Topic 

4 ‐ Market Analysis

EM-512
Project Evaluation and
Feasibility Analysis (PEFA)
Resource Person
Dr. Syed Amir Iqbal.
Professor,
Department of Industrial and Manufacturing Engineering,
NED University of Engineering and Technology.

Unit 4
Market & Demand Analysis

Resource Person
Dr. Syed Amir Iqbal.
Professor,
Department of Industrial and Manufacturing Engineering,
NED University of Engineering and Technology.

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 1
Topic 4 ‐ Market Analysis

Contents

 Situational analysis and specification of objectives

 Collection of secondary information
 Conduct of market survey
 Characterization of the market
 Demand forecasting
 Uncertainties in demand forecasting
 Market planning

Why to do project?

To sell it to the customers

 Which customers segment?
 What customer wants?
 What variants needed?
 How many will be sold?
 What must the break‐even?
 When to market?
 What are potential market?
 Are distributions available?
To reply these all, do situational analysis.

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 2
Topic 4 ‐ Market Analysis

Situational Analysis

It is performed by communicating with Potential

 Customers
Competitor’s Loyal
 Distributors
 Retailers
Conduct survey to figure out
 Competitors Occasional New
 Suppliers
 Distribution channels Former

Key Steps in Market & Demand Analysis

Collection of Demand
Secondary Forecasting
Information

Situational
Analysis and Characterisation
Specification of the Market
of Objectives

Conduct of Market
Market Survey Planning

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 3
Topic 4 ‐ Market Analysis

Types of Information

Sources of Secondary Information

 Pakistan Bureau of Statistics
 The official Gateway of Pakistan (ministries
website)
 Ministry of Production and Industries
 Database of Industrial Associations of
Pakistan
 Chamber of Commerce
 Ease of doing business (World Bank)
 Global Competitiveness Report (we Forum)
 Pakistan Stock Exchange (PSE)
 Business Recorder

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 4
Topic 4 ‐ Market Analysis

Primary Information
Secondary information, often
does not provide a comprehensive
basis for market and demand
analysis.

Census
 It is employed on entire population, such as census or elections.
 Costly for large population

Sample Survey
 It is employed on sample population, such as galop survey.
 Less costlier than census

Target of Market Surveys

 Total demand and rate of growth of demand
 Demand in different segments of the market
 Income and price elasticities of demand
 Motives for buying
 Purchasing plans and intentions
 Satisfaction with existing products
 Unsatisfied needs
 Attitudes toward various products
 Distributive trade practices and preferences
 Socio‐economic characteristics of buyers

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 5
Topic 4 ‐ Market Analysis

Steps to do Market Surveys

Typically, a sample survey involves the following steps:
1. Define the target population.
2. Select the sampling scheme and sample size.
3. Develop the questionnaire.
4. Recruit and train the field investigators.
5. Obtain information as per the questionnaire from the sample of 
respondents.
6. Scrutinize the information gathered.
7. Analyze and interpret the information.

Characterization of Market
Based on the information gathered from secondary sources and
through the market survey, the market for the product/service may
be described in terms of the following:
 Effective demand in the past and present
 Breakdown of demand
 Price
 Methods of distribution and sales promotion
 Consumers
 Supply and competition
 Government policy

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 6
Topic 4 ‐ Market Analysis

Methods of Demand Forecasting

Qualitative Methods Quantitative Methods Casual Methods

• Rely essentially on  • Based on analytical  • More analytical than 

the judgment of  models the preceding methods, 
experts • Generate forecasts on  • Seek to develop 
• translate qualitative  the basis of analysis of  forecasts on the basis of 
information into  the historical time  cause‐effect 
quantitative estimate series.  relationships specified 
• Namely; in an explicit, 
• Namely; quantitative manner. 
• Moving average
• Jury of expert  • Namely methods are;
opinion • Trend Projection
• Exponential  • Chain Ratio 
• Delphi Method • Consumption level
Smoothing
• End use
• Leading Indicator
• Economic

Qualitative Methods
Jury of executive opinion

• Involves small group of high‐level experts and 
managers
• Combines managerial experience with statistical 
models
• Quick decisions but group think is disadvantage

Delphi method

• Iterative group process, continues until consensus is 
reached
• 3 types of participants; Decision makers, Staff, 
Respondents

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 7
Topic 4 ‐ Market Analysis

Quantitative Methods: Moving Average

• 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

Quantitative Methods: Trend Projection

• 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  ^
y^ = a + bx
where y = computed value of the variable to
be predicted (dependent variable)
technique a = y-axis intercept
b = slope of the regression line
x = the independent variable

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 8
Topic 4 ‐ Market Analysis

Quantitative Methods: Trend Projection

Equations to calculate the regression variables

y^ = a + bx

xy - nxy
b=
x2 - nx2

a = y - bx

Quantitative Methods: Trend Projection

Time Electrical Power
Year Period (x) Demand x2 xy
2003 1 74 1 74
2004 2 79 4 158
2005 3 80 9 240
2006 4 90 16 360
2007 5 105 25 525
2008 6 142 36 852
2009 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.86

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 9
Topic 4 ‐ Market Analysis

Quantitative Methods: Trend Projection

Time Electrical Power
Year Period (x) Demand x2 xy
2003 1 74 1 74
2004 2 79 4 158
2005 3 80 9 240
The trend line
2006 4 is 90 16 360
2007^ 5 105 25 525
2008y = 56.70
6 + 10.54x 142 36 852
2009 7 122 49 854
∑x = 28 ∑y = 692 ∑x = 140
2 ∑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)(42)

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

Quantitative Methods: Trend Projection

160 –
Trend line,
150 – y^ = 56.70 + 10.54x
140 –
Power demand

130 –
120 –
110 –
100 –
90 –
80 –
70 –
60 –
50 –
| | | | | | | | |
2003 2004 2005 2006 2007 2008 2009 2010 2011
Year

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 10
Topic 4 ‐ Market Analysis

Quantitative Methods: Exponential Smoothing

• Form of weighted moving average

• Weights decline exponentially

• Most recent data weighted most

• Requires smoothing constant ()

• Ranges from 0 to 1

• Subjectively chosen

• Involves little record keeping of past data

Quantitative Methods: Exponential Smoothing

• Predicted demand = 142 Ford Mustangs

• Actual demand = 153

• Smoothing constant a = .20

Ft = Ft–1 +  ∙(At–1 ‐ Ft–1)

New forecast = 142 + .2(153 – 142) = 144.2  144 units

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 11
Topic 4 ‐ Market Analysis

Quantitative Methods: Exponential Smoothing

Quantitative Methods: Exponential Smoothing

Rounded Absolute Rounded Absolute

Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 12
Topic 4 ‐ Market Analysis

Casual Methods: Chain Ratio Method

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 :
Total amount of coffee sales : 174.5 million units
Proportion of coffee used at home : 0.835
Coffee used at home : 145.7 million units
Proportion of non-decaffeinated coffee used at home : 0.937
Non-decaffeinated coffee used at home : 136.5 million units
Proportion of instant coffee : 0.400
Instant non-decaffeinated coffee used at home : 54.6 million units
Estimated long-run market share for Maxim : 0.08
Potential sales of Maxim : 4.37 million units

Casual Methods: Consumption Level Method

The method estimates consumption level on the basis of elasticity
coefficients, the important ones being the income elasticity of demand
and the price elasticity of demand.

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 13
Topic 4 ‐ Market Analysis

Casual Methods: Consumption Level Method

The income elasticity of demand reflects the responsiveness of demand to variations in income.
It is measured as follows :
Q2-Q1 I 1 + I2
EI = x (4.9)
I2 –I1 Q2 +Q1

where EI = 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.

Example The following information is available on quantity demanded and income level: Q1
= 50 , Q2 = 55 , I1 = 1,000 and I2 = 1,020 . The income elasticity of demand is :

Casual Methods: Consumption Level Method

The price elasticity of demand measures the responsiveness of demand to variations in price.
It is defined as :
Q2 – Q1 P1 + P2
Ep = x
P2 – P1 Q2 + Q1
where Ep = price elasticity of demand
Q1 = quantity demanded in the base year
Q2 = quantity demanded in the following year
P1 = price per unit in the base year
P2 = price per unit in the following year

Example The following information is available about a certain product :

P1= Rs.600, Q1 = 10,000, P2 = Rs. 800, Q2 = 9,000. The price elasticity of demand is :

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 14
Topic 4 ‐ Market Analysis

Casual Methods: End Use 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.

Casual Methods: End Use 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.

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 15
Topic 4 ‐ Market Analysis

Casual Methods: End Use Method

Project Demand for a Chemical Producing Organization XCX:
This method may be illustrated with an example. A certain industrial chemical, XCX
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 XCX as shown in the following slide.
Consumption Projected Output in Projected Demand in
Coefficient * year X year X
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
* This is expressed in tonnes of XCX required per unit of output of the consuming industry

Casual Methods: 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 = p.N + ( q – p ) Nt-1 + ( q / N ) x ( Nt-1 )2

where nt, is the sales in period t, p is the coefficient of innovation, N is

the potential size of the market, q is the coefficient of imitation, and Nt
is the accumulative sales made until period.

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 16
Topic 4 ‐ Market Analysis

Casual Methods: Bass Diffusion Model - 1

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 of this older product. The sales trend
of the new product is expected to be similar to the older product.
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
1,000,000
n1 = 30,000
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

Casual Methods: Leading Indicator Method

Leading indicators are variables which change ahead of other variables,
the lagging variables. Hence, observed changes in leading indicators
may be used to predict the changes in lagging variables. For example,
the change in the level of urbanization ( 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.
The principal merit of this method is that it does not require a
forecast of an explanatory variable. 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.

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 17
Topic 4 ‐ Market Analysis

Casual Methods: Econometric Method

 An econometric model is a mathematical representation of economic
relationship(s) derived from economic theory. The primary objective
of econometric analysis is to forecast the future behaviour of the
economic variables incorporated in the model.

 Two types of econometric models are employed: the single equation

model and the simultaneous equation model

Casual Methods: Improving Forecasts

You can improve forecasts by following some simple guidelines:

• Check assumptions
• Stress fundamentals
• Beware of history
• Watch out for euphoria
• Don’t be dazzled by technology
• Stay flexible

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 18
Topic 4 ‐ Market Analysis

Casual Methods: Uncertainties

Demand forecasts are subject to error and uncertainty which arise

from three principal sources:

• Data about past and present market

• Methods of forecasting
• Environmental change

Casual Methods: Uncertainties

Given the uncertainties in demand forecasting, adequate efforts, along
the following lines, may be made to cope with uncertainties.
 Conduct analysis with data based on uniform and standard definitions.
 In identifying trends, coefficients, and relationships, ignore the abnormal or out-of-
the- ordinary observations.
 Critically evaluate the assumptions of the forecasting methods and choose a method
which is appropriate to the situation.
 Adjust the projections derived from quantitative analysis in the light of
unquantifiable, but significant, influences.
 Monitor the environment imaginatively to identify important changes.
 Consider likely alternative scenarios and their impact on market and competition.
 Conduct sensitivity analysis to assess the impact on the size of demand for
unfavorable and favorable variations of the determining factors from their most
likely levels.

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 19
Topic 4 ‐ Market Analysis

Casual Methods: Market Planning

A marketing plan usually has the following components:

• Current marketing situation

• Opportunity and issue analysis
• Objectives
• Marketing strategy
• Action programme

References

 Project Planning, Analysis and Selection, Prasanna Chandra, 9th
ed, McGraw Hill.
 Strategic Management: Concepts and Cases, FR David, 6th ed, 
Pearson.
 Capital Budgeting, Sandeep Goel, Business Express Press.

Dr. Syed Amir Iqbal, (Professor ‐ IMD, NED UET) 20