Estimating potential demand is essential for many businesses as it helps them compete in today?s environments. Without estimating a business may end up overestimating demand, which could result in time, resources, space, and money being wasted. Likewise, a business could also end up underestimating demand, which could lead to cancellations, backorders, and unhappy customers who may go to competitors. However, multiplying a country expected per capita consumption by its population is not a good method for estimating potential demand. Given that it disregards all the other factors that could potentially affect demand (i.e. technological, financial, political, and legal forces). Moreover, one could question how reliable expected consumption is, when so many factors can affect it too (i.e. seasons, trends, price, and income). This essay will first discuss the difficulties in estimating demand, then the essay will move to analyse the determinants of demand, and finally the essay will examine the global business environment impact on demand.
Difficulties in estimating demand
History is filled with stories of companies or at times entire industries making serious strategic mistakes, because of incorrect demand forecasts. For example, ?in 1974 U.S. electric utilities companies made plans to double generating capacity by mid-1980s based on forecasts of a 7% annual growth in demand? (Barnett, F. William, 1990). However, demand only grew 2%. As a result, many projects had to be postponed or cancelled. These companies made the mistake of assuming ?that relationships driving demand in the past would continue unaltered? (Barnett, F. William, 1990). They failed to realise that history can be an unreliable guide as domestic economies become more international, new technologies emerge, and industries evolve. However, one could argue that demand forecasting methods have improved immensely since 1974. This of course has some truth to it, but forecasting demand still remains problematic as ever. Given that there are still no hundred percent accurate demand forecasting methods. Though, by combing different forecast methods one can improve accuracy and reduce large errors.
The problems with demand indicators:
Even though population is a key determinant of demand, using it in estimation can be problematic. For example, ?the 1984 population estimates by the Ethiopian government differed from the actual census account, by nine million persons out of a total of 42 million (The Economist, 1985, p.30). Furthermore, the use of population in estimations can also be problematic if the population is not segmented. For example, a company producing wine can?t simply multiply a country expected per capita consumption, by its population in order to estimate potential demand. Since, a population consist of people who don?t drink alcohol like under aged children. Likewise, one also needs to know how many out the population actually have buying power, as there is no point including babies in demand estimations for supercars. Thus, an undifferentiated market strategy, were all consumers are considered the same, is not a truthful way to forecast demand. Usually, this strategy only tends to work when the product is an everyday item like bread or milk. Therefore, using population without segmenting it first can lead to inaccurate results.
Secondly, one has to question the assumption that per capita is the most suitable indicator to use when estimating potential demand. According to Uslaner (1976) using per capita in estimations can lead to vastly distorted results, ?the use of per capita measures in demand analysis has been given little theoretical justification?and unless there is such justification, the employment of such transformations can lead?researchers to erroneous conclusions? (p125). However, this stance is of course not supported by everyone. Lyons William argues ?that per capita are almost always perfectly suitable for use?and that criticisms of the use of such indices are wrongly specified and misleading? (William, L, 1977, p177). These two opposing points of view demonstrate that there are no universally agreed upon indicators to use when estimating potential demand, but instead remain a cause of disagreement amongst economist and scholars.
Determinants of demand:
Per capita consumption and population are not the only factors affecting demand. Therefore, other factors affecting demand also need to be included in the estimation. For example, the failure to include income of consumer?s in the estimation could be seen as a weakness. Since, ?a key determinant of demand is the level of income evident in the appropriate country under analysis? (AllExperts). Usually, when income increases, demand for normal goods also increases. For example, China?s meat consumption per capita doubled between 1990 and 2002, as the population income per capita also increased (Guardian, 2009).
Hence, many firms nowadays use income elasticity of demand to measure the relationship between a change in quantity demanded for a product and a change in income. Simply put, demand for a product is considered inelastic, if consumers are prepared to pay almost any price for the product. In contrast, demand for a product can be considered to be elastic, if consumers will only pay a certain amount for the product. Additionally, income distribution and inequality can also affect demand. For example, if national income were redistributed from the rich to the middle class, the demand for luxury goods may rise (Sloman & Hinde, 2007).
Another determinant of demand is price. Often, ?when the prices of goods rise, the quantity demanded fall? (Sloman, & Hinde, 2007). For example, in 2009 Ryan Air saw a decrease in passengers after the UK government introduced ?10 travel tax (Done, K, 2009). In contrast, when prices decrease, the quantity demand will increase. For example, in 2008 Microsoft saw a 20% increase in sales after the price of its Xbox console was reduced (financial times, 2009). Thus, when prices rise and incomes stay the same, purchasing power is reduced (the income effect). These high prices can in turn make consumers switch to cheaper replacement goods (the Substitution effect). For example, in 2008 Euro star reported a 21.3% increase in passengers (guardian, 2008). According to Euro star’s commercial director Nick Mercer, more and more airline passengers are deciding to travel by Euro Star when going to mainland Europe, because it?s cheaper compared to airlines.
Furthermore, demand can also be affected by complementarily goods. For example, a fall in prices of CD players can increase the demand for CD discs. Likewise, tastes or preferences can also affect demand. Consumers taste, just like fashion can change and be influenced by many factors including: advertising, fashion, health, experience, culture, or friends. However, ?the demands for some products like milk or bread are not affected much by changes in taste? (Pape, J, 2000).
Moreover, differences in cultures can also affect demand. Often, ?what is valued in one culture may not be valued in another?hence demand for a new product also varies from country to country? (Thomas, J, R, 1993, p33). For example, KFC is popular in most western countries, but failed in India because it only offered plain fried chickens. Whereas, McDonalds succeeded because it changed its menu and included local Indian spices to better suit the Indian appetite (Sloman & Hinde, 2007). Ethical concerns can also affect demand. For instance, anti-genetically modified (GM) food organisations like ?Friends of the Earth? & ?Green Peace? successfully persuaded UK consumers to shun GM foods, (BBC online, 2004). As a result, UK supermarket chains Tesco, Sainsbury?s, Asda, and others all removed products containing GM ingredients. Even though, there no was scientific evidence to suggest GM food actually caused illness in humans. From this example, we can clearly see how ethical concerns, when publicized loudly by interest groups can significantly affect demand for a product.
Equally, trading blocs can also affect demand. For example, the EU Single Market has created 2.75 million jobs across the European Union and boosted prosperity by ?800 billion, since 1993 (EUROPA, 2009). UK firms have gained access to more than 500 million EU consumers. An increase in prosperity, employment, potential customers and income could in turn increase demand for goods. In addition, thanks to the EU competition policy, UK airlines are now able to fly and operate in any EU member state without restrictions. This has helped British Airlines like Easjet and Ryanair to flourish. However, trade blocs can also negatively affect demand. For example, in 1993 the EU adopted a tariff and quota system that favoured banana producers from mostly Africa, Caribbean, and Pacific countries (Sloman & Hinde, 2007). EU tariffs in effect were pushing up the price of American produced bananas. This affected American banana producers drastically, because supermarket chains in Europe switched to the cheaper alternatives.
Likewise, demand can also be affected by obsolescence. For example, the floppy disk was once used by millions across the world. However, nowadays it is considered by many to be almost obsolete. The improvement in technology, and the rise of better alternative products, made the floppy disc out of date. Hence, not many people were surprised when PC world announced in 2007, that it would no longer sell floppy discs (Telegraph, 2007). However, obsolescence of products is not always a bad thing. Many economies depend on strong consumer demand. Thus, if durable products like cars were built to last as long as consumer?s lifetime, demand would reduce to levels that would create huge unemployment. Also, sometimes producers deliberately design products for short term use, because they know better replacements will soon come into the market. Furthermore, Leapfrogging can also affect demand. For example, wireless networks are not only easier to install than wired systems, but also cheaper. So, ?when the Bushnet project in Africa used HF radio to distribute Internet and email services to remote subscribers? (Fleming, 2003, p.16). They not only by passed earlier communication systems to newer ones, but also saved much needed money.
Similarly, employment can also affect demand. For example, if jobs suddenly became available in a community, were most people were unemployed. Demand for most normal goods would go up, because the newly employed have money to spend. Furthermore, expectations can also affect demand. For instance, if people think the price for a product will rise, they tend to buy more before the prices go up. As result, increase demand for these products. Finally, supply can also affect demand. For example, when supply rises, prices tend to fall, and consumers tend to buy more, which increases demand. Likewise, when supply falls, prices increase, and consumers tend to buy less, which decreases demand. Thus, from these examples, we can see that there are many factors that affect demand. Therefore, to simply multiply a country population by its per capita consumption is not a complete way to estimate demand.
Drivers of demand
Globalisation can both affect demand positively or negatively. For example, in Scotland 3000 employees lost their jobs after Motorola shut down its factory in Bathgate in late 2000 (Carlson, B, 2002). As a result, the small community in Bathgate which were completely depended on the plant for they incomes, were badly affected (BBC online, 2001). Likewise, economic growth can also increase demand. If the economy is growing, and people?s income is also growing, they are likely to buy more goods. For example, ?when UK incomes were rising at an average annual rate of 3% in mid-to-late 1990s, share prices rose rapidly. However, shares prices fell, as income growth rate fell in the early 2000s? (Sloman & Hinde, 2007). Thus, when income declines, demand for certain goods tends to decline too. Similarly, when income increases, demand for normal goods tends to increase too.
Global business environment:
The business environment ?consist of actors and forces that affect a company?s capability to operate effectively in providing products and services to its customers? (Jobber, D, 2007). In other words macro-environment and microenvironment forces can have a considerable amount of influence on potential demand. Technology is amongst those forces which can affect demand. Take the internet for example, which has revolutionised many parts of our life. However, it is because of the internet that demand for newspapers has declined. Most people nowadays prefer to read the news online for free, instead of buying it on paper. As a result, in 2009, ?the US newspaper industry suffered its worst sales decline in recorded history? (Kenneth Li, Financial Times, 2009). It is obvious when looking at this example that technological forces can drastically affect demand.
In addition, political and legal forces can also affect demand. For instance, in recent years many countries including Britain have banned smoking in public places. These bans in some circumstance have had a dramatic affect on the demand for cigarettes. For example, ?tobacco sales in Italy fell by 20 percent after a ban there? and restaurant revenues in Ireland declined by 3.2 per cent, after a similar ban there (Financial Times online, 2005). Hence, we can see that political and legal forces can have the most immediate impact on demand. Demand for a product can almost completely vanish if a particular product is made illegal by political and legal forces within a country (Thomas, J, R, 1993, p45).
Similarly, economic forces can also have a profound impact on demand. Usually, when governments raise interest rates, consumers tend to ?cut back on current expenditures as their repayment costs rise? (Jobber, D, 2007). Likewise, inflation can also reduce consumer purchasing power, which can lead to a fall in demand. Fluctuations in exchange rates can also affect demand. For example, UK businesses exporting to the US market saw a decline in demand, when the pound broke the $2 barrier in April, 2007, but US exporters to the UK saw a rise in demand (The Independent, 2007). From this example, we can see the link between demand and economic forces. Therefore, the global business environment must be taken into consideration when estimating potential demand.
Competition can also affect demand. For example, during the oil crises in the early 1970s, Japanese auto manufacturers like Toyota took away a segment of the US market share from traditional US car manufacturers like GM and Chrysler (Perner, UCS Marshall, 2008). US consumers switched to Japanese cars, because they were more fuel efficient than their US counterparts (Perner, UCS Marshall, 2008). Furthermore, social changes in customs or demographics can also greatly influence demand. For example, in 2008 woman fertility Rate in the UK increased to the highest level since 1973 (Office for National Statistics, 2009). As a result, sales of baby products increased by 8% (Mintel, 2009). This view is supported by Anna Rosier, managing director of Organix, “some of our growth is undoubtedly driven by the fact that there are more babies? (White, D, 2008). Thus, we can clearly see from this example how demand can be affected by a rise in birth rates.
As we seen, demand is not affected by just two factors, but by a host of factors. Therefore, solely using per capita consumption and population in demand estimations, can lead to inaccurate results. As the essay question hints to, this method is too simple. In fact, it doesn?t tell you much about the likelihood of your product actually being purchased. Nor, does it reveal from which group the demand is coming from, (i.e. consumers, government or businesses). Furthermore, catering to a demand isn?t always a straight forward process. As we have seen major environmental forces can drastically influence demand. Selling and marketing in a foreign market may prove to be troublesome. A marketing campaign may appear acceptable domestically, but deemed offensive within another country. Also, host government sometimes make operating in a market so difficult, that it becomes almost impossible to cater to a demand. Hence, a company needs to ask it selves whether it is even valuable and capable to cater to a particular demand successfully.
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