1a Project Mgt Session

8/8/2019 1a Project Mgt Session

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Introductiony Estimate the potential size of the market

y Idea about the market share that is likely to be

capturedy Likely aggregate demand for the product/service

y Likely market share


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OUTLINE

y Situational analysis and specification of objectives

y Collection of secondary information

y Conduct of market survey

y Characterisation of the market

y Demand forecasting

y Uncertainties in demand forecasting

y Market planning


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Collection ofSecondary

Information

Situational

Analysis and

Specification

ofObjectives

Conduct of

Market Survey

Characterisation

of the Market

DemandForecasting

Market

Planning

Key Steps in Market and Demand Analysis and their Inter-relationships


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Situ ti l A l sis & Specific ti f Objectives

In order to get a feel of the relationship between the product and itsmarket, the project analyst may informally talk to customers,

competitors, middlemen, and others in the industry. Wherever possible,

he may look at the experience of the company to learn about the

preferences and purchasing power of customers, actions and strategies ofcompetitors, and practices of the middlemen.

It is necessary to spell out objectives clearly and comprehensively

Objectives could be spelt in the form of questions

Example: Before introducing an improved air cooler, the followingquestions are relevant:

Who are the buyers ?

What is the current demand?

What price customers be willing to pay?

What are prospects of immediate sales?


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CollectionofSecondar Infor ation

yy Secondary information is information that has beenSecondary information is information that has been

gathered in somegathered in some other context and is readily availableother context and is readily available

yy Primary information represents the one that isPrimary information represents the one that iscollected for the first time to meet the specific purposecollected for the first time to meet the specific purpose

on handon hand

yy Secondary information provides the base and theSecondary information provides the base and the

starting point for the market and demand analysis. Itstarting point for the market and demand analysis. It

indicates what is known and often provides leads andindicates what is known and often provides leads and

cues for gathering primary information required forcues for gathering primary information required for

further analysisfurther analysis


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General Sources of Secondary

Informationy Census of India

y National sample survey reports

y Plan reportsy Statistical abstract of the Indian Union

y Economic Survey

y Monthly Bulletin of RBI

y Publications of Advertising agencies

y Stock exchange directory

y Guidelines to industries


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Industry-specific Sources of

Secondary InformationIndustry

yAutomobile

y Chemicals

y Textiles

Titley Annual reports of Association of

Indian Automobile

Manufacturers

y Annual reports of Organisationof Pharmaceutical Producers ofIndia

y Indian Textile Bulletin, Annualreports of Indian Cotton MillsFederation


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EvaluationofSecondar Infor ation

While secondary information is available economically and readily (provided the market

analyst is able to locate it), its reliability, accuracy, and relevance for the purpose under

consideration must be carefully examined. The market analyst should seek to know:

y Who gathered the information? What was the objective?

y When was the information gathered? When was it published?

y

How representative was the period for which the information was gathered?y Have the terms in the study been carefully and unambiguously defined?

y What was the target population?

y How was the sample chosen?

y How representative was the sample?y How satisfactory was the process of information gathering?

y What was the degree of sampling bias and non-response bias in the information

gathered?

y What was the degree of misrepresentation by respondents?


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Market Survey

SecondarySecondary information,information, thoughthough useful,useful, oftenoften doesdoes notnot provide provide aa

comprehensivecomprehensive basisbasis forfor marketmarket andand demanddemand analysisanalysis.. ItIt needsneeds toto bebesupplementedsupplemented withwith primaryprimary informationinformation gatheredgathered throughthrough aa marketmarket

surveysurvey specificspecific toto thethe projectproject beingbeing appraisedappraised..

TheThe marketmarket surveysurvey maymay be be aa censuscensus surveysurvey oror aa samplesample surveysurvey;;

typicallytypically itit isis thethe latterlatter..

CensusCensus surveysurvey refersrefers toto totalitytotality ofof allall unitsunits underunder considerationconsideration inin

aa specificspecific studystudy..

ExampleExample:: allall usersusers ofof LuxLux ,, allall readersreaders ofof EconomicEconomic TimesTimes

CensusCensus surveysurvey onlyonly employedemployed forfor intermediateintermediate goodsgoods oror goodsgoods usedused

byby smallsmall numbernumber ofof firmsfirms

CostlyCostly andand infeasibleinfeasible

AA samplesample ofof population population isis contactedcontacted toto gathergather informationinformation inin casecase

ofof aa samplesample surveysurvey


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Infor ationSought ina Market Survey

The information sought in a market survey may relate to one or more of the

following:

y Total demand and rate of growth of demand

y Demand in different segments of the market

y Income and price elasticities of demand

y Motives for buying

y Purchasing plans and intentions

y Satisfaction with existing products

y

Unsatisfied needsy Attitudes toward various products

y Distributive trade practices and preferences

y Socio-economic characteristics of buyers


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Steps inaSampleSurvey

Typically, a sample survey involves the following steps:

1. Define the target population.

2. Select the sampling scheme and sample size.

Probability sampling and non probability sampling

3. Develop the questionnaire.

4. Recruit and train the field investigators.

5. Obtain information as per the questionnaire from the sample

of respondents.

6. Scrutinise the information gathered.

7. Analyse and interpret the information.


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Types of Samplingy Probability Sampling

y Random Sampling

y Systematic Samplingy Multi-stage Sampling

y Stratified Sampling

y Non-Probability Sampling

y Convenience Sampling

y Quota Sampling

y Dimensional Sampling


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Characterisationof the Market

Based on the information gathered from secondary sources and through

the market survey, the market for the product/service may be describedin terms of the following:

Effective demand in the past and present

Breakdown of demand

Nature of product

Consumer groups

Geographical division

Price

Methods of distribution and sales promotion Consumers

age, sex, income, profession, habits ,attitudes, preferences

Supply and competition

Government policy


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I Qualitative Methods : These methods rely essentially on the judgment of experts to

translate qualitative information into quantitative estimates. The important

qualitative methods are :

y Jury of executive method

y Delphi method

II Time Series Projection Methods : These methods generate forecasts on the basis of

an analysis of the historical time series . The important time series projection

methods are :

y Trend projection method

y Exponential smoothing method

y Moving average method

III Causal Methods : More analytical than the preceding methods, causal methods

seek to develop forecasts on the basis of cause-effect relationships specified in an

explicit, quantitative manner. The important causal methods are :

y Chain ratio method

y Consumption level method

y End use method

y Leading indicator method

y Econometric method

Methods of Demand Forecasting


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JuryofExecutiveOpinion Method

This method involves soliciting the opinion of a group of managers on

expected future sales and combining them into a sales estimate

Pros

It is an expeditious method

It permits a wide range of factors to be considered

It appeals to managers

Cons

Thebiases cannot be unearthedeasily

Its reliability is questionable


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Delphi Method

This method is used for eliciting the opinions of a group of experts with the

help of a mail survey. The steps involved in this method are :

1.1. AA groupgroup ofof expertsexperts isis sentsent aa questionnairequestionnaire byby mailmail andand askedasked toto expressexpress

theirtheir viewsviews..

2.2. TheThe responsesresponses receivedreceived fromfrom thethe expertsexperts areare summarisedsummarised withoutwithout

disclosingdisclosing thethe identityidentity ofof thethe experts,experts, andand sentsent backback toto thethe experts,experts, alongalong

withwith aa questionnairequestionnaire meantmeant toto probeprobe furtherfurther thethe reasonsreasons forfor extremeextreme viewsviews

expressedexpressed inin thethe firstfirst roundround..

3.3. TheThe processprocess maymay bebe continuedcontinued forfor oneone oror moremore roundsrounds tilltill aa reasonablereasonable

agreementagreement emergesemerges inin thethe viewview ofof thethe expertsexperts..


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Pros

It is intelligible to users

It seems to be more accurate and less expensive than the

traditional face-to-face group meetings

Cons

There are some question marks: What is the value of the expert opinion?

What is the contribution of additional rounds and feedback to accuracy?


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Trend Projection Method

The trend projection method involves (a) determining the trend ofconsumption by analysing past consumption statistics and (b)

projecting future consumption by extrapolating the trend.

Linear relationship : Yt = a + btcalled the least square regression line

Where Yt is the demand for year t, t is time variable, a is the

intercept of relationship ,b is the slope of the relationship,

n is the number of observations

T Yn T Y

b=

T2n T2

a= Yb T


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Exponential Smoothing Method

In exponential smoothing, forecasts are modified in the light of

observed errors in the actual and the forecasted sales. In general

Ft+1 = Ft+ E et (4.7)

where Ft + 1 = forecast for year t + 1

= smoothing parameter (which lies between 0 and 1)

et = error in the forecast for year t = St - Ft

St = actual sales for year t


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Moving Average Method

As per the moving average method of sales forecasting, the forecast for

the next period is equal to the average of the sales for several preceding

periods.

In symbols,

St+ St-1 + + St-n+1F

t+1 = (4.8)

n

where Ft+1 = forecast for the next period

St = sales for the current periodn = period over which averaging is done, n is to be set by the

forecaster


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The potential sales of a product may be estimated by applying a series of factors to a

measure of aggregate demand. For example, the General Foods of the U. S estimated the

potential sales for a new product, a freeze-fried instant coffee (Maxim), in the following

manner :

Chain Ratio Method

Total amount of coffee salesTotal amount of coffee sales :: 174.5 million units174.5 million units

Proportion of coffee used at homeProportion of coffee used at home :: 00..835835

Coffee used at homeCoffee used at home :: 145.7 million units145.7 million unitsProportion of nonProportion of non--decaffeinated coffee used at homedecaffeinated coffee used at home :: 00..937937

NonNon--decaffeinated coffee used at homedecaffeinated coffee used at home :: 136.5 million units136.5 million units

Proportion of instant coffeeProportion of instant coffee :: 00..400400

Instant nonInstant non--decaffeinated coffee used at homedecaffeinated coffee used at home :: 54.6 million units54.6 million units

Estimated longEstimated long--run market share for Maximrun market share for Maxim :: 0.080.08

Potential sales of MaximPotential sales of Maxim :: 4.37 million units4.37 million units


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EndUse Method

Suitable for estimating the demand for intermediate products, the end use method, also

referred to as the consumption coefficient method, involves the following steps:

1. Identify the possible uses of the product.

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 product.

Project Demand for Indchem

This method may be illustrated with an example. A certain industrial chemical, Indchem

is used by four industries Alpha, Beta, Gamma, and Kappa.

The consumption coefficients for these industries, the projected output levels for these

industries for the year X, and the projected demand for Indchem as shown in the

following slide.


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ConsumptionConsumption

Coefficient *Coefficient *

Projected Output inProjected Output in

year X(in units)year X(in units)

ProjectedDemandforProjectedDemandfor

Indchem in year XIndchem in year X

Alpha Alpha 2.02.0 10,00010,000 20,00020,000

BetaBeta 1.21.2 15,00015,000 18,00018,000

KappaKappa 0.80.8 20,00020,000 16,00016,000

GammaGamma 0.50.5 30,00030,000 15,00015,000

Total Total 69,00069,000

ThisThis isisexpressedexpressed inin tonnestonnesofof IndchemIndchem requiredrequiredperper unitunitofof outputoutputofof thetheconsumingconsuming industryindustry

ItIt maymay bebe difficultdifficult toto estimateestimate thetheprojectedprojected outputoutput levelslevelsConsumptionConsumption cofficientscofficients maymayvaryvaryfromfrom yearyear totoyearyear in in wakewake ofof technologicaltechnological changeschanges..


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Bass Diffusion Model - 1

Developed by Frank Bass, the Bass diffusion model seeks to estimate the pattern of

sales growth for new products, in terms of two factors:p : The coefficient of innovation. It reflects the likelihood that a potential customer

would adopt the product because of its innovative features.

q : The coefficient of imitation. It reflects the tendency of a potential customer to

buy the product because many others have bought it. It can be regarded as a

network effect.

According to a linear approximation of the model:

nt= pN+ ( q p) nt-1 + ( q/ N) x ( nt-1 )

2

where nt, is the sales in period t, p is the coefficient of innovation, Nis the potential size

of the market, q is the coefficient of imitation.


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Bass Diffusion Model - 2

A new product has a potential market size of 1,000,000. There is an older product that

is similar to the new product. p = 0.030 and q = 0.080 describe the industry sales ofthis older product. The sales trend of the new product is expected to be similar to the

older product.

So, N= 10 lakh and p=.030 ,q=.080

Applying the Bass diffusion model, we get the following estimates of sales in year 1

and year 2.

0.080

n1 = 0.03 x 1,000,000 + (0.08 0.03) x + x 02 = 30,000

1,000,000

n2 = 0.03 x 1,000,000 + (0.08 0.03) x 30,000 + (0.08 / 1,000,000) x (30,000)2

= 31,572


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Leading Indicator Method

Leading indicators are variables which change ahead of other variables, the

lagging variables. Hence, observed changes in leading indicators may be usedto predict the changes in lagging variables. For example, the change in the level

of urbanisation ( a leading indicator) may be used to predict the change in the

demand for air conditioners (a lagging variable)

Two basic steps are involved in using the leading indicator method: (i)

First, identify the appropriate leading indicator(s).(ii) Second, establish the

relationship between the leading indicator(s) and the variable to be forecast.

Its limitations are that it may be difficult to find appropriate leading

indicator(s) and the lead-lag relationship may not be stable over time.


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Uncertainties in Demand Forecasting

Demand forecasts are subject to error and uncertainty which arise from threeprincipal sources:

Data about past and present market

Lack of standarisation

Few observations

Methods of forecasting

Unrealistic assumptions

Environmental change

Technological change

Shift in government policy

Vagaries of monsoon


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Coping with Uncertainties

Given the uncertainties in demand forecasting, adequate efforts, along the

following lines, may be made to cope with uncertainties.

ConductConduct analysisanalysis withwith datadata basedbased onon uniformuniform andand standardstandard definitionsdefinitions..

InIn identifyingidentifying trends,trends, coefficients,coefficients, andand relationships,relationships, ignoreignore thethe abnormalabnormal oror outout--ofof--

thethe-- ordinaryordinary observationsobservations..

CriticallyCritically evaluateevaluate thethe assumptionsassumptions ofof thethe forecastingforecasting methodsmethods andand choosechoose aa methodmethod

whichwhich isis appropriateappropriate toto thethe situationsituation..

AdjustAdjust thethe projections projections derivedderived fromfrom quantitativequantitative analysisanalysis inin thethe lightlight ofof

unquantifiable,unquantifiable, butbut significant,significant, influencesinfluences..

MonitorMonitor thethe environmentenvironment imaginativelyimaginatively toto identifyidentify importantimportant changeschanges..

ConsiderConsider likelylikely alternativealternative scenariosscenarios andand theirtheir impactimpact onon marketmarket andand competitioncompetition..


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SUMMARY

GivenGiven thethe importanceimportance ofof marketmarket andand demanddemand analysis,analysis, itit shouldshould bebe carriedcarried outout inin anan

orderlyorderly andand systematicsystematic mannermanner.. TheThe keykey stepssteps inin suchsuch analysisanalysis areare (i)(i) situationalsituationalanalysisanalysis andand specificationspecification ofof objectives,objectives, (ii)(ii) collectioncollection ofof secondarysecondary information,information,

(iii)(iii) conductconduct ofof marketmarket survey,survey, (iv)(iv) characterisationcharacterisation ofof thethe market,market, (v)(v) demanddemand

forecastingforecasting andand (vi)(vi) marketmarket planningplanning..

TheThe project project analystanalyst maymay dodo anan informalinformal situationalsituational analysisanalysis whichwhich inin turnturn maymay

provideprovide thethe basisbasis forfor aa formalformal studystudy..

ForFor purposespurposes ofof marketmarket study,study, informationinformation maymay bebe obtainedobtained fromfrom secondarysecondary andand /or/or

primaryprimary sourcessources..

SecondarySecondary informationinformation isis informationinformation thatthat hashas beenbeen gatheredgathered inin somesome otherother contextcontext

andand isis alreadyalready availableavailable.. WhileWhile secondarysecondary informationinformation isis availableavailable economically,economically, itsits

reliability,reliability, accuracy,accuracy, andand relevancerelevance forfor thethe purposepurpose underunder considerationconsideration mustmust bebecarefullycarefully examinedexamined..

SecondarySecondary information,information, thoughthough useful,useful, oftenoften doesdoes notnot provide provide aa comprehensivecomprehensive

basisbasis forfor marketmarket andand demanddemand analysisanalysis.. ItIt needsneeds toto bebe supplementedsupplemented withwith primaryprimary

informationinformation gatheredgathered throughthrough aa marketmarket survey,survey, specificspecific toto thethe project project beingbeing

appraised,appraised, thatthat isis likelylikely toto bebe aa samplesample surveysurvey..


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Typically,Typically, aa samplesample surveysurvey consistsconsists ofof thethe followingfollowing stepssteps:: (i)(i) DefineDefine thethe targettarget

population population (ii)(ii) SelectSelect thethe samplingsampling schemesschemes andand samplesample sizesize.. (iii)(iii) DevelopDevelop thethe

questionnairequestionnaire.. (iv)(iv) ScrutiniseScrutinise thethe informationinformation gatheredgathered.. (vii)(vii) AnalyseAnalyse andand interpretinterpret

thethe informationinformation..

BasedBased onon thethe informationinformation gatheredgathered fromfrom secondarysecondary sourcessources andand throughthrough marketmarket

survey,survey, thethe marketmarket forfor thethe product/service product/service maymay be be describeddescribed inin termsterms ofof thethe

followingfollowing:: effectiveeffective demanddemand inin thethe pastpast andand presentpresent;; breakdownbreakdown ofof demanddemand;; priceprice;;

methodsmethods ofof distributiondistribution andand salessales promotionpromotion;; consumersconsumers;; supplysupply andand competitioncompetition;;

andand governmentgovernment policypolicy..

AfterAfter gatheringgathering informationinformation aboutabout variousvarious aspectsaspects ofof thethe marketmarket andand demanddemand fromfrom

primaryprimary andand secondarysecondary sources,sources, anan attemptattempt maymay bebe mademade toto estimateestimate futurefuture demanddemand..

AA widewide rangerange ofof forecastingforecasting methodsmethods isis availableavailable toto thethe marketmarket analystanalyst.. TheseThese maymay

be be divideddivided intointo threethree broad broad categories,categories, vizviz..,, qualitativequalitative methods,methods, timetime seriesseries

projectionprojection methods,methods, andand causalcausal methodsmethods..

QualitativeQualitative methodsmethods relyrely essentiallyessentially onon thethe judgment judgment ofof expertsexperts toto translatetranslate

qualitativequalitative informationinformation intointo quantitativequantitative estimatesestimates.. TheThe importantimportant qualitativequalitative

methodsmethods areare :: JuryJury ofof executiveexecutive methodmethod andand DelphiDelphi methodmethod..


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CausalCausal methodsmethods seekseek toto developdevelop forecastsforecasts onon thethe basisbasis ofof causecause--effecteffect relationshipsrelationships

specifiedspecified inin anan explicit,explicit, quantitativequantitative mannermanner.. TheThe importantimportant causalcausal methodsmethods areare::

chainchain ratioratio method,method, consumptionconsumption levellevel method,method, endend useuse method,method, leadingleading indicatorindicator

method,method, andand econometriceconometric methodmethod..

ToTo enableenable thethe productproduct toto reachreach aa desireddesired levellevel ofof marketmarket penetration, penetration, aa suitablesuitable

marketingmarketing plan,plan, coveringcovering pricing,pricing, distribution,distribution, promotion,promotion, andand service,service, needsneeds toto bebe

developeddeveloped..

1a Project Mgt Session

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