Measuring Market Opportunities: Forecasting and Market Knowledge 5 Measuring Market Opportunities: Forecasting and Market Knowledge

Key Questions Before Making a Forecast. Purpose of the forecast? What specifically needs to be forecast? Importance of the past to the future? Method(s) to be used for forecasting? What could change the forecast? Forecast horizon? Long term ≥ 10 yrs; Medium Term: up to 5 yrs; Short term: up to 1 year. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. The Sales Forecast. Is based on a specific marketing plan. Stated as dollars or units. Estimate market and sales potential first. Establish marketing goals and broad strategies before making a sales forecast. Typically covers a 1-year period. Once made, the forecast becomes a key controlling factor in all operational planning throughout the company. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Forecasting. More than a “Sales” thing. Other organizational functions also forecasts variables that affect their operations Commonly used methods Statistical forecasting using high volumes of historical or collected data Extrapolations Analogs Expert judgment/Delphi method Top down Bottom up Most companies use a combination of these Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Top Down vs. Bottom Up. Top Down: Assumption - international and national events affect the future behaviour of local variables Forecast of economic conditions and industry trends. Determine the product’s market potential Determine its sales potential Measure the firm’s current or desired market share Forecast sales for the firm Bottom Up: Assumption - local events affect the future behaviour of global variables Develop customers/salespeople input for future demand Combine the estimates to get a total forecast. Adjust the forecast by managerial insights, competition, and general economic trends. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Discussion Question 1. Of the two main approaches for sales forecasting - top-down and bottom-up - which is better? Why? Both approaches have merits: Each process typically has access to different information, and will likely result in different forecasts Using both methods concurrently adds confidence to the forecast, if both methods produce similar results If the results of the two approaches differ, useful discussions of the underlying assumptions will be surfaced Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Forecast is Projecting Evidence. Evidence from: History Field/Market research Other organizations Alternative future possibilities Plans, strategies, and actions for future Issues Changes Etc. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

How does one go from methods to math? Chain ratio method (how many total xxx?, how many fit yy criteria?, how many…?) Brand or category indices (e.g., best or worst regions, cities, months, circumstances, etc. for the occurrence of event xxx) What’s the logic behind the chain ratio method? # of households in target market times concept purchase intent = # of households that will try if aware # of households that will try if aware times awareness adjustment = # of households will try if they find product at their store # of households will try if they find product at their store times distribution adjustment = # who will try the product What’s the logic behind brand or category indices? Category Development Indices report the ratio of consumption in a certain category to population in a defined geographical area. Brand Development Indices compare sales for a given brand to population in a defined geographic area Commonly used to assess whether a category or brand has above-average or below-average penetration in different geographic markets Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Ideas for new products or new ventures: How fast will customers adopt? Early majority 34% Late adopters 13.5% 16% 2.5% Innovators Laggards and Non-adopters Source: Adapted with permission from Marketing, 11/e, Acetate 8-8, by Michael J. Etzel, Bruce J. Walker, and William J. Stanton. The McGraw-Hill Companies, Inc. © 1997. All rights reserved.

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Discussion Question 4. How fast will the adoption curve move for a particular innovation? Diffusion of innovation factors, in order of importance (Rogers 1983): (1) risk (2) relative advantage (3) relative simplicity (4) compatibility with current behavior (5) ease of small-scale trial (6) ease of communication of benefits. Then ask, “What are the implications of diffusion theory for forecasting new product market penetration? Diffusion theory suggests that high penetration levels are rare at the outset. Typically, first-year penetration levels include some but not all of the innovators, i.e., less than 2½ percent will likely adopt in year one. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Targeting Attractive Market Segments 6 Targeting Attractive Market Segments

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Discussion Questions 1. What’s a market? 2. What’s a market segment? What’s a market? A group of individuals or organizations (i.e., buyers) having the willingness and ability to buy goods and services to satisfy a class of want or need What’s a market segment? A group of potential customers in a market who share similar wants and needs that are different from the wants and needs of consumers in other segments Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Objectives of Market Segmentation Identify a homogeneous segment that differs from other segments Specify criteria that define the segment Determine segment size and potential Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Defining Market Segments Three good ways to do it. Who the customers are Where they are How they behave Ask, for each approach, “What tools do we have to define segments this way? Can you think of examples of markets typically segmented this way?” Who? Tools: demographic descriptors (age, income, gender, education, etc.): cereal, clothing, cosmetics, some magazines Where? Tools: geographic descriptors: suntan lotion, snow blowers, trade areas for retail stores How they behave? Tools: Benefits sought: bicycles of various types, computers of various types Product usage: key accounts among organizational buyers Lifestyle/psychographics: health clubs, automobiles/SUVs Social class: jewelry, automobiles Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Segmentation variables. Geographic: Region, country, population density, climate… Demographic: Age, gender, income, occupation, What else???… Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Segmentation variables. Psychographics: personality, lifestyles, values, attitudes… Behavioral: benefits sought, usage rate, brand loyalty, end use, readiness to buy, decision maker(s)… (George Day, 1980) Top-down approach: start with the total population and divide it into segments. Bottom-up approach: start with a single customer and build on that profile Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

1. Choose criteria to measure market attractiveness and competitive Which Segments to Target? Constructing a Market Attractiveness/Competitive-Position Matrix 1. Choose criteria to measure market attractiveness and competitive 2. Weigh market attractiveness and competitive position factors to reflect their relative importance. 3. Assess the current position of each potential target market on each factor. 4. Project the future position of each market based on expected environmental, customer, and competitive trends 5. Evaluate implications of possible future changes for business strategies and resources requirements. 7

A Useful Tool for Assessing Market Segments: Segment Rating Chart WEIGHT RATING (0-10) TOTAL Market attractiveness factors Customer needs and behavior .5 10 5.0 Segment size and growth rate .3 7 2.1 Macro trends .2 8 1.6 Total: Market attractiveness 1.0 8.7 Competitive position factors Opportunity for competitive advantage .6 4.2 Capabilities and resources 5 Industry attractiveness 1.4 Total: Competitive position 6.6 Where does the necessary data come from to support the factor ratings? Primary and secondary marketing research Analytical frameworks from earlier chapters

Implications of Alternative Positions Within the Market-Attractiveness/Competitive-Position Matrix Weak Medium Strong Build selectively: Spec. in limited strengths Seek to overcome weak. Withdraw if indications of sustainable growth are lacking Desirable Potential Target Invest to build: Challenge for leadership Build selectively on strengths Reinforce vulnerable areas Desirable Potential Target Protect position: Invest to grow at max. digestible rate Concentrate on maintaining strength High Limited expansion or harvest: Look for ways to expand w/out high risk; otherwise min. invest. and focus operations Desirable Potential Target Build selectively: Emphasize profitability by increasing productivity Build up ability to counter competition Manage for earnings: Protect existing strengths Invest to improve position only in areas where risk is low Med. Market Attractiveness Divest: Sell when possible to maximize cash value Meantime, cut fixed costs & avoid further investment Manage for earnings: Protect position Minimize investment Protect and refocus: Defend strengths Seek ways to increase current earnings without speeding market’s decline Low Sources: Adapted from George S. Day, Analysis for Strategic Market Decisions (St. Paul: West, 1986), p. 204; D. F. Abell and J. S. Hammond, Strategic Market Planning Problems and Analytical Approaches (Englewood Cliffs, NJ: Prentice Hall, 1979); and S. J. Robinson, R. E. Hitchens, and D. P. Wade, “The Directional Policy Matrix: Tool for Strategic Planning,” Long Range Planning 11 (1978), pp. 8-15. 14

Differentiation and Positioning 7 Differentiation and Positioning

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. What is Positioning? A couple of definitions Creating distinct and valued physical and perceptual differences between one’s product and its competitors, as perceived by the target customer. The act of designing the firm’s market offering so that it occupies a distinct and valued place in the minds of its target customers. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Other Positioning Strategies Re-positioning: changing the identity of a product, relative to the identity of competing products, in the collective minds of the target market. De-positioning: attempting to change the identity of competing products, relative to the identity of your own product, in the collective minds of the target market. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Positioning Concepts three types: Functional positions Solve problems Provide benefits to customers Get favorable perception by investors and lenders Symbolic positions Self-image enhancement Ego identification Belongingness and social meaningfulness Affective fulfillment Experiential positions Provide sensory stimulation Provide cognitive stimulation Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Physical vs. Perceptual Positioning Analysis Exhibit 7.3 Physical positioning Technical orientation Physical characteristics Objective measures Data readily available Physical brand properties Large number of dimensions Represents impact of product specs and price Direct R&D implications Perceptual positioning Consumer orientation Perceptual attributes Perceptual measures Need for marketing research Perceptual brand positions and positioning intensities Limited number of dimensions Represents impact of product specs and communication R&D implications need to be interpreted Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 2

Product Mix Strategies Market penetration versus market skimming Premium Goods Penetra- tion Super Bargain High Quality Over- Pricing Average Quality Bargain Medium Hit and Run Shoddy Goods Cheap Goods Low High Medium Low Price Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Generic Competitive Strategies Exhibit 7.1 Competitive Advantage Lower Cost Differentiation Broad Target Cost Leadership Strategy Differentiation Strategy Narrow Target Focus Strategy (Differentiation Based) Competitive Scope Source: Adapted from Michael Porter, Competitive Advantage,New York: The Free Press, 1985, p. 12.

Steps in the Positioning Process Exhibit 7.4 (1 of 2) 1. Identify a relevant set of competitive products serving a target market. 2. Identify the set of determinant attributes that define the “product space” in which positions of current offerings are located. 3. Collect information from a sample of customers and potential customers about perceptions of each product on the determinant attributes. 4. Determine product’s current location (positioning) in the product space and intensity thereof. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 3

Steps in the Positioning Process Exhibit 7.4 (2 of 2) 5. Determine customers’ most preferred combination of determinant attributes. 6. Examine the fit between preferences of market segments and current position of product (market positioning). 7. Write positioning statement or value proposition to guide development and implementation of marketing strategy. 8. Position Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 4

Some Key Questions Concerning Positioning Decisions For whom are they written? In what sort of language? Should they focus on features or benefits? How many differentiating attributes should anchor them? For whom are positioning statements or value propositions written? An internal audience: marketing decision makers and ad agencies Should they be written in catchy consumer language or “plain prose?” Plain prose. The ad agency or other creative staff will develop the catchy consumer language, based on the chosen positioning. Can the class think of examples of catchy current tag lines and the positioning they represent? Should they focus on features or benefits? Why? Benefits, which are ultimately why people buy (e.g., safety, for Volvo, vs. side door airbags) What’s a feature? A physical attribute of the good or service itself What’s a benefit? The end-use consequences that the user will experience by using the product On how many attributes should one’s positioning be based? One, or perhaps two at most. No more. Why? Clear and simple communication No confusion about what the product stands for. Examples? Volvo: Safety. Note there’s more Volvo could say, but here’s where they focus. (One attribute) Miller Lite beer: Tastes great. Less filling. (Two attributes) Domino’s Pizza: Originally, fast delivery. Later changed to hot delivery. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Marketing Strategies for New Market Entries 8 Marketing Strategies for New Market Entries

Marketing Strategy: Introduction Stage. Most important attributes at this stage are: Price & Promotion Price Low High High-Profile Strategy Preemptive Penetration Strategy High Promotion Selective Penetration Strategy Low-Profile Strategy Low Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Marketing Strategy: Introduction Stage. 1.High-Profile Strategy (High price-High Promotion) When? - High control over offering - Low fear of competition 2. Selective Penetration Strategy (High Price-Low Promotion) When? - High profitability - High fear of competition 3. Preemptive Penetration Strategy (Low Price-High Promotion) When? - Strongly felt buyer need - Easy competitive entry 4. Low-Profile Strategy (Low Price-Low Promotion) When? - Current Production constraints - Large potential market Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

How do opportunities evolve over time? Product category sales (real dollars) Profit per unit Profit/unit Sales Life cycle extension Growth Competitive turbulence Maturity Decline or Introduction Ask students the following questions: Is the product life cycle concept useful? Why or why not? The product life cycle is concerned with the sales history of a product or product class. The concept holds that a product’s sales change over time in a predictable way and that products go through a series of five distinct stages: introduction, growth, shakeout, maturity, and decline. Each of these stages provides distinct opportunities and threats, thereby affecting the firm’s strategy as well as its marketing programs. Despite the fact that many new products do not follow such a prescribed route because of failure, the concept is valuable in helping management look into the future and better anticipate what changes will need to be made in strategic marketing programs. What are the product life-cycle limitations? The product life-cycle model’s major weakness lies in its normative approach to prescribing strategies based on assumptions about the features or characteristics of each stage. It fails to take into account that the product life cycle is driven by market forces expressing the evolution of consumer preferences (the market), technology (the product), and competition (the supply side). Time (years) Source: Reprinted with permission from p. 60 of Analysis for Strategic Marketing Decisions, by George Day. Copyright © 1986 by West Publishing Company. All rights reserved.

Categories of New Products Defined According to Their Degree of Newness to the Company and Customers in the Target Market (Exhibit 8.4.) High 20% 10% New product lines New-to-the world products Newness to the company Additions to existing product lines 26% 26% Revisions/ improvements to existing products 11% 7% Repositionings Cost reductions Low Low High Newness to the market Source: New Products Management for the 1980s (New York: Booz, Allen & Hamilton, 1982). 2

Business Analysis for New Product. Product’s relationship to existing line Development Costs Available Personnel and facilities Competition and Market acceptance Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Discussion Question 1.Is it better to be a market pioneer, or a follower? What are the advantages for pioneers? First choice of market segments and positions Defines the rules of the game Distribution advantages Economies of scale and experience High switching costs for early adopters Possibility of positive network effects Possibility of preempting scarce resources to suppliers What are the advantages for followers? Ability to take advantage of pioneer’s positioning mistakes Ability to take advantage of pioneer’s product mistakes Ability to take advantage of pioneers marketing mistakes Ability to take advantage of pioneer’s limited resources Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Some Advice for Would-Be Pioneers Being a pioneer without the basis for sustainable competitive advantage is a trap! First mover advantage is trumped by pioneers who are better. Best beats first. Concentrate on being best. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Discussion Question 2. When, and for whom, does it make sense to pursue a pioneer strategy? A pioneering firm stands the best chance for long-term success in market-share leadership and profitability when: The new product-market is insulated from the entry of competitors, at least for a while, by strong patent protection, by proprietary technology (such as a unique production process), by substantial investment requirements, or by positive network effects. The firm has sufficient size, resources, and competencies to take full advantage of its pioneering position and preserve it in the face of later competitive entries. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Discussion Question 3. When, and for whom, does it make sense to pursue a follower strategy? A follower will most likely succeed when: There are few legal, technological, or financial barriers to inhibit entry. It has sufficient resources or competencies to overwhelm the pioneer’s early advantage. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Strategies for Growth Markets 9 Strategies for Growth Markets