Decision Process

Emerging submarket

• The challenge is to detect and understand emerging submarkets, identify those that are attractive to the firm, given its assets and competencies, and then adjust offerings and brand portfolios in order to increase their relevance to the chosen submarkets.

A) Product or service can be augmented or expanded to include a new dimension. Eg cell phones with cameras

B) Market can be broken into niches. Eg an energy bar fragmented into :

• High Protein• For women• Low calories• Apple Crunch• Oats N Honey

Each of these niches is an area for which the original Power Bar was not relevant

C) Application scope can be expanded from components to systems or turnkey solutions ie.an aggregation into submarkets. Siebel in the 1990s created Internet based CRM solutions by aggregating a host of application areas including customer loyalty programmes, call centres ,sales force automation

D) Emergence of a new and distinct application can define relevant brand options. ( Eg, Bayer 81 mg Baby Aspirin and later Enteric Safety Coating for minimizing adverse effects of regular aspirin usage on the stomach.

E) A product class can be repositioned eg Starbucks

repositioning the retail coffee market

F) A customer trend can drive a submarket. Eg, Wellness and Herbs etc has given rise to HRB ( Healthy Refreshment Beverages)

G) New Technology – Notebook computers, I phones, hybrid cars can drive the perception of a submarket.

H) A whole market can be invented eg e Bay creating an online auction.

Market Size

• Actual market size is the starting point of the analysis of a market or submarket.

• In addition to this the potential market needs to be considered. A new use, new user group, or more frequent usage could dramatically change the size and prospects for the market. However, potential must not only be recognized but the marketer must have the vision and strategy in place to exploit it.

Special cases

• Ghost potential –Need for computers in many underdeveloped countries but low buying power and government regulations make it impossible for companies to operate in these markets.

• Large companies often cannot operate in smaller markets as the growth rate is low as compared to the company’s desired levels. This can be an opportunity missed.

Market and submarket growth

It appears logical to identify and invest in growth situations and disinvest in decline situations. But declining products markets may cause competitors to exit and present a growth opportunity. The firm may attempt to become a profitable survivor by encouraging others to exit and by becoming dominant in the most viable segments.

Conversely, growth contexts are not alwaysattractive as they can involve substantial risk.

Driving Forces

• The most strategic uncertainty involves prediction of market sales. A strategic investment decision will often depend on understanding the driving forces behind the market dynamics.

Forecasting growth

• Historical data is useful but needs to be used with care.

• What is more useful strategically is prediction of turning points , ie times when the rate and perhaps direction of growth change.

• Leading indicators of market sales include demographic data and sales of related equipment /products

Detecting Maturity and Decline

• Price pressure caused by overcapacity and the lack of product differentiation

• Buyer sophistication and knowledge

• Substitute products or technologies

• Saturation

• No growth sources

• Customer disinterest

Questions to Help Structure a Market Analysis

• Submarkets

Are augmented products, emerging niches, trend toward systems, new applications, repositioned product classes, customer trends, or new technologies creating worthwhile submarkets? How should they be defined?

• Size and Growth

Potentially important submarkets? Size and growth characteristics? Submarkets declining? How fast? Driving forces behind the trends?

Figure 4.1

Questions to Help Structure a Market Analysis

• Profitability

How intense is the competition among existing firms? Threats from potential entrants and substitute products? Bargaining power of suppliers and customers? Attractive/profitable markets or submarkets?

• Cost Structure

Major cost and value-added components for various types of competitors?

Figure 4.1

Questions to Help Structure a Market Analysis• Distribution Systems

Alternative channels of distribution? How are they changing?

• Market Trends

• Key Success FactorsKey success factors, assets, and competencies to compete successfully? Can assets and competencies of competitors be neutralized?

Figure 4.1

Market and submarket Profitability Analysis

Harvard Economist Michaal Porter applied

his theories and findings to the business

strategy problem of evaluating the

investment value of an industry or market.

The problem is to identify how profitable

the average firm will be.

Industry Profitability or Long term Attractiveness

• Michael Porter has identified 5 forces that determine the intrinsic long run attractiveness or profitability of a market or market segment.

Porter’s Five-Factor Model ofMarket Profitability

Threat of Potential Entrants

Threat of Potential Entrants

Bargaining Power of

Customers

Bargaining Power of

Customers

Threat of SubstituteProducts

Threat of SubstituteProducts

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Source: Adapted from Michael E. Porter, “Industry Structure and Competitive Strategy: Keys to Profitability” Financial Analysis Journal,July-August 1980,p.33.

Figure 4.3

IndustryProfitability

Competition among

existing firms

Competition among

existing firms

Porter’s Five Forces Model

Porter Competitive Model

Intra-Industry RivalrySBU: Wal-MartRivals: Kmart, Target,Toys R Us, Specialty Stores

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

• Consumers in Small Town U.S.A. • Consumers in Metropolitans Areas in the U.S. • Canadian and Mexican Consumers• Other Foreign Consumers

• Mail Order• Home Shopping Network• Electronic Shopping

• U.S. Product Manufacturers• Foreign Manufacturers• Local Governments

• Foreign General Merchandisers or Discounters• Established Retailer Shifting Strategy to Discounting or Megastores

• Telemarketing• Buying Clubs• Door-to-door Sales

Figure 3-2

Porter Competitive ModelEducation Industry: U.S. Universities

Intra-Industry RivalryStrategic Business Unit

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

• Faculty• Staff• Equipment and Service Suppliers• Alumni• Foundations• Business• Government

• Books and Videotapes• Computer-Based Training• Training Companies• Consulting Firms

• Students• Parents• Business• Employers• Legislators

• Foreign Universities• Distance Learning• Motorola U. • National Technical University

Threat of intense segment rivalry

• A segment is unattractive if it already contains many strong or aggressive competitors

• A segment is unattractive if both entry and exit barriers are high. Worst case where entry barriers are low but exit barriers are high.

• A segment is unattractive when there are actual or potential substitutes for the product

• A segment is unattractive if buyers posses strong or growing bargaining power

• A segment is unattractive if the company’s suppliers are able to raise prices or reduce quantity supplied.

Force 1: The Degree of Rivalry

The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition.

This force is located at the centre of the diagram; Is most likely to be high in those industries where there is a threat of substitute products; and existing power of suppliers and buyers in the market.

Force 2: The Threat of Entry

Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers.

Most common entry barriers

Economies of scale: for example, benefits associated with bulk purchasing;

Cost of entry: for example, investment into technology;

Distribution channels: for example, ease of access for competitors;

Cost advantages not related to the size of the company: for example, contacts and expertise;

Government legislations: for example, introduction of new laws might weaken company’s competitive position;

Force 3: The Threat of Substitutes

• The threat that substitute products pose to an industry's profitability depends on the relative price-to-performance ratios of the different types of products or services to which customers can turn to satisfy the same basic need.

• The threat of substitution is also affected by switching costs – that is, the costs in areas such as retraining, retooling and redesigning that are incurred when a customer switches to a different type of product or service.

Force 4: Buyer Power

Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry. 

This force is relatively high where there a few, large players in the market.

It is present where there is a large number of undifferentiated, small suppliers, such as small farming businesses supplying large grocery companies

Low cost of switching between suppliers, such as from

one fleet supplier of trucks to another.

Force 5: Supplier Power

• Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied.

• The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power

Bargaining power of suppliers exists in the following situations:

Where the switching costs are high (eg.switching from one Internet provider to another);

High power of brands (McDonalds, British Airways, Tesco)

Possibility of forward integration of suppliers

Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol stations in remote places).

"

The nature of competition in an industry is strongly affected by the suggested five forces. The stronger the power of buyers and suppliers, and the stronger the threats of entry and substitution, the more intense competition is likely to be within the industry. "

Market Trends

• It is crucial to distinguish between trends that will drive growth and reward those who have adopted differentiated strategies and

• Fads that will only last long enough to attract investment that is subsequently underemployed or lost forever.

Trend vs. Fadsa) Trends are likely to be driven by a solid force

such as: Demographics, Values, Lifestyle, Technology Not by Pop culture, fashion, a trendy crowd or

mediab) How accessible is it in the mainstream? Not confined to a niche or requiring a major

change in ingrained habits or priced too high or hard to use

c) Is it broadly based ? Across categories/ industries ? Eg Eastern influences in food design, health care in the US.

Key Success factors

• These are assets and competencies that provide the basis for competing successfully.

• Strategic necessities and strategic strengths need to be identified and projected into the future mainly to identify emerging KSFs.

Risks in High Growth markets• Number and commitment of competitors may

be too high for market to support• Competitor/s with superior product / lower

price• Key Success Factors might change and the

organization unable to adapt• Technology might change• Market growth lower than expectations• Price instability• Inadequate resources rto maintain high

growth rate• Inadequate distribution

Competitive Risk

• Overcrowding

• Superior competitive entry

Competitive Risk

• Overcrowding

• Superior competitive entry

Market Changes

•Changing KSFs

• New technology

• Disappointing growth

• Price instability

Market Changes

•Changing KSFs

• New technology

• Disappointing growth

• Price instability

Firm Limitations

• Resource constraints

• Distribution unavailable

Firm Limitations

• Resource constraints

• Distribution unavailable

Figure 4.5

Risks of High-Growth

Market