978-0130387752 Chapter 3 Market-Based Strategic Thinking

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CHAPTER3

Market Potential, Market Demand, and Market Share

You have to see more to sell more.

— Jack Welch

CEO, General Electric Co.,1981–2001

Jack Welch’s comment could be used to open a discussion on the importance of a business having a broad

vision of its market. A narrow market vision slowed Coca-Cola’s entry into several newly emerged markets for

beverages that directly compete with soft drinks. Those businesses that succeed in marketing have better

antennae for sensing new trends and emerging marketing opportunities. Those that lack this quality are in a

follower position, always trying to catch up.

IntroductoryExercise

The following factors describe the U.S. market demand for coffee and the customer demand

needed for a coffee shop to break even:

Americans consume about 2.4 billion pounds of coffee annually. In the U.S., 114 million people consider

themselves coffee drinkers.

The current average consumption per coffee drinker is about 1.5 cups a day, but in 1960 those who

considered themselves coffee drinkers drank three cups a day.

Coffee shop customers spend an average of $3 per visit.

To break even, the average coffee shop must have sales revenues of $6,500 per week.

The average margin is 40 percent.

Using this information, you can discuss market demand by addressing the following questions:

What would the market demand be if coffee drinkers consumed at the same daily rate as they did in 1960?

What are the possible factors contributing to the reduced rate of consumption?

How many customers does a coffeehouse need to break even? (Revenue of $6,500 per week divided by $3

per customer equals 2,167 customers per week.)

Teaching Objectives

Delineate the difference between market demand and market potential, and identify the factors that impact

the rate of market growth.

Introduce the concept of the market development index and how it can be used to assess market growth and

market development opportunities.

Introduce the concept of the share development index and the factors that determine a business’s market

share, and discuss how the SDI helps, along with the market development index, a business to quickly

assess its opportunities for growth.

Harvard Business School Case Materials

Cola Wars Continue: Coke and Pepsi in 2006–2007. HBS Case 9-706-447. This case examines the

industry structure and competitive strategy of Coca-Cola and Pepsi over their 100-year rivalry. New

challenges in 2006 included boosting flagging carbonated soft drink (CSD) sales and finding new revenue

streams. Both companies also began to modify their bottling, pricing, and branding strategies. They looked to

emerging international markets to fuel growth and broaden their portfolios with alternate beverages like tea,

juice drinks, sports drinks, energy drinks, and bottled water. In vying for the “throat share” of the world’s

beverage market, Coke and Pepsi fought their most intense battles over the $66 billion CSD industry in the

United States, where annual per-person CSD consumption is an average of 52 gallons. During a 20-year

“carefully waged competitive struggle” from 1975 to 1995, both companies achieved average annual growth

of around 10 percent, as U.S. and worldwide CSD consumption consistently rose. This cozy situation was

threatened in the late 1990s, however, when U.S. CSD consumption declined slightly before reaching a

plateau. The case considers whether Coke and Pepsi’s era of sustained growth and profitability might be

coming to a close or whether this slowdown would be just a blip in the course of over a century of enviable

performance. 28 pages.

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Taco Bell (1994).HBS Case 9-694-076. Taco Bell’s CEO John Martin boldly proclaims a growth goal of

200,000 points of access by the year 2000 (the company had approximately 3,600 in 1991). To realize such

dramatic growth, Martin embraces a philosophy of continual change. The implications for Taco Bell are

extensive changes in organizational structure, culture, human resources, technology, and communications.

In redefining its market and “thinking outside the box” in all aspects of its business, Taco Bell hopes to

become a “super brand”―transcending not only categories, but industries as well.

NTT DoCoMo: Marketing I-mode.HBS Case 9-502-031. I-mode is a wireless Internet service offered by

Japan NTT DoCoMo. Just 3 years into the product life cycle, the company has 30 million customers and a 60

percent share of Japan’s mobile Internet market. This case looks at a successful launch of a new product

and the factors that contributed to its rapid adoption. The case offers a good way to talk about product life

cycles and why they progress at different rates. 25 pages.

MSA: The Software Company–Planning the AMAP Product Line.HBS Case 9-590-069. MSA has

commissioned a major market research study to assess demand potential for a computer software system

designed for aerospace and defense contractors. Students must evaluate the results of the study (including

conjoint analysis) to assess whether MSA should invest in R&D to upgrade the technology or build a sales

organization. Teaching Note: 5-592-102.

Market Analysis.HBS Case 9-576-056. This reading provides students with a basic understanding of

conducting a demand analysis, defining a market, and projecting a product life cycle.

Market-Based Strategic Thinking

1. How does a product-focused market definition differ from a strategic market definition for a

company like Coca-Cola?

A product-focused market definition is narrowly defined around products, not customer needs. A strategic

market definition is much broader. It enables a business like Coca-Cola to see the market in terms of

2. How would a strategic market definition help a company like Nike?

The benefits of a strategic market definition include: (1) a market definition built around customer needs,

(2) a much broader picture of current and potential customers, and (3) a better understanding of the forces

3. Why is Facebook’s market vision an important element of the market demand Facebook creates?

Market vision is the ability to see beyond current customers and products to a broader range of unserved

customers and unarticulated customer needs, as illustrated in Figure 3-6. Each year Facebook is able to

4. Why is it important for Pampers to understand the market potential for disposable diapers?

We cannot know the growth potential of a market without knowing the maximum market potential. The

growth rate of a market is restricted by its current products, prices, and forms of distribution and

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Average usage is 2.5 years;

There are 387 million worldwide younger than 2.5 years;

5. How would you estimate the worldwide market potential for toothbrushes?

With roughly 6.8 billion people in the world, if each person consumed one toothbrush per year, the market

6. What would be your estimate of the MDI for toothbrushes?

7. What forces restrict today’s market demand for disposable diapers from reaching the maximum

market demand?

Shown here are the factors that restrict market development, as presented in Figure 3-6, along with

comments for each with respect to how that factor may act to limit worldwide usage of disposable diapers.

Inuencing Factor Impact on Usage of Disposable Diapers

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8. What factors help accelerate market growth and market demand for Apple’s iPad? How could Apple

influence these factors to further accelerate market growth?

Two fundamental forces slow or accelerate market demand: customer adoption forces and product

adoption forces, as presented in Figure 3-7. The table here presents an assessment of these forces for the

Apple iPad when the product first entered the market. The customer adoption forces (an 8.4 rating out of a

9. How does anMDI help Dell forecast its sales of personal computers?

The market development index is the ratio of current market demand to market potential. When the index is

below 50, the market has considerable growth potential, and growth-oriented marketing strategies are

10. How do customer adoption forces accelerate or impede market penetration of electric cars like

GM’s Volt?

There is a growing segment of car owners who want an all electric car but many perceive a considerable

11. How do product adoption forces accelerate or impede market penetration of electric cars like the Volt?

The overall product forces score is 4.75, as shown in the table under question 10.The Volt’s relative

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12. How could Apple accelerate the rate of market penetration for iPads?

example, could offer trial demos at high schools, college bookstores, and at kiosks in airports.

13. Why do iPod’s sales volumes, prices, and margins vary over the product life cycle?

During the introductory stage of the product life cycle, prices are typically high and volumes are low due to

limited production. Margins are often very high to help pay for the high marketing and sales expenses

14. Referring to Figure 3-10, why would the net marketing contribution be negative in the introductory

stage for GM’s Volt car?

Volume sold is low in the introductory stage when many potential customers are still evaluating the newly

introduced car. The resulting low level of sales typically would not cover the high cost of marketing and

15. Why would the NMC for a personal computer peak during the late growth stage of the product life

cycle?

At the late growth stage of the PC product life cycle, the optimal combination of volume, margin, and

marketing and sales expenses is achieved. Prior to this point, lower PC volumes yield a lower net

16. What share performance metrics underlie the market share performance of Apple’s Mac computer?

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Many factors affect a business’s market share. The share development tree in Figure 3-16 indirectly

17. How would Toyota use an index of its current and potential market share to gauge the market share

growth of the Prius?

The Toyota Prius dominated the hybrid car segment in the U.S. market with a 50 percent share until 2009

when more competitors entered the market. The important lesson to learn here is that the share metrics

18. What are the advantages of computing a market share index for a new printer?

A business could sample target market customers with a telephone survey, using the findings to estimate

the performance level of each factor along the share development tree presented in Figure 3-16 for its new

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19. Why would Netflix’s actual market share be different from its market share index for a given target

market?

There are a variety of market forces (e.g., customers, competitors, distributors, and environment) that can

impact the actual share at any point in time. The market share index for Netflix is only an approximation of

20. How could a matrix combining the MDI and SDI be used to develop international marketing strategy

for Gatorade?

Gatorade could estimate its marketdevelopment index and share development index for different segments

of the sport drink market. The segments, for example, could include one for professional teams, another for

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