The Key Elements of a Market Analysis

A market analysis is performed in order to determine who the customers are and what they want from your company. The key elements of a market analysis include the market size, market growth rate, market profitability, industry cost structure, distribution channels, market trends, and key success factors.

Market Size

In order to determine market size a business also needs to identify the target customer. "Knowledge of the customer enables you to determine the market size and what determines their buying decision. It provides information that will help you choose a location, determine the product or services to offer, establish pricing, and plan a selling strategy" (Guide, 2006). There are many methods that can be used to determine market size. One common technique is to use the following formula:

"Market size = number of buyers in the market x quantity purchased by an average buyer in the market per year x price of an average unit "(How to Size a Market).

Another procedure for determining market size entails the use of outside information sources. Examples of outside information sources include government data, trade associations, financial data from industry experts, and customer surveys.

Market Growth Rate

Identifying the market growth rate helps companies determine whether the size of the market is likely to increase at a level in which the company is able to compete. While some organizations attempt to use historical data to estimate the future rate of market growth, this is not an ideal technique. A preferable method of determining the market growth rate involves the study of "growth drivers such as demographic information and sales growth in complementary products. Such drivers serve as leading indicators that are more accurate than simply extrapolating historical data" (Market Analysis). Companies can also use growth models to forecast market growth (How to Conduct).

Market Profitability

Market profitability refers to how profitable a business can be within a specific market. It also refers to the "minimal market area an activity must have to stay in operation" (Market Profitability). Determining the market profitability helps a company determine whether they can earn a profit selling a particular product in a particular market. "The average profit potential for a market can be used as a guideline for knowing how difficult it is to make money in the market" (Market Profitability). Michael Porter developed a framework termed Porter's five forces, which pinpoints five things that affect market profitability: "buyer power; supplier power; barriers to entry; threat of substitute products; rivalry among firms in the industry" (Market Analysis).

Industry Cost Structure

Understanding the industry cost structure helps the organization identify ways to increase business success. It is "also helpful for formulating strategies to develop a competitive advantage" (Market Analysis). Researching the industry cost structure involves identification of the various stages at which value is added to the product or service. For example, the stages for a manufacturer are: "procurement; processing; fabrication; assembly; distribution; marketing" (How to Conduct). Companies may also choose to use a model, such as Porter's value chain model, "for determining where value is added and for isolating the costs" (Market Analysis).

Distribution Channels

Researching distribution channels helps the organization determine the best system of distribution. The following should be included in the research: current distribution channels, availability of additional distribution channels, and the likelihood of new distribution channels surfacing. Questions that should be answered include: Who controls the current distribution channels? How direct to the customer are current distribution channels? Do additional or emerging distribution channels offer the chance to develop or improve the competitive advantage?

Market Trends

"Changes in the market are important because they often are the source of new opportunities and threats" (Market Analysis). Both industry specific trends and regional trends should be evaluated. These trends involve customers, competitors, and the industry as a whole. The company needs to determine what is important to its current and target customers, what customer needs are not currently being met, what current strategies the competition is changing, and what new strategies the competition is implementing (How to Conduct).

Key Success Factors

The key success factors are elements that a company within a specific industry must possess in order to be successful. Examples of possible key success factors include name recognition, access to unique resources, customer loyalty, financial resources, and access to distribution channels. The company must define the appropriate current key success factors and have the ability to determine "success factors needed in the future" (How to Conduct).

Conclusion

All successful organizations will perform a market analysis on a regular basis. The information gained through an effective market analysis will assist the company in making changes that benefit the organization as a whole. This information will also help management make decisions that promote company goals and objectives. The key elements of a market analysis are an invaluable tool for all managers and organizations.

References

"Guide to Market Research and Analysis." Canada Business Network website. URL: http://www.cbsc.org/servlet/ContentServer?c=GuideFactSheet&cid=1081945275683&lang=en&pagename=CBSC_FE/display

"How to Conduct Industry Research." NineMSN Small Business website. URL: http://smallbusiness.ninemsn.com.au/article.aspx?id=82722

"How to Size a Market - Part I." Marketing Profs website. URL:http://www.marketingprofs.com/Tutorials/marketsize1.asp

"Market Analysis." NetMBA website. URL: http://www.netmba.com/marketing/market/analysis/

"Market Profitability." Hofstra University website. URL: people.hofstra.edu/geotrans/eng/ch7en/meth7en/marketprofitability.html