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Market Analysis

Market Analysis is an important tool to study the degree of attractiveness of a market that a company wants enter in the near future. This tool is used to study the current pattern of the market and evaluate future opportunities or threats and then decide whether or not it will be fruitful to enter into that particular market. The results of this analysis, assists an organization in making investment decisions.

Let’s discuss the dimensions of market analysis as outlined by David Aaker:

1. Market Size:

Market size refers to the current and potential volume of the selected market. The organization studies the growth potential of a particular market and decides to enter into the market only if the results match their expectation.

For example, the rise in demand of Smartphone has given a boost to several product development companies in the electronic industry. Some of the key parameters used by the organizations to gauge the potential of the industry are number of smart phone users and the purchasing power of the customers from different locations. The result obtained from this data can form an important basis for the organization to measure the market size and decide whether or not to enter into the market.

2. Market Trends:

It is very important for an organization to be updated with the market trends of the industry. They should keenly observe the behaviour of the customers and the steps taken by the competitors. Before entering a market, it is very important for an organization to analyze the direction of the market, whether it is expanding or  contracting.

3. Market Growth Rate and Profitability:

Growth projection and profitability is another dimension of market analysis. Companies make use of tools like Product Diffusion Curves to forecast inflection points in growth projections. On the other hand, market profitability can be predicted by using Porter’s Five Forces model, i.e., the analysis of market trend by taking into account threat of new entrants, a threat of substitutes, bargaining power of customers, bargaining power of suppliers, and the competitive rivalry.

4. Industry Cost Structure:

This dimension is about reducing costs by identifying and eliminating non value adding activities. Non-value adding activities can be identified by using value chain analysis. When the organization focuses and invests only on the activities that are critical for value creation, it can develop a competitive edge over the competitors in the market.

5. Distribution Channels:

Selecting effective distribution channels and identifying emerging channel partners helps an organization better understand new and easy ways to reach the customers and gain a competitive edge.

6. Key Success Factors:

Patents, technological superiority, channel partners, accessibility to resources may be some of the strengths of an organization. These success factors must be identified to utilize opportunities and remain competitive.

Proper analysis prior to entering a new market prevents an organization from wasting resources. It also helps an organization to understand what they need to accomplish before entering a new market.

A local company may boast the best surfboards around, but if it is situated in the Texas Panhandle a lack of sales could make waves. Similarly, a retirement home attempting to attract business through the latest technology might soon find itself in its twilight years. Companies that aspire to achieve sustained success in the marketplace must first perform a market analysis.

Market analysis involves examining market data to identify patterns and predict future events. The purpose of performing a market analysis is to understand the attractiveness of a market. David Aaker outlined the following dimensions of a market analysis:

1. Market Size—This dimension defines the size and potential of the markets under consideration. Market size is calculated on the basis of current sales volume for the market. Another important consideration for measuring market size is its future growth potential, so appropriate assumptions need to be made regarding market growth rates.

   Example of Market Size: The market for sports equipment typically varies from region to region. In areas with longer summers, the demand for tennis and golf equipment is generally higher. In mountainous regions there is a larger demand for skiing and hiking apparel. The population in regions may be similar, but the market size of each region may vary greatly for each specific product line.

2. Market Trends—Trends show the overall growth or decline of a market, competitor activities and customer behavior over time. Current market trends can also help in predicting future market trends.

   Example of Market Trends: The timing of major sporting events often results in an increased demand for particular products. For example, branded soccer balls and jersey sales increase every four years leading up to and during the World Cup.

3. Market Growth Rate and Profitability—Market growth rate forecasts use previous data and future trend indications to predict the future growth rate of markets. Product diffusion curves are used to predict inflection points in growth projections. Market profitability is often evaluated using Porter’s Five Forces model.

   Example of Market Growth Rate and Profitability: As international trade and growth in developing countries increase, it is possible to evaluate the potential acceptance rate of hi-tech features on bicycles in markets traditionally dominated by low-cost versions. For example, observing the patterns of user adoption of ceramic disk brakes in France may lead to an understanding of similar patterns in countries such as China.

4. Industry Cost Structure—Value Chain Analysis can be used alongside industry cost structure to identify value-adding activities and reduce costs by eliminating those activities that do not add value. Focusing on activities that are critical to the company can help develop a competitive advantage and prevent wastage of resources.

   Example of Industry Cost Structure: In the twentieth century, the banking industry typically relied on physical branches for addressing customer needs. However, the cost structure for the industry has changed significantly in recent times, with many customers preferring to do most of their banking transactions online, or through Automated Teller Machines (ATMs).

5. Distribution Channels—Analyzing the effectiveness of existing distribution channels and identifying emerging channels help a company understand its ability to reach customers and identify new opportunities to gain a competitive advantage. Companies with existing distribution channels may find it easier to launch similar types of products targeted at similar market segments.

   Example of Distribution Channels: As with most other industries, online sales and distribution have greatly impacted the marketing and sale of sporting goods. Online representation of the value of the product is crucial to ensure the customer is comfortable enough with the product to purchase it without actually being able to touch it. Relationships with shipping companies become equally important as the customer expects quick and reliable delivery.

6. Key Success Factors—Identifying key success factors helps an organization focus on existing strengths that have contributed to success and seize opportunities that can give it a competitive advantage. Such factors might include accessibility to essential resources, distribution channels, patents, operational efficiencies, technological superiority and so on.

   Example of Key Success Factors: The success of an online swimwear provider may be quantified with a few key factors such as the ability of the customer to receive clothing that fits without the benefit of trying it on, the ability of the company to keep shipping costs low enough to compete with brick-and-mortar stores and the ability to offer a broad range of product choices to maximize the overall appeal of the site.

Companies searching for success must be prepared to execute when presented with the opportunity. The prep work of any marketplace resident should include analyzing market size, market trends, market growth rate, industry cost structure, distribution channels and key success factors.

David Aaker’s outline of the dimensions of a market analysis can be found in Aaker, D.A. (2010), Marketing Research, New Jersey: John Wiley and Sons.