Once the market and its respective segments have been identified, they need to be analysed to determine their attractiveness to a company, as well as to understand how the company can best serve the market and how the market may develop in future.
David A. Aaker stated that a market should be analysed using the following dimensions:
- Market size, both in terms of value and number of units, and both current and future
- Market growth rate and factors which may influence that in future
- Profitability of firms currently in the market
- Cost structure of firms currently in the market
- Distribution channels
- Major market trends
- The key success factors
The market size is generally evaluated based on the level of sales and the potential number of customers in the market. As such, whilst a market may currently be very small, it could expand rapidly if the right product was found to appeal to more customers. For example, the market for personal computers was quite small until Bill Gates developed an operating system which made it easy for individuals to use computers for work and play.
The current market growth rate is an important factor, as it tends to indicate how a market is likely to perform in future. A market which is growing strongly is unlikely to suddenly disappear or become unprofitable. However, it is important to consider market growth drivers, including demographic and technological changes, to attempt to determine how a market will grow in future. By comparing a market to the behaviour of previous markets, and considering the product life cycle, it is possible to predict how a market will respond in future, and when it will reach maturity and decline.
Considering profitability can be difficult, as different firms will have different profitability levels, and may not be comparable to the firm carrying out the analysis. However, by considering the average profitability in a market, companies can consider how their offering might perform and whether they would be able to undercut less profitable competitors.
A more useful analysis is to look at the cost structure of current firms in the industry. This can help companies determine where value is created in a market, and hence how they can create more value than their competitors. It will also help companies to determine where they can obtain cost efficiencies over their competitors, and hence obtain competitive advantage.
Distribution channels need to be considered as they will ultimately determine how the product will reach the customer. Whilst existing distribution channels will be well developed, they may already be dominated by incumbents. In contrast, emerging channels can allow new entrants to create an advantage by promoting their channel as being more efficient. For example, in the organic food market the major supermarkets have significant domination through the products they allow on their shelves. As such, many companies have taken to selling their produce direct to the consumer, and marketing this channel as providing a greater level of organic certainty and avoiding the negative environmental impact of supermarket distribution.
The major market trends will also play an important role in the analysis, as they will help companies to identify where future opportunities and threats may arise in the market, and how these can be used to benefit a new product. For example, if a market is demanding more product variety, a company could launch a range of new products that will offer significant variety in the future.
Finally, the key success factors are the aspects of a market which determine which firms will tend to succeed in the long term. The main key success factors focus around that ability to access essential or unique resources; the minimum economies of scale in the market; the distribution channels in the market and their accessibility; and the rate of technological progress in the market. However, it is important to note that these factors can vary over time, particularly as a market moves through the product life cycle.
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