# SELF TEST #6: Volatility and Its Measurement

Test #1:

What is an index?

Answer: An index is the measure of the performance of one entity relative to another entity. The index is the ratio of the performance of the first entity divided by the performance of the second and then multiplied by 100.

Test #2:

What does an index over 100 tell us about the entity being measured compared to the base entity?

Answer: An index above 100 indicates that the first entity has a higher result than the second entity. An index below 100 indicates that the first entity has a lower result than the second.

Test #3:

If the market as a whole has volatility of 8%, what would be the volatility of the Very Large customer/Primary role segment of the market if its volatility index was 125?

Test #4:

What is volatility?

Answer: Volatility is the percentage of industry or company volume sold during a period of time that changes from one set of suppliers to another. Volatility can be either positive volatility, where the company gains a higher proportion of customer purchases, or negative, where the company loses a proportion of customer purchases. Positive volatility is the sum of Get In plus Increase Use. Negative volatility is the sum of Get Out plus Decrease Use. Unless many customers are entering or leaving a market, the industry's positive and negative volatility are very close in size. However, an individual company's positive and negative volatility may be quite different from one another.

Test #5:

How does volatility differ from normal growth?

Answer: Volatility arises when customers change suppliers or when customers enter or leave the market. Growth may occur whether or not there is any volatility in customer relationships. Volatility may occur even in a market that has no growth or is shrinking in size. Because of this volatility, a few fortunate suppliers may be able to grow, not only their market shares, but their total sales volumes, even in a shrinking market.

Test #6:

What is positive volatility?

Answer: Positive volatility is the percentage of industry or individual company volume sold during a period of time that is gained by a company, or by a set of suppliers, from another company or set of suppliers.

Test #7:

What is negative volatility?

Answer: The percentage of industry or individual company volume sold during a period of time that is lost by a company, or by a set of suppliers, to another company or set of suppliers.

Test #8:

What is a good guess for annual volatility in a Stable or Developing market?

Test #9:

What is a good guess for volatility in a Hostile marketplace?

Test #10:

Why is volatility low in Hostile marketplaces?

Answer: Volatility declines because competitors tend to turn Function and Price into commodities by copying them. As a result, customers make their buying decisions on Reliability and Convenience. Differences in Reliability and Convenience drive less annual volatility than do differences in Function and Price.

Test #11:

In a Hostile marketplace, where on the Size/Role matrix would you expect volatility to be high and low?

Answer: In a Hostile marketplace, the Primary and Secondary roles with Large and Small customers often have higher volatility than the market average because these customers feel that the suppliers in the market are favoring their larger competitors at their expense.

On the other hand, the Primary role with Very Large customers tends to become less volatile in a hostile marketplace because suppliers work strenuously to avoid failure in these relationships and the loss of the substantial volumes that go with them. These customers tend to be served with high levels of Reliability and Convenience, and, as a consequence, their volatility is often low.