UNIT 4: MARKET AND DEMAND ANALYSIS

Contents
4.0 Aims and Objectives
4.1 Introduction
4.2 Objectives of Market Analysis
4.3 Marketing Elements
4.4 Situational Analysis and Specification of Objectives
4.5 Collection of Information
4.6 Characterization of the Market
4.7 Demand Forecasting Methods
4.8 Summary
4.9 Answers to Check Your Progress Questions

4.0 AIMS AND OBJECTIVES

After completing this unit, you will be able to:

 understand the objective of market analysis;
 explain the major elements of marketing;
 describe the dimensions of market strategy;
 explain the operating dimensions of marketing;
 understand the role of marketing research in demand analysis;
 apply the basic steps of marketing research in demand forecasting;
 list out the demand forecasting techniques; and
 forecast demand-using demand forecasting techniques, such as moving average
method, trend projection method, exponential smoothing and the like.

4.1 INTRODUCTION

Very often project analysis begins with the estimate of the potential size of the market for the
product proposed to be manufactured or service planned to be offered and get an idea about
the market share that is likely to be captured. These are very important issue in project
analysis. Market and demand analysis aims at determining the aggregate demand for the

39
product/service and the market share of the proposed project. Traditionally entrepreneurs try
to make the statement that “the market is attractive”. This is simply the expectation of the
investors, but it is misleading. Formal thorough market and demand analysis increases the
project’s probability for success if it is done in an orderly and systematic manner. This unit
deals with the practice of forecasting demand for the proposed project. More specifically, it
deals with:
- objectives of market analysis
- the marketing elements
- situational analysis
- collection of information
- characterization of the market
- demand forecasting techniques

4.2 OBJECTIVES OF MARKET ANALYSIS

Market and demand analysis is a key activity for determining the scope of an investment, the
possible production programme, the technology required, and the choice of location. What are
the objectives of market and demand analysis? The objectives of demand and marketing
analysis are:
i. To determine the effective demand for the envisaged (proposed) project
ii. To determine the characteristics of the corresponding market in terms of unsatisfied
demand, competition, imports, exports etc.

4.3 MARKETING ELEMENTS

What is marketing? What are the elements of marketing? Marketing is defined as a

managerial and social process by which individuals, and groups obtain what they need and
want through creating, offering and exchanging products of value with others.

Marketing is characterized by the following elements:

a) Business philosophy
Marketing puts the problems, needs, and desires of the existing or potential consumer groups
at the center of business activities of the firm.

40
 b) Marketing research
Market orientation of project preparation considers both demand market and supply market.
Marketing research provides information to develop marketing strategies.

c) Marketing instruments
The successful implementation of marketing strategies requires shaping and influencing the
market in a well-planned manner, using the necessary combination or mix of marketing
instruments.

d) Marketing plan and budget

Based on the findings of market research, it is necessary to determine the required means and
to prepare plans of actions in achieving marketing objectives.

Check Your Progress 4.1

1. Why market and demand analysis is considered the key activity in project?
2. What are the objectives of market and demand analysis?
3. Mention the four elements of marketing
4. What is the role of marketing research in market and demand analysis?

4.4 SITUATIONAL ANALYSIS AND SPECIFICATION OF OBJECTIVES

The project analyst should be able to establish the relationship between the product and its
market. To do so, she/he may informally talk to the following parties:
- customers,
- competitors
- middlemen (wholesalers and retailers)
The purpose of contact with the above parties is to learn about the preferences and purchasing
power of customers, actions, and strategies of competitors, and practices of middlemen. The
main benefit of such informal contact is to avoid formal study of the market if adequate and
relevant information is obtained about project demand. If enough data was not generated at
this stage, formal market and demand analysis should be carried.

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4.5 COLLECTION OF INFORMATION

In order to achieve the market and demand analysis objectives, information should be
obtained from various sources. These sources are generally classified into primary sources
and secondary sources.

4.5.1 Sources of Secondary information

Secondary information is information that is gathered in some other context and is already
available. The important sources of secondary information are:

a) Census. The Central Statistical Authority (CSA) gathers and publishes data about
population, demographic characteristics, household size and composition and other
similar data
b) Economic survey
c) Annual reports on imports and exports
d) Industry specific sources
The reliability, accuracy and relevance of a secondary information should be examined
carefully in terms of:
- who gathered the information and the purpose (objective) for which it was gathered
- the time of information gathering and publication
- the relevance of information gather for the period
- target population
- the means of choosing the sample
- the representativeness of the sample

4.5.2 Primary information/Market survey

Secondary sources may not provide a comprehensive data for market and demand analysis.
Information obtained through secondary sources should be supplemented with primary
information gathered through market survey.

The market survey may be a census, or a sample survey. In a census survey, the entire
population is covered. The term population refers to the totality of all units under
consideration in a specific study.

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Example
- All higher private educational institutions
- All firms producing textile
Census survey may involve high cost and insensible. When census survey is impractical (all
elements of the population are not covered), sample survey is more useful.

What kind of information should be gathered through market survey? The following types of
information may be collected through market survey:
- Total demand and rate of growth of demand
- Motives for buying
- Demand in different segments of the market
- Income and price elasticity of demand
- Purchasing plans and intentions
- Satisfaction with existing products
- Unsatisfied needs
- Attitudes towards various products
- Distribution and price practices and preferences
- Socio-economic characteristics of buyers

The steps in sample market survey include:

1. Define the target population
2. selecting the sampling method 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. Secnitinize the information gathered
7. Analyze and interpret the information

4.6 CHARACTERIZATION OF THE MARKET

Market characterization involves describing the market for product/service in terms of the
following factors:
- effective demand in the past and present

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 - breakdown of demand/segmentation
- price
- methods of distribution
- promotion
- consumers
- supply and competition
- government policy

4.6.1 Effective Demand in the Past and Present

In order to gauge (measure) the effective demand in the past and present, apparent
consumption can serve as the starting point. Apparent consumption can be computed as
follows:
Consumption = P + I – E – CSL
where
P = production
I = Imports
E = Exports
CSL = Changes in stock level, usually increase in stock. The figure of apparent consumption
has to be adjusted for consumption of the product by the producers and the effect of abnormal
factors. After such adjustments, the consumption series may be obtained for several years.

Generally, effective demand and apparent consumption are equal in a competitive market.
However, due to exchange restrictions and controls on production and distributions,
competitive markets do not existing in most developing countries. As a result, the figure of
apparent consumption should be adjusted for market imperfections, but difficult to do so.

4.6.2 Breakdown of Demand/Market Segmentation

The total (aggregate) demand for the product may be broken down into demand for segments
of the market. What is market segment? What factors are considered in segmenting the
market? Why market is segmented?

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Market segmentation is defined as the dividing of the target market into subgroups of
consumer population with identifiable, distinct and homogeneous characteristics. (Philip
Kotler, 1999). The main reasons of market segmentation are:
- efficient use of marketing resources
- better understanding of customer needs
- better understanding of the competitive situation
- accurate measurement of goals and performance
- formulate marketing programs and strategies
- Design marketing mix (i.e., product, price, place, and promotion).
- Pay proper attention to particular area
Market is segmented on varies bases. Some of the most common bases are:
- Geographic segmentation – divide the market into different geographic units such as
western, eastern, northern, southern, central etc.
- Demographic segmentation – divide the market on the basis of age, sex, family size,
marital status, language, religion and so on
- Socio-economic segmentation – divide the market on the basis of income levels,
consumption levels, caste level (exclusive social class), culture and the like
- Psychographics segmentation – divide the market based on how consumers think, feel,
and behave
- Buyer behavior segmentation – divide the market based on customers knowledge,
attitudes, rules, or responses to a product.

4.6.3 Price
Price represents the value of a good or service for both the buyer and the seller. Price is the
only element in the marketing mix which generates revenues. Price may also be defined as the
value of product attributes expressed in monetary terms which a consumer pays or is expected
to pay in exchange and anticipation of the expected utility.

What factors affect the firm’s pricing decisions? Factors which affect the pricing decisions are
both internal and external. External factors that affect pricing decisions include:
- Demand for the product/service
- Competition

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 - Consumer’s quality perceptions
- Middlemen (distributors, detailers etc)
- Suppliers
- Government
- Economic conditions
- Ethical considerations
- Cost of materials and labor (or cost of inputs)

Internal factors that affect pricing decisions include:

- Organizational factors
- Marketing mix
- Product differentiation (different product attributes such as color, size, attractive
package, attractive uses, style etc).
- Cost of products
- Objective of the firm

What pricing strategy the firm may follow?

A firm that is planning to introduce new product may follow any one of the following pricing
strategy:
a) Market skimming pricing
It is the approach of setting a relatively high initial price for a new product.

b) Market penetration pricing

It is the strategy of setting a relatively low initial price for new product.
During market and demand analysis, the price statistics must be gathered along with statistics
concerning physical quantities. It may be helpful to distinguish the following types of prices:
- manufacturer’s price quoted as FOB (Free-on-Board) price or CIF (Cost, insurance,
and freight) price
- Landed price for imported goods
- Average wholesale price
- Average Retail price

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4.6.4 Distribution
The methods of distributing a product/service vary with the nature of the product. The typical
geographic separation of the manufacturer or producer from the ultimate consumer requires
some means for bridging the gap between the producer and the customers: what are the major
components of the distribution system? Distribution system has two components; namely,
channels of distribution, and physical distribution. Channels of distribution refer to
intermediaries or the process through which the products are transferred from the producers to
the ultimate users. Channels include wholesales, retailers, dealers, agents and other parties
involved in transferring the product or service to the consumers.

On the other hand, physical distribution is concerned with the flow of goods to the ultimate
consumers. Physical distribution includes transportation, warehousing, and inventory
management.

Therefore, the methods of distribution (channels and physical distribution) employed

presently and their rationale must be specified during market and demand analysis. Such a
study may explain certain patterns of consumption and highlights and difficulties that may be
encountered in marketing the proposed products.

4.6.5 Promotion
In marketing, the word “promotion” is used in many ways. In general sense, promotion is
defined as “any identifiable activities (efforts) on the parts of the seller to persuade buyers to
accept the seller’s information and store it in retrievable form”. The promotional function of
any organization involves the transmission of message to present, past, and potential
customers.

Who is the target in promotion? How is promotion carried? What are the objectives of
promotion?

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 Personal
selling

Publicity Advertising
Target
customer

Public relations Sales

promotion

The above diagram shows who the target for promotion is, and how promotion is carried out.
The target in promotion is customers. Customers may include industries, middlemen, opinion
leaders, and other consumers. The means of promotion are:
a) Personal selling – It involves face-to-face contact between seller’s representative and
the buyer
b) Advertising. It is paid form of non-personal mass media communication by an
identified sponsor. The media may include print media, direct mail, TV, radio,
billboard, Internet etc.
c) Sales Promotion. It includes activities that seek to indirectly induce or indirectly serve
as incentives to motivate a desired response on the part of target customers, company
sales people and middlemen, and their sales force.
d) Publicity. It involves the news carried in the mass media about a firm and its products,
policies, personnel or actions, such as news releases, press conference etc.
e) Public relations. It is a planned effort by an organization to influence the attitudes and
opinions of a specific group.

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The primary objectives of promotion are:
- to develop an awareness of, and an interest in, the organization and its products and
services
- to communicate the benefits of buying product or services
- To influence eventual purchase of the product or service
- To build the positive image of the organization
- To differentiate the product/service from its competitors
- To remind the people of the existence of the product/service and the organization

Therefore, during market and demand analysis, the project studying team should specify the
promotion methods employed presently and their rationale.

4.6.5 Supply and Competition

It is necessary to know the existing sources of supply. The existing sources may be domestic
or foreign. The following information should be gathered for domestic sources of supply.
- Location
- Present production capacity
- Planned expansion
- Capacity utilization level
- Bottlenecks in production
- Cost structure

The study should also cover competition from substitutes and near-substitute products.

4.6.6 Government Policy

Government may have significant role in influencing the product’s demand and market. How
government affects the demand and market for the product? Governmental plans, policies and
legislations may have bearing on the market and demand of the product. Some of the areas of
influence are:
- production targets in national plans
- trade control on imports and exports
- import duties
- export and import incentives

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 - excise duties
- taxes
- industrial licensing
- credit controls
- financial regulations
- subsidies or penalties of any kind

Check Your Progress 4.2

1. What is the role of apparent consumption in determining the effective demand?
2. The dividing of the target market into sub groups of consumer population is
__________________.
3. Mention some of the bases of market segmentation.
4. What are the main objectives of market segmentation?
5. Mention at least five external factors that affect pricing decisions.
6. Mention at least four internal factors that affect pricing decisions.
7. What are the possible pricing strategy that can be used by firm considering to launch
new product/service?
8. What are the two major components of product/service distribution?
9. From the following lists, specify whether the item is related to channel of distribution or
physical distribution
a) Transportation
b) Wholesaler
c) Retailer
d) Inventory management
e) Sales agents
f) Consignee
g) Warehousing
10. The effort that involves the transmission of message to present, past, and potential
customers is ________________.
11. Mention the primary means of promotion.
12. In demand and market analysis, the analyst should identify the sources of supply. What
are the possible sources of supply?

50
 13. How do you think the government influences the market and demand of the product?

4.7 DEMAND FORECASTING METHODS

After gathering information about various aspects of the market and demand from primary
and secondary sources, an attempt is made to estimate future demand. The market analyst has
several methods of forecasting the demand. Generally, these methods are classified in to
qualitative and quantitative methods.

Qualitative methods include:

1. Jury of executive opinion method
2. Delphi method

Quantitative methods include:

1. Trend projection method
2. Exponential smoothing method
3. Moving average method
4. End use (consumption coefficient) method

Each of these methods is explained below:

4.7.1 Qualitative Methods

1. Jury of Executive Opinion Method
This method involves soliciting the opinions of a group of managers on expected future sales
and then combining them into a sales estimate. It is the most popular method used in practice.
Some of the advantages of Jury of Executive Opinion Method are:
- an expeditious method for developing a demand forecast
- enables to consider a variety of factors to be included in the subjective estimates
provided by the experts. These factors include economic climate, competitive
environment, consumer preferences, technological developments and the like.
- Immense appeal to managers who tend to prefer their judgment to mechanistic
forecasting procedures.

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The jury of executive opinion method is not without limitations. Some of its limitations are:
- It involves greater subjective
- Its reliability is questionable

2. Delphi Method
This method is used for eliciting the opinions of a group of experts with the help of a mail
survey. Delphi method involves the following steps:
a) Send a questionnaire to a group of experts by mail asking them to express their views.
b) The responses received from the experts are summarized without disclosing the identity
of the experts. Then the summary is sent to the experts along with a questionnaire that
helps to probe further the reasons for the extreme views expressed in the first round.
c) The process may be continued for one or more rounds till a reasonable agreement
emerges in the view of the experts.

Delphi method has got the following advantages:

i. It is intelligible to users
ii. It seems to be more accurate
iii. It seems to be less expensive than the tradition face-to-face group meetings
The limitations of Delphi method are:
- It is difficult to value the expert opinion
- It is not easy to measure the contribution of additional rounds and feedback to
accuracy.

4.7.2 Quantitative Methods

1. Trend projection method (regression analysis) – also called least square method
Demand forecasting by trend projection method involves interrelated steps: These are:
i. Obtain demand data for some past periods, such as 10 years. This involves
determine the trend of consumption by analyzing past consumption statistics
ii. Establish liner relationship using the following formula:
Yt = a + bT
where
Yt = Demand for year t
a = Intercept of the relationship

52
 b = Slope of the relationship
T= Time variable
The values of a and b can be determined using the following formula:
Sxy
b=
Sxx
n
n(n  1) n
Sxy  n iDi   Di
i 1 2 i 1

where
n = No of observation
i = the ith observation
Di = the ith outcome
n 2 (n  1)(2n  1) n 2 (n  1) 2
Sxx  
6 4
b(n  1)
a= D
2
where D = the arithmetic average of the demands during periods 1, 2, … n.
To illustrate demand forecasting using simple regression analysis, consider the following data
concerning demand for product x during the last eight years.
Year Actual demand
1 200
2 250
3 175
4 186
5 225
6 285
7 305
8 190
The linear equation for the above data is formulated as follows: assuming that the base line is
the first five years:

53
 Yt = a + bT
n
n(n  1) n
Sxy  n iDi   Di
i 1 2 i 1

= 5[(200 x 1) + (250 x 2) + (175 x 3) + (186 x 4) + (225 x 5) –

 5(5  1) 
 2  [200 + 250 + 175 + 186 + 225]

5(6)
= 5[200 + 500 + 525 + 744 + 1125] - [1,036]
2
= 5[3094] – 15[1036]
= 15470 – 15,540
= -70
n 2 (n  1)(2n  1) n 2 (n  1) 2
Sxx  
6 4
5 2 (5  1)(2(5)  1) 5 2 (5  1) 2
= 
6 4
25(6)(11) 25(36)
= 
6 4
= 275 – 225
= 50
After Sxy and Sxx are obtained, b can be computed as:
Sxy  70  7
b=  
Sxx 50 5
Then a is computed as:
b(n  1)
a= D
2
200  250  175  186  225
D  207.20
5
7
 5  1
a = 207.20 -  
5
2

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   42 
 
= 207.20 –  5 
 2 
 
 
21
= 207.20 +
5
= 211.40
It follows that the regression equation based on five periods of data is:
7
Yt = 211.40  T
5

The above regression equation is used to forecast demand from period five to any period into
the future. For example, the demand forecast for period 7 (T = 7) is computed as follows:
7
Yt = 211.40 - T
5
7
= 211.40 - (7 )
5
49
= 211.40 -
5
1075 49
=
5
1008
=
5
= 201.6
Similarly demand for year 10 (T = 10) is forecasted as follows:
7
Yt = 211.40 - (10)
5
= 211.40 – 14
= 197.4
Alternatively, the values of a and b can be computed as follows:
Yt = a + bT
n TY   T  Y  Y  b T
b= a=
n T 2   T 
2
n

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Using the above data, the computations of a and b are as follows:
Year (T) Actual demand (Y) TY T2
1 200 200 1
2 250 500 4
3 175 525 9
4 186 744 16
5 225 1125 25
 = 15  = 1036  = 3094  = 55
n TY   T  Y
b=
n T 2   T 
2

5(3094)  (15x1036)
=
5(55)  (15) 2
15470  15540
=
275  225
 70
=
50
7
=
5

a=
 Y  b T
n
7
1036   15
=  5 
5
1036   21
=
5
= 211.40
7
Yt = 211.40 - T
5

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Check Your Progress 4.3
1. The following data shows monthly demand for the product of top company over the past
nine months.
Month Quantity demand
March 112
April 125
Ma y 120
June 133
July 136
August 146
September 140
October 155
November 152
Required
a) Establish the regression equation
b) Forecast the demand using trend projection method for:
i. December
ii. January
iii. February
2. Assume that the demand for aircraft engines during the six months operations (January –
June) are summarized below:
Month No of engines Months No of engines
January 133 April 640
February 183 Ma y 1876
March 285 June 2550
Required
a) Establish the regression equation
b) Forecast the demand using trend projection method for:
i. July
ii. August
iii. September

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 2. Exponential smoothing
Exponential smoothing is another very popular demand forecasting method. Under
exponential smoothing, the current forecast is the weighted average of the last forecast and the
current value of demand. That is:
New forecast:  (current observation of demand) + (1-) (last forecast)
In symbols,
Ft = Dt-1 + (1 - ) Ft-1
Where 0 <   1 is the smoothing constant. (alpha) determines the relative weight placed on
the current observation of demand. 1 -  is interpreted as the weight placed on past
observations of demand. D refers to the actual demand of current period (t-1). The above
formula can be rewritten as follows:
Ft = Ft-1 + (Dt-1 – Ft-1)
where
Ft-1 = previous forecast
 = smoothing constant
Ft = New forecast
Dt-1 = the demand for the current period.
From the above description, it is possible to conclude that exponential smoothing method
requires only three items of data: the last period’s forecast, the demand for the current period,
and the smoothing constant ().
To illustrate demand forecasting using exponential smoothing, assume that demand for
product X in April was forecasted to be 120 units (Ft-1 = 120). Actual April demand was 140
units (Dt-1 = 140). If smoothing constant is 0.4 ( = 0.40), the forecast for May would be:
FMay = Ft-1 + (Dt-1 – Ft-1)
= 120 + 0.40 (140 – 120)
= 120 + 8
= 128
Exponential smoothing applies a declining set of weights to all past data. If  is large, more
weight is placed on the current observation of demand and less weight on past observations.
On the other hand, if  is small, then more weight is placed on past data and the forecasts are

58
more stable. Thus, alpha () indicates the weight of importance given for past forecasting
inaccuracies in forecasting the next time period dictating how much correction will be made.

To further illustrate exponential smoothing, assume that Grace company has the following
recorded demand for its product Y in the last 8 quarters: The smoothing constant is 10%.
Quarter Actual demand (D) Forecast (F)
1 200 200 (By assumption)
2 250
3 175
4 186
5 225
6 285
7 305
8 190
The demand forecast for periods 2 – 5 are shown below:
Ft = Ft-1 +  (Dt-1 – Ft-1)
F2 = 200 + 0.10 (200 – 200) = 200
F3 = 200 + 0.10 (250 – 200) 205
F4 = 205 + 0.10 (175 – 205) = 202
F5 = 202 + 0.10 (186 – 202) = 200.4

Check Your Progress 4.4

1. Refer to Grace Company illustration, determine demand forecast from year 6-year 9.
2. Assume that the actual demand and forecast for the month of June 2005 were 100 units
and 90 units respectively. The smoothing constant is 0.30. Forecast the demand of July
using exponential smoothing method.

3. Moving Average Method

According to this method, the forecast for the next period is equal to the average of the
sales for several preceding periods.
S t  S t 1  ...  S t b1
Ft 1 
n

59
 where:
Ft+1 = Forecast for the next period
St = Sales for period t
n = period over which averaging is done
To illustrate, consider the following data for the past 10 years.
Year Sales (Actual)
1 80
2 60
3 70
4 90
5 75
6 100
7 80
8 85
9 60
10 80

If the company uses a four-year moving average, sales forecast for year 5 is:
S1  S 2  S 3  S 4
4
80  60  70  90
F5 = = 75
4

If the company uses a nine-year moving average, sales forecast for the 10th year is:
S1  S 2  S 3  S 4  S 5  S 6  S 7  S 8  S 9
9
80  60  70  90  75  100  80  85  60
F10 =  77.78
9
If the company uses a five-year moving average, the sales forecast for year 11 is:
S 6  S 7  S 8  S 9  S10
5
100  80  85  60  80
F11 =  81
5

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To elaborate the above answer (F11 = 81), the sales figure of the last five years (year 6, 7, 8, 9
and 10) are taken to forecast sales of year 11.
If the company uses a five year moving average, what will be sales forecast for year 12 and
year 13?
S 7  S 8  S 9  S10  S11 80  85  60  80  81
F12 =   77.20
5 5
S 8  S 9  S10  S11  S12 85  60  80  81  77.20
F13 =   76.74
5 5
Check Your Progress 4.5
Bedassa enterprise uses a five-year moving average policy to forecast its sales. It wants to
forecast sales of 1998 E.C. The following data shows the enterprises actual sales data for the
past five years.
Year Sales (Actual) (in thousands)
1993 6000
1994 5500
1995 6500
1996 6800
1997 5800
Required
a) Compute the sales forecast for 1988.
b) If the company’s policy is to use three-year moving average, what is its sales forecast
for 1998?
c) Considering the enterprise’s forecasting policy, forecast sales for 1999, 2000, 2001,
2002, and 2003.

4. End use method

End use method, also called consumption coefficient method, is more suitable for estimating
the demand for intermediate products. Intermediate products are considered output of one
company and then input of another company. For example, chips are the output to the chip
manufacturer but input to computer producing company. The use of end use method in
demand forecasting involves the following steps.

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Step 1. Identify the possible uses of the product
Step 2. Define the consumption coefficient (usage rate) of the product for various uses.
Step 3. Project the output levels for the consuming industries
Step 4. Derive the demand for the product.

To illustrate the application of end use method, let’s assume that four industries (electronics
industry, computer industry, electricity company, and telecommunication company) use chips
as input to their products. The chip manufacturer prefer to use End Use Method to forecasting
demand for chips in the upcoming year. The company collected consumption coefficient and
projected output of each industry and summarized the data below:
Industry Consumption Projected output for
Coefficient each industry

Electronics 5 10,000
Computer 4 30,000
Electricity 6 15,000
Telecommunication 7 20,000

Required: Determine the total forecasted demand for chips

To give a solution to the above question, it is advisable to understand the data properly. The
consumption coefficient indicates the rate of input (chips) per unit of output. For instance, the
consumption coefficient of 5 for electronics industry implies that the industry uses 5 chips to
produce one unit of its output. The 3rd column shows the planned production for each
industry. Accordingly, demand for chips in the coming year is computed as follows:

Industry Consumption Projected Projected demand

coefficient output for chips
Electronics 5 10,000 50,000
Computer 4 30,000 120,000
Electricity 6 15,000 90,000
Telecommunication 7 20,000 140,000
Total forecasted chips 400,000

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Check Your Progress 4.6
Assume that Kaliti Metal Factory produces various types of metal products, of these LTZ
metal is the major one. LTZ method is used by the following companies: French Door
Makers, table producers, and window makers. The consumption coefficient of each company
and their projected output are summarized below:

Company Consumption Projected

Coefficient output
French door makers 3 meters/door 3000 doors
Table producers 1.5 meters/table 2000 tables
Window makers 1.25 meters/window 4000 windows

Required: Determine the projected total quantity of LTZ metal

4.8 SUMMARY

Market and demand analysis is a key activity for determining the scope of investment, the
possible production programme, the technology required, and location choice. The primary
objective of market and demand analysis is to determine the effective demand and the
characteristics of the market for the proposed product/service.

In order to project the demand for the envisaged product/service, adequate and relevant
information should be gathered from primary as well as secondary sources. The market for a
product/service is characterized by, among other things, determining aggregate demand,
market segmentation, market mix (product, price, promotion, and distribution), consumers,
supply and competition, and government policy.

Several techniques may be used to forecast the demand for the product/service. They are
generally classified into qualitative methods and quantitative methods. Qualitative techniques
include jury of executive opinion method, and Delphi method. Quantitative techniques
include trend projection method, exponential smoothing, moving average method, and end
use method.

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4.9 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

CYP 4.1
1. Market and demand analysis is considered a key activity because it is used to determine:
- the scope of an investment
- the possible production programme
- technology required
- the choice of location
2. The objectives of market and demand analysis are to determine the effective demand for
the project and the characteristics of the corresponding market.
3. Business philosophy, marketing research, marketing instruments, and marketing plan and
budget.
4. Provides information about demand market and supply market to develop project
strategies

CYP 4.2
1. Since in a competitive market apparent consumption is equal to effective demand, the
successful determination of apparent consumption enables us to get effect demand for
the product or services
2. Market segmentation
3. Geographic segmentation, demographic segmentation, socio-economic segmentation,
psychographic segmentation, and buyer behavior segmentation.
4. The main objectives of market segmentation are:
- to pay proper attention to particular area
- for efficient use of marketing resources
- to better understand customer needs, and competitive situation
- to design marketing mix
- to formulate marketing programs and strategies
5. demand, competition, middleman, government, suppliers etc
6. marketing mix, product differentiation, cost of product, objective of the firm etc.
7. There are two possible pricing strategies; namely, price skimming (charge higher
price) and price penetration (charge lower price)

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 8. Channels of distribution and physical distribution
9. a) physical distribution
b) Channel of distribution
c) Channel of distribution
d) Physical distribution
e) Channel of distribution
f) Channel of distribution
g) Physical distribution
10. Promotion
11. Advertising, personal selling, sales promotion, publicity and public relations
12. Domestic sources and foreign sources
13. Though its plans, policies, and legislation

CYP 4.3
1. a) Yt = a + bT
n TY   T  Y
b=
n T 2   T 
2

Month Period (T) Y TY T2

March 1 112 112 1
April 2 125 250 4
Ma y 3 120 360 9
June 4 133 532 16
July 5 136 680 25
August 6 146 876 36
September 7 140 980 49
October 8 155 1240 64
November 9 152 1368 81
45 1219 6398 285
9(6398)  (45x1219)
b=
9(285)  (45) 2
= 5.05

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 a=
 Y  b T
n
1219 5.05(45)
=
9
= 110.19
Yt = 110.19 + 5.05T

b. (i) Forecast for December (T = 10)

Y10 = 110.19 + 5.05 (10) = 160.69 units
(ii) Forecast for January (T = 11)
Y11 = 110.19 + 5.05 (11) = 165.74 units
(iii) Forecast for February (T = 12)
Y12 = 110.19 + 5.05 (12) = 170.79 units

2. a) Yt = a + bT
n TY   T  Y
b=
n T 2   T 
2

Month Period (T) Y TY T2

January 1 133 133 1
February 2 183 366 4
March 3 285 855 9
April 4 640 2560 16
Ma y 5 1876 9380 25
June 6 2550 15300 36
21 5667 28594 91
6(28594)  (21x5667)
b=
6(91)  (21) 2
171,564  119,007
=
546  441
52.557
=
105
= 500.5

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a=
 Y  b T
n
5667  500.5(21)
=
6
 4843.50
=  807.25
6

Yt = -807.25 + 500.5T

b. (i) Forecast for July (T = 7)

Y7 = -807.25 + 500.5(7) = 2696.25
(ii) Forecast for August (T = 8)
YB = -807.25 + 500.50 (8) = 3196.75
(iii) Forecast for September (T = 9)
Y9 = -807.25 + 500.50 (9) = 3697.25

CYP 4.4
1. Ft = Ft-1 + (Dt-1 – Ft-1)
F6 = F5 + (D5 – F5)
= 200.4 + 0.10 (225 – 200.40) = 203
F7 = F6 +  (D6 – F6)
= 203 + 0.10 (285 – 203) = 211.20
F8 = F7 +  (D7 – F7)
= 211.20 + 0.10 (305 – 211.20) = 220.58

F9 = F8 + (D8 – F8)
= 220.58 + 0.10 (190 – 220.58) = 217.52
2. FJuly = FJune +  (DJune – FJune)
= 90 + 0.30 (100 – 90)
= 93

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CYP 4.5
6000  5500  6500  6800  5800
a) F1998 =  6120
5
6500  6800  5800
b) F1998 =  6366.67
3
5500  6500  6800  5800  6120
c) F1999 =  6144
5
6500  6800  5800  6120  6144
F2000 =  6272.80
5
6800  5800  6120  6144  6272.80
F2001 =  6227.36
5
5800  6120  6144  6272.80  6227.36
F2002 =  6112.83
5

CYP 4.6
Company Consumption Projected output Projected
Coefficient (m) demand
French door makers 3/door 3000 9000
Table producers 1.5/table 2000 3000
Window makers 1.25/window 4000 5000
Total projected quantities of LTZ metal 17000 meters

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