1 Cambashi - The importance of evidence-based market planning

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The importance of evidence-based market planning

05 November 2014

Dan Roberts offers some advice to enterprises that are thinking about expanding into new geographical territories.

Dan Roberts

"Where next?" is a phrase that must come up numerous times in planning sessions the world over.  Usually it's along the lines of "We're doing well in our existing markets, but to reach our growth targets we need to expand into new territories.

So where should we target next?" Cambashi believes passionately that those sorts of decisions can only be made with reference to impartial evidence. It's what we like to call "Evidence-based Market Planning".

Cambashi is not alone in advocating market planning using data. Malcolm Macdonald starts one of his books on marketing planning by advocating the need to put your own company's performance into the context of your market's performance.

For example, if your company is growing at 10 percent a year, then a target growth of 15 percent might seem ambitious. However, if your market is growing at 30 percent per year and is forecast to grow even faster, then your growth and forecasts do not seem so great.

To answer the market planning question posed above, we need to consider the alternative new markets and analyse the market size data. In our regular series of webinars on evidence-based market planning, we look at a number of scenarios that marketing teams commonly meet. One such scenario was the question of which countries to target next.

To illustrate the numbers-based process, we consider the hypothetical situation of a small US-based software provider that has been successful selling into the High Tech industries in US and Japan.

The company's main product is a software product to help designers optimise power supplies, it works alongside mechanical and electrical design software from other providers. Revenues are about $10m per year.

Growth in US and Japan seems to have slowed, so the management team is looking for new territories to sell into. The product is a small part of what Cambashi calls the Technical Applications market in High Tech; but as an add-on, the opportunities will follow the same pattern as the whole Technical Applications market.

When you're attempting to forecast the market for your products, you need to consider the macro and micro external environments. Cambashi's Observatories do just that for the Technical Applications market.

The Country Observatory forecasts the overall market by country, taking into account the economic macro environment; the Product Observatory tracks the different Technical Applications product lines and providers by the main geographical regions and represents a view of the micro external environment.

The Employment Observatory tracks employment by occupation, industry and country and provides a view of the social macro environment, while the Industry Observatory forecasts the Technical Applications market by industry sector and country, using economic macro environment data, as well as input from both Country and Product Observatories to ensure consistency.

The observatories also represent an independent view of the market, free from the vested interests of the sales or marketing teams.

The first thing to do is look at the worldwide market in High Tech industries. There are 18 industries that could be considered as High Tech in the Industry Observatory. The global market for technical applications software in those industries is $1.7bn.

The scenario sales team estimates that they account for about 5 percent of their customers' engineering software budget. Alongside the $1.7bn global market, this gives a first-level approximation of the global market for the company's product at about $85m.

If we look at the High Tech market by country (see chart 1), you can see that our company is already in the two biggest markets for High-Tech - US and Japan. China, Germany and South Korea look like the best bets for the next countries to address.

However, market size is not the only consideration. We need to consider growth and the expected market in the future, say five years' time (see chart 2). This chart shows the base year in blue (2012 in this chart), with the 5-year projection in orange.

Growth rates are shown as the yellow diamonds. The chart is ordered with the biggest market in 2017 to the left, with the smallest to the right. You can see that China, Vietnam and Philippines have the highest growth rates, but the biggest potential markets are those to the left of the chart, as highlighted.

These will be the top six countries in 2017, but it is interesting to note that Switzerland and Germany are often considered together as single sales region, alongside Austria called "DACH". In fact, a combined Germany plus Switzerland market would be bigger than Japan in five years' time. 

To get a better understanding of what the basis of previous successes were, we need to look at US and Japan more closely. Chart 3 shows the High Tech subsectors for the combined US and Japan markets.

Again, the blue bar is 2012, with the orange bar expected market in 2017. The stand-out sector for both size and growth is the sector that the UN's latest standard coding system (ISIC4) calls "Manufacture of irradiation, electromedical and electrotherapeutic equipment". That is electronic medical devices, distinct from other medical equipment, such as syringes and bandages. 

The equivalent chart for China shows a very different picture, with consumer electronics, domestic appliances and communications equipment (phones) as the largest sectors. This is what you would expect, but the medical devices sector is one of the smallest in China. To make a market entry in China, we would need to address different subsectors from those where we have been successful in US and Japan.

A combined chart for Germany and Switzerland shows that medical devices is one of the biggest sectors, but the biggest sector is "Automation, control and other equipment" - also in the top three in US and Japan.

South Korea is different again, with a single very dominant sub-sector of "Manufacture of electronic components and boards". Although this is also relatively big in US and Japan, we would need to check that our solution truly addresses this sector before trying a market entry project in South Korea.

Initial thoughts after looking at the Industry Observatory suggest that Germany and Switzerland might be the safest bet, with a significant market and reasonable growth, but most importantly similar subsectors to our existing markets. A medical devices initiative might work across US, Japan, Germany and Switzerland.

Dan Roberts is a Senior Consultant at Cambashi Ltd, a Cambridge based independent industry analyst firm.

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