SMALL BUSINESS MANAGEMENT (MARKET STUDY/ANALYSIS)

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Question:

Market Study/Analysis can help a prospective business owner to determine whether or not there is a demand for a particular product. Identify and explain all the steps involved in the scientific method of market analysis.

Answer:

Conducting A market Study – market study is one of the most important aspects of a feasibility study since it is herein that the nature and the extent of the problem towards which the project is directed are identified and quantified.

Market Study involves:

i. An assessment of past and present demand and supply conditions and characteristics

ii. An assessment of present and future behavious of the demand and supply conditions and characteristics

iii. An assessment of the resulting demand supply gaps, and

iv. A provision of the ground-work for the subsequent assessment of:

(a) Costs, which depend upon the alternative project sizes, locations and technical processes that flow from the specification of the problem;

(b) Benefits, their identification and measurement

The Essential Steps in Market Study

The approach to follow in carrying out a market study for a proposed project may consist of the following steps:

Step I

Define the market envisaged for the project output both in the sectoral and geographical contents. From the sectoral viewpoints, the two broad categories are the consumers demand and the producers demand. The consumers demand of the project output is determined by the amount of the output needed by buyers who make direct use of the product for consumption purposes. The producers’ demand is a derived demand derived in the sense that it is demand expressed by the extend and levels or use to which the project output is to make in producing another final product.

From the geographical viewpoint, the territorial boundary terms of regions, provinces, municipalities or some other terms of reference, must be delimited as precisely as possible so as to determine the size of the geographical area in which the project can exercise its influence. It is within such geographical boundaries that data will be collected for the project study.

Step II

Estimate the total demand (both satisfied and unsatisfied demand) for the project output. In achieving these objectives, do the following:

Stage 1:

Identify the principal determinants of demand for the particular good service under consideration, which can be used to derive reasonable approximation of the corresponding level of total requirements. In the case of consumer demand, the strongest determining factors will in general be:

(a) Population and

(b) Per capital income – the higher the levels of these two variables, the greater the total, requirements of the project output will tend to be:

(d) The relative prices of other goods/services, particularly of those performing the same function with the proposed project output.

In the case or producer (investment) demand, the producers will want the goods/services provided by the project only insofar as it is needed in the production/distribution of their output. Their demand for the output of the proposed project-exists because a demand also exists for their own product. Their demand for the project output thus depends;

(1) On the scale of the operations of the producers, buyer of the project output; and

(2) Ultimately, on the level or demand of their own product

Hence, a consideration of the ultimate source(s) of demand of these producers’ final output is important on achieving a correct assessment of the determinants of producer’s demand of a proposed project output.

Stage 2

Evaluate the determinants of demand identified in stage 1 above. To aid an evaluation of the determinants of demand for purposes of subsequent projections, we need to study the characteristics of past and present demand for the project output.

Quantitatively, the data to consider include:

i. Population in the geographical area of influence of the project

ii. Per capita income

iii. Income distribution levels and growth of influence of past and present demand

iv. Competing products and of sources of supply

v. Geographical distribution of income levels, past and present demand;

vi. For marketed goods, prices of the projects and those of the competing products; and

vii. Whatever else may be relevant to gain a fuller understanding of the situation

The above should be supplemented by such qualitative data such as:

i. Consumer types and behaviours

ii. The marketing system

iii. Trends in government policies and their effects and

iv. Other such relevant consideration

Stage 3:

Project the current situation into the project’s life time. The steps in projections include:

(1) Forecasting:

The first step in projection is usually that of forecasting. In making a forecast, future variables are derived under the assumption that the same forces operating on demand for the project will continue to operate and in exactly the same way.

Forecast can be undertaken in at least four ways:

(a) By a simple extrapolation of the historical trend of demand

(b) By i) First obtaining the impute co-efficient (in cases where the projects output can reasonably be considered as an input in the production process of the using entity)

ii) Projecting using entity’s production level; and

iii) Deriving the demand for the project’s output on the basis of the co-efficient.

(c) By making necessary inter-regional/inter-markets comparison: In doing this, regions must not only be selected with caution, at a given point in time, but must also be comparable.

(d) By: i) incorporating into a (set of) demand equation(s), the principal determinants identified in stage 1 above

ii) Then projecting the values of the determinants and

iii) Deriving the corresponding level of demand for the project’s output

(2) Conversion of Forecasts, derived into projections:

The forecast thus derived above are then converted into projection by bringing in modifications that may result from consideration of the following:

(a) Possible changes in structural relationships in the demand over the projections period. Where possible, this would include changes in technical co-efficient arising from Technological change.

(b) Possible shifts in economic policy and their corresponding effects

(c) Possible changes that the project itself may include. If any change is expected from this source, then, two sets of projections would emerge; on under the assumption that the project is non-existent, and the other under the assumed operation of the project.

Step 3

Evaluate the existing supply conditions of the proposed project output. The approach to adopt may be described in the following stages:

Stage I

Investigate if in the first place there is any supply source at all

Stage II

If so, examine such sources of supply particularly;

i. Their combined output

ii. Their distribution methods and patterns

iii. Their capacities and capacity utilization

iv. Their costs; and

v. Other relevant characteristics

As in the case of the study of demand, have these data on an historical basis. Have also, some knowledge of the effect of economic policy on these variables.

Stage III

Using the approach and considerations essentially similar to these relating to demand, project the supply of the project’s output into the projects lifetime. However, in the case of supply, make two sets of projections for each policy assumption one with the project and the other without project.

Note: in the case of demand, with and without projections are necessary only when the project itself is expected to generate changes in demand.

Step IV:

Measure the extent of the current gap in demand for proposed project output.

The above may be achieved in stages:

Stage 1:

Consolidate the information so far obtained in the past and current demand and supply conditions and obtained a measure of the current gap in the demand for the proposed project output.

Pinpoint, also the underlying reasons for whoever bottlenecks may currently exist, to allow for achieving proper solutions to such problems.

Stage 2

Determine the extent of future need (net demand) and distribution of the project’s output. This can be achieved by consolidating the projected demand and supply levels without the project. This serves as starting point for the identification of alternative sizes, location, and specifications of the proposed project.

In additions to supply provided by project’s operations, narrow down, if not altogether close up, the projected gap between demand and supply (ex project). Some additions, in turn, generate the benefits that would determine whether or not the costs that the project would involve would be justified.