Chapter 2:

Market/Demand Analysis

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 2.1 Overview of Feasibility study
 Feasibility study:- is an analysis of the ability to
complete a project successfully, taking into
account legal, economic, technological, scheduling
and other factors..

 It allows project managers to investigate the possible

negative and positive outcomes of a project before
investing too much time and money.

For example, if a private school wanted to expand its

campus to alleviate overcrowding, it could conduct a
2
feasibility study to determine whether to follow through.
 This study might look at
 where additions would be built

 how much the expansion would cost

 how the expansion would disrupt the school year

 how students' parents feel about the proposed expansion

 how students feel about the proposed expansion

 what local laws might affect the expansion

 Business plan Vs Feasibility study

Reasons to Do a Feasibility Study
 Give focus to the project and outline
alternatives by narrowing them
 Surface new opportunities through the
investigative process
 Identify reasons not to proceed
 Enhance the probability of success
 Provide quality information for decision
making
 Help to increase investment in the company

 Help in securing funding from the

sources 4
Reasons given not to do a Feasibility Study
 We know that it is feasible as an existing
business is already doing it
 Why do we do another feasibility study when
one was done just a few years ago?
 Feasibility studies are just a way for
consultants to make money
 The market analysis has already been done
by the business that is going to sell us the
equipment
 Feasibility studies are a waste of time 5
2.2 Market & Demand Analysis
Market:- is any place where the sellers can
meet with the buyers where there is a
potential for a transaction to take place.
 Marketing is a business activity of
presenting products or services to potential
customers in such a way as to make them
eager to buy
Market analysis:- is a process of
assessing the level of DD for the product
or service to be produced by the project.
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2.2.1 Role of Market/Demand Analysis
Market analysis usually ranks top in the
sequence of the core chapters of a feasibility
study.
 Analysts who have to calculate the socio – economic
costs and benefits of a project, can only start their job, if
market analyst delivers sales forecast and market
strategy.
 market analysis is obviously more ambitious and risky in
comparison to the other parts of a feasibility study, as it
has to fight with the future.
 The marketing demand and sales forecast is necessarily
subjective and vague, since, in the final end it has to
deal with the behavior of human beings 7
2.2.2 Steps In market and Demand
Analysis

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 Collection of Demand
Secondary Forecasting
Information

Situational
Characterizat
Analysis and
ion of the
Specifications of
Market
Objectives

Conduct of Market
Market Survey Planning

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1- Steps. SITUATIONAL ANALYSIS AND SPECIFICATIONS OF
OBJECTIVES

 An informal survey of what information is available

in the area
 The analyst may informally talk to the customers,
competitors, middlemen, and others in the industry
 To learn about:
◦ the preferences and purchasing power of customers
◦ actions and strategies of competitors
◦ practices of the middlemen.

 To carryout formal study after this stage, it is necessary

to specify objectives of market study at this stage.
◦ May be structured in the form of questions.

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 The objectives of the market and demand analysis may be
to answer the following questions:
 Who are the buyers of the product?
 What is the total current demand for the product?
 How is the demand distributed temporally &
geographically?
 What is the break-up of demand for products of different
sizes?
 What price will the customers be willing to pay for the
improved product?
 How can potential customers be convinced about the
superiority of the new product?
 What channels of distribution are most suited for the
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product?
2 Steps COLLECTION OF SECONDARY
INFORMATION

 There are two types of secondary

information:
 General Sources of Secondary
Information
 Industry Specific Sources of Secondary
Information
 Evaluation of Secondary Information
 Timeliness and accuracy
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Secondary Sources of Data
1. Ethiopian Economic Survey
2. Census of Ethiopia
3. Reports of Export Working Groups on
Various Industries
4. Census of Manufacturing Industries
5. Monthly Statistical Bulletin
6. Annual Survey of industries
7. Guidelines to Industries
8. Publications of Advertising Agencies
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 3-Steps CONDUCT OF MARKET SURVEY

 Census Survey
 Sample Survey

 Steps in a Sample Survey

 Define the Target Population
 Select the Sample Size and Sampling Scheme
 Develop the Questionnaire
 Recruit and Train the Field Investigators
 Obtain Information as Per the Questionnaire
from the Sample of Respondents
 Scrutinize, analyze and interpret the Information
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 4 CHARACTERISATION OF THE MARKET

 Effective Demand in the Past and Present

Production + Imports – Exports – Change in stock level
 Breakdown of Demand
 Nature of Product
 Consumer Groups
 Geographical Division
 Price
 Methods of Distribution and Promotion
 Consumers
 Supply and Competition
 Government Policy

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 5. DEMAND FORECASTING

Two main types: qualitative and quantitative

I. Qualitative (Subjective) Methods
 These methods rely essentially on the judgment
of experts to translate qualitative information into
quantitative estimates
 Used to generate forecasts if historical data are
not available (e.g., introduction of new product)
 The important qualitative methods are:
 Jury of Executive opinion Method
 Delphi Method

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 A. JURY OF EXECUTIVE OPINION METHOD

 Involves small group of high-level experts and

managers
 Pool opinions of these experts
 Group estimates demand by working together
 Combines managerial experience with statistical
models

17
A. JURY OF EXECUTIVE OPINION
METHOD
 Main advantages
 Combine knowledge and expertise from various
functional areas
 People who have best information on future
developments generate the forecasts
 Main drawbacks
 Expensive
 No individual responsibility for forecast quality
 Risk that few people dominate the group

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B. DELPHI METHOD
 Panel of experts, queried iteratively
Anonymous written responses encourage
honesty and avoid that a group of experts are
dominated by only a few members

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 B. DELPHI METHOD
 Approach

Coordinator Each expert Coordinator

Sends Initial writes response performs
Questionnaire (anonymous) analysis

Coordinator Coordinator
sends updated
No Consensus Yes
summarizes
questionnaire reached? forecast

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5 DEMAND FORECASTING

B. DELPHI METHOD
 Main advantages
 Generate consensus
 Can forecast long-term trend without availability
of historical data
 Less expensive
 Main drawbacks
 Slow process
 Experts are not accountable for their responses

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5 Steps DEMAND
FORECASTING

II. Quantitative (Objective) methods

 Employ one or more mathematical models that
rely on historical data and/or causal/indicator
variables to forecast demand.
 Major methods include:
 time series projection methods
 causal models

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i. TIME SERIES PROJECTION METHODS
 Set of evenly spaced numerical data
 Obtained by observing response variable at regular time
periods
 Forecast based only on past values, no other variables
important
 Assumes that factors influencing past and present will
continue
 The important time series projection methods are:
Trend Projection Method

Exponential Smoothing Method

Moving Average Method

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1. Trend Projections
Fitting a trend line to historical data points to
project into the medium to long-range
Linear trends can be found using the least
squares technique

y^ = a + bx
where y^ = computed value of the variable to be
predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable (time
variable)
Interpretation of Coefficients
 Slope (b)
 Estimated Y changes by b for each 1 unit
increase in X
 If b = 2, then sales (Y) is expected to
increase by 2 for each 1 unit increase in
time (X)
 Y-intercept (a)
 Average value of Y when X = 0

 If a = 4, then average sales (Y) is

expected to be 4 at time 0
Least Squares Method
Equations to calculate the regression variables

y^ = a + bx

Sxy - nxy
b=
Sx2 - nx2

a = y - bx
Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2008 1 74 1 74
2009 2 79 4 158
2010 3 80 9 240
2011 4 90 16 360
2012 5 105 25 525
2013 6 142 36 852
2014 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.86

∑xy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
∑x - nx
2 2 140 - (7)(4 2)

a = y - bx = 98.86 - 10.54(4) = 56.70

Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2008 1 74 1 74
2009 The
2 trend line is79 4 158
2010 3 80 9 240
2011 4 ^y = 56.70 90
+ 10.54x
16 360
2012 5 105 25 525
2013 6 142 36 852
2014 7 122 49 854
Sx = 28 Sy = 692 Sx2 = 140 Sxy = 3,063
x=4 y = 98.86

Sxy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
Sx - nx
2 2 140 - (7)(4 2)

a = y - bx = 98.86 - 10.54(4) = 56.70

Least Squares Example
Trend line,
160 – y^ = 56.70 + 10.54x
Power demand

150 –
140 –
130 –
120 –
110 –
100 –
90 –
80 –
70 – | | | | | | | | |
60 – 2008 2009 2010 2011 2012
Year
2013 2014 2015 2016
2. Exponential Smoothing Method
 forecasted results are modified in light of observed
errors in the past
 Requires smoothing constant ()
 Ranges from 0 to 1

 Subjectively chosen

 Involves little record keeping of past data

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 Exponential Smoothing

New forecast = Last period’s forecast

+  (Last period’s actual demand
– Last period’s forecast)

Ft = Ft – 1 + (At – 1 - Ft – 1)

where Ft = new forecast

Ft – 1 = previous forecast
 = smoothing (or weighting)
constant (0 ≤  ≤ 1)
Exponential Smoothing Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant  = .20
Exponential Smoothing Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant  = .20

New forecast = 142 + .2(153 – 142)

Exponential Smoothing Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant  = .20

New forecast = 142 + .2(153 – 142)

= 142 + 2.2
= 144.2 ≈ 144 cars
 3. Moving Average Method
 Forecasted sales for next period is the
average of sales of past periods
 MA is a series of arithmetic means
 Used if little or no trend
 Used often for smoothing
 Provides overall impression of data over
time
∑ demand in previous n periods
Moving average = n
Moving Average Example
Actual 3-Month
Month Sales Moving Average
January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11 2/3
May 19 (12 + 13 + 16)/3 = 13 2/3
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19 1/3
Weighted Moving Average
 Used when trend is present
 Older data usually less important
 Weights based on experience and
intuition

∑ (weight for period n)

Weighted x (demand in period n)
moving average = ∑ weights
 Weights Applied Period
3 Last month
2 Two months ago
1 Three months ago
6 Sum of weights

Actual 3-Month Weighted

Month Sales Moving Average
January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 121/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 141/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 201/2
ii. Causal methods

 Causal methods seek to develop forecasts

on the basis of cause-effects relationships
specified in an explicit, quantitative manner.
 High-Low method
 Chain Ratio Method
 Consumption Level Method
 End Use Method
 Leading Indicator Method
 Regression analysis
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A. High-Low method

 it uses only the highest and lowest observation

values of the dependent and independent
variables.
 The demand function is estimated by using these
two points to calculate the slope coefficient and the
constant or intercept.
 b = difference between the highest demand and lowest demand in
the past divided by the difference between the highest and the
lowest of the independent variable.
 a = Y-bX (take either highest or lowest observation values for
X and Y)

40
A. High-Low method
 Illustration:
The following data were about sales of a certain product
and no. of households over the past five years. Use no.
of households as determinant for demand
Year No. of households Actual sales in
thousands
2006 500 120
2007 450 110
2008 600 135
2009 660 140
2010 710 162

 b = 200; a = 20,000 ; dd function: Y = 20000 + 200X 41

B. CHAIN RATIO METHOD
 Market Potential for Men leather coats
with fur in Ethiopia
 Population next year(U)= 100,000,000
 Proportion of U that are age over 18 (A) = 75%
 Proportion of A that are men (M) = 50%
 Proportion of M that have annual incomes over Br65000
(I) = 50%
 Proportion of I that live in cold areas (C) = 50%
 Proportion of C that are fashion conscious (F) = 30%
 Proportion of F that are early adopters (E) = 10%
 Average number of coats purchased per year (Y) = 0.5
coats
 Average price per coat (P) = Br4,000
What is potential demand for this product next year?

42
C. CONSUMPTION LEVEL METHOD
 This method is used for those products that
are directly consumed. This method
measures the consumption level on the basis
of elasticity coefficients. The important ones
are
 Income elasticity of demand
 Price elasticity of demand

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D. END USE METHOD
 This method forecasts the demand based on
the consumption coefficient of the various uses
of the product.
 Is mostly used for intermediate products

It involves the following steps:

 Identify the possible uses of the product

 define the consumption coefficient of the product for

various uses
 project the output levels for the consuming industries

 derive the demand for the product

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D. END USE METHOD
 Illustration: A specialty wheat flour is used by four
industries. The Consn Coeff., the projected output
levels for these industries and the projected dd for
specialty wheat flour for next year are shown below.

Projected Demand for specialty wheat flour

Consumption Projected Output Projected Demand for sp
Coefficient next year wheat flour next year

Alpha 2.0 10,000 20,000

Beta 1.2 15,000 18,000
Kappa 0.8 20,000 16,000
Gamma 0.5 30,000 15,000
Total 69,000 45
E. LEADING INDICATOR METHOD

 This method uses the changes in the

leading indicators to predict the changes in
the lagging variables.
 Two basic steps:
1. Identify the appropriate leading indicator(s)
2. Establish the relationship between the leading
indicator(s) and the variable to forecast.

46
F. Regression Analysis
Used when changes in one or more independent
variables can be used to predict the changes in
Sales

Most common technique is simple

regression analysis

We apply this technique just as we did in

the trend projection method example
Simple Regression Analysis
Forecasting an outcome based on predictor
variables using the least squares technique

y^ = a + bx

where y^ = computed value of the variable to be

predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable though to
predict the value of the dependent
variable
 Simple Regression Analysis Example
Sales Local Payroll
(Br millions), y (Br billions), x
2.0 1
3.0 3
2.5 4
2.0 2 4.0 –
2.0 1
3.5 7 Sales
3.0 –

2.0 –

1.0 – | | | | | | |
0 1 2 Area
3 4payroll
5 6 7
Simple Regression Analysis Example

Sales, y Payroll, x y2 x2 xy
2.0 1 4 1 2.0
3.0 3 9 9 9.0
2.5 4 6.25 16 10.0
2.0 2 4 4 4.0
2.0 1 4 1 2.0
3.5 7 12.25 49 24.5
∑y = 15.0 ∑x = 18 ∑y2=39.5 ∑x2 = 80 ∑xy = 51.5

∑xy - nxy 51.5 - (6)(3)(2.5)

b= = = .25
x = ∑x/6 = 18/6 = 3 ∑x2 - nx2 80 - (6)(32)

y = ∑y/6 = 15/6 = 2.5 a = y - bx = 2.5 - (.25)(3) = 1.75

Simple Regression Analysis
Example
y^ = 1.75 + 0.25x Sales = 1.75 + 0.25(payroll)

If payroll next year

is estimated to be 4.0 –

Sales
Br6 billion, then: 3.25
3.0 –
Sales = 1.75 + .25(6)
Sales = Br3,250,000 2.0 –
| | | | | | |
1.0 0– 1 2 Area
3 4payroll
5 6 7
Multiple Regression Analysis
If more than one independent variable is to be
used in the model, linear regression can be
extended to multiple regression to accommodate
several independent variables

y^ = a + b1x1 + b2x2 …

Computationally, this is quite complex

and generally done on the computer
Multiple Regression Analysis
In the previous example, assume including interest
rates in the model gives the new equation:

y^ = 1.80 + 0.30x1 - 5.0x2

And if interest rate for the next year will be 12%, area
payroll is Br6 billion
Sales = 1.80 + 0.30(6) - 5.0(0.12) = 3.00
Sales = Br3,000,000
UNCERTANITIES IN DEMAND
FORECASTING

 Data about past and present markets.

 Lack of standardization
 Few observations
 Influence of abnormal factors
 Methods of forecasting
 Inability to handle unquantifiable factors
 Unrealistic assumptions
 Excessive data requirement

54
UNCERTANITIES IN DEMAND
FORECASTING

 Environmental changes
 Technological changes
 Shift in government policy
 Developments on the international scene
 Discovery of new source of raw material

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COPING WITH UNCERTAINTIES
 Conduct analysis with data based on
uniform and standard definitions.
 Ignore the abnormal or out-of-ordinary
observations.
 Critically evaluate the assumptions
 Adjust the projections.
 Monitor the environment.
 Consider likely alternative scenarios.
 Conduct sensitivity analysis
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6 Market Planning
 Marketing plan is product specific, market
specific , or company-wide plan that describes
activities involved in achieving specific marketing
objectives within a set time frame.

 A marketing plan shows the specifics of how you

will market or attempt to sell your product or
service.

57
6 Market Planning
It has the following key components
 1. Current marketing situation: market situation,
competitive situation, distribution situation, macro-
environment, etc.
 2. Opportunity and issue analysis: SWOT analysis
 3. Objectives: clear-cut, specific, and achievable.
 4. Marketing strategy: Target segment, positioning,
product line, price, distribution, sales force,
promotion,etc.
 5. Action program: what will be done, when it will
begin or be completed, who will accomplish the tasks,
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