Are you sûre you undertsand the forces developping on your markets

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Are you sure you understand correctly the forces developing in your markets? Strategic errors are very often linked to a lack of understanding of markets and forces that develops naturally in those markets.

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Strategic errors are very often linked to a lack of understanding of markets and forces that develops naturally in those markets.

Transcript of Are you sûre you undertsand the forces developping on your markets

Page 1: Are you sûre you undertsand the forces developping on your markets

Are you sure you understand correctly the forces developing in your markets?

Strategic errors are very often linked to a lack of understanding of markets and forces that

develops naturally in those markets.

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Market forces naturally change over time due to:• Demography:

• The relative weight of populations • The structure of age of populationsThe countries with dynamic demography are the emerging or under developed ones. Their population accounts for 85% of the world population. The countries with “Malthusian” demography are in the developed countries and their population represents only a 15% weigh.

 • Economic cycles:

• The phase of investment gives growth• The phase of renewal gives decrease Just like product or technology life curve, an economy passes through an investment phase where volumes grow regularly alongside their penetration and their development. Then the renewal phase comes where volumes tend to decrease, the needs are correctly covered and market is only natural renewal.   

 • International trade liberalization agreements and more generally the evolution of

population’s information and trainings thanks in particular to internet and other modes of communications.

 • Ores localization, in particular energetic ones.

Developed countries have eaten into their raw material reserves at different levels and are generally in a situation of dependence upon emerging and underdeveloped countries. Certain important emerging countries share this situation in particular China and India. The progressive scarcity of these essential resources drives a geopolitical slip and dependence. It modifies the power balances and could prove to be explosive in more or less long term. 16 dec. 2013

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The developed countries are characterized by a demography which is not dynamic (even decreasing), a population getting older and older, a majority and increasing share of the economy in phase of renewal, an advanced opening and dependence towards international trade.  The under developed or emerging countries on the contrary are characterized by a dynamic demography, a large majority share of the economy in phase of investment and a variable opening to the international trade. Resulting is a natural and generalized slip:• from developed countries offering a consumption reach of a few tens to a few

hundreds of million people (benefiting from a high level of R & D and standard of living and higher equipment rate supporting creation and development of new products),

• towards emerging countries opening a consumption reach of several hundreds of million to one or two billion people avid of consumption and only partially equipped (and with increasing standard of living thanks to globalization),

• then towards under developed countries which add a few billion potential consumers not-equipped (still their standard of living tends to increase more slowly).

 This slip accelerates as an industry, a technology or a kind of product progress towards maturity. It brings (makes necessary/inevitable) an accelerated prices decrease and thus a permanent search for costs reduction.

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Let us take the example of a given product life cycle (theoretical) which would concern potentially a one person out of three and with an average renewal rate every 3 years. While populations access to this product and through the rate of equipment evolution, this product market will evolve from 5 to 670 million units.  The quantity increase will follow a characteristic geographical evolution.• At the beginning the developed countries will start to be equipped and will concentrate

the market volumes, • Then gradually these countries will see their equipment rate progressing while new

populations start consuming the product,• The developed countries will then pass in phase of renewal whereas the geographical

extension towards new populations continues in an accelerated way,

Finally the product will be very widely diffused and the market will reach a maximum in phase of pure renewal.  

Graph of the quantitative trends in the market.

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As a consequence of the market enlargement, prices will tend to erode taking into account the cumulated volumes produced but also of the need to serve populations with lower standard of living. An average decrease of 5% will make that a product initially sold 2500 € at the beginning of cycle will only be worth €320 at the end of the cycle giving an evolution of the global market incomes as follows. Graph of the evolution of the incomes.

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To these evolutions (localization of consumers, prices and quantities sold) will naturally correspond an evolution of manufacturing costs and localization and thus a material change in the competition.  The product creators will see gradually appearing new entrants starting from the zones hardly covered i.e. starting from emerging or under developed countries. These new entrants will benefit from competitive advantages related to the volume of their markets but also of lower labor costs or lower raw materials costs without having to spend as much of R & D and marketing than the “creators”. The different actors will have the ability to develop more or less aggressive strategies but this will not materially change the geographical slip. Thus the market could see the creators developing then disappearing gradually against new entrants from emerging and under developed countries as the first pattern hereafter. Else certain competitors may at an early stage develop a globalization strategy with production delocalization enabling them to control the competition development and in the long run to preserve an important position as in the second pattern. The different actors strategy will potentially use a whole panel of differentiation tactics (depend on product types) such as product range renewal, increasing value added of product range, creation of fashion effect and product personalization, associated services,… This will generally cause to slow down the slip and to render the market more complex in order to limit its slip.

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Capital intensity was a important barrier but its effect tends to disappear against emerging countries with strong trade surpluses (and who thus constitutes important capacity of investments) and/or having strongly liberalized their economies (and thus attracting easily international capitals).    Qualification and education level is another one but which tends to reduce also at least with respect to large emerging countries which developed their universities and their R & D capabilities.  Moreover, these two barriers do not have much importance in a certain number of sectors where their intensity is relatively low and where their impacts on the productivity is compensated by the low local costs level.   Developed countries government action will tend to support the movement towards liberalization. Indeed, developed countries need (on variable levels) the international trade:• To avoid the recession, their economy being mainly in phase of renewal,• For the access to ores and energy of which they are largely overdrawn,• To be able to export their own products and thus cover more or less well their imports,• To maintain (or decrease) the cost of living in their country and thus to develop their

standard of living. Emerging countries government actions will also tend to liberalization but their motivation will be focus towards their employment and standard of living increase. This action is and will continue to be “very political” in the nondemocratic countries. The driving topic of their action remains (I) to facilitate the export of their production towards the countries with stronger incomes (II) to facilitate the importation of capital and technology to develop local industry (III) to protect local industry.  

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Two patterns of evolution on a global standard market.

1st pattern.

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Revenues Creator Entrant 1 Entrant 2 Entrant 3 Entrant 4 Entrant 5 Creator Entrant 1 Entrant 2 Entrant 3 Entrant 4 Entrant 5

12500 100,0% 12 500 - - - - - 27708 95,0% 5,0% 26 323 1 385 - - - - 45125 90,0% 7,5% 2,5% 40 613 3 384 1 128 - - - 64303 85,0% 10,0% 5,0% 54 658 6 430 3 215 - - - 84844 80,0% 12,5% 6,5% 1,0% 67 876 10 606 5 515 848 - -

106395 75,0% 13,5% 7,5% 4,0% 79 796 14 363 7 980 4 256 - - 128641 70,0% 13,0% 10,0% 7,0% 90 049 16 723 12 864 9 005 - - 151306 65,0% 12,5% 12,5% 10,0% 98 349 18 913 18 913 15 131 - - 174148 60,0% 12,0% 13,5% 12,0% 2,5% 104 489 20 898 23 510 20 898 4 354 - 196953 55,0% 11,0% 14,0% 13,0% 4,5% 2,5% 108 324 21 665 27 573 25 604 8 863 4 924 219537 50,0% 10,0% 15,0% 14,0% 7,0% 4,0% 109 768 21 954 32 931 30 735 15 368 8 781 241740 45,0% 9,0% 16,0% 15,0% 8,0% 7,0% 108 783 21 757 38 678 36 261 19 339 16 922 263426 40,0% 8,0% 16,5% 15,5% 11,0% 9,0% 105 370 21 074 43 465 40 831 28 977 23 708 284477 35,0% 7,0% 17,0% 16,5% 13,5% 11,0% 99 567 19 913 48 361 46 939 38 404 31 292 304797 30,0% 6,0% 17,0% 16,5% 16,5% 14,0% 91 439 18 288 51 815 50 291 50 291 42 672 324304 25,0% 5,0% 17,0% 16,5% 19,0% 17,5% 81 076 16 215 55 132 53 510 61 618 56 753 342932 20,0% 4,0% 17,0% 16,5% 23,0% 19,5% 68 586 13 717 58 298 56 584 78 874 66 872 360629 15,0% 3,0% 16,5% 16,0% 26,5% 23,0% 54 094 10 819 59 504 57 701 95 567 82 945 377354 10,0% 2,0% 16,5% 16,0% 29,5% 26,0% 37 735 7 547 62 263 60 377 111 319 98 112 393077 5,0% 1,0% 16,0% 15,5% 33,0% 29,5% 19 654 3 931 62 892 60 927 129 715 115 958 398816 0,0% 0,0% 16,0% 15,5% 36,0% 32,5% 0 - - 63 810 61 816 143 574 129 615 395402 15,5% 15,0% 36,5% 33,0% - - 61 287 59 310 144 322 130 483 389501 15,5% 15,0% 36,5% 33,0% - - 60 373 58 425 142 168 128 535 382104 15,0% 14,5% 37,0% 33,5% - - 57 316 55 405 141 379 128 005 373430 15,0% 14,5% 37,0% 33,5% - - 56 014 54 147 138 169 125 099 363677 15,0% 14,5% 37,0% 33,5% - - 54 552 52 733 134 560 121 832 353024 15,0% 14,5% 37,0% 33,5% - - 52 954 51 189 130 619 118 263 341633 15,0% 14,5% 37,0% 33,5% - - 51 245 49 537 126 404 114 447 329649 14,5% 14,0% 37,5% 34,0% - - 47 799 46 151 123 619 112 081 317203 14,5% 14,0% 37,5% 34,0% - - 45 994 44 408 118 951 107 849 304410 14,5% 14,0% 37,5% 34,0% - - 44 139 42 617 114 154 103 499 291374 14,5% 14,0% 37,5% 34,0% - - 42 249 40 792 109 265 99 067 278190 14,5% 14,0% 37,5% 34,0% - - 40 338 38 947 104 321 94 584 264938 14,5% 14,0% 37,5% 34,0% - - 38 416 37 091 99 352 90 079 251691 14,5% 14,0% 37,5% 34,0% - - 36 495 35 237 94 384 85 575 238513 14,5% 14,0% 37,5% 34,0% - - 34 584 33 392 89 442 81 094 225460 14,5% 14,0% 37,5% 34,0% - - 32 692 31 564 84 547 76 656 214187 14,5% 14,0% 37,5% 34,0% - - 31 057 29 986 80 320 72 824

Market share Revenue distribution

Developed countries Emerging or underdevelopped countries Developed countries Emerging or underdevelopped countries

-20,0%

0,0%

20,0%

40,0%

60,0%

80,0%

100,0%

120,0%

12

50

0

45

12

5

84

84

4

12

86

41

17

41

48

21

95

37

26

34

26

30

47

97

34

29

32

37

73

54

39

88

16

38

95

01

37

34

30

35

30

24

32

96

49

30

44

10

27

81

90

25

16

91

22

54

60

Creator Developedcountries

Entrant 1

Entrant 2 Emergingor underdeveloppedcountriesEntrant 3

Entrant 4

Entrant 5

-20 000

-

20 000

40 000

60 000

80 000

100 000

120 000

140 000

160 000

12

50

0

64

30

3

12

86

41

19

69

53

26

34

26

32

43

04

37

73

54

39

54

02

37

34

30

34

16

33

30

44

10

26

49

38

22

54

60

Creator Developedcountries

Entrant 1

Entrant 2 Emerging orunderdeveloppedcountriesEntrant 3

Entrant 4

Entrant 5

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2nd pattern

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Revenues Creator Entrant 1 Entrant 2 Entrant 3 Entrant 4 Entrant 5 Creator Entrant 1 Entrant 2 Entrant 3 Entrant 4 Entrant 5

12500 100,0% 12 500 - - - - 27708 95,0% 5,0% 26 323 1 385 - - - 45125 90,0% 7,5% 2,5% 40 613 3 384 1 128 - - 64303 85,0% 10,0% 5,0% 54 658 6 430 3 215 - - 84844 80,0% 12,5% 7,5% 67 876 10 606 6 363 - - 106395 75,0% 15,5% 9,5% 79 796 16 491 10 108 - - 128641 70,0% 18,5% 11,5% 90 049 23 799 14 794 - - 151306 65,0% 21,5% 13,5% 98 349 32 531 20 426 - - 174148 60,0% 23,0% 14,5% 2,5% 104 489 40 054 25 251 4 354 - 196953 55,0% 25,0% 15,0% 3,5% 1,5% 108 324 49 238 29 543 6 893 2 954 219537 50,0% 27,0% 15,5% 5,0% 2,5% 109 768 59 275 34 028 10 977 5 488 241740 45,0% 29,0% 16,0% 6,0% 4,0% 108 783 70 105 38 678 14 504 9 670 263426 40,0% 30,5% 16,5% 7,5% 5,5% 105 370 80 345 43 465 19 757 14 488 284477 35,0% 32,0% 17,0% 9,0% 7,0% 99 567 91 033 48 361 25 603 19 913 304797 30,0% 33,5% 17,5% 10,5% 8,5% 91 439 102 107 53 339 32 004 25 908 324304 25,0% 35,0% 18,0% 12,0% 10,0% 81 076 113 506 58 375 38 916 32 430 342932 20,0% 36,5% 18,5% 13,5% 11,5% 68 586 125 170 63 442 46 296 39 437 360629 15,0% 38,0% 19,0% 15,0% 13,0% 54 094 137 039 68 519 54 094 46 882 377354 10,0% 39,5% 19,5% 16,5% 14,5% 37 735 149 055 73 584 62 263 54 716 393077 5,0% 41,0% 20,0% 18,0% 16,0% 19 654 161 161 78 615 70 754 62 892 398816 0,0% 42,5% 21,0% 19,5% 17,0% 0 - 169 497 83 751 77 769 67 799 395402 42,0% 21,0% 20,0% 17,0% - 166 069 83 034 79 080 67 218 389501 41,5% 21,0% 20,5% 17,0% - 161 643 81 795 79 848 66 215 382104 41,0% 21,0% 21,0% 17,0% - 156 663 80 242 80 242 64 958 373430 40,5% 21,0% 21,5% 17,0% - 151 239 78 420 80 287 63 483 363677 40,0% 21,0% 22,0% 17,0% - 145 471 76 372 80 009 61 825 353024 39,5% 21,0% 22,5% 17,0% - 139 445 74 135 79 430 60 014 341633 39,0% 20,5% 23,0% 17,5% - 133 237 70 035 78 576 59 786 329649 38,5% 20,0% 23,5% 18,0% - 126 915 65 930 77 468 59 337 317203 38,0% 19,5% 24,0% 18,5% - 120 537 61 854 76 129 58 682 304410 37,5% 19,0% 24,5% 19,0% - 114 154 57 838 74 580 57 838 291374 37,0% 18,5% 25,0% 19,5% - 107 809 53 904 72 844 56 818 278190 36,5% 18,0% 25,5% 20,0% - 101 539 50 074 70 938 55 638 264938 36,0% 17,5% 26,0% 20,5% - 95 378 46 364 68 884 54 312 251691 35,5% 17,0% 26,5% 21,0% - 89 350 42 787 66 698 52 855 238513 35,0% 16,5% 27,0% 21,5% - 83 480 39 355 64 398 51 280 225460 34,5% 16,0% 27,5% 22,0% - 77 784 36 074 62 001 49 601 214187 34,0% 15,5% 28,0% 22,5% - 72 824 33 199 59 972 48 192

Developed countries Emerging or underdevelopped countries

Part de marché Distribution des revenus

Developed countries Emerging or underdevelopped countries

-20,0%

0,0%

20,0%

40,0%

60,0%

80,0%

100,0%

120,0%

1250

0

6430

3

1286

41

1969

53

2634

26

3243

04

3773

54

3954

02

3734

30

3416

33

3044

10

2649

38

2254

60

Creator Developedcountries

Entrant 1

Entrant 2 Emerging orunderdevelopped countries

Entrant 3

Entrant 4

Entrant 5

-20 000

-

20 000

40 000

60 000

80 000

100 000

120 000

140 000

160 000

180 000

1250

0

6430

3

1286

41

1969

53

2634

26

3243

04

3773

54

3954

02

3734

30

3416

33

3044

10

2649

38

2254

60

Creator Developedcountries

Entrant 1

Entrant 2 Emerging orunderdeveloppedcountries

Entrant 3

Entrant 4

Entrant 5

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The analysis and the patterns presented remain very generic taking into account the multiplicity of market types. However, a firm intervening on international markets must maintain for each one of its markets this kind of analysis and clearly define its strategy versus such forces that will naturally impact on it.  During the market forecast (and follow-up of its evolution), it will be important to correctly understand the effects of the crises on volumes for durable goods.          

Renewal markets.            Example of a market whose tendency is a renewal every 5 years on average with a basic quantity of 1 million unit.  

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In absence of crisis, the market profile would be

Year n-1

Year nYear n+1

Year n+2

Year n+3

Year n+4

Year n+5

Year n+6

Year n+7

Year n+8

Year n+9

(in thousands)Renewal potentialin positive economic cycle 1 000 1 000 1 000 1 000 1 000 1 000 1 000 1 000 1 000 1 000 1 000for a total installed base 5000 5000 5000 5000 5000 5000 5000 5000 5000 5000 5000Market profile:Year of purchase 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000Age <2Years 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000Age <3Years 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000Age <4Years 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000Age <5Years 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000

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A crisis happening in year N with progressive recovery over 3 years, will involve a drop then a readjustment of the renewal rate like below (part of the customers delaying their

decision of renewal)                                

The crisis on a market initially stable will involve a disturbance of annual volumes over years. In fact, the market volumes at a given time will be itself the reflection of last crises.                                                            It is thus necessary to understand:      • How the last crises are reflected year after year,• How a crisis which arrives will increase the oscillations of the market,           with the aims to anticipate correctly the evolutions to come and to adjust the production and the sales strategy consequently and with the right timing. 

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Installed base 5 000 5 000 5 000 5 000 5 000 5 000 5 000 5 000 5 000 5 000 5 000Year of purchase 1000 600 700 850 1400 1300 750 700 850 1400 1300Age <2Years 1000 1000 600 700 850 1400 1300 750 700 850 1400Age <3Years 1000 1000 1000 600 700 850 1400 1300 750 700 850Age <4Years 1000 1000 1000 1000 600 700 850 1400 1300 750 700Age <5Years 1000 1000 1000 1000 1000 600 700 850 1400 1300 750Age <6 years 400 300 150 150 150 0Age <7 years 400 700 300

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Investment markets.

The crisis will also disturb the quantities sold over several years.  In practice, a market is never completely an investment or renewal market, it will then be necessary to combine the two analysis in order to obtain a market forecast which correctly integrates the effects of crisis on the global market.

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Year n-1

Year nYear n+1

Year n+2

Year n+3

Year n+4

Year n+5

Year n+6

Year n+7

Year n+8

Year n+9

Equipment rate progressing by 10% then 5%15% 25% 35% 50% 55% 60% 65% 70% 75% 80% 85%

Yearly quantities 150 100 100 100 50 50 50 50 50 50 50Cumulated quantities 150 250 350 450 500 550 600 650 700 750 800

A crise intervening in year n will impact the investments rate in n+1 and n+2 yearsbut will also create a recovery effect on following yearsYearly quantities 150 30 60 90 130 90 50 50 50 50 50Cumulated quantities 150 180 240 330 460 550 600 650 700 750 800

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This analysis is necessary and important to understand correctly the market scale and to make timely decisions.

The danger is, indeed, to make mistake on the reasons for the volume variations and to take inappropriate decisions or with a wrong timing. Wrong understanding and not adapting to these ups and down in timely manner will be source of major profitability impacts. On top that could modify significantly respective market shares of the various competitors.

The “doctrinal approach” tends to want and to forecast linear volume evolutions on markets. In practice, for durables goods, up and down effect is the rule taking into account the fact that economic crises, with more or less important impacts, occur very regularly (3-5 years). For consumer goods, effects are rather immediate and the ups and down are much simpler to understand. Extract from my book « Globalisation – Adapter l’organisation de son entreprise face à la mondialisation » EMS Editions

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