Market Attractiveness and Market Potential

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Market Attractiveness and Market Potential

I. Outline
A. What makes markets attractive to enter?
B. How can we forecast before entering or in early stages of the evolution of the market, the level of market potential and industry sales? C. Are there entry advantages? What are the sources of such advantages? Are these durable? D. If there are entry advantages, should you always enter first? II. Market attractiveness

A. Market size
B. Growth rate
C. Heterogeneity of customers
✓ Is heterogeneity, and the presence of different segments good or bad? D. Existing competitors and potential competitors
E. Level of costs that become sunk post entry
F. Uncertainty
G. Cannibalization of your existing sales
III. Forecasting market potential and industry sales
A. We can look at firm i’s sales Si as
Si =I*MSi and I = f(P)
Where P is the potential market, I is industry sales, MSI is the market share of firm i. The function f is a function of macro economic variables, and industry marketing mix variables. Clearly I < or = P. MSI should be a function of marketing mix variables of all the firms. This is a top down approach and often we don’t know how to model f or MSI especially in early stages of the evolution of the market. But once we gain some experience in the industry, this might be a useful tool. We can use available data to model market share of a firm. B. A second approach is a bottom up approach. Here we define the different segments that are in the target market. We first estimate potential sales in each segment and then aggregate up. How to estimate potential sales in each segment? C. Survey of customers and ask their purchase intentions and adjust the purchase intention to reflect potential sales. Markstrat suggests that you do this. D. Use prior experience in other markets.

✓ Consider Federal Express. Suppose Fed Ex is entering new market say a new country, how can it estimate potential for overnight service in that country? ✓ Fed Ex. has data on the evolution of markets in other and perhaps ‘similar’ countries. It divides its customers into several segments as follows

|Segment |# of firms |Employees/firm |Annual turnover |Unit volume |Gross revenue | |Legal | | | | | | |Accounting | | | | | | |Construction | | | | | | |Healthcare | | | | | | | | | | | | |

This is a variation of input-output analysis that you might have heard of. E. How do you obtain the segment sizes? For business to business markets government publications, trade association reports can be useful. ✓ SIC directory is a standard source to get aggregate data on the number of establishments and characteristics of these establishments. ✓ Bureau of commerce reports and reports put out by different agencies at the state level are also helpful ✓ For consumer markets one can obtain distribution statistics (such as income family size etc.) from government reports. F. Testing/experiments

✓ Test markets or pre-test markets for consumer goods ✓ Alpha/beta tests for business to business and high tech products are common. Even though these are often done to iron out technical problems, can give a good indication of acceptance. G. A growth model to forecast industry sales. This model is based on model from epidemiology. The model makes assumptions about how the product diffuses (hence term...
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