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Chapter 3 Homework Assignment
In chapter 3 you will present an analysis of the market in which your business idea will operate.
Note: A requirement to compute a Pro-forma Forecast of Volume is described in the instructions. An example of how that is computed is included as an attachment at the bottom of this announcement.
Format this week’s homework using the section headings from the Business Plan Template. Use this outline:
3.0 MARKET ANALYSIS
3.1 Industry Analysis
3.2 Market Segmentation
3.3 Target Market Size and Trends
3.4 Buyer Behavior
3.5 Competitor Analysis – Direct, Indirect and Future
3.6 Pro Forma Forecast of Annual Sales Volume
Section 3.1 Industry Analysis: Begin this chapter with a summary Industry Analysis, using the techniques for industry analysis that you learned in EMG 4005. Describe your business’ NAICS industry code and provide market details such as those found in IBISWorld (Access is available through Evans Library – which you can access from this link https://libguides.lib.fit.edu/c.php?g=427694&p=2919540 (Links to an external site.) ). Then proceed to “drill down” into this market, in the chapter sections that follow.
Section 3.2 Market Segmentation should draw upon the segments described in your NAICS code. Search the information you will find in IBISWorld for facts about how your market/industry is segmented. Indicate which segment will be the focus of your business, and why.
Section 3.3 Target Market Size and Trends should describe the expected size of your chosen market segment (the segment from those identified in Section 3.2 that is a “best fit” for your business) and the trends that the segment is experiencing to indicate the potential opportunity that your business anticipates. This will help to justify your volume forecast, which follows further in this chapter.
Section 3.4 Buyer Behavior should draw upon the findings from the market research that you conducted last week. In this section, you can use a lot of the material from your week 2 homework submission. You might say, for example, “Based on market research conducted (date) on a random sampling of (number) potential customers, the following findings describe the expected buyer behavior in our market segment.” You should note the buyer preferences your analysis revealed with respect to your product and business model, and remark on what changes you are planning as the result of the research findings.
In addition to citing your week 2 market research, you should describe the expected buyer behavior in your chosen market segment, based on information that you may find in published sources. Do a web search and see if you can find any other research that talks about buyer behavior in general in the market segment that you are pursuing. You can incorporate that as well.
For example, here’s a study about how buyers select mobile phone apps: http://www.ijstm.com/images/short_pdf/1463065319_1581ijstm.pdf (Links to an external site.) (the study was conducted in India, but the findings appear to be universal). Be sure to properly describe any research project you draw from (including your own), so the reader can assess the quality and validity of the cited findings.
Section 3.5 Competitor Analysis should describe in as much detail as possible the competitors your business will encounter. The objective is to indicate how much difficulty your business may face from the competition, in achieving its volume objectives.
Describe direct competitors (those that sell products that are similar to yours) and indirect competitors (those that offer alternate solutions for the business problem your product attempts to solve). Also describe the potential for future competitors to come into existence, in terms of barriers to entry and difficulty for others to enter the market. Describe other businesses that could potentially enter your market and explain why they might be able to enter or be blocked by barriers. Include a Competitive Analysis Grid.
Section 3.6 – Pro Forma Forecast of Annual Sales Volume is a critically important part of your business plan and CANNOT BE SKIPPED. “What is a Pro Forma Forecast of Annual Sales Volume?” you ask. It is a prediction of the sales volume that your proposed business venture will experience in the future. Yes – in the future! The forecast is to display yearly data looking forward over the next five years. The forecast is to presume that your expansion plan has been installed and the volume that you forecast should be based on the expanded business. And volume means quantity, not value so don’t get caught up in predicting revenue.
Here’s how to construct a Pro Forma Forecast of Annual Sales Volume.
1) Decide on the unit of measure that will describe your business’ volume. This is a very critical step because the measure will also be used for pricing and performance measurement.
Every business has some metric that describes its volume. If you are selling a product, then “pieces” is probably the appropriate unit of measure. Or perhaps a liquid measure such as “gallons.” Services can be described in terms such as “billable hours” (for example – a consultant) or “number of pieces handled while providing service.” (for example – a dry cleaner)
2) Create a spreadsheet that shows forecast volume both before and following the implementation of your expansion plan.
Have six columns in your schedule for volume data, plus a column to the very left for the description of each line. In the left-hand (first) volume column, show the actual results your business achieved in the prior 12 months (pre-expansion). (in this classroom exercise, you will imagine those “actual results” just the same as you imagine the future forecast results.) The five remaining volume columns will contain your forecast for five years into the future. The five-year forecast period must remain consistent through every chapter of the Business Plan.
The five forecast years are intended to cover the period of time the expansion plan will be in effect. You will likely predict a “ramping up” of volume as your production comes on stream and your marketing efforts begin to show results.
3) Develop the forecast results. The technique for forecasting future customer demand has two stages.
Start by predicting the total market demand for the next five years for your entire industry market segment. This data is usually publicly available from Industry Representative Groups and Agencies and/or from IBISWorld. You don’t self-generate this data.
Drawing your inputs from reputable existing industry forecasts adds credibility to your company forecast. Often there are established industry groups that research and publish data about their industry, including historical demand as well as forecasts of predicted future demand. These data are generally soundly developed and can be relied on for determining customer demand within the total industry.
Then predict how the addition of your business into the existing mix of competitors will impact total market demand.
Usually, two impacts occur. First, the new competitor will likely divert (steal) some of the existing competitor’s current demand. Second, the addition of a new competitor actually stimulates the total market to expand. The reason is that a new competitor’s product is usually differentiated from the existing competitors’ products or is considerably cheaper, and thus causes new customers to enter the market.
Predict how your business will capture a part of the existing market demand by causing customers to divert from their already established choices and instead choose your products (called conquest sales or diversions).
Predict how your business will stimulate new market demand (based on your product fulfilling pent-up demand that the existing competitors did not satisfy), causing the overall market size to expand (called plus-sales or market expansion).
The combination of the conquest sales that your product can divert from existing competitors together with the additional market expansion sales volume that results because you have a new, innovative product sums to the total demand for your product.
You won’t find this data in published sources. You must self-generate this information as scientifically as you can. One of the techniques is to develop algorithms that relate your specific business’ demand to some known, publicly available forecast. For example, you may find a historical relationship between gasoline price changes and ride-sharing – let’s say, for every $0.01 increase in gas prices, ride-sharing increases by 2%. You can quickly find a credible forecast of predicted gasoline demand. And thus, your new ride-share-scheduling phone app business can model how you expect demand for ride-sharing to change over time.
Attached is an example forecast, using hypothetical data made up solely for demonstration. You can follow this example to craft your own forecast.
4) In addition to providing your forecast results, describe the methodology and the assumptions behind how the data were developed. The reader will judge the quality of the forecast results based on the credibility of the forecasting process and assumptions. In forecasting, the methodology and assumptions are just as important as the results.
5) Avoid this trap, no matter how tantalizing it appears. Some students and even some research authors attempt to use Revenue to describe the size of their business. Revenue is never an expression of volume. Any report that attempts to describe a business size in terms of revenue is simply skipping the process of describing the business’ fundamental production and sales volume. Revenue is the mathematical product of the business’ sales volume times the unit price.
Key points regarding your forecast:
1) The forecast is about the number of products you will sell – not the sales revenue you will realize.
2) The volume forecast is the basis for every other forecast you will develop in this report. It’s like the foundation of a new house -it will support and define the size of the rest of the structure – the walls, the roof, the windows, the doors. In construction, all the rest of the house structure relates back to the foundation, and in this business plan your forecasts of revenues, facilities cost, equipment cost, employee cost, and all other costs will relate back to the volume forecast – they aren’t independently developed.
3) Forecasting isn’t precise. Therefore, always round your results to avoid criticism of “being too precise.”
4) If you discover in future weeks that your volume forecast doesn’t make as much sense as you thought it did, you have the flexibility to go back and modify your volume forecast. Even in real-life situations, a future forecast can always be modified when more data becomes available.
5) Remember that this is a classroom exercise with limited time and resources. With limited market data to draw upon, it is sufficient to be aware of the fundamentals of the forecast process. Draw upon these fundamentals to describe your forecast process, but just create numbers that seem sensible and don’t get bogged down by the research. Create a table that represents your best efforts to predict the volume with the limited data and time that you have available.
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