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Market and Demand Analysis Demand Forecasting General considerations: 1. Factors involved in demand forecasting 2. Purposes of forecasting 3.

Determinants of demand 4. Forecasting demand for new products 5. Criteria of a good forecasting method 6. Presentation of a forecast to the management 7. Role of macro-level forecasting in demand forecasts 8. Recent trends in demand forecasting 9. Control or management of demand Demand Forecasting Accurate demand forecasting is essential for a firm to enable it to produce the required quantities at the right time and arrange well in advance for the various factors of production, viz., raw materials, equipment, machine accessories, labour, buildings, etc. In a developing economy like India, supple forecasting seems more important. However, the situation is changing rapidly. The National Council of Applied Economic Research.

Factors involved in Demand Forecasting

1. How far ahead? a. Long term eg., petroleum, paper, shipping. Tactical decisions. Within the limits of resources already available. b. Short-term eg., clothes. Strategic decisions. Extending or reducing the limits of resources. Factors involved in Demand Forecasting

2. Undertaken at three levels: a. Macro-level b. Industry level eg., trade associations c. Firm level 3. Should the forecast be general or specific (product-wise)? 4. Problems or methods of forecasting for new vis--vis well established products. 5. Classification of products producer goods, consumer durables, consumer goods, services. 6. Special factors peculiar to the product and the market risk and uncertainty. (eg., ladies dresses) Purpose of forecasting 1. Appropriate production scheduling. 2. Reducing costs of purchasing raw materials. 3. Determining appropriate price policy 4. Setting sales targets and establishing controls and incentives. 5. Evolving a suitable advertising and promotional campaign. 6. Purpose of short & long-term forecasting 7. Planning of a new unit or expansion of an existing unit. 8. Planning man-power and financial requirements. 9. Demand forecasts of particular products form guidelines for related industries (e.g. cotton and textiles). Length of forecasts Short-term forecasts upto 12 months, eg., sales quotas, inventory control, production schedules, planning cash flows, budgeting. Medium-term 1-2 years, eg., rate of maintenance, schedule of operations, budgetary control over expenses. Long-term 3-10 years, eg., capital expenditures, personnel requirements, financial requirements, raw material requirements.

Criteria of a good forecasting method 1. Accuracy measured by (a) degree of deviations between forecasts and actuals, and (b) the extent of success in forecasting directional changes. 2. Simplicity and ease of comprehension. 3. Economy. 4. Availability. 5. Maintenance of timeliness. Presentation of a forecast to the Management In presenting a forecast to the management should :1. Make the forecast as easy for the management to understand as possible. 2. Always pin-point the major assumptions and sources. 3. Give the possible margin of error. 4. Make use of charts and graphs as much as possible for easy comprehension. Recent trends in demand forecasting 1. More firms are giving importance to demand forecasting than a decade ago. 2. Since forecasting requires close cooperation and consultation with many specialists, a team spirit has developed. 3. Better kind of data and improved forecasting techniques have been developed. 4. There is a greater emphasis on sophisticated techniques such as using computers. 5. In spite of the application of newer and modern techniques, demand forecasts are still not too accurate. 6. Top-down approach is more popular then bottom-up approach. Control on management of demand 1. The key to management of demand is the effective management of the purchases of final consumers. 2. The management of demand consists in devising a sales strategy for a particular product. 3. It also consists in devising a product, or features of a product, around which a sales strategy can be built i.e. Product design, model change, packaging and even performance reflect the need to provide what are called strong selling points.

Situational Analysis & specification of objectives Situational Analysis: Predictions of sales program & means of carrying it. Understanding Customers needs & purchasing power Present market players. Growth Opportunities Specification of objectives: Who are the buyers?

Prospect of the product Price which a customer will be willing to pay Channels of distribution

Collection of Data Based on primary data: The following steps are required: The output required from the study Specifications of the data required Mode of collection of data Conducting the survey and obtain data Analysis & conclusion

Primary Data Advantages of Primary Data: The accuracy of the study will be high. Analysis will be easier, as data specifically required is collected.

Disadvantages of Primary Data: Testing of the questionnaire on insiders before survey to avoid vague answer from the respondents Confidential or embarrassing information may not be responded.

Secondary Data Based on secondary data:Two basic types of sources: Internal and External Internal: The past records of an organization offer substantial information. The information relating to the trends in sales can be used to get first a broad idea of the market condition. External: Market Research Organizations:- Like MARG, ABC , CMIE, Trade Journals etc. Trade Associations: Like FICCI, CII, Local chamber of industries etc. Government Research Organizations: Central Statistical Organization, RBI etc.

Advantages of Secondary Data: It is available easily and saves time. It may be cheaper than collecting it first hand, if the data required is standard data.

Data collected by professional research organizations may be more accurate and reliable Disadvantages of Secondary Data: For providing highly user-specific information, research organizations charge heavily. The user can often have no direct check on the quality of the data collection process of the research agency.

The plans of the user to enter into a specific area of the market may not remain confidential

Characterization of the market Effective Demand in the past & Present Breakdown of demand Price Methods of distribution & sales promotion Consumers Supply & competition Government policies SIMPLE MOVING AVERAGE

YEAR

QUARTER

NUMBER OF CYLINDERS

THREE QUARTER AVERAGE

FIVE QUARTER AVERAGE

Q1 Q2 Q3 Q4

1200 900 1000 750 1100 500 750 1300 1100 900 1200 1000 1033 883 950 783 783 850 1050 1100 1033 990 850 820 880 950 910 850

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

1400 1200 1000 800 600 400 200 0 1Q1 1Q2 1Q3 1Q4 2Q1 2Q2 2Q3 2Q4 3Q1 3Q2 3Q3 3Q4 DEMAND THREE QUARTER FIVE QUARTER

WEIGHTED MOVING AVERAGE WEIGHTS ATTACHED 3Q4= 60% 3Q3=30% 3Q2=10% WMA=1000*0.60+1200*0.30+900*0.10 =1050 EXPONENTIAL SMOOTHING F(t+1)=*D(t)+(1-)*F(t) F(t+1)=Forecast for year (t+1) D(t)=Demand for year (t) F(t)=Forecast for year (t) =Adjustment factor F(t+1)=0.30*1200+0.70*1000 =1060

EXPONENTIAL SMOOTHING

YEAR 1

QUARTER Q1 Q2 Q3 Q4

DEMAND 1200 900 1000 750 1100 500 750 1300 1100 900 1200 1000

FORECAST =0.30 1000 1060 1030 1021 940 988 842 814 960 1002 971 1040

FORECAST =.50 1000 1100 1000 1000 875 988 744 747 1024 1062 981 1091

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

CHAIN RATIO METHOD DEMAND FOR GYM Population (U) =20,00,000 Proportion of U that fall in area (A) = 2% Proportion of A that are men (B) = 55% Proportion of B b/w 10-35 age group (C) = 75% Proportion of C that go to Gym (D) = 1% Daily demand for Gym=20,00,000*0.02*0.55*0.75*0.01 = 165

CONSUMPTION LEVEL METHOD Income Elasticity of Demand Method Income Elasticity: This reflects the responsiveness of demand to variations in income. It is calculated as: E1 = [Q2 - Q1/ I2- I1] * [I1+I2/ Q2 +Q1] Where E1 = Income elasticity of demand Q1 = quantity demanded in the base year Q2 = quantity demanded in the following year I1 = income level in the base year I2 = income level in the following year Income Elasticity of Demand Method I1=12000 I2=14000 Q1=250 Q2=300 E1=[300250/14000-12000] * [12000+14000/ 300 +250] = 2.36 CONSUMPTION LEVEL METHOD Price Elasticity of Demand Method Price Elasticity: This reflects the responsiveness of demand to variations in price. It is calculated as: EP = [Q2 - Q1/ P2- P1] * [P1+P2/ Q2 +Q1] Where EP = Price elasticity of demand Q1 = quantity demanded in the base year Q2 = quantity demanded in the following year P1 = price level in the base year P2 = price level in the following year

Price Elasticity of Demand Method Q1=250 Q2=400 P1=3.5 P2=8 EP=0.59 Regression Models This is a statistical model is used when there is one or more factors that effects the changes in the dependent variable Simple Regression Model

Age 22 23 24 27 28 29 30 32 33 35 40

SBP 131 128 116 106 114 123 117 122 99 121 147

Age 41 41 46 47 48 49 49 50 51 51 51

SBP 139 171 137 111 115 133 128 183 130 133 144

Age 52 54 56 57 58 59 63 67 71 77 81

SBP 128 105 145 141 153 157 155 176 172 178 217

220 200 180 160 140 120 100 80 20 30 40 50 60 70 80 90

Multiple Regression Relation between a continuous variable and a set of i continuous variables y=a+ b1 X 1 + b2 X 2 +-------+ bi X i Partial regression coefficients bi Amount by which y changes on average when xi changes by one unit and all the other xis remain constant Measures association between xi and y adjusted for all other xi Example SBP versus age, weight, height, etc Qualitative Method Delphi Method: It consists of an effort to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until the results appear to converge along a single line of the issues causing disagreement are clearly defined. Developed by Rand Corporation of the U.S.A in 1940s by Olaf Helmer, Dalkey and Gordon. Useful in technological forecasting (non-economic variables).

Advantages 1. Facilitates the maintenance of anonymity of the respondents identity throughout the course. 2. Saves time and other resources in approaching a large number of experts for their views. Limitations/presumptions: 1. Panelists must be rich in their expertise, possess wide knowledge and experience of the subject and have an aptitude and earnest disposition towards the participants. 2. Presupposes that its conductors are objective in their job, possess ample abilities to conceptualize the problems for discussion, generate considerable thinking, stimulate dialogue among panelists and make inferential analysis of the multitudinal views of the participants. Qualitative methods Jury of executive method: Soliciting the opinions of a group of managers on expected future sales & combining them into a sales estimate. Advantages: It takes into consideration variety of factors like economic climate competitive advantage etc. Has immense appeal to managers who tend to prefer their judgment to mechanistic forecasting procedures.

Market planning Market planning contains Current market situation Market situation Competitive situation Distribution situation Macro-environment

Opportunity & issue analysis Objectives Marketing Strategy Action Program