L5 Mktg Manual Advance Edition

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MARKETING POLICY, PLANNING AND COMMUNICATION QCF Level 5 Unit

Contents Chapter Title Introduction to the Study Manual

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Unit Specification

vii

Coverage of the Syllabus by the Manual

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1

Marketing Culture and Orientation The Development of Marketing What is Marketing? The Strategic Orientation of Business Developing a Marketing Orientation Strategic Implications of a Marketing Orientation Coordination of Marketing with Other Management Functions Organisation for Marketing

1 3 4 5 10 12 20 27

2

Markets and the Marketing Environment The Concept of the Marketing Environment Macro Forces Micro Forces An Alternative View of the Marketing Environment The Marketing Audit Market Segmentation, Targeting and Positioning The Marketing Mix

35 36 37 41 44 45 50 62

3

Marketing Strategies Strategy and Planning Corporate Strategy Marketing Strategies Corporate Objectives Marketing Objectives Models for Formulating Marketing Strategies

69 70 71 75 77 78 84

4

Marketing Plans Development of the Marketing Plan Nature of a Marketing Plan Implementing the Marketing Plan Control and Evaluation Evaluating Sales Performance Evaluating Marketing Performance

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101 103 105 110 120 123 124

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Chapter Title

Page

5

Research for Marketing Introduction The Research Process Types of Research Sources of Information Research Methods Using External Research Agencies Information Systems

131 133 133 137 141 145 148 151

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Understanding Consumers and Consumer Behaviour The Buying Process Influences on Individual Buying Behaviour Classifications of Consumers The Social Psychology of Consumer Behaviour Organisational Purchasing

157 158 164 167 172 187

7

Product Management and Development Nature of Products and Services Product Management Product Branding Product Packaging The Product Life Cycle Extending and Expanding the Product Life Cycle New Product Development

195 196 199 212 215 216 224 227

8

Pricing Policies and Price Setting What Does a Price Represent? The Pricing Decision Breakeven Analysis and Price Price Elasticity Marginal Costing

235 236 238 248 250 253

9

Distribution Policy and Management The Importance of the Place Element Channels of Distribution Dealing with Intermediaries Distribution Channel Maintenance and Change Physical Distribution Management

257 258 261 268 276 279

10

Marketing Communications A Strategic Approach to Promotion The Communications Process Advertising Sales Promotion Personal Selling Public Relations Direct Marketing International Marketing Communications Evaluating Performance

285 287 295 300 306 313 320 333 335 339

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Chapter Title

Page

11

Services Marketing The Importance of Services Marketing Characteristics of Services The Services Marketing Mix Creating Value Service Quality and Performance

343 344 344 347 348 350

12

Marketing and New Technologies Introduction The Changing Marketing Landscape The Impact of Technology on Marketing The Effects on Marketing Strategy Ethical Issues and the Downside of Internet Marketing

353 354 355 358 362 366

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Introduction to the Study Manual Welcome to this study manual for Marketing Policy, Planning and Communication. The manual has been specially written to assist you in your studies for this QCF Level 5 Unit and is designed to meet the learning outcomes listed in the unit specification. As such, it provides thorough coverage of each subject area and guides you through the various topics which you will need to understand. However, it is not intended to "stand alone" as the only source of information in studying the unit, and we set out below some guidance on additional resources which you should use to help in preparing for the examination. The syllabus from the unit specification is set out on the following pages. This has been approved at level 4 within the UK's Qualifications and Credit Framework. You should read this syllabus carefully so that you are aware of the key elements of the unit – the learning outcomes and the assessment criteria. The indicative content provides more detail to define the scope of the unit. Following the unit specification is a breakdown of how the manual covers each of the learning outcomes and assessment criteria. The main study material then follows in the form of a number of chapters as shown in the contents. Each of these chapters is concerned with one topic area and takes you through all the key elements of that area, step by step. You should work carefully through each chapter in turn, tackling any questions or activities as they occur, and ensuring that you fully understand everything that has been covered before moving on to the next chapter. You will also find it very helpful to use the additional resources (see below) to develop your understanding of each topic area when you have completed the chapter. Additional resources 

ABE website – www.abeuk.com. You should ensure that you refer to the Members Area of the website from time to time for advice and guidance on studying and on preparing for the examination. We shall be publishing articles which provide general guidance to all students and, where appropriate, also give specific information about particular units, including recommended reading and updates to the chapters themselves.

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Additional reading – It is important you do not rely solely on this manual to gain the information needed for the examination in this unit. You should, therefore, study some other books to help develop your understanding of the topics under consideration. The main books recommended to support this manual are listed on the ABE website and details of other additional reading may also be published there from time to time.

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Newspapers – You should get into the habit of reading the business section of a good quality newspaper on a regular basis to ensure that you keep up to date with any developments which may be relevant to the subjects in this unit.

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Your college tutor – If you are studying through a college, you should use your tutors to help with any areas of the syllabus with which you are having difficulty. That is what they are there for! Do not be afraid to approach your tutor for this unit to seek clarification on any issue as they will want you to succeed!

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Your own personal experience – The ABE examinations are not just about learning lots of facts, concepts and ideas from the study manual and other books. They are also about how these are applied in the real world and you should always think how the topics under consideration relate to your own work and to the situation at your own workplace and others with which you are familiar. Using your own experience in this way should help to develop your understanding by appreciating the practical application and significance of what you read, and make your studies relevant to your

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personal development at work. It should also provide you with examples which can be used in your examination answers. And finally … We hope you enjoy your studies and find them useful not just for preparing for the examination, but also in understanding the modern world of business and in developing in your own job. We wish you every success in your studies and in the examination for this unit.

Published by: The Association of Business Executives 5th Floor, CI Tower St Georges Square New Malden Surrey KT3 4TE United Kingdom

All our rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the Association of Business Executives (ABE). © The Association of Business Executives (ABE) 2011

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Unit Specification (Syllabus) The following syllabus – learning objectives, assessment criteria and indicative content – for this Level 5 unit has been approved by the Qualifications and Credit Framework.

Unit Title: Marketing Policy, Planning and Communication Guided Learning Hours: 160 Level: Level 5 Number of Credits: 18

Learning Outcome 1 The learner will: Understand the creative nature of marketing and know how to evaluate the role and value of marketing in a variety of business contexts. Assessment Criteria The learner can:

Indicative Content

1.1 Identify and apply traditional and contemporary concepts and tools of marketing and marketing management to various business contexts at domestic, international and global levels.

1.1.1 Identify and apply the major concepts and tools of marketing. 1.1.2 Develop an understanding of contemporary marketing practice. 1.1.3 Assess marketing as a concept and a management function. 1.1.4 Relate marketing activities to various business contexts (domestic, international and global).

1.2 Explain how technology, particularly the internet, is changing traditional marketing and improving marketing systems and processes.

1.2.1 Explain how technology is impacting on marketing theory and contemporary marketing practice. Show how it is creating new ways of doing things. 1.2.2 Explain Assess how organisations can gain competitive advantage through the exploitation of technology (e.g. internet, e-marketing, new media, JIT, research methods, mobile telegraphy etc.).

1.3 Identify and explain the various 1.3.1 Explain product, production, sales and marketing business orientations. orientation.

Learning Outcome 2 The learner will: Understand the marketing mix concept (7Ps) and its role in the formulation of an integrated marketing plan in both domestic and international markets. Assessment Criteria The learner can:

Indicative Content

2.1 Explain the 4Ps of the marketing mix and apply them in order to achieve the marketing plan objectives.

2.1.1 Price. The approaches to price setting, the price/quality relationship, price as a segmentation variable, price discrimination, promotional pricing and the communication role of price. 2.1.2 Promotion. The formulation of communication plans and programmes for products, services and organisations in domestic, international and global markets. The communication mix elements, models and

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frameworks and how to measure and evaluate the performance of campaigns and other communication activities. Explain ‘new media’ and show how it can be used to advantage. 2.1.3 Place. The evaluation of channel and physical distribution policies and the key concepts and models at both domestic and international levels. This includes; channel choice, level of market exposure, selection of intermediaries, channel conflict and co-operation, ‘wheel of retailing’, service elasticity and the components of a business logistics system. Show how technology is changing some traditional distribution methods and explain intermediation and disintermediation. 2.1.4 Product. Evaluate product/service decisions and relate them to the product/service life cycle and the new product development process (NPD). 2.2 Explain and apply the 3Ps of service marketing and show how they differ from product marketing.

2.2.1 Explain how to implement decisions relating to physical evidence, process and people in relation to the service marketing mix. Show why service marketing is so important today.

2.3 Examine and apply service/quality models to service marketing issues.

2.3.1 Appreciate that central to any service product is the service encounter between the provider and the customer. Be aware how service quality can be measured and in particular show an understanding of the GAPs model and the SERVQUAL framework.

Learning Outcome 3 The learner will: Know how to formulate and evaluate marketing plans at domestic and international levels. Assessment Criteria The learner can:

Indicative Content

3.1 Explain the need for marketing planning.

3.1.1 Explain how to develop creative and imaginative competitive strategies. Understand competitive positions (leader, follower, challenger, nicher and defensive).

3.2 Identify and apply the key analytical tools and frameworks related to the marketing planning process.

3.2.1 Explain and apply a range of analytical tools and frameworks in a creative manner associated with marketing planning.

3.3 Create marketing plans and describe and apply all the elements of the marketing planning process.

3.3.1 Explain the need for the marketing plan and its relationship with the overall strategic business plan and appreciate the concept of a hierarchy or cascade of plans.

3.4 Explain how marketing plans are monitored, measured and controlled.

3.4.1 Explain that plans are usually measured against set objectives. Show the importance of investigating any deviation from the objectives so that corrective action can be taken.

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3.4.2 Illustrate how organisations measure performance by using appropriate models, frameworks and systems (e.g. the balanced scorecard, management by exception etc.)

Learning Outcome 4 The learner will: Understand the role of information and research in marketing decision making and the influence technology has had on these activities in recent years. Assessment Criteria The learner can:

Indicative Content

4.1 Explain and discuss the market research process, the techniques used and how market research is conducted.

4.1.1 Explain and discuss the market research process, the techniques of marketing research and planning and how to conduct market research. 4.1.2 Discuss the nature of the marketing research process and the stages in the marketing research process. 4.1.3 Explain the sources of secondary data and the methods of collecting primary data: interviews, surveys, observations, experimentation and the internet.

4.2 Explain the role of information in the marketing planning process and describe the nature, role and function of marketing information systems.

4.2.1 Explain the role of information in the strategic planning process. Define markets, and describe how a competitive advantage can be gained through the use of marketing information. 4.2.2 Describe the nature, role and function of a marketing information system (MkIS), its component parts, and how it might be implemented.

4.3 Explain and demonstrate how ‘new technologies’ have changed traditional market research practices.

4.3.1 Assess the creative possibilities of using the internet, mobile phones, interactive television, databases and related technologies in marketing practice. 4.3.2 Explain how new technologies have formed the platform for the e-marketing and e-commerce revolution and their impact on marketing and business. 4.3.3 Describe how the developments in technology allow marketers to be more customer-focused and reactive to customer needs. 4.3.4 Demonstrate how database marketing and data mining have improved the accuracy and efficiency of many marketing operations (e.g. direct mail, internet, advertising, JIT and CRM).

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Learning Outcome 5 The learner will: Understand the macro and micro environmental factors affecting marketing decisions and how to conduct environmental scanning and external audits. Assessment Criteria The learner can:

Indicative Content

5.1 Identify and assess the importance of macro and micro environmental factors.

5.1.1 Explain the forces affecting all organisations in a market: political, legal, regulatory, societal/green, technological and economic/competitive. 5.1.2 Explain the more company-specific forces reflecting the nature of the business, its suppliers, marketing intermediaries, buyers, competitors and its public. 5.1.3 Explain how to conduct competitor analysis and examine company strengths and weaknesses.

5.2 Explain how the environment impacts on strategic marketing decisions.

5.2.1 Explain that failure to recognise changes in environmental forces leaves an organisation unprepared to capitalise on marketing opportunities or to cope with the threats created by these changes.

5.3 Describe environmental scanning and external audits and explain how they are undertaken.

5.3.1 Explain the process of collecting information about the marketing environment to help marketers identify opportunities, prepare for impending threats and assist in marketing planning.

Learning Outcome 6 The learner will: Understand consumer and organisational buyer behaviour and the main influences at individual, household and organisational level. Assessment Criteria The learner can:

Indicative Content

6.1 Explain the different types of consumer buying behaviour, the various factors that affect consumer behaviour and how knowledge of consumer behaviour can be used in marketing practice.

6.1.1 Explain the different types of consumer buying behaviour. 6.1.2 Describe the various factors that affect consumer behaviour: personal, social, psychological. 6.1.3 Explain the importance of understanding consumer behaviour and the use of this knowledge in marketing practice.

6.2 Explain the different types of organisations and the main characteristics of organisational buying and organisational demand.

6.2.1 Show knowledge of the different types of organisations. 6.2.2 Appreciate the characteristics and differences between B2B and consumer behaviour. 6.2.3 Show all the main characteristics of organisational buying and organisational demand, often derived demand.

6.3 Explain the concepts of the ‘buying centre’ and the decisionmaking unit and the sequential nature of organisational decisions.

6.3.1 Discuss the nature of the exchange process between industrial/organisational buyers and sellers, and the factors affecting the buying decision process.

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6.3.2 Develop an understanding of segmentation, selecting and targeting in B2B markets.

Learning Outcome 7 The learner will: Understand segmentation targeting and positioning tools and techniques and be able to develop and implement STP strategies in an appropriate and creative manner. Assessment Criteria The learner can:

Indicative Content

7.1 Explain the nature and roles of segmentation, targeting and positioning in consumer, business to business and international markets.

7.1.1 Explain the concept of segmentation and assess the various bases for market segmentation. 7.1.2 Explain how target markets are selected and distinguish between undifferentiated, differentiated and concentrated marketing policies. 7.1.3 Describe the concept of positioning and the application of appropriate strategies. Demonstrate skills in perceptual mapping and multi-dimensional scaling in product and service positioning.

7.2 Examine the issues involved in managing the marketing mix in relation to STP for both products and services.

7.2.1 Explain how market segmentation helps the organisation to target its marketing mix more closely on the potential customer and thus to meet the customer’s needs and wants more closely.

7.3 Develop segmentation, 7.3.1 Appreciate that STP is a critical stage within the targeting and positioning plans in a marketing planning process and that creative STP plans creative manner. can help achieve sustainable competitive advantage.

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Coverage of the Syllabus by the Manual Learning Outcomes The learner will:

Assessment Criteria The learner can:

Manual Chapter

1. Understand the creative nature of marketing and know how to evaluate the role and value of marketing in a variety of business contexts.

1.1 Identify and apply traditional and contemporary concepts and tools of marketing and marketing management to various business contexts at domestic, international and global levels 1.2 Explain how technology, particularly the internet, is changing traditional marketing and improving marketing systems and processes 1.3 Identify and explain the various business orientations

Chap 1

2.1 Explain the 4 Ps of the marketing mix and be able to apply them in order to achieve the marketing plan objectives 2.2 Explain and apply the 3 Ps of service marketing and show how they differ from product marketing 2.3 Examine and apply service /quality models to service marketing issues

Chaps 1 & 7 – 10

3.1 Explain the need for marketing planning 3.2 Identify and apply the key analytical tools and frameworks related to the marketing planning process 3.3 Create marketing plans and describe and apply all the elements of the marketing planning process 3.4 Explain how marketing plans are monitored, measured and controlled

Chaps 3 & 4 Chaps 3 & 4

4.1 Explain and discuss the market research process, the techniques used and how market research is conducted 4.2 Explain the role of information in the marketing planning process and describe the nature, role and function of marketing information systems 4.3 Explain and demonstrate how ‘new technologies’ have changed traditional market research practices

Chap 5

2. Understand the marketing mix concept (7Ps) and its role in the formulation of an integrated marketing plan in both domestic and international markets.

3. Know how to formulate and evaluate marketing plans at domestic and international levels.

4. Understand the role of information and research in marketing decision making and the influence technology has had on these activities in recent years.

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Chaps 1 & 12

Chap 1

Chap 11

Chap 11

Chap 4

Chap 4

Chap 5

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5. Understand the macro and micro environmental factors affecting marketing decisions and how to conduct environmental scanning and external audits.

5.1 Identify and assess the importance of macro and micro environmental factors 5.2 Explain how the environment impacts on strategic marketing decisions 5.3 Describe environmental scanning and external audits and explain how they are undertaken

6. Understand consumer and organisational buyer behaviour and the main influences at individual, household and organisational level.

6.1 Explain the different types of consumer Chap 6 buying behaviour, the various factors that affect consumer behaviour and how knowledge of consumer behaviour can be used in marketing practice 6.2 Explain the different types of Chap 6 organisations and the main characteristics of organisational buying and organisational demand 6.3 Explain the concepts of the ‘buying Chap 6 centre’ and the decision-making unit and the sequential nature of organisational decisions

7. Understand segmentation targeting and positioning tools and techniques and be able to develop and implement STP strategies in an appropriate and creative manner.

7.1 Explain the nature and roles of segmentation, targeting and positioning in consumer, business to business and international markets 7.2 Examine the issues involved in managing the marketing mix in relation to STP for both products and services 7.3 Develop segmentation, targeting and positioning plans in a creative manner

Chaps 1 & 2 Chaps 1 & 2 Chap 2

Chaps 2 & 3

Chaps 2 & 3

Chaps 2 & 3

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Chapter 1 Marketing Culture and Orientation Contents

Page

A.

The Development of Marketing The Industrial Revolution The 20th Century Today

3 3 3 3

B.

What is Marketing?

4

C.

The Strategic Orientation of Business Production Concept Product Concept Sales Concept Marketing Concept

5 5 7 8 9

D.

Developing a Marketing Orientation The Need for Integration Introducing the Marketing Concept Internal Marketing

10 10 10 11

E.

Strategic Implications of a Marketing Orientation External Changes Organisational Changes Effects of Globalisation Analysis of Foreign Markets Exploiting Overseas Opportunities International Marketing Economic Environment Political-Legal Environment Cultural Environment Technological Environment Geography Communications Network and Transportation Facilities

12 12 13 14 15 15 15 16 17 17 18 19 19

(Continued over)

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Marketing Culture and Orientation

F.

Coordination of Marketing with Other Management Functions Marketing and Production Marketing and Finance Relations with Other Departments Conflict between Marketing and Other Departments

20 21 22 24 26

G.

Organisation for Marketing Alternative Structures Organisation Structures for Marketing Comparison of Marketing Structures

27 27 30 34

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A. THE DEVELOPMENT OF MARKETING It would be a mistake to think that marketing is a phenomenon of the 20th century. Its origin can be traced back to early civilisation. When communities began to specialise they produced surpluses in certain products which they then sought to exchange with other communities. The need to exchange goods encouraged the emergence of local markets where different products could be brought together in one place for sellers and buyers to trade. In these simple market structures, the sellers had a fairly good idea of what pleased their customers, since often they were neighbours.

The Industrial Revolution Prior to the 17th century and the start of the Industrial Revolution, producers and merchants tended to operate on a small scale, concentrating their operations in very localised markets. However the Industrial Revolution brought with it advances in technology and production techniques which meant new processes, greater output and a transformation of the British economy away from its dependence on agriculture to one of industrial production. Industry now became more remote from its markets as it sought power and fuel to generate its machines. Increased output meant an even greater desire to trade, while large-scale production forced the development of distribution channels to enable the demand from wider, larger markets to be met. The era was founded on the principle of supply in trying to satisfy even greater demands by increasing production efficiency. It laid the foundation of the modern industrial society, with sophisticated systems of marketing institutions and finance, all of which are based on the fundamental concept of carrying out trade through exchange.

The 20th Century Improvements in technology and production processes meant that the 20th century witnessed a transition from a production society to a consumption society. Service industries such as banking and hospitality grew substantially in the latter half of the century. Increasing competition, not simply local or regional but national and international, meant that the problem became no longer one of supply but of anticipating demand. Towards the end of the 20th century the invention of the internet had a major impact on businesses and the way customers purchased products. Customers had wider access to products and services, more information to inform their purchase decisions and more transparent pricing. Businesses now faced both opportunities and threats, for example being able to reach new and wider markets but being exposed to increased competition.

Today All kinds of industries are now engaged in an intense struggle to establish customer preference in favour of their products over those of the competition. Rather than wait for orders to come to them, the industry must go out and manage demand for its products by winning customers and also, importantly, retaining customers by building customer loyalty. For many, this process was the start of the marketing era and out of it many modern marketing practices were born. Advertising appeared as a means of stimulating sales. Branding and packaging were developed as a way of saying something about the quality of the product. Salesforces were introduced rather than relying solely on the merchants to find and develop new markets for their products, while products themselves were developed to better satisfy customer needs. There are now many more producers and products than there are markets for them, which has resulted in an imbalance where supply exceeds demand. For modern business to achieve the levels of demand it requires, it must not only concentrate on improving efficiency

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levels of production but, more importantly, must also produce products and provide services the market wants to buy. This requires business to place greater emphasis on marketing research to find out what buyers want, not what they simply need, and to match its productive capacity and product lines to meet the anticipated wants. In effect, the national and international situation has changed from a seller's market to a buyer's market, and failure to give buyers what they want will surely lead to failure.

B. WHAT IS MARKETING? As we have already noted, marketing has been around for thousands of years and has evolved from simple bartering to the highly complex systems which are in use today. Marketing as a discipline has its critics. These are the people who think of marketing as being a "poison pack" which is responsible for all the evils in the world – mainly because of criticisms relating to the effects of advertising. However, marketing also has its devotees. Some people see marketing as a "magic wand"; they think that when a company has problems all they need to do is to get in a marketing manager and all the problems will disappear. Neither of these viewpoints is correct. Marketing is now recognised almost as a science. It is seen as a logical approach to business which involves the studying, and understanding, of relationships and exchanges between buyers and sellers. Various definitions of "marketing" have been proposed by practitioners of marketing: "Marketing is a human activity directed at satisfying needs and wants." (Kotler). "The management process responsible for identifying, anticipating and satisfying customer requirements profitably." (CIM) In marketing terms, a customer's needs, wants or requirements tend to mean a product or service. Products are tangible, although the wider meaning of a product includes intangible benefits such as after-sales service and services are intangible. However, there are still things that the customer wants in order to deal with a real or imagined requirement or, to put it another way, the customer has a problem to solve. People can satisfy their requirements, or problems, in one of four ways: 

self-solution (coming up with the answer to the problem themselves)

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force (threatening/stealing)

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begging (pleading/seeking sympathy)

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exchange (offering something of value to the owner).

The last method, exchange, is based on a mutually beneficial outcome to both parties. Exchange summarises marketing and applies in every type of product exchange, from the simple purchase of a bar of soap by a customer in a supermarket, to the purchase of attack aircraft by a government. In every case both parties give, or exchange, something of value to the other. For this to be possible, two parties must: 

have something of value to exchange

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be capable of communicating

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be free to accept or reject the exchange situation.

The existence of these criteria does not necessarily mean that an exchange will take place – only that it is possible.

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Successful exchanges will only occur when there is some individual (or organisation) with enough interest (and available resources) who is prepared to enter into an agreement with the owner, or producer, of some particular item(s).

C. THE STRATEGIC ORIENTATION OF BUSINESS It is very easy, on a marketing course, to get carried away with the total ethos of marketing but we must remember that not every organisation adopts a marketing stance. Having identified what marketing means and its development, we must, before we explore the nature of marketing any further, take a look at alternative methods of carrying out business. No matter what the market type is, the company has to deal with it on a day-to-day basis and present itself as a successful concern. How the company presents itself and its activities to the world will depend very much on a combination of factors, including among others: 

the nature of the product or service being sold

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the beliefs of the decision makers

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the extent of the influences from the environments

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customer expectations.

A company may be seen as being aggressive, caring, ethical or some other identifying factor which summarises what the company stands for in its marketplace. The perceptions held by the public may be, to a large extent, influenced by the approach or stance that the company adopts. The different approaches to markets are referred to as Strategic Business Concepts or Strategic Business Orientation. There are only really four different types as outlined below: 

production concept (or production orientation)

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product concept (or product orientation)

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sales concept (or sales orientation)

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marketing concept (or marketing orientation).

Production Concept A company following the production concept is operating on the idea that the more you can produce the more you can sell. Managers assume that customers are only interested in the availability of products and low prices and that marketing is not necessary. This may or may not be true. Consider the following examples: 

A fashion company making exclusive dresses, selling on average at £3,000, produces and sells 12 dresses each month. If they were to double their production rate it is unlikely that they could retain their "exclusive" appeal. This would mean prices would have to be reduced and revenue would fall – not to mention the increased costs in materials and labour needed to make more dresses.

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A company making electronic switching gear, on a batch production basis, produces 4,000 units each four-week period. The units are sold at £3.00 each and are recognised as being "superior" products to those of the competition, which sell at £2.50 per unit. The competitor sells more units than the company does.

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If the company were able to increase production and reduce the price slightly they could possibly sell more units and increase their revenue. Of course, calculations need to be made taking into account all costs incurred, e.g. Current Level of production Sales @ £3.00 Fixed costs Variable costs (£0.25 per unit) Profit (per four weeks)

4,000 £12,000 £2,000 £1,000 £9,000

Potential

@ £2.75

6,000 £16,500 £2,000 £1,500 £13,000

Assuming that new production plant cost £4,000, and that all units produced were sold, it would take only one month's production to recover the costs. After that the company would be making even more money than they are at present. Even allowing for a price match to that of the competitor this would seem an advantageous move for this company. However, let us take this one step further with another example: 

Imagine a company that makes a small electrical product which can be used in photography. After introducing a small pilot batch, it appears that sales potential for this product is promising. The company has the production capacity to produce 3,000 units per month. Managers fix a target production level of 12,000, which will take four months to complete, and production begins. Once the first monthly batch has been completed selling activity takes place and everyone stands back waiting for the orders, but few orders are taken. An investigation is begun after eight weeks as to why the product is not selling – by which time the company has produced a total of 6,000 units. The investigations are completed by the end of Week 10 (7,500 units produced). The company discovers, by asking its current customers, that a new digital camera has been launched which has made their product obsolete almost overnight. The company are left holding all the stock, and now have to accept the losses or find other markets for the product which, in turn, will involve them in even more costs for research, marketing and other activities.

In this last example the production concept has failed miserably. To simply mass produce any product on the outcome of meagre research is foolish in the extreme. The company might well find a market for their product but it would be a "niche" market rather than a mass market because of the changes in technology. Producing in smaller batches appropriate to the level of demand makes much more sense. Using these three examples we can see that there are times when a production orientation will work and times when it will not. This concept works when: 

the market is low cost and high turnover

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there is high demand for the product

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buyers are sensitive to price

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the organisation has the capacity to mass produce, and

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the marginal production costs incurred are low.

BUT it does not work in the opposite circumstances.

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Companies following a production orientation gain from: 

economies of scale

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reduced marketing and production costs



greater market share



strength over the competition.

However, they lose: 

any degree of exclusive appeal

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close contact with customer needs



high levels of customer loyalty.

It is not enough for a company to simply make lots of what it is good at – if the customers do not want the product it is a waste of resources and is likely to end in financial ruin.

Product Concept Product orientation is present when managers in the company believe that customers will recognise a good product or service and buy it when it is made available. The managers have such a firm belief in the quality and appeal of the product, that they cannot accept that customers may not readily see the same advantages. The managers fail to undertake any marketing or even carry out essential research before beginning production. Consequently they are dumbfounded when customers are not beating a path to their door to buy up existing stocks. Perhaps one of the most quoted examples of this type of orientation concerns the Sinclair CV5, a small motorised vehicle which was introduced into the UK by Clive Sinclair. Sinclair thought he had an excellent product which would help alleviate pollution and lower traffic levels on the roads of Britain. He did carry out product tests – but they were in a gymnasium. When the product was finally launched it proved to be dangerous and frightening when users were faced with large trucks and other vehicles using the public roads. Sinclair had underestimated the fact that his target audience liked their cars and that they were not going to buy something which, in their opinion, was inferior to what they already had. Despite his belief in it, the product failed completely. Although the CV5 is used to demonstrate how product belief by managers can be dangerous it is not the only example in existence. Currently there are many organisations which have excellent products of all kinds but, because they do not market them or tell people about them, they are not selling. One of the most pertinent in my recent experience concerns a branch of the armed forces in the United Kingdom. This particular branch of the forces is known throughout the world for its superb training facilities but, because of the global reduction in defence forces, the facilities are now underutilised. To make use of the facilities and to recoup some revenue, decisions were made at senior levels to offer personnel training to other national governments. There is no doubt that the product is excellent and yet it was not taken up to any large extent. This is simply because they thought everyone would come running once the decision had been made and little effort was put into finding out if what they had actually matched the requirements of the potential customers. The goods news is that professional marketing help was sought and customer needs research was undertaken. A major drawback to sales was identified as being the lack of facilities for accompanying families while personnel were being trained. This aspect has now been addressed and sales are healthy. I am sure that this product will be a major earner in the near future.

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We must not overlook the fact that sometimes a good product does have a good future and that the belief of a manager can save the product from disappearing. Innovative products spring from creative minds and sometimes creative minds can be far ahead of the majority of the public. It is only after a period of time, and education, that people will appreciate the benefits and begin to buy. The product may then take off and become very successful. If every new product that did not sell was dropped immediately we would never move forward, but to simply go ahead and produce a product because its creator believes in it is dangerous. Companies following a product orientation can only be successful if: 

there is a current demand for the product

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there is a potential demand for the product

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products are given full marketing support

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products meet customer requirements.

Thus it is obvious that product orientation MUST, if it is to be successful, be adopted only after research has been carried out.

Sales Concept Orientation on selling means that the company sells what it makes – it does not make what it can sell. Managers believe that buyers have to be coaxed into buying by aggressive techniques. This will involve heavy activity on the selling and promotional aspects with perhaps discounted prices being used and incentives to buy being offered. The company is more interested in moving stock than in stocking the right goods. Companies selling goods very similar to those of the competition are often following this type of orientation as they can see no other way to get customers. Consider the following situation. In a medium-sized town there are four outlets selling carpets. They are all selling very similar products, many actually coming from the same manufacturer. The managers think that the only way they can get customers in is to attract them. So: 

one outlet offers ten per cent reduction (a reduction in profit)

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another offers interest free credit (charges from the finance company)

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another offers free fitting (labour costs incurred)

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the last offers extended guarantees (insurance costs for potential replacements).

In each case the company is using money to attract money and each gain will only be short term. It is likely that they will have to continue on this round of competitive activity just to stay in the market. If one of them were to break the cycle and research customer requirements they might well find that customers are prepared to pay a slightly higher price for good quality advice on carpet buying – something which would not cost too much money to provide but which would give the outlet a competitive edge. Sales orientation usually implies the existence of an aggressive sales force and this can bring a company into disrepute. If a salesperson is more interested in his or her commission from a sale than in repeat business from a customer, they are more likely to use methods which could be, to put it mildly, disreputable. Corporate reputations can be damaged very easily, but can take a long time to be recovered. In the mid 1990s in the UK the financial services sector was greatly affected by previous sales techniques used by its salespeople. Changes in legislation resulted in vast amounts of

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money being paid to people who had been given bad or misleading advice from pensions and insurance salespeople in the past. The result of this has been that salespeople must now be qualified and are strictly controlled. Methods of paying commission have been changed and there is now no advantage for a financial services salesperson to use any aggressive methods. Nevertheless there is, and always will be, a place for sales orientation. We have market traders who sell aggressively to move their stock; and there are companies who buy and sell inexpensive products which customers may buy either on impulse or to meet a short-term need. But it is safe to say that if a company wishes to obtain and keep a customer, they must be looking to satisfy customer needs and not simply make a sale. The sales concept only works when: 

there is little need for an after-sales service

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companies are not interested in forming relationships with customers

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buyers have low expectations of the product or service

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repeat purchasing is unlikely.

Marketing Concept Companies following the marketing concept firmly believe that the customer is the key to successful business. Unlike the other three concepts/orientations discussed, the marketing concept actually begins WITH the customer: the company is trying to provide what the customer wants rather than making the customer want what the company has. If an organisation is following the marketing concept it will have three distinct characteristics: 

Customer Orientation The organisation must define customer needs from the point of view of the customer, not its own. It will need to actively seek information from the marketplace in order to assess whether the offerings are meeting customer requirements and, if not, why not.

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Organisational Integration All functions, sections or departments of the organisation must work together to meet the overall objectives of the organisation – which must be to satisfy customer requirements. When individual sections of a company do not fit in with the total effort there may be friction or problems which can result in lost opportunities or dissatisfied customers.

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Mutually Profitable Exchange The organisation is entitled to a reasonable profit for a reasonable product. The customer is entitled to a reasonable product for a reasonable price. In other words – both should be satisfied. This satisfaction may well be the result of negotiation where the customer has accepted an alternative product or where the organisation has had to accept a lower profit – but they must be satisfied with the exchange. If it is not a mutually accepted exchange, it is not marketing.

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D. DEVELOPING A MARKETING ORIENTATION The Need for Integration Marketing affects most other activities in the company, so it is inevitable there will be a lot of discussion between managers about the outcome of marketing decisions. Each manager wants to run his or her department as efficiently as possible. This often means, for instance, that the production manager will want to set up and run a production line for one product, then set up for another product from the range, producing everything in economic batches. Consumers do not buy that way and they neither know nor care about economic batches. If the production manager wants to produce a quantity of products and tells the buyer, the buyer will know what raw materials to order and when they should be delivered. The same information tells the human resources manager how many people will be required and he or she will decide whether or not to take on more staff, either temporarily or permanently. The same reasoning can follow through to the warehousing and distribution functions. All this activity can fit neatly into place to make the company look as if it is running efficiently. Yet it is possible for all this to go on without anyone giving a thought to the wishes of potential customers. I have even seen new products designed with no reference whatsoever to the wishes of the very people who might have bought the product. When I was asked to do some belated market research on a new product, I took the prototype with me and almost everyone said they liked the idea but not the size. None were ever sold and development costs were all wasted. Worse still, the principle of the product had been revealed and was soon copied by rivals. An adverse situation can change if a marketing concept is introduced gradually, rather than overnight. Even in companies which consider themselves to be marketing oriented, changes in activities which will affect other departments must be made with care. This is so that managers are aware of the benefits they can achieve as well as the different working routines (which they may not like).

Introducing the Marketing Concept Most companies already have some marketing activity, although there are a few that do not use the word "marketing" at all. When I taught marketing to a class of buyers at a night school, one of them started by saying "No-one does any marketing in our company and we have been going 100 years; we don't need marketing." A few weeks later the same man said "I am astonished. I have been doing the marketing all the time and I am the Chief Buyer!" The activities called "marketing" go on in most companies and it is useful to identify just what level they work at. If the marketing function can be shown to be useful to other departments, any changes which may be recommended will be accepted more readily. Many examples can be quoted of the way in which a formal marketing function can help other departments. I was told by a sales representative that a certain large company refused to buy from our company because of "group policy, which nominated suppliers". I found that three companies in the same group were already buying from us, so the salesman went back with the information and made the first of many sales. When marketing can be seen to be beneficial to other departments, changes can be made so the total marketing effort is more efficient. Salesmen are probably the first to acknowledge that they get some help from good publicity, so it may be logical to start by introducing a better class of product literature and to run better advertisements. When customers see the result and gain more confidence in the company, sales may rise and salesmen will be glad of the help. Increased sales will affect most

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departments in a company and if marketing can get some of the credit there are better chances for improvement in other ways. Marketing depends on information and the most specific information about the needs and wishes of existing customers can come from the salespeople who meet them, listen to their comments and note their dissatisfactions. The information flow will grow more quickly when it can be seen that marketing can operate as a two-way system. Even simple activities, such as clipping from newspapers any items of news about customers, can be the start of a twoway flow. Salesmen are grateful for sales leads and even such a simple service will usually be appreciated. Once the sales team realise the way in which marketing can collect useful information, they will soon start contributing their own items, which may seem trivial at first glance. However, a good marketing information system can put bits of news or even gossip into context and what looks like a collection of trivial items may become quite significant information when put together and related to other items. The growth of the internet has meant that information is more widely available and easier to access than ever before. Organisations and the sales force can monitor competitor activity, such as product launches, pricing and even distribution strategies, as well as changes in the external environment, such as new technologies and changing and emerging consumer trends. Part of the marketing effort will almost certainly be sales forecasting. Forecasts which are even reasonably close can be a big help to buyers, enabling them to place orders for materials and components ahead of their required delivery time and possibly at better prices. The same applies to the finance manager, the distribution manager and probably to every manager in the company. Most of what is mentioned here already happens in most companies, but there may well be a need to formalise efforts to make them into a more coherent marketing activity.

Internal Marketing You might have deduced by now that the marketing manager has a marketing job to do within his or her own company if he or she is to introduce the marketing concept fully and effectively. Internally, there is a variety of "customers", starting with the chief executive (to be handled with care) and including all the directors and senior managers. The marketing effort required here will be to persuade them that the inconveniences which marketing will demand are worthwhile in the long run. They will be the ones to make the lower ranks enthusiastic about marketing. Perhaps we should start right at the beginning and convince directors and senior managers of the quality of the products. That may surprise you, but in this changing world there may be many managers who were happier "in the old days", when the pace was slower and new technology could be picked up leisurely. If they do not believe in the new products and policies how can they expect their workforce to believe in them? Many of the ideas used to communicate with customers outside the company can also be used, with modifications, to communicate with people inside the company. Good news can be spread by means of a company newsletter via email or intranet. A creditable mention in the newsletter can work wonders for an employee's morale. I have seen times when sales engineers went to great lengths to get unusual applications of the firm's products written up for the newsletter. The prestige of being one of the few who were named easily justified the strenuous efforts which some of the engineers made to get the photographs and diagrams needed. I tried hard but never quite made the headlines. If an employee is proud to work in a specific company, he or she will do more than the minimum required to keep out of trouble. I am sure you will have met the employee who

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does just enough to keep out of trouble and you can contrast them with the dedicated company enthusiast who does far more than just keep the boss happy. If someone is freewheeling the cause may not be within the control of the marketing management, but overall company morale is a fair topic for management meetings and freewheeling is a sign of poor morale. In his book Marketing (published in 1990 by Houghton Mifflin) Steven J Skinner refers to "discretionary effort". He describes this as the difference between the minimum effort to keep out of trouble and the maximum amount of effort an employee can put into the job. He goes on to suggest that part of the marketing effort (and budget!) can usefully be allocated to researching the opinions of staff at all levels and to internal publicity. This is not just a matter of analysing sales figures and comparing them with a previously set standard. Reasons for over-achievement and under-achievement should be found and lessons learned at all levels. Real benefit can only come from internal marketing if management allocates enough time and money to making any improvements which may be required. This is where internal marketing may become very difficult. From time to time a company may derive a lot of benefit from having a marketing audit carried out by a firm of specialists – the effort and the results may be agonising, but the outcome may be a company in better shape. I mention this with some caution, because a firm I worked for was practically ruined by taking on consultants who ignored the most important people – the customers. Perhaps the brief they received told them to ignore the customers? I do not know, but I had to put up with some very strong comments from good customers. Clearly, the brief is vital and full cooperation of staff can only be obtained if there is adequate consultation before the experts arrive. In that case it was disaster right from the start, although the consultants were a big-name firm. They got off to a bad start by making it clear they had little respect for us, almost blaming the lower ranks for the problems of the firm.

E. STRATEGIC IMPLICATIONS OF A MARKETING ORIENTATION External Changes There is little point in changing attitudes towards marketing internally if there is no equivalent change in the company's external activity. Various groups of people have an interest in the affairs of specific companies and will see external activities more clearly than internal changes. The change from sales orientation to marketing orientation was described this way by Levitt in his famous article Marketing Myopia: "Selling focuses on the needs of the seller; marketing on the needs of the buyer. Selling is preoccupied with the need of the seller to convert his product into cash; marketing with the idea of satisfying the needs of the customer by means of the product and the whole cluster of things associated with creating, delivering and consuming it." Changes in the company's strategy, as it changes from sales orientation to marketing orientation, will be evident to people outside the company in various ways and we can look at some of the more significant strategic changes.

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Product Design Customers will see the changes which they asked for in design now begin to be available, whereas the sales-oriented company just wanted to push what they had or could get easily. Customers will notice that the sales team will ask more questions and there may even be marketing researchers asking questions about desirable features in products. Whereas the standard products were offered for long periods and changes were not welcomed, the marketing-oriented company will offer new features or new models much more readily. Competitors will also notice a difference – their products will face more challenging competition from new or modified products.



Suppliers The old, long-run demands for existing products will be replaced by shorter-run demands for different products to suit customers' needs. There ought to be a new enthusiasm in the company, which will be reflected in purchases of raw materials and components. Product line changes will show in different buying patterns in the company and ideas might also come through for quite different types of supplies.



Publicity A marketing-oriented company will be much more "visible" in appropriate journals and maybe in other media too. There will be more originality in the design of advertising campaigns and evidence of coordination of different media. PR campaigns will be evident and the company name will feature more prominently in trade and other journals as articles are published by the company's technical experts. If the new strategy runs to sponsorship of sporting events, there will be dramatic changes in publicity efforts; selling activities ought to synchronise with sponsorship activities as far as possible.



Distribution "When do you want it?" might surprise some customers who have become accustomed to "You'll have it next Tuesday, when the lorry will be round your way". Scheduled deliveries to fit in with the customer's production plans may even feature in the strategy of a marketing-oriented company. Just-in-time deliveries are part of the marketing strategy of some suppliers, who get the benefits of long-term association with valued customers.



Prices There are not likely to be any bargains simply because a company changes its strategy from sales to marketing orientation, but the prices and terms which are applied are likely to be more realistic. Financial arrangements should be more in line with the customer's individual needs, because the marketing-oriented company will see the total offering, from analysis of the customer's needs right through to satisfying them, as one integrated concept.

Organisational Changes When a company starts to put the needs of the customer first, there may have to be significant changes in the organisation and it is unlikely that old ideas of tightly regulated departments will survive. Customer satisfaction will have to become everybody's job and there will be changes in the handling of customer contact, especially where customers collect from warehouses or company-owned shops.

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Management may well decide that changes have to be made, but it is equally important that the same managers allocate adequate facilities and money to make the changes smoothly. Although many people regard marketing as just the application of common sense, there may be times when the actions necessary to satisfy customers will be a nuisance to some production people, who might well resist. Sometimes activities which appear to be quite unrelated to marketing can cause problems. A production bonus scheme was introduced in a factory which made conveyor belts and output went up dramatically, along with improvements in product quality. But so did the number of part-delivered orders, because the operators had soon realised that if they made big belts they got more money than if they made smaller belts. Unfortunately, customers wanted a full set of belts including both big and small, to fit during their plant shut-down which happened just once a year. Within two years the company no longer made conveyor belts – they still had the ability but they just had no customers. In another factory a new buyer saw an increase in sales so he ordered double the quantity of one particular raw material; but when it was delivered there was not enough storage space for the extra quantity. If he had bothered to ask for predictions of production and sales over the next few weeks, he could have placed the larger order at a better price and asked for scheduled deliveries to fit in with production schedules. It is clear there can be difficulties in making the change from sales or production orientation to marketing orientation and it would be easy to get the impression that "marketing" are trying to dominate the whole company. A sales forecast (prepared by marketing) becomes an impossible target and sales people are upset. Production is based on the forecast, along with material purchases, and if the demoralised sales force do not sell as much as the new marketing people think is possible, the whole company can be at loggerheads. Such desperate situations should not happen, of course, and can be avoided if the chief executive ensures that full and frank discussions are held at all levels. People do not automatically know about or believe in marketing, so there has to be a period of training and adjustment before a company can claim to have made the transition from sales or production orientation to marketing orientation. The transition period can be easier all round if marketing people market themselves internally to their colleagues. Finally, I must stress that I have taken extreme (though true) examples, so as to show the extent of potential problems. Many companies already have some commitment to marketing and would not necessarily have to go though all the difficult times described here.

Effects of Globalisation It is almost a cliché to say that we now live in a global village, but firms increasingly have to view the world market as just an extension of their domestic market. The globalisation of markets represents not only opportunities for domestic producers to earn revenue from overseas, but also threats to domestic producers from overseas competition. Various factors have contributed to the globalisation of business: 

Goods and services are increasingly traded between economies in order to exploit the concept of comparative cost advantage – i.e. an economy will export those goods and services that it is particularly well suited to producing and import those where another country has an advantage.

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The removal of many restrictions on international trade (such as the creation of the Single European Market) has allowed countries to exploit their comparative cost advantages. Nevertheless, restrictions on trade remain, especially for trade in services.

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Cultural convergence that has resulted from improved communications and increasing levels of overseas travel has led to a homogenisation of international market segments. Combined with the decline in trade barriers, convergence of cultural attitude allows many organisations to regard parts of their overseas markets as though they are part of their domestic market.

Analysis of Foreign Markets Exploiting overseas opportunities can be quite a challenge for most organisations. Overseas markets can represent very different opportunities and threats compared with those that an organisation has been used to in its domestic market. Before a detailed market analysis is undertaken, an organisation should consider in general terms whether the environment of a market is likely to be attractive. By considering in general terms such matters as political stability or cultural attitudes, an organisation may screen out potential markets for which it considers further analysis cannot be justified by the likelihood of success. Where an exploratory analysis of an overseas marketing environment appears to indicate some opportunities, a more thorough analysis might suggest important modifications to a product format which would need to be made before it could be successfully offered to the market.

Exploiting Overseas Opportunities Having analysed an overseas market and decided to enter it, an organisation must make marketing mix decisions that will allow it to successfully penetrate that market. Marketing mix decisions focus on the extent to which the organisation will adapt its product offering to the needs of the local market, as opposed to the development of a uniform marketing mix that is globally applicable in all of its markets. Subtle changes in the product formulation are often needed – McDonald's fast-food restaurants, for example, offer the same basic service around the world, but adapt some details of the menu to satisfy local tastes (e.g. rice as well as fries is offered in many parts of the Far East). A new overseas market represents both a potential opportunity and a risk to an organisation. A company's market entry strategy should aim to balance these two elements. The least risky method of developing an overseas market is to supply that market from a domestic base. This is often not a cost-effective method of serving a market, and may not be possible in the case of many types of services. Where an exporter needs to set up production facilities overseas, risk can be minimised by gradually committing more resources to a market, based on experience to date. Companies often use joint ventures or strategic alliances in order to exploit overseas market opportunities. A company with production expertise may join up with a company that has specialised knowledge of an overseas market to jointly develop that market. At other times, a company with expert knowledge of its own domestic market may join up with a foreign company that has expertise in a product area and seeks to work with local companies in order to expand its markets.

International Marketing In order to penetrate the international market, the marketer must have adequate market information. Some, of course, will be accessible and free in the UK, e.g. by contacting the BIS (Department for Business Innovation and Skills). However, in many cases it will be desirable (if not essential) for the marketing manager to instigate market research in a particular market. This may be done directly by the company or by the appointment of a market research agency in the overseas market or by the appointment of a UK agency with overseas branches or associates. The expense of such market information has to be evaluated, reviewed and appropriate budgets prepared in line with the objectives.

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The state of an international marketing environment can have a tremendous impact on marketing plans and, in particular, the marketing mix, i.e. product policy, advertising, pricing and distribution. Careful consideration must be given to the selection of brand names, packaging design, colours, symbols and so on, particularly in consumer goods marketing, and that is just the start! However, it is normal for most companies to go into international marketing gradually, rather than all at once, so the information tends to build up. In addition, many companies take on an agent who deals with much of the information that the company needs. The Chartered Institute of Marketing (CIM) definition of marketing is not restricted to the UK – it is equally applicable to international marketing, and that means we must find ways in which to satisfy such customers. We therefore have to find out where they are, what they are like, how they buy, what they would like to buy and how we can tell them about our products or services. In short, we need to analyse the environment.

Economic Environment One of the most common ways of analysing the economic environment is to classify it according to some economic indicator which relates to marketing and the potential for sales. (a)

Classification by industrial structure 

Subsistence Economies Here the majority of people are engaged in simple agriculture, producing only enough to survive and so there is little opportunity for exporters.



Raw Material Exporting Economies These countries provide opportunities for exporting extractive equipment, tools and supplies, trucks and materials-handling equipment. They may also contain a wealthy section of the population to which luxury goods and Western-style commodities are exported. Examples are Chile (tin and copper) and Saudi Arabia (oil).



Industrialising Economies Manufacturing is beginning to play an important role here, e.g. in Egypt, India, Brazil, the Philippines, South Korea and Taiwan. Reliance may be put on importing textile raw materials, steel and heavy machinery.



Industrial Economies This, in effect, means much of the Western world.

(b)

Classification by income level Economies can also be classified according to national incomes: 

Very low family incomes – the subsistence economies.

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Mostly low family incomes – largely Eastern European countries.

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Very low and very high family incomes – largely found in the Middle East, Latin American countries and in some industrialising nations, with those enjoying the high incomes tending to be a tiny minority of the population.

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Low, medium and high family incomes – found in many of the industrialising nations and the advanced nations.

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Gross national product per capita – most firms want to know how much income potential consumers in a country have to spend. The higher the GNP per capita, the better the chance a company has to sell consumer products in the higher price bracket. The fully developed Western nations offer excellent markets on the basis of per capital GNP. However, you have to be careful about the GNP per capita measure which, in effect, is found by dividing a country's population into its total income. Some of the Middle Eastern countries, e.g. Kuwait, may have a very high GNP per capita, but this is due to the influence of a very wealthy sector of the community.

Political-Legal Environment A company will be influenced in its internal operations by the degree to which a country welcomes foreign firms and the degree to which it is accepted by the indigenous population, e.g. anti-American feeling exists in many Middle Eastern countries. The level of political stability will influence international marketing operations and if a country is politically unstable, a company may favour export marketing to direct foreign investment. The type of political parties, political philosophies and nationalistic tendencies will all have an effect and may result in expropriation (confiscation of property), exchange controls, import restrictions, tax and price controls, and labour problems. Under the legal aspects pertaining to marketing, we can list the following: 

rules of competition

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retail price maintenance laws

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cancellation of distributor or wholesaler agreements

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product quality laws and controls

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packaging laws

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price controls

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patents

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trade marks

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copyright laws and practices

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pollution and safety laws, e.g. for cars.

Many overseas countries, e.g. Germany, Nigeria and the United States, are organised on a federal basis. Different states within these federal countries may well have different laws, and different taxation and regulations. A marketer would also have to consider local regulations, e.g. a company is likely to have to obtain planning permission if it wants to build a factory in a certain province.

Cultural Environment "Culture" means a person's entire social heritage – all the knowledge, beliefs, customs and skills they possess as a member of society. The elements of culture include the material culture in terms of technology and economics; the social institutions embracing social organisation, education and political structures; beliefs, particularly of the religious variety; aesthetics, which includes graphic and plastic arts, folklore, music, drama and dance; and language. A complete and thorough appreciation of the dimensions of a culture may well be the most important attribute to a foreign marketer in the preparation of marketing plans and strategies.

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A country may be distant geographically but close in terms of culture, e.g. Australia has a very similar culture to the United Kingdom. Cultural distance, therefore, is not the same thing as physical distance. Often firms will prefer to be involved with countries on the other side of the world rather than with a relatively close country because in terms of cultural distance the more distant country is nearer. For example, the USA is closer to the UK in terms of culture than it is to Mexico and many Central American countries. 

Material Culture The material culture can affect the level of demand, the quality and types of product demanded, and their functional features, as well as the means of production of these goods and their distribution: for example electrical appliances are unlikely to have a market where less than one per cent of homes have electricity. Even if electricity is available, certain electrical goods may not have a market due to the level and distribution of income, e.g. the many electrical appliances used in the kitchen.

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Social Institutions Under social institutions we can mention, for example, the position of men and women in society. For instance, the Singer Sewing Machine Company tried to sell sewing machines in Moslem countries, where a woman's position is a secluded and protected one: women were not allowed to attend the sewing classes. Singer overcame the problem by inviting the men along to sewing lessons and demonstrating to them how much additional work the women could do with sewing machines after taking sewing lessons. Another example of a social institution is that of education which affects literacy which, in turn, affects promotion.

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Religion Religion can influence people's habits, their outlook on life, the products they buy and the newspapers they read. Religion can influence whether or not promotional messages are accepted. For example, an advertisement based on puritanical principles, whereby Frenchmen were threatened that if they did not brush their teeth regularly they would develop cavities or would not find a lover, was unsuccessful. This was attributed to the fact that in Catholic countries cleanliness was not regarded as being next to godliness!

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Aesthetics Aesthetics are important to the marketer, particularly in terms of product styling, advertising and package design.

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Language A thorough understanding of the language is required, particularly for advertising purposes. The marketer must appreciate the true meaning of a language and avoid resorting to "dictionary translations".

There is almost an infinite number of experiences and examples of marketing in a foreign cultural environment. The framework we have looked at should enable you to be aware of examples and experiences of your own.

Technological Environment Technology includes the techniques used in the creation of material goods. It is the technical know-how possessed by the people of a society. In tradition-bound societies relatively little technology may be used and the output may be correspondingly small. In modern economies, on the other hand, technological development is in operation to a great extent. We must also consider the technology of marketing. This will involve the communications media and systems within a country, plus the distribution systems.

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The internet and the World Wide Web are also beginning to affect world trading patterns and practices. Admittedly, at the moment the amount of global trading on the internet is relatively small in comparison to other methods for facilitating world trade. However, its impact is growing and it is likely to have a major effect on the nature, patterns and practices of world trade in the future; so much so that no marketer can afford to ignore this aspect of the world trading environment.

Geography The marketer should consider the effects of climate, altitude, physical terrain, humidity and temperature upon his or her product and marketing in general. They must also assess the impact of geography upon distribution and communication systems and upon the state of the economy. In Britain we have few geographical hazards, but sudden falls of snow can throw our road and rail systems into chaos. In many overseas countries there are the hazards of mountains, difficult roads with bad services, and roads which may disappear if the weather turns bad. The impact of the topography and climate may mean that sales have to be made and the goods delivered at certain times of the year. Consider the effect of geography on product design. Motor vehicle manufacturers in Britain, Germany and France will normally fit heaters to all their products. Such equipment in vehicles for export to Central Africa and South East Asia would be unnecessary. Rainfall and snow may sometimes affect the required product quality. For example, in Scandinavia some imported cars have a poor image because their bodies are not built to withstand sub-zero conditions and the strong chemicals sprayed on the roads to control ice. The topography can affect products used in the open, e.g. excessively hilly terrain may necessitate special gear ratios in cars.

Communications Network and Transportation Facilities The developed countries usually have a satisfactory communications network for the physical transportation of goods. This is backed up by a good audio communications system. In the developing countries the audio communications are often of a poor standard and it may take a day to make a telephone call because the lines are inadequate and there is a queue of callers. In countries characterised by great distances it is necessary to consider transport as an important element in the cost of the product. Buying patterns tend to be influenced by the transportation arrangements. The means of communication must be assessed when making decisions about stock levels, spare parts and service arrangements. The local transport can be an important consideration with consumer goods and consumer durables. For example in one market we may find demand for small unit sizes because shoppers have to carry their shopping some distance, whilst other environmentally similar markets may demand larger units of the same product because shopping is home delivered or shoppers use cars to do their shopping. Perhaps also under this heading we need to consider the nearness of the market. The EU countries count for well over 50 per cent of the UK's trade. Considered merely on distance alone how attractive France, Germany or Holland would be compared to, say, Chile, Australia or Thailand. The extra costs involved in delivering to these latter three countries would far outweigh the costs of delivery to the first three. You would also have to consider the unfamiliarity of the terrain plus, in some cases, the unfamiliarity with the market itself.

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Obtaining information from overseas sources is always a problem. Firstly, there is the long lead time in obtaining a reply; some overseas correspondents are extremely slow in replying to letters. Secondly, it is difficult to find sources which have the information. Some countries are well documented; others leave much to be desired. The developed countries tend to be better documented than the developing ones, but even so, many of the developed countries produce their statistics too late for them to be of real value for taking tactical marketing decisions. It is not much use to a marketing manager to have information about the trends in usage of certain kinds of industrial machinery for a period ending two, three or even five years ago. Even in developed countries which are comparatively well documented, it is always advisable to compile a list of sources composed of people who know the industry in which the researcher is interested. The opinions given by knowledgeable people in an industry may be of greater value than the statistics which are available. The industry expert may not be able to quantify his or her views to a fine degree of accuracy, but this is not always necessary. Views and knowledge of experts will be up to date and the information they give is likely to be sound. Always remember that industry and commerce are both living activities which are subject to pressures from markets and respond to initiative. Often the need for information arises after the events have taken place. It is often impossible to go back and collect information in retrospect. Sometimes the information is required by a limited number of people and they or a specialised group collect it for their own uses. It is therefore not surprising that complete information about any market is rarely available from one source. Many sources have to be approached if a balanced and, as near as possible, total body of knowledge is required.

F. COORDINATION OF MARKETING WITH OTHER MANAGEMENT FUNCTIONS The most important single element in the implementation of the marketing concept is that of coordination – or bringing together and reconciling a diversity of conflicting views and attitudes in order to design a uniform customer-oriented plan of action. It is not a question of marketing dictating policy or operations: it is to do with marketing coordinating and cooperating with the other departments which exist only because there is a market for the products or services of the company. Marketing, like any management function, takes its lead from the policy decisions of senior management. Marketing, however, through its research functions, provides senior management with the information upon which it will make decisions. In effect the marketing department has the responsibility for coping with all the vagaries of the marketplace. It provides the organisation with forecasts and estimates of sales volume, profitability and market potentials, as well as the limitations imposed by the company on resources and policies. So marketing has an overriding responsibility which cuts across the entire organisation. Whilst this does not directly set the goals for other management functions, indirectly it provides the information base from which the goals and schedules of all other functions are determined. Clearly then, an effective working relationship between marketing and the various other functional areas of the business is vital to success. The task of the marketing department in this process is to represent the interests of the customer to other departments in such a way that customer needs are adequately met. Here we will consider two of the most important interrelationships, namely those between marketing and production, and marketing and finance.

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Marketing and Production (a)

Role of Marketing Before and During Production The marketing concept requires that products are designed and made to satisfy clearly specified consumer needs. So the marketing function must provide accurate and timely information to the design and production departments about the nature of these needs. In addition, where possible, this information should be provided in terms which the management of the production function will understand. For example, phrases such as "we need a better quality product" are too vague to provide clear guidelines to production staff as to the specific requirements of the marketplace. What is required, for example, are sizes, colours, fabrics, flexibility, weight and standards. Similarly, the marketing function should be responsible for the provision of information which will form the basis of production planning. Sales forecasts and estimates of market demand are essential for efficient production planning and control.

(b)

Role of Marketing After Production Once the products have been designed and produced in the required quantities, they must be efficiently marketed to identified target markets. After purchase, marketing must monitor customer attitudes to the company's products; any adverse comments or complaints must be noted and, if necessary, passed back to the production department for action.

(c)

Cooperation Between Production and Marketing So you can see that marketing plays a role both before and after the production effort. An effective working relationship between production and marketing is an essential requirement for efficiency. To illustrate this point, we will examine three aspects of this relationship. Making a New Product Before an elaborate marketing plan is implemented, it is essential to ensure that the product will be available when and where it is required. For this reason, a production scheme is needed, and the marketing team must liaise with the production team in order to achieve this aim. Where an entirely new product is involved, it is usual for the manufacturing department to produce a quantity to be introduced to the customers on a sample basis. Such sampling frequently reveals flaws, either in the production technique or in the quality of materials used, which can be easily rectified before mass production begins. Whilst it is essential to avoid the overproduction of a new line before it is satisfactorily established, it is equally undesirable to accept orders for large quantities of a new product when such quantities will not be available at the time required. It is exciting to contemplate the prospect of a successful market research and advertising campaign, culminating in a massive launching of a new product, with the result that very large orders are taken within the first few days and the product continues to sell well over a long period of time. However, the introduction of a new product needs care, with a steady advertising build-up and an order book which begins modestly and develops gradually over a period of months. A steady expansion is much easier to deal with from both the marketing and production points of view than an initial onslaught which may or may not be maintained. Maintaining Level and Standard of Production Once the scheme of production has been established and the level of demand has been ascertained, the marketing organisation must ensure that the production department maintains both the level and the standard of production. The standard of

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production is obviously of vital importance, since the manufacturing department needs to be able to produce homogeneous units of the product for as long as is necessary. The maintaining of standards applies not only to the basic production process, but also to the various subsidiary processes, such as finishing, painting and packaging. The level of production, once determined, should be maintained in accordance with future demand. It will be necessary for the manufacturing department to produce, initially, a number of units of the product to deal with the first sales. For the most part, however, the production team should be engaged in manufacturing goods ordered for delivery at least several months in the future. This precaution will allow for any unforeseen circumstances such as breakdowns in production flow, whether from strikes or from delays in receiving raw materials or subcontracted components. It is therefore prudent for the company to carry about three months' production of a particular line, as a stock from which orders may be fulfilled and which may be replenished from new production. Obviously this will depend upon the nature of the product, the demand and storage facilities. Some firms in the fast-moving consumer goods markets maintain less than one week's production in store, and companies manufacturing perishable goods such as bread and confectionery must obviously sell their products within a very short time, in order that the consumer may purchase the food whilst it is still fresh. Improving Production Methods The techniques of production are not the province of the marketing executive, but it is highly desirable that the marketer be aware of the processes involved in making the product which she or he is selling. The reasons for this are as follows: 

Much of the success in marketing the product will depend upon the marketer's ability to impart to the potential customer its technical merits.



Potential customers are likely to wish to discuss certain technical aspects of the product with the marketing executive, and it is therefore necessary that the marketer has a sound grasp of the production technology in order to be able to discuss any queries raised by prospective buyers.



The marketer who is sufficiently production-oriented may undertake extensive overseas marketing visits without being accompanied by one of the technical production staff. This will reduce the expenditure involved in the trip, as well as inspiring greater confidence on the part of potential customers.



Most manufacturing organisations have a research unit of some kind, which is constantly experimenting with new processes, and even with new materials. It is of vital importance that the marketing department should be fully aware of the progress being made by the research unit, for the successful results of experiments will become the selling products of the future. At the same time the marketer, by virtue both of contact with a wide variety of buyers (perhaps situated in different countries of the world) and of knowledge of competitors' products, may be able to impart valuable information to the production team for successful incorporation into their own manufacturing techniques.

Marketing and Finance (a)

Role of Marketing and Finance Many of the decisions which must be taken in marketing a product or service require information from the finance department. Perhaps the most obvious of these is the provision of cost information for pricing decisions. At this point, it is important that you appreciate the need for the finance function to provide accurate information. In turn, the marketing department must provide accurate information to the accountants with

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regard to, for example, forecast levels of sales, market share objectives and competitors' prices. The important point is that effective coordination and communication is a two-way process. (b)

The Need for Effective Teamwork You should be aware that pricing is only one of the various activities which require that marketing and finance work closely together. As we did earlier for production and marketing, we will examine situations which might require effective teamwork between these two departments. Planning and Controlling Salesforce Activities As with any area of business activity, it is important that marketing activities be planned and controlled. In broad terms this means setting clear and realistic objectives, preferably (where possible) in quantitative terms. Having determined objectives, a company should then measure its performance in terms of the degree to which these objectives are being achieved and at what cost or how efficiently. Take, for example, the planning and control of the efforts of the salesforce. The average company spends thousands of pounds keeping each member of its salesforce on the road. In addition, the difference in performance between an effective and ineffective salesperson can be enormous. Taken together, this means that (ideally) a company should have clear objectives for the activities of its sales force and also be able to measure the efficiency of each member of the sales team. Setting sales objectives is a matter for the marketing department. The finance function is required to provide information which will enable marketing and sales to assess the cost-effectiveness of the sales team. For example, we might require information on the following factors: 

total selling costs



breakdown of total costs by salaries, commissions and expenses



details of costs incurred by each salesperson.

Together with information provided by marketing and sales, this information enables the following to be calculated: 

average cost per call



sales costs by territory



trends in direct versus indirect costs.

Marketing and finance must work together as a team to achieve effective sales control. Credit and Discount Policies An important aspect of competitive marketing strategy is the issue of policies and procedures for customer credit, and discount policies. For many purchasers the amount of credit which a company is willing to extend is a critical factor in the purchase decision. In many companies decisions on credit and discount are often taken unilaterally by either the marketing department or the finance (accounts) department. However what is required is a joint decision on credit and discount which reflects both the competitive needs of the marketplace and the financial resources of the company. For example, a decision by the marketing department to allow an extra 30 days' grace between delivery and payment may well be very competitive but may cause severe cash-flow problems for the company. Similarly, a decision by the finance department to cease offering price discounts for quantity may improve the short-term financial or cash-flow position of the company at the expense of long-term market share. Clearly, such decisions cannot be taken without consultations between marketing and finance.

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Relations with Other Departments (a)

Scope of Relations We have examined in some detail why marketing and sales need to have an effective working relationship with production and finance. Although these are two of the most important functional areas with which marketing must work, they are by no means the only ones. In fact, all of the functions of a business need to work together to achieve customer satisfaction at a profit. The marketing concept stresses that customer satisfaction is a function of the total efforts of a company, not just those of the marketing department. Packaging, quality control, transport and distribution, purchasing, even the efforts of the company word processor operator, may all influence the level of customer satisfaction. To illustrate this point we will examine a practical example.

(b)

Quoting a Selling Price The sales representative is one member of the organisation who is in contact with the buyer, and may, in fact, discuss the question of the final selling price. Whilst it may be desirable that the representative should have some scope for negotiation as far as the price is concerned, he or she must be in possession of all the relevant facts. This is to enable him or her to arrive at a final minimum price at which the transaction will show a profit. So it is absolutely vital that the representative, through the sales or marketing manager, should continue to consult the other departments concerned in the computation of the selling price. The following price computation shows a number of factors which might be taken into consideration in estimating selling price. If the goods are subject to VAT, or quantity discounts are involved, then further complications will arise. Computation of Sales Price Per Unit £ Raw materials Labour Overheads Production cost Mark-up – 10% on cost Transfer to sales Basic overhead addition (15%) including delivery in UK Profit mark-up on cost – 10% Cash sales price

4.23 2.81 1.32 8.36 0.84 9.20 1.38 1.06 11.64

3 months' credit – 2½% additional

11.93

6 months' credit – 5% additional

12.22

Above prices valid up to 1 dozen 1% discount – 12–50 units 1½% discount – over 50 units

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Requirements of Particular Departments It is necessary for the marketing and sales department to liaise with the following other departments of the organisation. Production Department The "transfer to sales" price of goods manufactured by this department includes a number of items which may be subject to variation. For example, the cost of raw materials might increase, whereas labour and overhead costs are always subject to adjustment; the mark-up of ten per cent over production cost may be incorporated in the transfer to sales price merely as a precaution against increases in the cost of production. Full liaison with the production department will ensure that the marketing department is always aware of the degree of flexibility allowed in fixing the transfer price. At the same time, the production department can advise when a change of production cost will be likely and how many units can still be sold at the original price. Packing Department Explicit instructions must be given to the packing department by the marketing department in respect of every sales contract. It is essential that the goods sold are not only ready for despatch when required but also packed correctly. Transport Department Good communications must be maintained between the transport and marketing departments since delivery on time is a vital part of any sales contract, and penalty clauses may be invoked for late delivery. Full transport and delivery instructions must therefore be given to the transport department as soon as possible, so that it can make its own arrangements for programming the despatches. Finance and Credit Control Department Buyers often request, and are granted, periods of credit. Granting credit must be considered from two separate aspects: the financial cost to the company, and the creditworthiness of the buyer. The marketing department should be in regular contact with the finance and credit control department in order to receive up-to-date information in respect of the costs of financing and the limits which are accorded to buyers. IT Department With the growing importance that the internet plays in marketing, marketers and IT specialists need to work closer than ever before. Marketers will need to ensure that websites are developed and maintained to meet the needs of their users/customers. They might do this by providing information, online ordering capability and supporting the delivery of customer service (for instance by providing customers with order confirmations). The marketing department will also wish to ensure that the IT department understands the contribution of the website to developing a brand image and marketing positioning for the organisation's products and services. Recent developments in website analytics allow organisations to monitor customer usage of their websites providing a greater understanding of customer/buyer behaviour and product preferences. It is often the marketing department that will have access to and analyse this data. Therefore there is a need for close cooperation between marketing and IT to ensure that this knowledge is transferred so that the website can be improved and further developed to offer competitive advantage.

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Conflict between Marketing and Other Departments It is generally assumed that the effectiveness of any individual department or management function and, ultimately, the whole company, will depend upon cooperation among the specialist functions of the business. Although in principle all departments should cooperate, in practice there is often substantial rivalry and conflict between them. This is because department heads may have their own views as to what constitutes the effective management of their particular area of activity. Further, the aims of the marketing department, imposed by the logic of customer satisfaction, may be at odds with the aims of other departments. The following table illustrates a number of conflicting issues that may arise between marketing and other functions. Functions

Source of Conflict

Production

Production often stress long production runs of standardised items, together with finite sales forecasting for planning processes. Differences occur on issues of lead times, modification changes, minimum ordering, scheduling, stockholding, etc. Marketing, on the other hand, will stress the need for a greater variety of products, shorter production runs, etc.

Research & Development (R&D)

R&D may emphasise a need for pure research, for experimentation and greater accuracy and development time. Marketing's emphasis will be on more applied research and they will become frustrated with overruns on time and budget.

Purchasing

Purchasing specialists will stress the need to choose between suppliers, to focus on price specifications and delivery times. Marketing may stress the need for high quality, higher priced items in line with what customers are demanding.

Design

Engineering design will seek to standardise, while marketing will seek to customise.

Finance

Potential conflict here is often over prices to charge and pricing methods, cost allocation, profitability targets, credit control and marketing budgets.

Interdepartmental conflicts are often attributed to the issue of ownership or territory. This can occur when departments form views or beliefs as to whose function certain organisation activities belong to. Marketing research, selling and promotion are widely recognised as the proper reserves of marketing management. However, within marketing operations there are subfunctions such as product planning, customer service, packaging, distribution and pricing which are often fought over between marketing and other functions.

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G. ORGANISATION FOR MARKETING You will be aware that there are all sizes of organisations in existence, ranging from the oneperson operator to the huge multinational conglomerate business group. Despite the differences in size, they all have one common characteristic: they exist to provide something to other parties, and survive by making a profitable return on their output. Regardless of the reason for existence, every organisation needs to be structured to make it efficient and effective. Basically the structure is the skeleton or backbone of the organisation and is generally used as a means of grouping the necessary activities together in some way that makes sense. Structures are usually represented as diagrams or organisation charts, and I am sure that you have seen many examples of such charts during your studies to date, as well as in your own work experience. An organisation chart can serve many purposes: 

identifying responsibility for activities



showing who is in a decision-making position



giving the hierarchy of command



enabling the chain of communication to be seen.

Alternative Structures A business of any kind may be organised in several ways. The most common structures are as described next. 

Regional/Geographic This is a very simple way of splitting up responsibilities. The region can be small (local towns) or very large (Africa, Indonesia, United States, etc.). As the business develops each area can then be subdivided to cope with increased work (e.g. north, south) or perhaps in one of the ways considered next.



Task/Function Typical functions to be found in organisations are: finance, production, purchasing, marketing, human resources (personnel), etc. Structuring a company by this method means that, irrespective of the region involved, there are people who are responsible for certain activities with the resulting benefits of experience and expertise. If a company organises in this way and then subsequently grows in size, it may further subdivide the activities into regions.



Market/Customer Depending on what is being offered by the company this may be a very good way of structuring. For example, a company which provides diagnostic testing media will have many different types of customers: hospitals, agricultural testing laboratories, food manufacturers, public health laboratories, cosmetic manufacturers. Having personnel who deal with specific customer groups means that expertise can be built up and specialised knowledge is available to deal with any relevant problems.



Product/Technology This type of structure is usually found in the large conglomerates which have a wide range of products, e.g. ICI has paint, chemicals and textiles, which are used by different people for different purposes. The production processes can vary greatly and

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may have their own requirements which demand that they are regarded separately. Add this to the different customers they are likely to be dealing with and you can see why such a structure might be used. 

Matrix This is a form of management structure which involves bringing personnel from various sections of an organisation together for specific reasons. Predominantly used for a problem-solving exercise, it is most commonly used for managing complex projects and has the benefit of multiple-skilled and experienced people working together. NASA (North American Space Agency) was one of the first organisations to use this type of structure in order to land a man on the moon! Sometimes a member of the team will be acting as a leader and sometimes just as a member, depending on which skills are needed at any given time. Managing Director – Directors Finance Dept

Design Dept

Production A

B

C

Marketing Dept

Project S Coordinator Project F Coordinator Project Y Coordinator 

Tall and Flat Structures can be either tall or flat: Tall Organisation

Flat Organisation

Manager

Department Manager

Supervisor First Sales

Salespersons

Second Sales Third Sales, etc. Tall organisational structures have many levels and so are associated with narrow spans of control. (However in larger organisations with many employees, broad spans of control can co-exist at many of the levels.) So you can see that tall structures mean a long chain of command from the top to the bottom of the organisation, with power and authority reducing the further you move down the chain. A major advantage of tall structures is the distinct division of work between the levels which reinforces a clear line of authority. On the other hand the number of levels can make the identification of objectives difficult at each level, the distance between the top

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and bottom level can hinder communication, and additional management levels tend to be costly. Flat organisational structures have relatively few levels and are associated with broad spans of control. The fewer lines of management mean people are nearer to the top and this can create better communication links which add to the overall efficiency and effectiveness levels. Many businesses have now moved to a flat type of structure. It is considered that they allow more flexible working, devolution of authority and autonomy and, because of the reduced number of management levels, reduced administrative/staff costs. People moving up the shorter chain of command are given more responsibility and greater authority for decision-making, which motivates them to be more productive. 

Strategic Business Units The evolution of markets and business into the highly complex and competitive state which exists today has led many companies to base their activities on Strategic Business Units (SBUs). This idea was first introduced by McKinsey & Co. (USA) for General Electric in the early 1970s and today it is common practice. The whole concept simply means that companies have identified certain units of their business as being key sections and, as such, these sections are given individual responsibilities. An SBU is a separate operating unit (within an organisation) which is self-contained and can relate to a single product, a product range, a department or even a subsidiary company within a large multiple organisation. McKinsey & Co. stated that to be an effective SBU, the unit must meet the following criteria. It should have: 

a unique purpose in the organisation



its own "manager" (at any level) to make decisions



its own plans which fit into the overall corporate plan



its own customer base



recognised competition.

The benefits of operating on the basis of SBUs include: 

the single-mindedness of the personnel involved



no fragmentation of effort



easier processes for purchasing, accounting, etc.



easier monitoring and control of activities.

The disadvantages can be: 

duplication of effort by scattered expertise in the organisation



restrictive practices between SBUs to gain competitive advantage



poor utilisation of resources due to "narrow" planning activities



wasteful purchasing effort due to smaller quantities



self-protection activities on the part of the "manager" and personnel.

Most organisations tend to use a combination of the methods outlined here to form the structure which is best suited to their activities. This is because of changes that have taken place as the organisation and its market have evolved.

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Changes which take place and can involve structural reorganisation include the following: 

the day-to-day operations become too much for the personnel employed and more people are required



the need to increase production to cope with demand



the need to add different products to the range offered



moving from one market area to another



customer tastes



increased competition



developments in technology



government regulations.

Organisation Structures for Marketing So far we have looked at possible structures for the total organisation. We have seen that a company can be structured in a variety of ways according to its needs and circumstances. For the purpose of this course, we will take the following as a typical structure for an organisation. The marketing function is expanded to show further detail. Please remember that this is only an example and is not meant to infer that this is the ideal structure – each company will have its own priorities. Managing Director

Director Finance

Director Procurement

Director Marketing

Director Production

Director Personnel

Manager R&D

Manager Sales & Marketing

Manager Advertising

Manager PR

Manager Distribution

Manager USA

Manager Europe

From this structure you can see that power emanates from the managing director and cascades down the hierarchy of command. The structure is based predominantly on a functional basis in that there are people at senior level who are responsible for defined activities for the company overall, e.g. finance, marketing, purchasing. With a high level and central control of these activities expertise can be accumulated, cost savings can be made and a much greater degree of control can be achieved. Marketing itself is also organised on a functional (or task) basis but is then split geographically into USA and Europe and, within the two geographic areas, a task structure is used for the operational levels.

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The alternatives for grouping marketing activities are exactly the same as for the organisation overall: 

functional structures



regionally-based structures



product structures



customer-based structures



product/customer-based structures.

Let us look at each of these in turn. (a)

Functional Marketing Structure The following organisational chart shows the functional marketing organisation of a medium-sized company. Under this structure, personnel are grouped by functional specialism and their activities are coordinated by the marketing director (or manager). The system benefits from clearly designated areas of responsibility. On the other hand, it has a rather restricted outlook with each department tending to plough its own furrow. Problems can arise if the organisation grows into a top-heavy hierarchy of specialists, with strictly functional interests. Marketing Director

Sales Manager

Sales Office

Customer Services

Marketing Manager

Home Sales

Marketing Research

Product Planning

Advertising, PR, Sales, Promotion

Area Managers Branch Managers (b)

Regional Marketing Structure Most organisations will be structured at least in part on a regional or geographical basis. This is particularly true of salesforces operating nationally, where the national sales managers supervise regional managers, each of whom may supervise several area managers or field sales people. The structure is typical in the case of multiproduct companies, or companies with large exporting operations.

(c)

Product Marketing Structure Companies that have broadly differentiated product lines frequently organise their marketing activities on a product or product group basis. The organisation as depicted here is only viable where each product/product group generates sufficient sales revenue to offset inevitable duplications of effort. Not surprisingly it was first adopted by the large multinational FMCG (fast moving consumer goods) companies, but has now spread to other sectors including industrial manufacturing and financial services.

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Marketing Director

Market Research Manager

Field Sales Managers

Product Manager A

Product Group Advertising & PR Manager(s) Manager

Product Manager B

Product Manager C

When a product group structure is used it is normal to appoint product or brand managers with specific responsibility for the performance of a product in a market. The term "product manager" is usually used in industrial marketing and "brand manager" in consumer marketing. Essentially, the duties of the product or brand manager are to coordinate all activities associated with the marketing of a given product or brand. The product manager prepares a marketing plan for the product and defines the sales volume, market share and profit objectives. Forecasts and budgets are prepared and the resources required for advertising, sales promotion and salesforce efforts determined. In addition, the product manager will make recommendations and changes to the offer in terms of product modifications, pricing, distribution or in terms of deleting or adding new products. Product managers must compete with other product managers for the company's resources. Although they work to guidelines set by top management, who impose ceilings on their expenditure, they have a right of appeal based on the worthiness of their marketing plans and the objectives they seek to achieve. Once the plans are agreed the product manager is responsible for implementing and coordinating all activities. The product manager must liaise with other functional specialists as well as outside agencies in delivering the bottom-line sales and profits included in the plan. As these are the same skills required of top managers, often the product manager's position acts as the proving ground for senior management appointments. The great advantage of the production management structure is that it guarantees a focus and specialisation of management at the product/brand level. This means that all the major profit earners of the company get the benefit of a full-time champion dedicated to their well-being. The potential drawbacks to this structure relate to the product manager having too much responsibility and not enough authority. Problems invariably arise in terms of reporting relationships and decision-making authority, while the healthy rivalry between product managers may develop into unproductive competition and conflict. (d)

Customer-based Marketing Structure Market or customer-based structures and the product-based structure are quite similar. In a company like Unilever, which is producing a group of nearly identical products from the same manufacturing facility, all of which are to be sold through the same distribution outlets, the product manager system ensures that the individual brand is given the individual attention it deserves. However, where a company is selling one product or line of products that appeals to different segments of the market, the market or customer approach may make more organisational sense, since it puts appropriate focus on each of the marketing opportunities.

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The following organisation chart illustrates a customer-based structure for a hypothetical manufacturer of crockery ware. Marketing Director

National Sales Manager

Marketing Research Manager

Market Manager Hotels

Market Manager Retail

Market Manager Commercial

You could argue that this structure represents the closest means of implementing the marketing concept, for it is implicit that customer requirements will take precedence over all other activities. It is a recognition that customers often have needs for a series of related products which may be usefully combined with a company's product offer. For example, IBM do not just sell computers – they sell computer systems and software tailor-made to end-user specific requirements. Emphasis only on the product could well result in the employment of salespeople specialising in certain products and missing out on such opportunities. If we were to generalise, then, where a company's product has mass appeal across industry or user categories, then the responsibility for marketing should be vested in product managers. However, where there are marked differences in the needs or buying habits of separate customer groups, then these should be regarded as separate markets and market managers appointed. (e)

Product/Customer Structure Where companies have many products being distributed into many markets they could choose to use either a product-based or customer-based structure. In an effort to resolve this dilemma, a composite of the two structures has been formed. The textile company Du Pont have chosen a composite-style organisation in employing separate managers for yarns, rayon, acetate, nylon and Dacron (terylene) and separate market managers for its apparel such as men's wear, women's wear, home furnishings and the industrial market. The grid line structure as illustrated next operates across the dimensions. The product managers plan the sales and profits of their respective fibres and seek information or forecasts of fibre usage from the market manager. The market managers are only interested in meeting the needs of their customer markets rather than pushing a particular fibre and, in preparing their market plans, seek information from the product manager on prices and availability of different fibres. This structure appears to be suited to large, multi-product organisations in terms of greater coordination of activities and faster decision-making. Against this is the fact that the system is costly and can lead to interdepartmental conflict. Product Managers Rayon Men's wear Market Managers

Women's wear Home furnishings Industrial markets

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Comparison of Marketing Structures There are clearly a number of advantages and disadvantages from operating either one or more of the marketing structures we have identified. N Piercy's: Marketing Organisation (Allen & Unwin) provides a succinct summary as shown in the following table. Form

Functional

Advantages

Disadvantages

Specialisation in task activities to develop skills.

Excess levels of hierarchy may reduce unity of control.

Marketing tasks and responsibilities clearly defined.

Direct lines of communication may be ignored.

Situational Indicators Simple marketing operators. Single pricing product/market.

Conflict may emerge. Product/Brand

Specialisation in product brands. More management attention to marketing requirements of different products/ brands. Fast reaction to product-related change.

Market/ Customer/ Geographical

Specialisation in a market entity – focus on customer needs. Fast reaction to market-related changes.

Product/Matrix

Advantages of functional product and market specialism and integration.

Dual reporting. Too much product emphasis. More management levels and cost. Conflict between product managers.

Duplication of functions. Coordination problems. More management levels.

Allocation of responsibilities is difficult.

Wide product lines sold to homogenous groups of customers but sharing production/marketing systems, i.e. proliferation of brands and diversified products requiring different skills/activities. Limited standardised homogeneous product line sold to customers in different industries, i.e. proliferation of markets each meriting separate efforts. Multiple products and multiple markets.

Duplication inefficiencies.

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Chapter 2 Markets and the Marketing Environment Contents

Page

A.

The Concept of the Marketing Environment

36

B.

Macro Forces The Political Environment The Economic Environment The Social Environment The Technological Environment

37 37 39 40 41

C.

Micro Forces The Customer Environment The Competitor Environment The Supplier Environment Company Resources

41 41 42 43 43

D.

An Alternative View of the Marketing Environment

44

E.

The Marketing Audit Scope and Objectives of a Marketing Audit Environment (Customer) Audit Competitor Audit Opportunities and Threats Revealed by Audits

45 46 46 47 48

F.

Market Segmentation, Targeting and Positioning Bases for Segmentation Market Targeting Positioning

50 51 59 61

G.

The Marketing Mix The Seven Ps Kotler's Seven Cs Relating the Marketing Mix to Segmentation, Targeting and Positioning Repositioning Relaunching

62 63 64 66 66 67

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Markets and the Marketing Environment

A. THE CONCEPT OF THE MARKETING ENVIRONMENT When an organisation is structured it means that it has set itself up in a manner appropriate to carry out its business, but that does not mean that business will be able to be done without interference! From time to time, major events change things suddenly. Two world wars, the Depression of the 1930s and the oil crisis of 1974 are profound examples. More often, companies tend to be faced with perhaps significant but less drastic environmental changes. For instance in the early 1990s a relatively high level of interest rates, and later the development of the internet, have both had a major impact on the way organisations do business. For businesses, especially small ones which had already been forced to cut back like many others, the future might have been ruinous. For the house buyer, mortgages became prohibitive and the knock-on effect hit housebuilders, solicitors, removal firms, landscape gardeners, surveyors and others involved in the process. It even included retailers of carpets and domestic appliances. You can see that no organisation stands in isolation. Each is, or can be, affected by multiple factors both externally and internally. To describe the influencing factors on marketing we use the term "marketing environment" – which is another way of saying "the operating arena" – and this comprises two elements: 

the external environment – known as the macro environment



the internal environment – known as the micro environment.

Figure 2.1 summarises these two environments and shows where influences on marketing activity can come from. Figure 2.1: The macro and micro marketing environments

MACRO FORCES

Political

Economic

Customers Competitors

MICRO FORCES Shareholders Directors

Distributors Local communities

Technological

Social

Banks Suppliers National governments

Managers Employees

Laws and social practices

Planning Trading partners

Activities

Media

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Taking the macro environment first, we have four distinct areas of influence, known generally by their initial letters as PEST: 

Political factors



Economic factors



Social factors



Technical factors.

These factors can be best viewed as factors beyond the control of the organisation and are termed "uncontrollable variables". They can be contrasted with the so-called "controllable variables" which for marketing purposes include such activities as marketing plans, pricing, distribution, product development and promotion. The controllable variables are surrounded and thereby influenced directly or indirectly by the uncontrollable factors of the marketing environment. The importance of understanding a firm's environment is that it helps companies to plan for change. It must continually adapt its operation in terms of its marketing activities and plans to take account of environmental changes or it will fail. To summarise, the marketing environment can be divided into two distinct categories, termed the micro and the macro environment. The micro environment consists of those forces close to the company that affect its ability to serve its customers. The macro environment includes the larger forces of politics, economics, technology and social forces and it is these we will deal with first.

B. MACRO FORCES The Political Environment The political environment can be influenced by three factors: ideology, the law and ethics. (a)

The Government's Ideology towards Business Activity This can be an important factor in the profitability of most companies in the UK. The Conservative government of the 1980s and 1990s created a favourable climate for business activity. Corporation taxes were reduced and privatisation developed with state-run corporations being slimmed down. Government controls were reduced and government initiatives, particularly privatisation, altered the country's business environment which the following Labour government did little to reverse. It is not only the political climate in the UK that is important, but also the political attributes of other countries with which UK businesses have to deal. Dictatorships and changes of political control can be unpredictable, and wars or civil wars can flare up, playing havoc with business. For example, following the return of Hong Kong to Chinese ownership in July 1997, companies there worried about the Chinese government's attitude to business.

(b)

Legal Controls on Business There are many laws that affect the trading activities of businesses throughout the world. UK law now permits, for example, public houses to stay open longer to sell alcohol. The Sunday trading laws have been relaxed, and so many of the retailers who would like to open for business on Sundays can now do so. Companies will become more "responsible" as time goes on under the product liability laws, which in the UK are embodied in the Consumer Protection Act 1987. All countries have similar legislation. The internet automatically gathers data about customers and provides organisations with the opportunity of using this personal data to learn more about their preferences

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and buying habits. Organisations will want to use this information to develop closer customer relationships and engage in personalised marketing activity. However, data protection legislation (Data Protection Act 1998) was introduced to protect customers from the misuse of their personal data. Organisations are restricted from disclosing personal information to third parties without permission and from using personal information for purposes other than that for which it was gathered, for example sending unsolicited emails. (c)

Ethics of Marketing Practice Managerial ethics reflect a code of behaviour expected of managers by the public. Pressure groups are able to influence business ethics. The "Green" campaign is well under way, and many retail grocery outlets sell green products such as washing powder. Greenpeace are also trying to curb business activities that might have an adverse effect on the natural environment. We all know that Greenpeace do not limit their activities to one particular country. Monitoring the activities of pressure groups can be a very apt way for companies to predict future legal constraints. Pressure groups which attract a high level of popular support often force governments to introduce laws, sooner or later, in support of their cause. Many professions and industries have set up self-regulatory systems which aim to control the activities of their members and avoid the need for the government to introduce laws which might be more restrictive. The idea is good, if companies accept the control by their own industry. However, that means control by their own competitors and some companies see that as a difficult thing to accept. Perhaps the most impressive self-regulation schemes in the marketing business are those which apply to advertising, because they are so widely accepted. The Advertising Standards Authority (ASA) was established in the 1960s, and is funded by a voluntary levy on advertising spending. Although the levy is voluntary, compliance with the advertising compliance codes is not. Initially the remit of the ASA was to regulate non-broadcast advertising – i.e. advertisements in newspapers, magazines and posters. In the early years it established the slogan (part of the original code) that advertisements should be "honest, decent, legal and truthful". In 2004 Ofcom delegated the responsibility for broadcast advertisements – radio/TV commercials, internet advertising etc. – to the ASA. There are two codes for advertising regulation – the UK Code of Broadcast Advertising (the BCAP Code) which applies to broadcast advertisements and the UK Code of NonBroadcast Advertising, Sales Promotion and Direct Marketing (the CAP Code) for nonbroadcast advertisements. In advertising, the ASA has considerable power even though it controls by agreement. If the ASA decides that an advertisement contravenes the BCAP or CAP code, it only needs to tell the publishers of its decision, and the advertisement will not appear again. An advertising agency could be in serious difficulties too, because if they do not withdraw or modify the advertisement they could find that they do not get paid and cannot work under normal conditions.

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The Economic Environment The economic environment is often bound up with the political environment, and national economies are becoming increasingly dependent upon world economic trends. This is particularly relevant for the UK with regard to its links with the European Union. Following the establishment of the European single market in 1992, the realities of the economic environment for companies both within the UK and the European Union are such that, with the free movement of goods and services, greater competition will occur within the national markets formerly assured as home territory. Europe is not alone in this type of activity. Trading groups abound throughout the world, e.g. NAFTA (North American Free Trade Area), which has seen the USA, Mexico and Canada join forces in producing a common trade area for the countries involved. Reduced barriers to importation, etc. have resulted in increased trade between the parties and greater protection from imports from elsewhere in the world – all of which helps the economic situation for the member countries. There are other economic factors of direct influence on marketing including the following. 

Income Levels Income levels must have a strong bearing, for the amount of disposable income individuals receive needs to be soaked up by producers of goods and services. The gross domestic product (GDP) of a country is a useful indicator: this refers to the value of goods and services produced within the country. Another indicator is the gross national product (GNP), which refers to the value of domestically produced goods and services plus the country's overseas earnings. The GNP describes much more closely the country's national income. A better description of a country's wealth can be found in its "per capita" income, which is the total national income divided by its population.



Inflation Inflation erodes the purchasing power of money and causes other problems for marketers in areas such as pricing and the accurate estimation of demand. Governments all over the world try to reduce inflation rates in order to stabilise the economy and make it easier for international trading to take place. The "rate of inflation" is often an indicator of how stable the economy of a country is. For example in the UK, when the government succeeded in controlling the economy during the mid 1990s, inflation ran at approximately 2–3 per cent. In the same period in some countries in South America and in the former Soviet bloc inflation was running at upwards of 20 per cent (and much higher in some cases).



Distribution of Income The way income is distributed is important to marketing organisations and this will be reflected in the segmentation (dividing the market into specific groups of consumers, discussed later in this unit) part of marketing strategy. In some countries there are the very rich, the middle classes and the poor; but in Switzerland, for example, there are few who are poor enough to be compared to the poor of Bangladesh. The levels of income in any country will determine the type of marketing activity that takes place there. Few people in Switzerland have a need for basic survival products and, likewise, there will be limited numbers of people in poorer areas of Bangladesh who have a need for luxury status products.



Patterns of Consumption It is necessary for marketers to establish the level of spending power of different classes of the population.

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Sales patterns may vary from region to region and from country to country. For example, traditionally the French drink more wine than the British, whereas the British drink more beer. Consumption patterns can be found in such publications as the Mintel Reports. During the later half of the 20th century the western world has seen a significant growth in service sector industries, such as health, education, financial services and tourism.

The Social Environment The social environment in which an organisation operates can be divided into two categories: demographic and behavioural. (a)

Demographic Aspects Population Size World population is increasing as a general trend but in different areas of the world the population is actually falling. When the population of a country shows a downward trend it may be that the marketer will cease to see that country as a good opportunity and withdraw or restrict activities. This in turn will have an effect on the individuals in that marketplace as choice will be restricted and prices may increase due to lack of supply of some products. Age Distribution Falling trends in birth rates, coupled with advances in medical science, have meant that the world population overall is "ageing". To the marketer this means changing tastes and needs and therefore marketing activities need to adapt over time. This is not to say that there are no babies being born – only fewer, with a resulting shift in the age profile. The 1960s through to the late 1980s were seen as the ages of the "Youth Culture". However as age levels have increased so we have seen the emergence of other cultures, e.g. the growth of the number of people in the age ranges of 55 plus has given us the "silver panther" market or (more unkindly) the "wrinklies". Changing Family Patterns The typical family is no more. Mr and Mrs Average, both in their first marriage with two children, the husband at work and the wife at home, now represent less than four per cent of all families in the industrialised countries. Even in the poorer and newlyemerging economies we are seeing changes to the traditional life styles of people and, consequently, changes to marketing activity.

(b)

Behavioural Aspects Cultural Values People grow up in a society which shapes their beliefs: for example, alcohol is forbidden in some Moslem countries, while Jews do not eat pork or mix meat and dairy products together at the same meal. Concern for the natural environment has led to significant changes in product development for such items as fridges and freezers, air fresheners and deodorants. Other aspects include a growing interest in health and fitness, which has led to changes in our eating habits and recreational pastimes. More informal dress wear for men and greater acceptance of more flexible working hours have affected the types of products and services we seek. Aesthetic Values What one society rates as attractive, another may find unattractive or distasteful. This applies particularly to colour, design, styling and fashion.

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The Technological Environment Technology is the major driving force for change everywhere. A consequence of this is that product life cycles are becoming shorter. No sooner has company A launched a new super product, than company B brings out a superior model. Many commentators believe that possibly as many as 80 per cent of all products today will not be on sale in ten years' time. Companies that do not invest in keeping in touch with product developments, possible via research and development, will surely not survive. 

New Processes New ways of doing things are constantly emerging, e.g. satellite broadcasting involves consumers purchasing satellite dishes; EFTPOS – Electronic Funds Transfer at the Point of Sale – has been developed for retailers.



New Materials New materials become available: optical fibres and carbon fibres are examples. The laser compact disc (CD) has replaced vinyl records.



The Internet In 2007 consumers spent approximately £46.6bn on the internet (a 54 per cent increase over the previous year) and organisations are spending more on internet marketing than radio, press advertising and direct mail together. E-commerce activities, e.g. selling online, online banking and using the internet to research and gather information, are a normal part of life in the developed world. The internet is more widely available through mobile telephones and wireless networks.

The internet and mobile technologies provide organisations with many opportunities, such as the ability to engage in one-to-one marketing communications activity, gather detailed data on customer behaviour, reach new markets and achieve cost savings through electronic distribution strategies, e.g. online ordering. However, the internet also provides many threats for organisations, such as more transparent pricing information, ease of switching to competitors and a reduction in customer loyalty.

C. MICRO FORCES The micro environment includes not only the company itself, but also its customers, competitors and suppliers.

The Customer Environment All companies need to have a good understanding of their customers: who and what make up their markets. We can identify five types of markets, although the industrial, reseller and government markets are often grouped under the heading of "organisational markets". These markets are shown in Figure 2.2.

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Figure 2.2: Types of market

Organisational Markets

Resellers Industrial

Government

Consumers

International

Company

The consumer market consists of individuals or households that buy and consume goods. Although several categories exist consumer goods basically fall within two broad bands: 

fast moving consumer goods (often known as FMCGs) such as cigarettes, confectionery, newspapers and food



durable consumer goods such as washing machines, refrigerators, hi-fi equipment and cars (some of these goods, e.g. washing machines, freezers and refrigerators, are often referred to as white goods).

The industrial markets (sometimes called producer markets) are made up of organisations that buy goods and services for further processing or conversion into finished items. Resellers are the retailers, wholesalers, agents, etc., that buy goods and services for resale at a profit. Government markets are government units or agencies that buy goods and services to provide for public services. International markets include overseas buyers and consumers, producers, resellers and governments.

The Competitor Environment Competition forms a major part of the environment in which companies operate. Few companies do not have competitors, and where monopolies have existed government has actively sought to force organisations back into the competition arena, e.g. in the UK the coal industry, telecommunications, gas and electricity.

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With shortening product lives, effective planning must be carried out in the light of the competitive situation in which the company finds itself. The competition should be assessed in several ways, such as: 

direct competition – those companies that produce the same type of product or service and sell to the same customers



industry competition – those companies that operate in the same broad product areas, but do not necessarily serve the same markets



indirect competition – companies that make different products or services, but which may attract the resources or compete for the disposable income of the markets you wish to serve.

Good examples of indirect competition include the purchase decisions to buy a car or go on holiday, to move house or pay school fees.

The Supplier Environment The supplier environment is very much more linked today to quality management and relationship marketing, in which a partnership is forged with the supplier in the same way as that with the customer. Suppliers are essential to the company for it to produce its goods or services. For example, the Ford Motor Company must obtain steel, motors, tyres, fabrics, glass and other components in order to make cars. It also requires labour, equipment, power, etc. in order to maintain full-scale production. Supplier developments or changes in relationships can seriously affect marketing. Developing a close relationship with suppliers can help prevent disruption to production and can make operators much more effective through the use of such schemes as JIT (just-intime). The micro environment is closer to the company and consists of the forces, people and organisations which operate within the immediate environment of the company. Usually the effects of changes are easier to see and to forecast. That does not automatically make the changes easier to deal with, but it does mean that the marketing manager can have some hope of influencing some of the micro-environmental factors.

Company Resources The environment within which marketing management must work involves the resources of the company, and they are not endless. There are always likely to be conflicting opinions about how resources should be used, and one of the jobs of the managing director is often to make the difficult choices between equally deserving departmental managements. Resources are often thought of as they appear in the company accounts, in terms of money – either actual money in the bank or the estimated values of the buildings and machinery that the company owns. These resources are important, and if the opportunity arises to earn some extra profit the company may be able to acquire extra resources. That is what expansion is all about. Physical resources are a valuable asset, and the company which has access to adequate resources can take advantage of opportunities whenever they come up. The other type of resource is, of course, people – of all grades and types, doing demanding or menial jobs, all of which add up to achievement of the objectives given in the company's mission statement. One final resource is more difficult to define – the management skill that makes all the difference between a successful company and a loser, where both companies have apparently equivalent (other) assets and resources.

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D. AN ALTERNATIVE VIEW OF THE MARKETING ENVIRONMENT While studying the foregoing you will no doubt have realised that influences on an organisation from the environment will vary in intensity. There are those influences which will have a direct impact on the operating practices of a company, and those which may have an impact on the operating practices but perhaps over a longer period. For this reason many writers now split the marketing environment into three sectors – micro, proximate macro and macro (Figure 2.3). Figure 2.3: Micro, proximate macro and macro

Macro Proximate macro Micro



Micro influences are those strictly internal to the organisation – staff, shareholders, production rates. These are largely controllable by the company but will definitely affect operating practices, e.g. if shareholders demand an increase on the rate of return on investment it can mean increased activity in selling or even reduced numbers of people employed.



Proximate macro influences are those such as competition, customers and suppliers with which the company deals on a day-to-day basis. They may therefore not only influence the organisation but may also have an immediate effect on the company's activities, e.g. if a competitor changes their price structure it may affect another company which, in turn, could reduce prices or cease production.



Macro influences are the same as in the previous view of the marketing environment: the political, economic, social and technological changes which are likely to be beyond the control of the company. For example changes in legislation on safety equipment may not impact immediately but will eventually lead to the company either conforming to the new legislation or ceasing production activities for certain products.

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E. THE MARKETING AUDIT Marketing activities can be expensive, so it is necessary to check that the money is being well spent and there is at least a good chance of its producing the required results. Such checks are called marketing audits, and they can range from intensive studies of every detail of the marketing activity to simple checks on the results of a branch office or an individual territory. We looked at some aspects of the auditing activity (without giving it that name) when we considered the marketing environment, but we must now look at the formal system of auditing marketing activity, which can be carried out at different levels. Kotler gives the following definition of a marketing audit: "A marketing audit is a comprehensive, systematic, independent and periodic examination of a company's marketing environment, objectives, strategies and activities with a view to determining problem areas and opportunities, and recommending a plan of action to improve the company's marketing performance." If you think that looks expensive you are right, and when you add the fact that the best audits are done by outsiders who can charge high fees for their services, you can see why some companies do not go in for regular audits. It is often a sign of trouble when a company calls in specialists to do a marketing audit, but that does not mean the idea of auditing is wrong. Maybe if there were more audits, each one would be more useful and the company would prosper. You can understand the reluctance of managers to spend money on audits, especially by outsiders, because the results of the audit may suggest a specific department could have done better, and that reflects badly on the manager. The CIM definition of marketing refers to the supplying of customer requirements "efficiently and profitably", and the nature of marketing activity means it is not obvious at the time that the money which is being spent will produce the right results. A more constructive view of the marketing audit is that it might show how some activity could be done in a better way, or it might reveal a threat to our business that we did not know about. If you are familiar with the use of the word "audit" in accountancy, you will know that the audit of some accounts is required by law or by HM Revenue and Customs. That is not the situation with marketing audits – they are done because the company wants to know the answers to some serious questions. There can be times when outsiders insist on a marketing audit – for example, when a company is in financial difficulties and bankers want to know whether or not it would be wise to lend more money. It is worth mentioning at this point that the internet has increased the capability of organisations to research and gather detailed data. Such data can be used during the marketing audit, as well as being used to undertake ongoing analysis of markets, products and customers. Data gathered via websites can be organised into databases. Techniques such as data warehousing (storing and accessing the data) and data mining (retrieving and analysing the data) can improve the quality of information available for the marketing audit and subsequent strategic planning.

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Scope and Objectives of a Marketing Audit The range of enquiry in a marketing audit could be enormous, and it is usual to limit the enquiries to some specific aspect of the company's activities. Kotler lists six components of the marketing audit, each of which could function alone if a full audit is not needed or desirable: 

environment audit



strategy audit



organisation audit



systems audit



productivity audit



function audit.

Audits cost money and should be done with a specific purpose in mind. Like most marketing activities, auditing should have a clearly defined, measurable objective. It must also be properly funded – if the company cannot allocate staff or pay consultants to do the job properly then it is better not to do the job at all. The outcome of most auditing activity will be to show how some jobs could have been done in a better way, or some results were not as good as they should have been. The snag is that you cannot audit a plan beforehand, and it takes a good manager to accept that he or she could have done better. Often the audit result is just an opinion anyway, because investigations cannot reproduce the actual situation at decision time. However, although they cost a lot of money and take up management time, marketing audits can be very valuable if they are set up properly. A great deal depends on the attitude of the managing director: if he or she views it as a learning operation, so that his or her team will be able to learn from their mistakes and do a better job next time, then the audit will have been worthwhile. Modern technology has provided companies with an alternative to some aspects of auditing – the computer-operated modelling procedure. If suitable information about the market is fed into such a computer application and then changes are made in some of the data, it is possible to see what effect that would have had on the profit level. Such what-if? modelling can take some of the guesswork or judgement out of marketing decision-making. As remarked previously, modern technologies have allowed organisations to increase the amount of data they are able to gather about their market and customers. Examples would be data gathered through the use of loyalty cards or e-commerce/online buying. When such data is entered into a database, data mining and website analytics can provide greater understanding of consumer buying behaviour and purchasing activity. For example, organisations are able to track a customer's route through a website, see how they enter (e.g. have they entered the website directly or through a search engine), what pages they look at and how long they spend on each page, at what point they exit the website and what products they purchase. The analysis of this detailed information can be fed into the marketing audit.

Environment (Customer) Audit There are several aspects that would be worth knowing about the more important of your customers, and these might form the basis of an audit of the company's environment. It is always worthwhile trying to understand the way in which your products are going to be used, although sometimes that can be difficult. For instance, a company making gearboxes could supply to several different types of machine-makers, who in turn supply the machinery on which some consumer products are made. If there was a reduction in the demand for

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those consumer products, the effect would be felt sometime in the future by the machinery maker, then by the gearbox maker, but it might be difficult for the gearbox company to see just why its sales had fallen off. Some technologies change very quickly. Consider batteries – the type used in calculators and watches. As calculators were made smaller, the batteries changed from the cylindrical type to smaller flat discs, developed for a range of products such as hearing aids and cameras as well as calculators. A new range of products was brought out, and the market for them grew. But within a few years calculators which would work from light-powered cells and needed no replacement batteries were developed. If the makers of cylindrical batteries had been examining the markets in which their customers operated, they might have been able to predict the emergence of the new technology and forecast the effect it might have on their sales. Or it might have happened too quickly. Sometimes a study of the markets you and your customers sell into can help to see how your own sales will perform. I worked in an engineering company which sold components to many industries, and we found that the car makers provided us with a good sales forecasting system. Many of our customers were selling either products or services to the car manufacturers and we found that our sales went up six months after an increase in the sales of cars made in Britain. Sales fell six months after the car output went down, and we were able to use an HMSO publication called Leading and Lagging Indicators for guidance. Investigations into your customers' markets have to be handled with great care: it is easy to give the wrong impression, and this is a long-term investigation which will run on indefinitely. People can get the idea you are planning to move into their market, selling direct to their customers, rather than that you are into some long-term study of potential developments. When you are involved in marketing research you might well find that the people with whom you come into contact welcome a general discussion of the market trends that can be identified. Although it is never correct for a marketing researcher to reveal information about another company, it is often possible to refer to trends in a way that does not reveal names. As with all marketing activities, it is necessary also to establish positive objectives for any investigations into your customers' markets. In the short term you should be able to get a good idea of the future for each of your main customers by reading their advertisements, press comments and other publicity. Even their job advertisements can be useful. This is the sort of "investigation" that you might make a regular part of your sales force activity, because they can contribute bits of news and maybe comment on the strength of news reports. As mentioned previously, analysis of websites, loyalty cards etc. allows organisations to track, monitor and anticipate future customer activity.

Competitor Audit Collecting information on competitors should be a regular part of analysing the marketing environment, because knowledge of the strengths and weaknesses of your competitors is valuable information. Your own marketing plans and selling activities can be improved if you know of the weaknesses of a competitor, and if you know they are significantly stronger in one area, you can avoid a head-on attack on their market. Many small companies survive nicely by finding a niche which their bigger competitors do not bother to go into; small companies can manage well enough on the smaller quantities that big companies find a nuisance. Information about competitors should flow into your company on a routine basis, and you should not need an outsider to carry out an audit in order to tell you the things you can see for yourself. The value of an audit could be in bringing together many items of information.

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You might have a session, as part of a sales conference, in which everyone enters into a brainstorming look at one specific competitor, then another and so on, going through the activities of the main competitors. If you have an outsider doing a marketing audit you can ask for information on matters you cannot normally get to know about. The consultant may have different sources of information, and he or she may be skilled in the sort of detective work that deduces ideas from the minimum of facts. However, there is a lot you can do for yourself if you study information that routinely comes into your company. Try to think out why a particular action has been taken, and what the implications will be for customers. A change of policy on credit terms may not be announced in a press release, and you might find a flow of customers moving from a competitor to your company. You need to ask why this has happened. The process of "putting two and two together" is a valuable exercise and it is often useful to ask a few people to get together and give their views on a specific matter. You do not need an expert to obtain routine information, but you might get some benefit from the opinions of other people. The matters you may not know about are the effects of competitors on your own sales and profits. You may know of orders missed if you work in an industrial market, where many orders are based on quotations and there comes a time when it is clear that an enquiry is dead. Your salesperson should be able to find out whether or not the job went ahead, and if it did you will know whether or not you got the order or part of it. The buyer is not obliged to tell you who got the order, or why, and that is part of the relationship your salespeople have to develop over the years. In consumer markets there is more openness about retail selling prices – you can check just by looking on the shelves – but that will not tell you the deals that went on between the salespeople and the buyers. You need to know what made a store manager allocate more shelf space to a competitor's product, and what the store and the competitor expect to get out of this move. The store manager is not obliged to tell you, and again such information may only be revealed if your salesperson has developed a close relationship with the store management. A continuing study of the advertisements used by your main competitors will show changes of policy, and recruitment adverts can be very revealing. You could combine a study of advertisements with a regular survey of the sales of specific products. Some companies make their business from surveying the sales in shops at regular intervals: the best known in Britain is Nielsen, based in Oxford. The Nielsen survey reports depend on actual counts, which are split into product categories by the researcher, of stock and invoices. Sales over the counter are much more revealing than company turnover, but there are no comparable surveys for industrial products. Nielsen also operates in other countries and is one of the leading names in marketing research in the USA. The internet makes it easier for organisations to monitor competitor activity. Websites often contain information about competitors, their products, communications about future products and pricing.

Opportunities and Threats Revealed by Audits (a)

Opportunities It is worth quoting Skinner's definition of marketing opportunities: "Those opportunities that arise when the right combination of circumstances and timing allows an organisation to take action to reach a particular market." An audit which is done by an outside consultant may be very expensive, but there is a better chance of getting an objective study of the market in which you operate than

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there would be if your own staff did the audit. People working in a company have split loyalties – they know they ought to be objective but they have friends on whom they depend. Outsiders have just the one loyalty – to their client. An outsider might have wider experience than an internal manager, which could enable him or her to recognise an opportunity that would not be seen as such by the insider. I knew a manager who was quite sure there was no scope for selling his products to a particular company. However, a consultant was called in and knew of a buying policy change which enabled the manager to sell to that company. This was an opportunity revealed by the open-minded approach of the outsider. An internal manager must be deeply involved in his or her own department, so might not be fully familiar with the capabilities of other departments, especially if they are in different locations. Internal politics aside, it is unlikely that a manager would recommend the company to take up an opportunity that would do away with his or her own job. Further, the manager might not have the time or knowledge to see how two situations could be brought together to create an opportunity that neither created on its own. (b)

Threats As we've seen, a business can be threatened in several ways, such as the loss of markets due to advances in technology. Threats are more predictable in fast-moving industries and it is often possible to take some action so that profits do not suffer unduly. The more subtle threats are those from new competitors, who can appear on the market without any warning. Your sales force might have some idea that something is about to happen, and your suppliers may give a hint or two, but no one is obliged to tell you of new competitors. Threats may come from within the company too, owing to inefficiency in selling or manufacture. Markets change, sometimes in a subtle way which has to be taken into account. Yet few managers like change – there is an inbuilt resistance to change in most of us. Most changes are more tolerable if there is recognition at top management level of the time and effort that will be needed. If a marketing audit reveals a threat to the future of the company then it has served a useful purpose.

(c)

When Opportunities Become Threats It may not be obvious but it is possible for an opportunity to become a threat to the company: usually that happens if the management is not fully coordinated. An example from personal experience may help. In a company that was organised in divisions dealing with specific product ranges, one divisional manager saw an opportunity to make some profit by marketing the coated fabric from which another company made floating oil barriers to control oil spills in harbours. That was fine, but the manager of another division that made assembled products saw the opportunity differently and he started marketing complete oil barriers. So the major customers of one division had a competitor in the other division, and they stopped buying the products. The same situation provided an opportunity for one division and a threat to the other. In a different company the research and development department designed a conveying system that was brilliant and attractive. The enthusiastic R and D manager took the product into a full launch, even though the company had not invested in the resources to make the product on a production basis. A major exhibition brought in hundreds of serious enquiries, yet there was no sales force to visit the prospects.

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The directors disagreed so strongly about the allocation of resources that the design was sold off and the R and D manager was dismissed, along with all his department, which included me. That seemed bad at the time, but I turned the threat of poverty into opportunities that have kept me solvent. In these two examples you can see that the element missing was the overall control of the company's marketing effort, and the reason for that could only be a lack of top management expertise. Another situation which involved a big opportunity caused serious problems because the company was too small to handle one big order, brought in unexpectedly by their star salesman. The order was worth more than a normal year's turnover and the management were seriously embarrassed. They could not afford to pay the people and buy the materials, yet they did not want to lose the order.

F. MARKET SEGMENTATION, TARGETING AND POSITIONING Apart from the highly specialised companies which deal with very few customers, companies have to find their buyers. However, the number of people and organisations in the world make it almost impossible for any one organisation to reach and serve every potential customer. This means that there must be some way of splitting up the overall market into smaller, more manageable portions. This is done by segmentation. Segmentation is an important element in the marketing mix and you will see in what follows the different ways that you can segment a market. Targeting and positioning then follow; the latter affects all aspects of the marketing mix, but in particular the communications elements. The purpose of segmentation and positioning is to: 

establish which segments of the total market your product or service is selling to and how efficient it is



ensure that the product's position in those segments is how you are seen in the minds of the target market.

Segmentation can be defined as: "The act of dividing the market into specific groups of consumers/buyers who share common needs and who might require separate products and/or marketing mixes." (Adapted from Kotler) Segmentation is the single most important aspect of promotion, perhaps even of marketing today. It is the foundation which enables promotional campaigns to be constructed effectively and efficiently. Marketing is consumer centred. It is marketing's job to identify specific consumer needs, and to satisfy those needs through the creation of a "package", making it available to the identified consumers and making the same consumers (and associated customers) aware that the package exists. Obviously it is wasteful to make a product available when there is no consumer need; equally obviously there is no point in advertising a service in media that are not seen by the target consumers (and/or customers). It follows that it is necessary to examine a potential market to identify the particular parts of it that share a common need, have a similar psychological make-up and can be reached with both promotion and product. When this is done you have segmented the market.

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Bases for Segmentation There are a number of ways in which markets may be segmented. The main bases are: 

Geographic – the market is divided into geographic units: a nation, a country, a city, a town. The geographic unit is quite likely to be a TV area – certainly an area for which secondary data sources exist.



Demographic – people-based segmentation, where the market is divided on criteria such as age, sex, family size, family life cycle, job type, income.



Psychographic – segmentation based on such things as lifestyle, attitudes, beliefs and intentions.

Alternative bases can be developed from behavioural issues such as: 

occasions – when the product is used



benefits – those sought by the consumer



usage – heavy users are of more value than light users.

There is no right or wrong way to segment a market. Consequently marketers are always developing their own approaches to segmentation because each market must be approached from the perspective of their own organisation. We shall review the general criteria used for segmenting markets before going on to consider some of the main bases applied. (a)

Criteria for segmentation The rules for segmentation are easy to accept as they are simply common sense. Always remember that while the marketer is trying to identify a segment which matches the product or service being offered, a profitable outcome is also required which means that the segment must meet the following criteria: 

Identifiable It must be capable of being identified as a separate section of the overall market and must display some common characteristic which sets it apart from the overall market.



Recognisable Do the members of the segment recognise themselves as being different and do other organisations in the chain of distribution recognise the segment? If neither the buyers nor those who serve them recognise the segment it is unlikely to be a successful option. It is more likely to be a segment created in the mind of a person who believes strongly in the benefits of a particular product: but remember this is not true marketing – it is product-led marketing.



Substantial It must be large enough to warrant activity on the part of the marketer. In the extreme example just given, the woman with green hair could not be described as a substantial segment.



Profitable It must be capable of achieving the desired objectives. This may not be in financial terms. Segments can be identified and used as a means of entering a market even though they produce little or no profit. This type of situation is often found in international marketing if an organisation just wants to get a presence in the marketplace for some reason or other. A segment, which produces little profit, can also be chosen as an investment because of potential add-on sales at a later date.

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

Accessible The marketer must be able to reach the segment. It is no good identifying a potential segment if you cannot serve it because of government regulations or location, etc.



Measurable You need to know the size of the segment before, during and after your activities. If you cannot measure, you cannot assess your success. Someone once said "If I cannot measure it, I cannot manage it", and this is very true.



Reliable or Stable The chosen segment must demonstrate a history and a future. If a segment suddenly appears, say because of a fashion fad, it may not be either stable or reliable. Unless the organisation is able to move quickly and satisfy the immediate need, the segment may disappear just as quickly.



Sustainable The organisation must be capable of serving the segment in the longer term. It is pointless identifying a segment which is so big that it is impossible to maintain. All this will do is to create dissatisfied customers and wonderful opportunities for competitors to come along and take the segment over – with the resulting losses of investment and effort for the original organisation.

Another aspect which should be considered is whether the segment fits with the company image and objectives. For example, a company which sells high quality goods and relies on brand image would be unwise to suddenly start marketing to a lower income group. The company could lose their credibility with the loyal customers they have in the higher price bracket which might mean greater losses than the income derived from the new segment. (b)

Organisational Segmentation Unfortunately the segmentation techniques available to those marketing to individuals are not available to the organisational marketer. On the other hand the strictly limited size of organisational markets is a major bonus. In organisational segmentation, groupings of customers can be broken down by: 

using the Standard Industrial Classifications (SIC) of the UK census of production



the technology of the industry, e.g. chemical or electrical, extractive, processing or manufacturing



size of organisation



seasonal purchasing trends



geographic location



the type of product needed.

This organisational demographics approach to segmentation assumes that organisations operating in similar industries have similar needs, and will exhibit the same kind of buying behaviour. Unfortunately this assumption is likely to be false in sufficient cases to warrant a serious attempt to locate a more effective method of segmentation.

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Other bases for segmentation include: 

benefits sought



title/position of key decision-makers



the degree of formality in the buying organisation



the type of people involved in the buying decision.

The type of product needed is a great help in segmentation. Office equipment is in universal demand and is almost a mass market. It can break down to users of types of machine, for example, which require specialised support (e.g. determine the users of Apple Macs as against PCs). Medical X-ray equipment is in limited demand, and those requiring it can very easily be identified. New uses for X-ray equipment can also be identified, and provided for (e.g. the increased security need at airports, and now in shopping centres, hotels, museums – wherever the public gathers in sufficient numbers to make a target for terrorists). Additionally to the comparative weakness in segmentation criteria, we are short of information regarding the diffusion process for new products. How quickly will they be accepted? Can the adoption process be hurried up? How can innovative organisations be identified? Fortunately for many selling to organisations there are major benefits that have accrued over the years. Organisations: 

tend to be more stable in their requirements than individuals, especially those which are highly capitalised, and those which engage in long production runs



are more visible than individuals, and can thus be individually researched



are fewer in number, and thus individual sales research is cost-effective



tend to congregate around trade associations, exhibitions, conferences, etc. and can thus be identified and accessed.

The individual nature of the target audience generally precludes the use of mass media – but the very need for highly targeted communications brings major benefits with it: 

sales records can be highly detailed, and extend over a long period



individual contacts can be fostered and developed, again over a long period



trade and specialist press exist to target virtually every type of organisation



direct mail lists can access virtually every individual of significance by job title and in many cases, by name.

Note: In some cases where a supplier is marketing to individuals, it has been possible to achieve a "double strike" in communications by transferring the retail brand into the organisational market. Thus, when Dulux paint is advertised an important subaudience is the organisational buyers, who have the opportunity to decide which brand of paint they will buy in bulk. (c)

Geodemographic Segmentation The powerful tool of geodemographic segmentation is made possible by the use of computers and the system of postcodes (zip codes) used by the Royal Mail. There are over 24 million homes and businesses in the UK and every one has a postcode. The postcode breaks into constituent parts to provide a lot of vital information. Let us examine the post code MK42 8LA:

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MK

The outward code, which identifies one of 120 postcode areas. MK is Milton Keynes.

42

A district within the area. There are 2,900 districts in the UK. MK42 is the Kempston district of Bedford in the Milton Keynes area.

8

The first digit of the inward code which identifies one of 9,000 sectors. MK42 8 is a sector within Kempston.

LA

Narrows down to units, which may be a handful of houses on a street or a single business. 174,000 "large users" have individual postcodes.

Thus, MK42 8LA encompasses a group of houses on King's Road, Kempston. By cross-referencing postcodes with government census data it is possible to identify clusters of households that share similar characteristics. Thus "geo" from geographic and "demographic" come together as geodemographic. The originators of the technique have marketed it under the acronym ACORN (A Classification of Residential Neighbourhoods). Several competitors have joined them and use the same basic technique, but provide uniquely tailored services. MOSAIC, for example, claims to be "the standard for packaged goods, grocery retailing, door-todoor distribution, local media and list owners' selection services". Choosing between rival suppliers is a question of matching your need to their exact provision. Geodemographics depends for its success on the high probability that like people live together and that like people behave in similar fashion. Thus if a grouping can be identified and labelled, and its behaviour studied, it is probable that a similar grouping elsewhere in the country will share similar behaviour. The census is taken every ten years, with a sample census every five. From the 2011 Census on, census returns can be completed by householders online if desired. The major providers all use the same basic methodology, so we can illustrate how the database is constructed by reference to ACORN. ACORN takes as many as 79 data items from the 9,000 items produced by the census authorities for each of the 150,000 small geographic areas that cover Britain. These include significant facts such as sex, age, marital status, economic position, education, home and car ownership. Where the small geographic areas with similar characteristics cluster in the census data they form the 54 ACORN Types, which are then used as a means of defining and understanding the people in any given area – for example, "Families with mortgages and younger children". Choosing the right geographical area is vital. Different markets need to view their customer base in different ways: 

retailers are interested in store catchment areas



direct marketers are concerned with postal geographies



TV advertisers deal in ISBA (Incorporated Society of British Advertisers) TV regions



health care marketers are interested in administrative areas.

ACORN can take the data of individual clients and include it within the basic ACORN system. It can then be profiled in whichever geographic areas are most appropriate – from postal areas to areas defined by contour lines on a map. Additionally, all geodemographic surveys provide easy cross-referencing to two major marketing research databases. The Target Group Index (TGI) and the National Readership Survey (NRS) allow ACORN profiles to be extended to include data on product usage, holidays, readership, etc.

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Using geodemographic data makes numerous things possible: 

You can be given an exact count of the target households to leaflet, an exact number of leaflets to print, and road maps that specify on which houses to drop leaflets.



You can match a target segment against media (who show their readership by geodemographic classification).



You can select sites for retail shops so that they are close to their target customers. ACORN data helped retailers to prove that customers choose stores by time and simplicity, not by distance criteria. In other words being close to the customer is not enough. If the journey is difficult – or perceived as difficult – the shopper will go elsewhere. Shoppers will go 25 miles on a motorway rather than three miles across town, for instance.



You can adjust stock range and levels so that the correct goods are in areas of demand.

One simple way to secure customer information is through the guarantee cards that most manufacturers ask buyers to complete and return. In the UK there is no need to register a purchase with the manufacturer, the purchaser's contract is with the retailer. Yet many of the cards are filled in and returned. You will notice that they normally ask for more data than is needed simply to register a purchase. Every card that is returned extends the manufacturer's database, and provides more information about its customers. Geodemographic data is very easy to obtain on contract. Individual prices are discussed with those who have a serious interest, but the service is proven to be costeffective. Another well-established geodemographic system is MOSAIC, which we have already mentioned. This offers 12 lifestyle groups, which in turn are split into 52 different types. (d)

Social Grade Segmentation The UK market is divided by the National Readership Survey into six social grades, which are often described as segments. The classification has become so useful that it is almost universally known, and is in very wide usage. Unfortunately the division is based upon the data relating to the chief income earner, which means that all in a household are graded identically no matter what their differences may be in education levels, work, disposable income, lifestyle, etc. Thus the only marketing value is to assist, as a form of shorthand, the broad description of a market area – "This is a product for the A/B market".

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The classifications are: Social Grade A B

Social Status

% of UK Population (1998/99)

Occupation

Upper middle class Middle class

C1 C2 D

Lower middle class Skilled working class Working class

E

Those at lowest level of subsistence

Higher managerial, professional Intermediate managerial, professional Supervisory or clerical Skilled manual workers Semi-skilled and unskilled manual workers State pensioners, widows, casual or lowest-grade workers

2.8 18.6 27.5 22.1 17.6 11.4

Source: National Readership Survey (NRS Ltd) July 1998 – June 1999 Table 2.1: Resident Population of GB by Sex and Age: Estimate Mid-1998 Years of age

Total '000

'000

Males %

Females '000 %

0-4 5-9 10-14 15-24 25-34 35-44 45-54 55-64 64+

3,670 3,913 3,795 7,189 9,231 8,505 7,756 5,881 9,290

1,882 2,004 1,948 3,687 4,720 4,294 3,870 2,895 3,821

7.0 6.6 6.2 15.4 15.9 14.1 11.6 10.2 12.9

1,788 1,908 1,847 3,502 4,510 4,210 3,885 2,985 5,465

6.3 6.0 5.6 14.0 14.9 13.5 11.1 10.2 18.4

Total

59,228

29,128

100.00

30,100

100.0

Sources: ONS; General Register Offices for Scotland and Northern Ireland Note: figures may not add due to rounding. (e)

Life Cycle Segmentation Life cycles provide a useful basis for segmentation in some markets. Some years ago the National Westminster Bank (the "NatWest") set out the stages of the life cycle, and the financial implications, in a leaflet focused on savings and pension plans (the figures given here have been updated to 2010 and are approximate): 

You're born – and are reliant on somebody else for everything.



You go to school – with at least 11 years to look forward to. It costs about £8,000 per term to educate a child at a boarding school and about £4,000 per term at a day school. Paying out of income is almost impossible – take out a regular savings plan early.

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

You get a job – the last thing you think about is life assurance and pensions, but remember if you start a personal pension at 20 instead of 30 you could pay 9 per cent less of your salary each year and still secure the same pension.



You start a family – a real need for protection. One in five men will die before they are 65. Take out insurance!



You buy a house – you can choose between term assurance and an endowment plan.



You plan time off – you will need money to live on. Banks and building societies can help with saving and investment plans.



You run your own business – you may need to borrow, to arrange life assurance, a tax-efficient way to save for the future.



You save for your daughter's wedding – an average wedding costs over £18,000. A bit of a shock if you don't save for it.



You think about retiring – the State pension is (2009/2010) £95.25 for a single person and £152.30 for a couple (assuming full contributions). Only one person in 100 in a company pension scheme will receive maximum pension benefit so the sooner you think about a personal pension plan the better.



You're worth more than you think – without careful planning you could leave an unnecessary tax bill for your dependants to pay. Take out a life-assurance policy under trust.

Sagacity grouping looks at the life cycle in conjunction with job type. The basic thesis is that people have different aspirations and behaviour patterns as they go through their life cycle. Four main stages are defined which are subdivided by income and occupation groups. (f)

Psychographics Lifestyle segmentation is made possible by ascertaining the typical lifestyle of a typical customer and then confirming that there are sufficient similar customers and potential customers to form a viable segment. The TGI survey is an important tool in lifestyle segmentation. 

Target Group Index (TGI) Run by the British Market Research Bureau the TGI is a long-standing and greatly respected continuous survey of 24,000 adults. Since 1968 it has been continuously in the field and its reputation is well deserved. Published annually (April to March) it also provides six-monthly figures for April to September. The TGI has 34 volumes and provides considerably detailed information on over 3,000 brands. The TGI works with the full range of standard demographics and offers special breakdowns on such things as working status. It has a lifestyle section consisting of nearly 200 attitude statements against which the level of agreement or disagreement of each respondent is measured. This allows cross-tabulation of attitude against demographics, media and brands to assist with very detailed market targeting.

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

Benefit Segmentation This is segmentation based on the consumer benefits – those of the users/buyers of the product. A car can be sold on such features as economy, safety and acceleration. It is essential to know what a potential customer wants from a purchase – will he or she appreciate acceleration as a benefit? Should the offer be made in terms of convenience and safety? Sought benefits vary with lifestyle and circumstances. Thus a young man's benefit needs are likely to change remarkably as he becomes a father for the first time and convenience, safety and economy replace acceleration, speed and status as priorities. Similarly, a sufferer from chronic arthritis is likely to need an automatic car, whatever he or she may have previously preferred.



Attitudes Crucially important within marketing, attitudes, beliefs and intentions can be the key to any form of segmentation. It is possible to segment on individuals holding the same attitudes – fans of a particular football team, for example – but more subtle is the influence which attitudes, beliefs and opinions have over everyday behaviour. It is important always to consider attitude when segmenting a market because individuals will have a unique approach whatever general classification you can slot them into. Geodemographics coupled with lifestyle surveys comes closest to providing an understanding of the prevailing attitudes within a segment, but an understanding of the particular attitudes that affect a specific product/market is necessary for truly effective segmentation.

As technology advances, markets are becoming more fragmented, as can be seen through new media providers such as Sky Television with sports channels, DIY channels, baby channels etc. Also the use of websites and related technologies means that organisations are able to not only communicate individually with customers but are able to tailor their products to an individual's requirements. An example of this can be found with computer manufacturers, e.g. Dell, where websites allow individual customers to tailor their computers prior to despatch.

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Market Targeting This has been defined by Kotler as: "The act of developing measures of segment attractiveness and selecting one or more of the market segments to enter." (a)

Target-Market Selection There are five patterns of target-market selection, as shown in Figure 2.4. Figure 2.4: Target market selection M1

M2

M3

M1

P1

P1

P2

P2

P3

P3 Single-segment concentration

M2

M3

Multi-segment coverage M1

M2

M3

P1 P2 P3 Market specialisation M1

M2

M3

M1

P1

P1

P2

P2

P3

P3

Product specialisation P  Product

M2

M3

Full market coverage

M  Market



Single-segment concentration allows tight focus and concentrated effort. However it does involve higher risks since a market change will leave one vulnerable.



Multi-segment coverage is the selection of several segments, which may have little or no synergy. Risk is spread.



Product specialisation focuses on the production of a single product, which is sold to several segments. Reputation is built on the quality and the range; the risk is that the product itself can be superseded. Hence the focus needs to be on the task, not the product. The classic example is the American railways which

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were product-focused and not task-focused. Their future lay in transportation, not in railway trains.

(b)



Market-specialisation requires coverage of a market's needs, e.g. "All you need for your office".



Full market coverage is possible only for organisations since the aim is to supply all consumer groups with all the products they might need, e.g. IBM (computers), Microsoft (software), Ford (vehicles).

Differentiation In undifferentiated marketing an organisation will ignore market segment differences and offer a single product to the whole market. Note how even the mighty Coca-Cola have revised their approach by the introduction of targeted versions of their original product. Undifferentiated marketing is only sustainable in conditions of monopoly or where demand greatly exceeds supply. As competition enters, and when demand slows down, it is no longer a tenable policy. Differentiated marketing requires the design of products to be tailored to segment needs. Thus Ford will produce up to 18 or 20 versions of each model to cater firstly for the basic needs of a generalised segment and then for individual needs within that segment. For example, the need may be for a small car to use in the city. Thus the Fiesta is first choice. But then one can choose from a range of options: 

manual or automatic transmission



engine size



tuning for performance or economy



colour and upholstery options



status additions – exclusive models, customisation, etc.

Transcending product and service are the differentiation potentials of personnel and image. 

Personnel differentiation can be secured by a hiring and retention policy that attracts high-quality staff. High-quality personnel more than justify their higher cost if managed correctly within an appropriate corporate policy. Without management support from corporate level, high-quality personnel will become frustrated and leave.



Image differentiation refers to a perceived difference, part of which can be expressed as branding. An image must convey a singular message in a distinctive way with emotional power. Those who succeed in establishing a corporate image have immediate recognition within their target markets. This is sufficient – it is wasteful to develop an image in markets where there is no intention to trade. Image is normally encapsulated in a symbol, and an effective symbol immediately conjures up the whole emotional appeal associated with the organisation and/or its products and services. Thus even a split second peripheral glance at the "Golden Arches" on a busy main road alerts the driver to the restaurant and provides an immediate and powerful image of exactly what type of food, ambience, service and price are available – far more powerful than a sign for Priscilla's Restaurant about which nothing is known, especially when a decision has to be made in seconds.

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61

Target Audiences and Publics Target audiences and target publics are defined segments that are selected to receive promotional activity. "Audience" has traditionally been used in advertising; "public" in public relations. Both terms have exactly the same meaning, and target audience is gradually replacing the PR term. A target audience must automatically be a segment. Just as segments must be specifically identified, so must target audiences. Each of these is a specific target audience: 

the individuals within MOSAIC Type 14



adult males within MOSAIC Type 14



adult males within MOSAIC Type 14 within the Tyne Tees TV region.

Positioning There need be no such thing as a commodity. Convert a commodity into a product that can be targeted in two stages: 

Consider it an undifferentiated product.



Identify a way to differentiate. This will come from identification of a target market – a niche market – with consumers who have unfulfilled needs.

Developing an overall "package" of benefits that can be positioned in the minds of the target consumers completes the transformation. Thus positioning is the act of designing an offer so that it occupies a distinct and valued place in the minds of the target customers (Kotler). Note that products are not positioned – the term "product positioning" is incorrect. Positioning refers exclusively to a mental concept. The package that comprises the offer has to be positioned – remember that consumers do not want products, they want what products do for them. They want their needs to be fulfilled. Example How is a Mars bar positioned? Is it a filled bar of chocolate, a piece of confectionery to be found on the sweets counter? No! A Mars, we have been told, "helps you work, rest and play". So it is positioned as a nourishing snack that is fun to eat. Who eats Mars? According to the adverts (the pictures, not the words) the eaters are young, healthy, virile, active, fit and happy. Where do we find Mars? On the confectionery counters; but also on the biscuits/snacks counters, in vending machines, in cafés – and we now also find "fun", "standard" and "extra large" bars as the Mars brand is extended. Further brand extension has seen the introduction of Mars ice cream which carries the same packaging and symbolism as the traditional Mars bar, along with many other spinoff products. A Mars bar, by virtue of its wide appeal and low price, could have a very wide market at which to aim: but it is actually aiming at several different market segments. Mars are not targeting individuals, they are instead targeting identified groups that individuals move into and out of as they pass from stage to stage through life. (a)

Positioning Maps By taking two of the key variables influencing consumers it is possible to plot organisations or offerings against one another. This gives a picture of the market in terms of competitive position and facilitates the identification of market gaps (otherwise known as niches). Figure 2.5 illustrates a retail food positioning map.

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Figure 2.5: Retail food positioning map EXCLUSIVE  Fortnum & Mason  Harrod's Food Hall  Cullens

LOW PRICE

HIGH PRICE

 Marks & Spencer

Tesco  Kwik Save 

 7-11 Stores CONVENIENT Positioning maps are usually shown in two dimensions for simplicity but it is normal for multidimensional mapping to be used, i.e. several key variables are plotted against each other in order that an identified niche can be accurately defined. Thus a sequence of positioning maps may be required to illustrate even a static position. Obviously a series of maps will be needed to describe a dynamic situation. Positioning maps are a very effective tool because not only do they force detailed market study, but they also present information in a readily understandable form. (b)

Positioning statements Positioning statements are succinct descriptions of the exact position that the product is to take in the minds of the target market. Very great care and considerable time are taken to ensure that the statement is accurate and detailed. It will become the focus for all marketing effort and so the creative management time devoted to it will be repaid in long-term benefit. We shall return to positioning statements later in the course. It is difficult to challenge a competitor who holds a position; usually it is better to define, establish and protect a position that is unique in the market.

G. THE MARKETING MIX Companies who follow the marketing concept will use the marketing mix to conduct their dealings with customers. The "mix", as it is affectionately known, is really a combination of factors which can be amended or adapted to suit the requirements of individual (or groups of) customers. It is the "toolbox" of the marketer.

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The Seven Ps The term "marketing mix" covers the seven controllable variables of: 

Product



Price



Place



Promotion



People



Processes



Physical evidence.

You will note that seven is emphasised. There is a good reason for this. Previously if you were to ask someone what the marketing mix was, they would say "The four Ps – product, price, place and promotion." Until relatively recently this would have been correct. However, the marketing mix has been extended! We now have the seven Ps to play with: the original four, plus people, processes and physical evidence. These last three are sometimes referred to as the "soft elements" of the mix and are regarded as being relevant to internal rather than external aspects of the organisation, although they are all relevant to the customer. Increase in the service industries, during the later half of the last century, has aided the importance of the seven Ps as people, processes and physical evidence play an important role in adding value and creating competitive advantage. We will be looking at mix elements later in the course, but it may be appropriate to give some attention to the "new" or "added" mix elements at this point. 

People This element covers the training and motivation of the people involved in the marketing effort – in other words, everyone in the organisation. It is important that the correct image is portrayed to customers at all times, and the staff are the people who deliver this image. The attitude they have to the customer is important, and may be shown by the way in which they answer the telephone. Are they polite? Do they understand the product range enough to help the customer? These considerations (and many more) are important. Because of fierce competition and the heightened awareness of today's customers, organisations are having to pay greater attention to customer care and it is with the internal staff that customer care begins and ends. In the delivery of services there is no tangible product for consumers to experience and therefore it is people who add value and provide quality. There is no product for repeat purchase, and so customer loyalty is developed through the relationship staff develop with customers at the point of the service. Therefore, as with customer care, delivery of service is dependent on staff. The search for improvement in this element of the marketing mix has led to the introduction of internal marketing programmes designed to make staff aware of the importance of the customer, as well as to motivate them to work towards achieving customer satisfaction.

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

Processes This element refers to the systems used in the organisation which contribute to the marketing effort. It may seem a strange organisational aspect to include in the marketing mix but, if you consider that the marketing mix is the "toolbox" which contains the controllable variables used by the marketer to satisfy customer needs, it makes sense. The customer comes into contact with the organisation in many ways: making enquiries; making a purchase; seeking advice on delivery dates; receiving invoices and statements; and after sales. If the marketer can influence or modify the organisational processes in such a way that they become customer friendly, it can only add to the overall marketing effort. Examples of improving or competing through process improvements can be seen by organisations offering e-commerce capabilities through their websites, such as online banking services. Process improvements can not only add value and gain competitive advantage, but they can also be used to develop closer customer relationships. An example here would be where customers get personalised text communications such as reminders, promotions etc.



Physical Evidence This aspect refers to what the customer experiences surrounding a purchase. Overall the term covers the physical appearances and ambience that collectively imprint on the customer's mind. It could be the appearance of the showroom, the trimmings that are in a hotel, the quality of information leaflets, the external aspects of the building, the type of music played in the background or any of the additional facilities that organisations provide which give additional service to a customer. Services are of course essentially intangible and it is therefore important that organisations try to find ways to make a service seem more tangible for their customers. An example of physical evidence being used in service industries would be an insurance company which issues customers with physical pieces of paper/insurance policies.

Although marketers have always considered these aspects, their importance was never formally acknowledged until the 1980s and even then they were regarded as applying only to service industries. It is now recognised that they are equally important to all types of marketing activities. This recognition is helping marketing professionals to give improved levels of customer service, thereby providing more and more customer satisfaction.

Kotler's Seven Cs The concept of the seven Ps has developed from the marketer's viewpoint of what is required; Kotler considers marketing's role from the perspective of what customers and consumers need, and he has introduced a C concept. Kotler's four Cs cover the original four Ps (product, price, place, promotion) but it is relatively simple to add Cs to people, physical evidence and process.

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When we do this we see that the marketing focus is made far clearer from the customers' and consumers' viewpoint. It follows that marketers should produce as Ps only what customers and consumers value as Cs:



Seven Ps

Seven Cs

Product

Customer value

Price

Cost

Place

Convenience

Promotion

Communication

People

Consideration

Processes

Coordination and concern

Physical Evidence

Confirmation

Customer Value Value is a combination of many factors, all of which are subjective and dependent on the perceptions of individuals. Often what is valued is not the major benefit, especially when branded goods are functionally so similar. Kotler says that the car he valued most highly was a Ford because it was the only one with a gadget to hold his can of Coca-Cola.



Cost When judged from the C viewpoint, price becomes only one element of cost. How much time, energy and effort have to be committed to the product? What are the status and reputation issues? Cost is a blend of issues that far outweigh "mere money" in importance.



Convenience People want the function and/or the symbolic values – and they want them where they are needed. Thus convenience is the factor that matters. Obviously a package has to be placed in a channel of distribution, but all that matters to the customer is that it is available where, when and how it is most convenient. For example, when buying a new computer the cost involves such price issues as the total cost of the CPU, monitor, keyboard, cables and VAT. But the time and effort to set up and then become experienced on the new equipment are also cost factors. Will there be a need for new software? Can the existing data be read directly, or easily transferred? Is the package conveniently packaged physically? Is it easy to assemble? Is it delivered complete? Is the basic software preloaded?



Communication The customer and the consumer both have to learn about the package, and in terms that both comprehend and, hopefully, believe. Messages must be tailored to the needs and perceptions of the members of the target audiences.



Consideration Marketing is people oriented. Individuals differ and each must be provided for. Therefore all contacts have to be established on a procedure, but with provision for flexibility where possible. Staff must be trained to show consideration in their explanations and in showing why in certain circumstances there can be no flexibility.

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

Coordination and concern This double C shows the need to coordinate efforts throughout the whole process. Everybody must be focused on the need to satisfy identified customer needs. There must be concern, demonstrated in the after market especially, to check that the package is delivering to requirement and to promise.



Confirmation Everything about the package – about the offering – has to be consistent so that each succeeding message, in whatever order it happens to be received, confirms what has gone before. An unkempt salesperson can destroy confidence built up by superb promotion even if he or she has excellent product knowledge.

Relating the Marketing Mix to Segmentation, Targeting and Positioning Segmentation, targeting and positioning are always considered together since any change in one factor will inevitably affect the others. Therefore having selected a target market, the organisation has to decide on what basis it will compete in the chosen segment or segments. Customers will position the product in their minds in relation to their perception of the key attributes, i.e. consumers see Volvo in terms of safety and durability. Establishing a concept, product or brand in the minds of individuals within a target market requires dedicated and long-term marketing planning. The promotional tools are of major importance, but everything about the product offering must be consistent with the selected position. Thus a new product must have its positioning characteristics designed into it, the channels of distribution and pricing must be consonant with the overall image, and the promotional plan must feature the characteristics to which the target consumers will respond. There are four factors of critical importance for successful positioning (Jobber 1995) : 

Credence – the attributes of the product used to position the product need to be perceived as credible by the target customers.



Competitiveness – the product should offer the consumer benefits which competitors are not offering.



Consistency – a consistent message over time is invaluable in helping to establish a position against other products and services that are competing. An organisation should not change its positioning as it leads to confusion in the consumers’ minds.



Clarity – the product positioning statement needs to clearly differentiate its position from the competition i.e. “Have a Break – Have a Kit Kat”.

Repositioning Repositioning an existing product involves a planned move from one position to another. This may be executed as a series of steps over a long period, with each step sequential and designed to be as unobtrusive as possible. Thus, the image of HP Brown Sauce was changed from an old fashioned product to a sharp, modern product in four stages over nearly three years. The reputation that HP had earned over many years was retained, as were the existing older customers, but the new youthful and active positioning was one to which new, younger consumers also responded.

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Relaunching Relaunching requires the effective withdrawal of a product so that it can be positioned where it is required. To some extent this is akin to a new product launch except that there will be a balance of consumer reaction to the product which will be related to its old position. In the case of Lucozade this was judged beneficial because it had a strong positive image as a tonic drink for invalids recovering from illness. The decision was taken to reposition the product as an energy drink for the youth market and it was successfully relaunched. It was not repositioned in stages because it needed to be introduced to a new segment as a new product. It is still available for its original purpose but it is no longer targeted at that segment.

The benefits of effective segmentation, targeting and positioning on tactical activities are: 

Efficient promotion – directing the right messages to the right people in the right place and at the right time. Clearly differentiates the product or service offering.



Improved retention – of customers, building relationships and loyalty through customer attachment to the brand.



Improved service levels – doing the right things to target and deliver value to the segment.



More effective production – enables organisations to make products that customers want. Providing the unique selling proposition.



Higher prices – when customers perceive the value they will expect to pay higher prices.



More focused new product development – reduces risk in research and development costs.

The marketing mix has a crucial part to play in the positioning process and should be used to ensure that the correct activities are chosen so that value is experienced by the customer. The following questions need to be addressed in order to ensure the product is delivering value and benefits:  

Product Price

–

Are the attributes and benefits relevant or do they need updating?

–

Does the branding portray the correct position?

–

Does the price reflect value for money?

–

Does the price reflect the customer perception of quality?

–

Are the correct channels of distribution being used that are right for the product?



Place



Promotion –

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Chapter 3 Marketing Strategies Contents

Page

A.

Strategy and Planning

70

B.

Corporate Strategy Organisational Stance and Positioning Attack Strategies Defence Strategies

71 72 73 74

C.

Marketing Strategies Types of Marketing Strategy

75 75

D.

Corporate Objectives

77

E.

Marketing Objectives Nature and Purpose of Marketing Objectives Defining Marketing Objectives Factors Influencing Marketing Objectives Benefits of Marketing Objectives Problems in Formulating Marketing Objectives

78 78 79 80 83 83

F.

Models for Formulating Marketing Strategies Ansoff Porter's Generic Strategy Model Portfolio Analysis Models General Electric Business Screen (GE) Gap Analysis

84 84 87 89 94 97

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Marketing Strategies

A. STRATEGY AND PLANNING Philip Kotler said of planning that it was deciding in the present what to do in the future. It involves both the determination of a desired future and the steps necessary to bring it about. A market-orientated company will seek to adapt its strengths and weaknesses in order to take advantage of any future opportunities that arise to give satisfaction to its target markets. Three levels of planning have been identified: 

Corporate or visionary planning that provides a mission and structure for evaluating and allocating resources to business



Business planning which involves long-range planning for positioning the company and its products to best serve its target markets



Functional planning including marketing planning which is generally annual planning involving specific goals and plans over one year.

Figure 3.1 demonstrates these levels as well as the process. The marketing plan operates at the centre of this decision-making process by providing the target by which the company's efforts will be measured. It should also provide the starting point whenever there is a need to respond to changing external or internal circumstances which could affect the company, its customers or the relationship between them. Figure 3.1: Strategic Planning for Marketing Initial environmental and business analysis Develop the mission statement CORPORATE Detailed marketing audit Corporate objectives and strategy formulation Marketing objectives and strategy formulation BUSINESS Estimate expected results Identify alternative plans and mixes Implementation

FUNCTIONAL

Review (Adapted from Gilligan & Fifield, 1997)

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It is quite easy to confuse the words "strategic" and "strategy", which is understandable because, basically, the same word is being used. Like so many other words in the English language "strategy" can mean different things. In marketing: 

"Strategy" can be used to describe the means of achieving an objective; or



"Strategy" can be used to describe an approach, stance or long-term plans. (From this use of the word we get "strategic planning" meaning a higher level of planning.)

Over the years marketing authors have tried to clarify this issue and they have used different ways of doing this. Wilson, Gilligan and Pearson in Strategic Marketing Management, readily admit that there is no standard definition of "strategy", but highlight three "levels" of strategy: 

Corporate strategy – dealing with the allocation of resources throughout the entire organisation, covering all of the various businesses or divisions



Business strategy – which exists at the individual business or division level and is concerned with the question of competitive positioning



Functional-level strategy – which is limited to the actions of specific functions within specific businesses.

Thus we see the model shown in Figure 3.1, which demonstrates the strategic planning process. This is all very well for a large organisation. We can see a progression from the top level to the lower levels and, from our previous studies, you will know that as the plans move down the organisation they become ever more focused and detailed. But what about smaller organisations? Well, this process still works. What the authors have done is to give a picture which will encompass any organisation. It may be that some of the levels will "combine", e.g. small to medium-sized companies may only have one small tier of top management above the operational levels. The higher level will still decide on the allocation of resources overall, but may produce fairly detailed plans for operational levels. Or, in some cases, the detailed planning will be left to the operational level. You should also note, from Figure 3.1, that there is no distinct section for "segmentation". Presumably this is because the authors consider that segmentation is part of the marketing audit process. It is also worth noting that the authors place the "detailed marketing audit" before setting "corporate objectives and strategy formulation". Many companies do not undertake marketing audits until after they have formulated their objectives. They then carry out investigations to see if the objectives are achievable. If they are not achievable they will "revisit" the objectives and fine tune them to fit better with the increased knowledge gained in the audit.

B. CORPORATE STRATEGY Strategies are formulated as a response to the various factors in the company's environment – and these may come from both external and internal sources. (a)

External 

Nature of the competition and the products which are on offer in the marketplace.



Political, economic, social and technological pressures.



Needs and requirements of the buyers.



Changes which are, or are likely to be, taking place in the environment.

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(b)

Internal 

Corporate objectives



Size and power of the company



Availability of resources



Current and past practices



Expectations of stakeholders



Position of the firm in the marketplace



Nature of the firm's business (leader/follower)



Managerial stance and attitude (aggressive/or not).

To put it another way, any aspect of the internal and external environments can have an influence on strategy formulation. In particular, always remember the internal aspects – they are very important.

Organisational Stance and Positioning We have just noted that the managerial stance and attitude can have a big influence on strategy formulation. Organisations can be categorised as being any one of the following: (a)

Leaders These are innovative companies who are regularly first into the marketplace with new products. They tend to be powerful companies who will have major market shares and the benefit of abundant resources. They gain advantage from being first to the market, but they invest heavily in development and face the risks attached to being innovative. They must adopt strategies which will: 

protect their current market share by using the mix, or



encourage current customers to use more, or



attract and retain new users and/or customers, or



redesign the product/service for new and existing users, or



introduce new products to new markets.

Companies can carry out these strategies by adopting a stance of:

(b)



innovation – always being in front of the competition



fortification – activities aimed at keeping the competition down



confrontation – aggressive promotion, price wars



harassment – pressure on distributors, criticising competition.

Followers These are the companies who do not invest heavily in research and development (R & D) but "copy" what the leaders do. This type of company will never get the initial major market share, but they do not have to invest money in development or in making the target market "aware", as the leaders will have already done this. They may also capitalise on errors which the leaders make, e.g. if a leader's new product has a slight technical problem, followers may be able to solve that problem before launching their own version of the product. If this is done, the early adopter and early majority categories of buyers may well turn to the "following product" and the leaders will lose market share. Followers can make

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many different amendments to a leader's product (price, quality, distribution, etc.) and amendment is cheaper than development so costs will be lower. Followers are often referred to as "me-too" marketers in that they do not come up with original ideas or practices. They are simply happy to hang on to the tails of the leaders and take any benefits they can. Challengers, or followers, may at times seek to overtake the leaders and will often adopt methods which involve price-cutting incentives to distributors, giving improved service levels, sharing costs with distribution channel members, etc. (c)

Nichers These types of organisation are those that are, to one extent or another, providing a "specialised" product offering. They will have some kind of USP (unique service proposition) which they can offer to their customers. Niche marketers are often left alone by the market leaders as they (nichers) are either chasing a small market segment, or are providing something which is non-viable for the larger firm, e.g. individual service levels may be extremely high. Nichers can gain from being seen as "specialist" and can, consequently, often charge much higher prices for their product offerings. Niche markets can be very profitable, despite relatively low market share. We could not possibly expect an organisation to adopt a stance and retain that stance forever. As we know, the environment changes, as do the circumstances of any organisation. These changes could mean that an organisation will need to attack a leader, or defend against a follower. The reasons for this may be a search for growth or profits, for survival, or simply because the management culture has changed and the new management considers it safe to change direction.

Attack Strategies (a)

Direct Challenge – Differential Advantage This is a high-risk strategy but one with potentially high pay-off. Such a policy requires sufficient working capital and management determination to last out a long campaign, for a major market leader is in a very strong position and buying market share calls for marketing's equivalent of extensive trench warfare. It is unlikely to work unless clear differential advantages are offered, and welcomed, by consumers. The attack mounted by Fosters lager on the British market was a distinct success, although many would argue that in the glass there is little to tell between Fosters and similar-priced lagers. A decade before, Heineken succeeded in entering the market as a substantial player. It is interesting to note that both successes came from brilliant promotional campaigns supported by adequate products.

(b)

Direct Attack – Distinctive Competence Removing the distinctive competence from the market leader by innovation is extremely effective providing that the advantages are valued by the target market and communicated effectively. A classic example is Xerox, who took the copying market away from 3M by introducing a better process.

(c)

Direct Attack – Market Share Gobbling up the smaller firms in the market can build market share very quickly – providing that it is possible to retain it when (or if) branding is consolidated. Normally there will be loss of trade as old brands change to the new, but the promotional stimulus may well shake a few percentage points from the market leader in exchange for what is lost.

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(d)

Flank Attack This involves the location of a position which is not open and which it is possible to occupy and hold. When segmentation analysis reveals a niche that is not being served, it is first necessary to ask why. If the answer is not "because it is untenable" then it becomes available as an attack base from which to build market presence and share. Cadburys, for instance, failed with a direct attack, Aztec against Mars, but succeeded with Wispa when they outflanked Aero.

(e)

Encirclement An encirclement attack endeavours to overwhelm a competitor by simultaneous attack on every front: an expensive strategy, but one extremely difficult (and expensive) to resist. Casio's approach to the calculator market is a typical example of encirclement. They overwhelmed the opposition by a constant stream of ever better, ever cheaper products until they achieved dominance.

(f)

Bypass The most indirect assault involves broadening a resource base over a period whilst avoiding confrontation until strategically prepared. In 1971 Colgate was underdog to Proctor and Gamble; by 1976 it was well placed in 75% of its markets, and out of contact with P & G in the remainder.

(g)

Guerrilla A relatively small competitor cannot attack aggressively on a broad front but can choose where and when to hit in the knowledge that the big competitor is likely to be slow in response. Profits are therefore taken before response comes – by which time the smaller firm is striking elsewhere. This is unlikely to defeat the market leader but it can take a substantial amount of profits from the market. The Hoppa buses introduced in UK cities have become a serious nuisance to the established major companies operating traditional buses on fixed routes.

Defence Strategies (a)

Position Defence Based upon a clear positioning that is established over years of effort (as the Mars Bar has been), a position defence consists of flexible consolidation. A static position is untenable; product innovation in the widest sense to include promotional innovation is needed to keep the product alive, healthy and active in the minds of its customers and consumers. An entrenched leader that is innovative will usually have massive cost advantages and be able to withstand sustained attack to such an extent that, as when approaching a porcupine, you do it, if at all, with care.

(b)

Pre-emptive Defence An attack upon a potential challenger can distract through their need to defend. The attack need not be head-to-head – a fighting brand in another market can be made active and set to assault a position of vital importance to the rival. Nestlé are past masters at this type of market strategy – from comparatively few production lines they now produce many branded versions of the same canned milk, and not all are intended to be market leaders.

(c)

Counter-offensive This is an aggressive response to an attack in order to prevent loss of market share. Responses involve using mix elements. When Cadbury's attacked Mars they were immediately faced with an overwhelming counter-offensive. They withdrew from the confrontation.

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Mobile Defence This is good marketing policy even without the threat of an attacker on the horizon because it involves constant moving, through innovation, market broadening and diversification into new territory. It requires a willingness to "go where no-one has gone before" but the prospects of excellent returns and safety from attackers are very tempting. Richard Branson and his Virgin empire exemplify the entrepreneurial approach to growth through mobility.

(e)

Flanking Defence The American car giants exemplify failure in attempts to erect effective flank defences. Alert to the threat from Japan, which was focused on small cars, they attempted to protect their overall position with hastily designed American compacts. These were no competition for the carefully thought through, well designed and very efficient Japanese competition, and the flanking defence turned out to have been a major distractor which occupied time and resources that weakened their overall position.

(f)

Contraction Defence Pulling back to a position of strength to be better able to mount a counter-attack is sometimes a good policy. But, just as a defensive force pushed into the keep of its castle in medieval times was usually held there under siege, so a modern company is unwise to get into a position where it has to contract. The British motor-cycle industry contracted before each successive wave of Japanese imports until there was no effective British motor cycle left.

C. MARKETING STRATEGIES The marketing strategy is the means of achieving the corporate objectives. As such it lays down longer-term goals and targets for the marketing personnel to follow. The marketing strategy gives measurements which can be used as controls, but it also gives messages to the stakeholders, or publics. It says: 

"This is where we are going", and



"When we will get there", and



"This is our stance".

The fact that the strategy is longer term gives both internal and external involved parties an indication of confidence and belief in the future. Perhaps the most important purpose of marketing strategy is to give purpose to the rest of the marketing activities. This means that the overall strategy should give clear guidelines on practices and substrategies which are developed as a result of it.

Types of Marketing Strategy One of the most fundamental issues which a company must decide on is the type of marketing strategy, or approach, that they will adopt. There are three basic marketing strategies which any company can follow: 

undifferentiated marketing



differentiated marketing



concentrated marketing.

The models in Figure 3.2 show the differences between these three types.

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Figure 3.2: Marketing Strategies (a)

Undifferentiated Marketing FIRM

(b)

marketing mix

Entire Market

Differentiated Marketing Segment A FIRM

marketing mix

Segment B Segment C

(c)

Concentrated Marketing Segment A FIRM

marketing mix

Segment B Segment C



Undifferentiated Marketing Here there is a standard, unchanged product and a standard, unchanged marketing effort. The product will be aimed at a large sector of the market. This strategy can reduce costs (e.g. marketing, production) but will encounter wastage in promotional activity and possibly in distribution. Not too many companies are in the fortunate position of producing a product which is suitable for everyone in the world. (Try to think of some examples other than Coca Cola.)



Differentiated Marketing Here the company segments its markets and offers modified products to different segments. The marketing mix elements will also be modified to suit the requirements of the chosen segments. Using a differentiated strategy will mean higher costs, but ultimately the profit levels could be higher as the offering has been targeted to the segments. This should mean that there will be less wastage of effort.



Concentrated Marketing Here the total marketing effort is aimed at one market segment. This strategy is really aimed at the exploitation of a limited market area and tends to be used by those companies who have highly specialised products. It is "niche marketing" by another name. Concentration on key markets can be very beneficial to an organisation, e.g. control is easier – especially in times of difficulty. Market knowledge will be improved with little, or no, wastage of resources on unprofitable segments and non-price factors, such as delivery or customising, etc., are much easier to exploit.

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It is common for organisations with a diverse product range to use a combination of all three strategies for different parts of their product mix. There are no rules. Decisions will depend on the prevailing conditions within the markets being approached and other influencing factors outlined below. Some marketing authors will tell you that segmentation is a result of the decisions made on the type of marketing approach which is to be used. Others will tell you that segmentation is the cause of this type of decision having to be made. The reason for the differences in opinion is likely to lie in "when" each of the two activities is undertaken. Some believe segmentation comes first, whilst some believe "approach" comes first. In my opinion it makes little difference. Segmentation and the type of marketing approach are irretrievably linked. It is the old puzzle of: "Which comes first – the chicken or the egg?" I cannot differentiate between which causes which. If we do not know our segments, we cannot know how to market to them. If we do not know which type of marketing we, and our offering, are most suited to, what is the point of segmenting the audience? I can give you no easy answer to the question of which comes first, or which creates the need for which – segmentation or type of strategy. All I can say is that I believe they are both essential in the marketing effort. Remember that there are no "water-tight" boxes in marketing to keep things "tidy", and this is another grey area. Try to understand the "spirit" of the processes involved and don't get bogged down in petty issues.

D. CORPORATE OBJECTIVES Corporate objectives relate to the entire organisation and are essentially longer term and broad in their coverage. There is a general maxim about the expression of objectives, as encompassed by the acronym SMART. Objectives should be: Specific – Measurable – Achievable – Realistic – Timed. These overall corporate objectives will represent the expectations of senior management and other important stakeholders, and may be expressed in either quantitative or qualitative terms. (a)

Quantitative Quantitative objectives (in terms of numbers) can relate to money, percentages, periods of time, output figures, etc. Examples are: "To achieve 5% year-on-year growth in profit after tax for the next five years." "To effectively reduce operating costs by a total of 20% over the next five years and, in the same time period, to achieve growth in profit after tax by 8% each year."" "To achieve 15% return on investment in the next tax year."" Sometimes the actual target figures will be given in the statement: "To achieve £5,000,000 increase in profit in 1999, which represents a growth of 15% on 1998 profit levels."

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(b)

Qualitative Qualitative objectives (in terms of "ideals") can relate to service levels to be achieved, image, position, ethics, etc. The following is an excerpt from a statement of objectives published in the annual statement of a police force in northern England: "Within five years, or as soon as is practicable, to have a police force which: Is more open, relaxed and honest with ourselves and the public; Is more aware of our environment, sensitive to change and positioning ourselves to respond to change; Is more closely in touch with our customers, puts them first and delivers what they want quickly, effectively and courteously; Is the envy of all other forces." You can see from all the examples we have given that a statement of objectives can be simple or quite involved; there can be one aim or several. It will depend on the circumstances and the nature of the organisation.

E. MARKETING OBJECTIVES Irrespective of the nature of the corporate objectives, corporate strategies are selected as the means of achieving the stated corporate objectives. The corporate strategies are then passed down the hierarchy of command and communicated to the functional levels. Accepting the fact that the corporate level has decreed what must be done, it is then up to the functional levels to translate the corporate strategies into workable functional objectives. For obvious reasons, we are only dealing with the marketing function from this point on in the course, but please remember that the marketing function is part of the organisational network and, as such, is irreversibly linked with all other functions.

Nature and Purpose of Marketing Objectives Marketing objectives, in exactly the same way as corporate objectives, can be expressed in either qualitative or quantitative terms, e.g. "To increase market share by 5% each year for the next five years." "To be recognised as the leading supplier of pre-packed meals to the airline industry by the end of 1999." "To achieve recognition as the leading company for customer service and technical support by the end of 1999." The main purpose of marketing objectives is to achieve the corporate objective(s). Over and above that prime function, marketing objectives should give direction to the personnel immediately involved, and send signals to the rest of the organisation as to what is being aimed for. If people have no sense of direction or do not understand the targets which have been set, they will never cooperate to the best of their ability. Following on from that, if a marketing objective is not clearly defined it will be impossible to formulate effective strategies and the whole planning process will be invalidated almost immediately.

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Defining Marketing Objectives Gilligan et al, in Strategic Marketing Management (1992) present two published viewpoints of researchers who have identified possible marketing objectives: (a)

McKay (1972) The authors state that McKay suggested that there were only three possible marketing objectives:

(b)



to enlarge the market



to increase market share



to improve profitability.

Gultinan and Paul (1988) They also tell us that Gultinan and Paul argued that six objectives should be given consideration: 

market share growth



market share maintenance



cash flow maximisation



sustaining profitability



harvesting



establishing an initial market position.

Gilligan et al then go further to suggest that the supportive thinking for both of these viewpoints can be said to reflect the thinking of Ansoff on marketing objectives. (c)

Ansoff (1968) Ansoff argued that marketing objectives can only ever be about: 

products, and



markets

and that products and markets are either 

existing, or



new.

This means that, according to Ansoff, marketing objectives should always be expressed in terms of existing or new products or markets – or a combination of all four factors, as expressed in the following model.

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Figure 3.3: The Ansoff Matrix New

Existing

LOW RISK

MEDIUM RISK

New

Market

Product Existing

MEDIUM RISK

HIGH RISK

We shall look at Ansoff's model in greater detail later in the chapter.

Factors Influencing Marketing Objectives The influences on marketing objectives can be related to the external and internal forces we have considered previously – for example: The external environment: 

a rapidly changing environment



government legislation



uncertainty on competitive activity or actions



changes taking place in technology, in particular internet based technologies such as SMS, downloads, broadband etc



different patterns of population or buying behaviour



recessionary economics, etc.

The internal environment: 

unrealistic corporate objectives



poor planning skills



narrow viewpoint of the planners



lack of resources



fear of failure to achieve limiting creativity



lack of knowledge of the market environment, etc.

What often happens is that marketing objectives are only loosely defined until such time as all of the available strategies have been considered. Then, once a realistic strategy has been selected, the marketing objectives are "firmed up" or even re-defined. This process is quite acceptable as long as the final marketing objectives still fit with the corporate objective and will still work towards achieving the corporate goals. To illustrate this, we can work through the example of the general goal of maintaining competitive advantage and consider the implications of this for marketing. Maintaining the Competitive Edge Every company that is in business for a reasonable length of time must do something better than its competitors – at least in the opinion of a number of customers. That something

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better may involve various factors, ranging from location and delivery to product performance and marketing. Service industries need to consider how competitive advantage is gained through the delivery of the service and how process improvements can be made to add value. Therefore, in service industries organisations will need to work with the whole service delivery chain to create value for consumers. The marketing audit should show what it is that the customers find the company does better than its competitors, even if the audit is a simple internal affair. If the product is a fast-moving consumer product there will probably be dozens of products competing for the consumer's disposable income. The consumer is quite capable of going out shopping for gardening equipment and coming home with a set of pans instead. The competition is not just those other products in the same category: they are the immediate competition, but everything else in the neighbouring stores could be a competitor too. When the product is a non-essential purchase, the situation is at its "worst". Generally speaking, food is a priority and most basic foodstuffs are only competing against similar products, so quite modest research can reveal what consumers think about the various brands. It is worthwhile looking at some of the factors that make one product or service more attractive than another. If you are buying a personal service such as haircutting or dentistry, it is unlikely that you will travel a long way when there are suppliers near home. Location is important for many consumer products – the opportunity to see and touch the product, to have it delivered if necessary, and to be able to get service quickly, may ensure that a local supplier is preferred. Speed and convenience are the two great attractions of shopping on the net, which is growing rapidly. For others the most important factor may be performance – if you do not like the taste of a food or drink product, it does not matter about other features. So what can the marketing manager do to maintain the competitive edge? Well, first he can find out why his customers buy his products instead of others. We can go through a list of the possibilities and suggest ideas for keeping one step ahead of the competition: (a)

Product/Service Quality There are what can be considered "normal" standards in every product, and there can be grades of quality, so you must position your products in the appropriate grade. Your marketing researchers should have been able to identify the grades and you must judge which of them to aim at. That might not be the top grade in terms of features, but the grade you choose must be identifiable by the customers. It is essential that different models of your product can be seen to fit into different grades, or have different features that make them better. There are sometimes too many models to choose from, and the customer could get confused. That makes it difficult to decide on a model, and the decision may be deferred, which means it may go against your product. If you open a catalogue such as Index or Argos, you will see several models of electric shavers, for instance, all from the one maker, and it is difficult to see why there are so many.

(b)

Availability There is so little to choose between some products that if one is not available immediately, the consumer will choose a different one. That means your products have to be widely distributed if they are to be highly competitive. There is more involved than just getting the goods into lots of shops, because the retailers have their own views of what will sell and make them profit. You have to convince them too, that the product is worth having on their shelves. Quite often the retailers and wholesalers will want to know what promotional efforts you are making, because they know that television advertisements help to move products off their shelves.

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There are sometimes problems in ensuring delivery, and many people can tell of having taken a morning off work for a delivery man to bring, say, a new washing machine, then he comes in the afternoon. Control is possible in the warehouse but as soon as the van gets on the road some control is lost. The company may appear to have failed to keep a promise owing to a road accident or traffic hold-up which was not the delivery van driver's fault. If you can do better than your competitors on this, you will have a competitive edge. (c)

Price Price matters most where there are few product features which are obviously better than those of competing products. You can get a competitive edge by making a special offer of some sort (such as three for the price of two), if the retailers will go along with your policy. Remember also that lowest price is not necessarily the competitive edge you need; buyers can be suspicious of a low price with some goods.

(d)

Promotion If you tell people your products are the best, and you can show examples that "prove" the claim, some people will believe you and others will test your claim. In all cases it is necessary to tell people your product exists before they have any chance of buying it. There are many ways to promote products – but some of them can appear excessive, making people think that the price could be cut if the advert were more sensible.

(e)

People Employees play an important role in adding value to a product and in particular a service. The performance of employees will have either an indirect effect (for a product) or a direct effect (for a service, or service element of a product) and therefore, it is important for organisations to be able to train and motivate their employees to deliver excellent customer service. Human Resource Management, therefore, plays a vital role in recruiting employees with the correct skill set and ensuring existing employees are well trained, motivated and loyal. Loyalty of employees is particularly important in industries where personal selling is used. The marketing department can also contribute to the training and motivation of employees by using internal marketing techniques, such as newsletters, to improve communication with employees.

(f)

Processes Processes are a set of activities that are linked together to either produce a product or deliver a service. In fact, delivering a service is largely about processes. Value and competitive advantage can often be achieved by excellent or innovative processes, both internally within the organisation and throughout the whole value chain. Managers need to be aware of those processes that add the most perceived value from a customer's point of view.

(g)

Physical Evidence Physical evidence most applies to the delivery of services. Services are intangible and are consumed at the point of delivery, therefore, organisations will need to look for ways of making services more tangible for customers. An example would be an airline; the flight is the delivery of a service. However, airlines look for ways of making the service more tangible and therefore adding value for the customers. For example, airlines will issue tickets, confirmations, will provide magazines that customers can take away, award air miles etc.

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Benefits of Marketing Objectives Providing marketing objectives are defined clearly and communicated correctly, they can bring many advantages: 

They give a clear direction to the personnel involved Everyone involved knows exactly what is expected of them and how they are supposed to be working. People who do not have a clear idea of what it is they are working towards become disillusioned and demotivated.



They can create unity A common goal unites people in all circumstances, particularly when the goal is seen as being worthwhile. If the objectives are seen to have been set with a good purpose, everyone will work together to achieve them.



They allow for measurement of achievement Because the objectives specify targets and time scales, monitoring can be carried out to check progress. This allows for either the achievement of success, which creates a "feel good" factor, or for adaptation and fine-tuning of activities to get progress back on target. The setting of standards can become a powerful motivator for personnel as they will strive to do better.



They can reduce risk If all personnel know what it is they are working towards, there will be less risk of "mavericks" doing what they think is best, rather than what has been laid down by the objectives.



They can improve decision-making Managers at lower levels will be able to make day-to-day decisions based on their knowledge of the objectives and the progress made in achieving them. This ability to make decisions away from the higher level can save a lot of time which might otherwise be wasted in trying to communicate with higher-level people. It also enhances the capabilities of lower-level managers.

Problems in Formulating Marketing Objectives Despite the fact that so many advantages can be gained, it is a sad fact that many organisations find it almost impossible to define good marketing objectives. There can be several reasons for this. 

Fear of Failure If previous objectives were not achieved, planners may be reluctant to define new objectives and will not strive to achieve.



Apathy If the personnel in the company are demotivated for some reason, they will not be interested in any new objectives as they will see them as "just another ploy to get us to work harder".



Success When a company is doing well, a new objective is often seen as being unnecessary. This is the "If it works why try to fix it?" syndrome. Unfortunately complacency of this kind can often lead to a company losing its market share to a competitor.

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

Organisational Culture A lack of marketing orientation in an organisation can prevent objectives from being formulated. Lack of marketing often means lack of "vision" and short-termism. Instead of a strategic stance being adopted, only short time scales are set or activities are managed on a basis of "as we need to do it". The result is that the future is not taken into full consideration, which may end in disaster.



Lack of Knowledge Perhaps the biggest problem in formulating marketing objectives is the fact that knowledge is necessary. To formulate an objective which says: Where we want to be? Planners need to know the answer to: Where are we now? Knowing "where we are" implies investigation and a full search for knowledge. Do you remember the fictional example I used earlier about you going to New York? Well, if you hadn't known that you were in London, or how much time and money you had, how could you have realistically planned to get to New York? The answer has to be that you would not have been able to. You would have had to investigate all of the factors influencing your plan before you could even begin. This is exactly the same for marketing. Before we can really be happy that we are setting good objectives we have to consider our current position. This means that we need to undertake a full marketing situational analysis in order to define marketing objectives and then select appropriate strategies to achieve those objectives.

F. MODELS FOR FORMULATING MARKETING STRATEGIES To achieve marketing objectives, strategies must be formulated for each section of the marketing function or individual SBU. (Remember, these strategies must also be Specific, Measurable, Achievable, Realistic and Timed.) Marketing planners have to deal with an enormous amount of information. They need to represent the information in a way which is easy to understand – models help them to do this. A model is simply a diagram which summarises a given set of circumstances, and is drawn up to help you, not to confuse you. Please try to remember that. If you can accept the usefulness of models, you will soon find yourself using them in your working life as well as in your studies. We shall now concentrate initially on two models which can help in deciding which strategy to adopt: Ansoff, and Porter's Generic Strategy Model.

Ansoff Ansoff's is perhaps the most quoted model of all in marketing theory and practice. It is used as a strategy choice model, in that it helps a planner to see which strategy is appropriate at any given time and in various sets of circumstances. Ansoff claimed that in marketing we can only ever be talking about products and markets, and that these can only be old, or existing, and new, or potential.

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Thus marketers have: 

existing products which they can sell to existing markets



existing products which they can sell to new markets



new products which they can sell to existing markets



new products which they can sell to new markets.

Using these combinations gives a choice, according to Ansoff, of four possible basic strategies, as shown in Figure 3.4. Figure 3.4: Ansoff Matrix

New

Existing

MARKET PENETRATION

PRODUCT DEVELOPMENT

New

Market

Product Existing

MARKET DEVELOPMENT

DIVERSIFICATION

Strategy 1: Market Penetration (same product/same market) This strategy will be appropriate when a market is growing and not yet saturated. Penetration can be achieved by: 

attracting non-users of a product



increasing the usage, or purchasing rate, of existing customers.

The strategy will often be implemented by increasing activity on one or more of the mix elements, e.g. using more intensive distribution, aggressive promotion, pricing, etc. Strategy 2: Market Development (same product/new market) This strategy is often found when a regional business wishes to expand or if new markets are emerging because of changes in consumer habits. It can also occur when a new use has been discovered for an existing product. Implementation of this strategy involves appealing to market sectors (or geographical regions) not currently catered for and may mean a repositioning of products as well as, very often, new distribution methods or channels. Strategy 3: Product Development (new product/existing market) With this strategy an organisation develops new products or services to appeal to its existing markets. It may simply be a product "refinement", e.g. change of packaging or taste, etc. Product development is most prevalent when branding exists. Promotional aspects will emphasise the added qualities of the "new" product and link it specifically to the security of, and confidence in, the brand. This strategy builds on customer loyalty and the benefits to be gained by purchase. Other mix elements, e.g. distribution, may remain unchanged.

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Strategy 4: Diversification (new products/new market) This strategy is sometimes introduced so that a company does not become too dependent on its existing SBUs. It can be a form of "insurance" against potential disasters that could occur in the event of drastic environmental changes. It can also simply be a means of growth and expansion of power, etc. "New" might be a totally innovative product, which has never been seen in the marketplace, or it can be a product which is already available in the market but is new to the firm. In either case, Diversification means catering for market sectors which are also new to the firm. If a new product is developed for the existing market it is Product Development and not Diversification. Firms can diversify by producing their own new products or by taking over some other product. In the latter case there are two main types of diversification – integration or conglomeration. (a)

Diversification by Integration 

Vertical Integration This involves the acquisition of some other enterprise in the chain of distribution between the manufacturer and the customer. It can be either "forward", i.e. towards the customer, or "backward" towards the source of raw material. For example, a company dealing in writing stationery may vertically integrate forward by taking over a retail outlet to sell its products, or backward by taking over a paper mill. Although there will obviously be control benefits to be gained in either of these examples, the company will be dealing with a product, or products, and markets which are new to them.



Horizontal Integration This is the acquisition of another organisation which has a feature that is desired, i.e. the acquired organisation may be using similar materials or components for which they have a monopoly of supply. This is particularly relevant when materials, etc. are in short supply. The company that is acquired may use similar production methods and have greater capacity; or its distribution channels may be highly effective and would prove advantageous; or it may have some other quality which could be seen as a benefit, e.g. Johnson Brothers (china manufacturers) taking over the Wedgwood china company and capitalising on the Wedgwood brand and reputation.

(b)

Diversification by Conglomeration This strategy moves the firm away from its existing product-market situation into an entirely new area in order to satisfy a primary objective. Quite often this is done as a short-term activity that will allow an organisation to recover from a temporary setback in market conditions. For example, a company that produces ladies' lingerie, and is faced with cash problems in the short term, may reap instant profits if it invests in "spotbuying" and "selling-on" of oil on the open market. This type of activity can also be part of a longer-term strategy to spread risks.

Ansoff applied Here we shall look at Ansoff's model as applied to Coca Cola, who use all four strategies (adapted from Evans and Berman (Marketing, 1990)). (a)

Market Penetration 

More adults used in commercials – "You can't beat the feeling" theme



Price discount and promotions (fun caps) to existing customers

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(c)

(d)



Increasing sales through fast-food outlets



Strengthened distribution network.

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Market Development 

Greater emphasis on China, Eastern Europe, South America, Middle East, Africa



Appeal to men with Diet Coke



Changing image of soda from children to "family".

Product Development 

New brands/flavours



New containers.

Diversification 

Manufacturer of water treatment and conditioning equipment



Acquiring Columbia Pictures, Embassy Communications



Licensing company name for clothing range.

Conclusion Ansoff's model is one which is so widely used that you cannot afford not to know it really well. There is no doubt that the model is extremely useful in deciding which strategy to adopt in a given set of circumstances; however, you should recognise that it is not perfect as it does not cover everything: 

it takes no account of any environmental factors



it does not give any room for judgement on profitability



it can inhibit the creativity of planners.

Despite the shortcomings it is very useful. It can also be used to assess risk; the further away from its present position a company moves the more the risk increases. For example, a company selling the current product to the current market is in the safest position. All factors are known – buyers, distribution, competition, etc. Once the company begins to change some aspect, risks occur. With "new" products to existing markets there is always a danger that the customers will not adopt the new product and, possibly, that the new product will have an adverse effect on the existing range. Likewise, unknown market sectors, or regions, can be risky (hence the need for market research) and, of course, the unknown variables involved in diversification make it the most risky strategy of all. Marketers need to consider all influencing factors when selecting which strategy, or strategies, to adopt.

Porter's Generic Strategy Model Michael Porter is a widely quoted authority. This model claims that there are only three main strategies which a business can follow: 

cost leadership



differentiation



focus.

A business which followed none of these strategies would become "stuck in the middle" and be unlikely to succeed in the long term.

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Figure 3.5: Porter's Generic Strategy Model Differentiation

Cost Leadership

Stuck With No Clear Strategy

Focus

Strategy 1: Cost Leadership Following this strategy means that the company aims to produce in large quantities, at the lowest cost possible and sell at lower prices. By doing this they can capitalise on economies of scale and defeat any competitor who has not got equal production capacity, or who can keep prices to a minimum. This strategy will also attract price-sensitive buyers away from the competition, e.g. moulded plastic garden chairs which are not seen as being "different" are often bought on the basis of the lowest price. Strategy 2: Differentiation This strategy involves offering some unique selling (service) proposition (USP) that the competition do not have. Prices may not be too important to buyers of products sold under this strategy and it often follows that customers become brand or product loyal, e.g. a whisky drinker may prefer to buy Macallan whisky despite the fact that it costs more than Bell's, or an own-label make from a supermarket. Another example could be that of a fashion company producing a diverse range of clothes to suit different requirements for different target sectors (military uniforms/workwear/leisure). Strategy 3: Focus The company aims at very select market sectors and will be charging higher prices or offer special USPs. The company can concentrate on its key products for specific targets, acquire a reputation for being "specialist", or can simply attack sectors of the market which are being ignored by the competition. They are, to some effect, niche marketers, e.g. Rolex watches, Rolls Royce cars or bespoke tailoring. Conclusion Porter's strategy model allows a company to decide which overall "type" of marketing they want to adopt. If the firm is powerful and rich in resources they may well choose to follow a Cost Leadership or Differentiated strategy. However, smaller firms may be forced to adopt a Focus strategy because their product offering has a very specific market. For example, the car market overall is very broad but Morgan cars are aimed at a select market sector and command high prices which give good profits. The strategies suggested by Porter can also be used, to some extent, in conjunction with the Ansoff strategies. A company which is following an overall business approach of Cost Leadership may still carry out Market Development if they wish to extend their operating area. A company which has adopted a Focus strategy may still be involved in Product Development, etc. Unlike the Ansoff model, the Porter model at least takes into account market share and profitability in relation to the nature of the market a company is operating in.

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Portfolio Analysis Models The Ansoff and Porter models can help in deciding which strategy to adopt and are easy models to use. However, marketers need more than these simple guidelines; they need to be able to analyse their product offering and measure progress. Because of this various models have been developed which can be used in this way. The more important are outlined below. (a)

Boston Consultancy Group Matrix (BCG)

The BCG matrix is as well known as Ansoff and is one which you should be fully familiar with for your examinations. Using the variables of market share and market growth rates, planners can plot their products/SBUs onto a grid which will then suggest certain strategies that can be used. Because analysis is undertaken on an individual basis (SBU/product) it means that firms can mix and match their efforts in order to achieve optimum results at any given time. Figure 3.6: Boston Consultancy Group Matrix

Market Growth

High 20

10

Low 0 10x

1x

0.1x

Market Share Note the following about the diagram: 

The circles on the grid represent the position of SBUs in one company in accordance to the growth rate of the market(s) and the share held.



The size of the circle is proportionate to the percentage of total income produced by that product/SBU for the actual organisation.



The location of the circle indicates market growth rate and relative share in relation to the leading competitor in the field. In Figure 3.6 market share of 0.1 means that the product has only 10% of the volume of its leading competitor. Market share of 10 means that the product is leader and has ten times the sales volume of its nearest competitor. It is important to remember that the mid-point of the axis diagram represents the point where a product/SBU has equal share to the leading competitor. Changes in proportionate share, or market growth rates, will move the position of the circle(s) on the grid.

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BCG Classification of Products Using the BCG means that planners can classify their products/SBUs into four categories according to their position on the matrix. This classification can also help in understanding the "nature" of the products/SBUs, i.e. whether they are "cash providers" or "cash users". Figure 3.7: Boston Consultancy Group Matrix

Market Growth

High 20

10

Low

0

Stars

Question marks

Cash cows

Dogs

10x

1x

0.1x

Market Share 

Question Marks (sometimes referred to as Problem Children or Wildcats) Question Marks are products which have low market share and are in high growth markets. The product/SBU has not yet reached a dominant position in the market. Although it may be generating funds, it still requires a lot of investment for development and the company must decide if they want to keep investing. For example, in Figure 3.7 the company has three Question Marks. Planners may decide that it would be better to concentrate all efforts on one of them, in order to make it successful, and keep the others just ticking along until they have secured the position of the most favourable. The product which is producing a greater proportion of revenue for the company (the one with the largest circle) may be chosen for additional effort as it obviously has good earning potential. A greater market share should be gained as soon as possible. Decisions of this type would be based on a variety of factors relating to the product(s) and the competitive environment.



Stars If Question Marks succeed they become Stars – leaders in high growth markets. Stars are the "providers of tomorrow" and a company with no Stars should worry. The company depicted in Figure 3.7 has two Star products – one which has the leading share in its market and one which has only slightly more share than its leading competitor. Efforts should be made to increase the share of the second product in order to secure its future profitability, particularly as the market has a very high growth rate – this could be where future earnings lie.

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This, of course, means investment, which can be a cash drain on the organisation. Even Stars with high market share may involve investment in promotion or distribution, etc. if the competition is attacking. Stars can therefore both produce revenue and use resources – which can mean "breaking even". Investment decisions must be based on the future potential of the product and its market. Companies want to retain the share that Stars hold, but they also want the market to stabilise as stable markets are much easier to cope with than high growth markets which can mean difficulties in production and distribution. In Figure 3.7 the Star with the leading share is moving down the spectrum which indicates that growth in that market is slowing or stabilising and, providing no share is lost, the Star should become a Cash Cow. 

Cash Cows When market growth reaches a stable level (10% is used in our diagrams as an example but this will vary according to the particular market) Stars become Cash Cows providing they hold a leading share of the market. If they lose any market share to the competition they will "slip" into either being a marginal Question Mark or, at very worst, a Dog. Cash Cows produce good revenue, do not require high investment and often mean that economies of scale can be gained. The money earned from Cash Cows should be used to invest in other products/SBUs which are placed in the other classifications on the BCG matrix. Figure 3.7 shows that the company has only one Cash Cow so is vulnerable. A loss in market share could mean trouble, even more so if there is no Star to come in and take the place of the Cash Cow. In this situation a company would have to pump in finance to support its Cash Cow, thereby deflecting support from the other categories. If the company continued to support other categories and neglected its Cash Cow, the Cash Cow could eventually become a Dog. In our example it would be very dangerous if the Cash Cow slipped to being a Dog, as the Star which could come into the Cash Cow category is not making as much money for the company as the current Cash Cow. Given these circumstances it is likely that the company would invest in its current Cash Cow to retain market share. Sometimes Cash Cows which are losing their share can be turned into Question Marks, which is preferable to becoming Dogs, but this situation will only really occur if something happens to revitalise the market – perhaps a new use for a particular product may be found and the market will begin to grow again.



Dogs Dogs have weak market share in low growth or stable markets. These products can often take up more time than they are worth. They usually produce low profits and often incur losses. They will always consume cash, even if it is just in the time taken to manage them. Given the fact that Dogs consume cash many are often dropped by companies, but it is not always wise to do that immediately as they may still be making money. In Figure 3.7 you can see that the proportion of the company's revenue for one of its Dog products is actually higher than the proportion of revenue gained by one of its Star products. If the company were to drop the Dog, they would have less cash coming in, which could have serious repercussions. The competition must also be considered, as well as the effects on customers. Dropping a product from a range can upset buyers who will then look for alternative sources for that product. The alternative sources may also be able to offer other products which the buyers want and they may place their future orders with the new

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suppliers – resulting in the loss of even more sales overall. Decisions on product deletion must therefore not be taken lightly or without full investigation. Dogs that are retained tend to be kept because they are recognised as being a product with "other" benefits. For example, the customer will have to come back to the company to buy consumable supplies which are actually highly profitable for the company, or perhaps the product has such a high image and reputation in the market that the company prefers to maintain it. There is also danger in keeping on a Dog if it is proving to be useless as this just wastes resources that could be better employed elsewhere. Decisions to retain Dogs past their useful life are usually based on someone's great belief in, or favour for, that product – they become "Pets". For example, the owner of a company may wish to maintain a product which was the foundation of the company's current product range despite the fact that the market has changed and technology has bypassed the original product. Sentimentality, and the power of the owner, will ensure that the product is retained and money will be wasted. We should also not overlook the case of products which have just been launched and the market has not really taken off. Such products could be classified as Dogs but, given more investment, the market might be stimulated into a faster growth rate and the Dog could actually gain more share. Sometimes the faith of one manager in a product can turn a company's portfolio around completely. As we noted earlier – product deletion decisions can be risky. They should always be calculated for effects. BCG Matrix: Cash Position for Products We have seen that the various types of products or SBUs each have different characteristics as far as revenue generated and money for investment are concerned. Figure 3.8 indicates the likely cash position for products, etc. placed on a BCG matrix, but planners should not be too dogmatic about this as there will always be exceptions to the rule. Figure 3.8: Boston Consultancy Group Matrix High

20

STARS

Market Growth

Revenue Investment

QUESTION MARKS +++ –––

Revenue Investment

–

0 10

CASH COWS Revenue Investment

DOGS

+++ –

Revenue Investment

++ Low

++ –––

+ – 0

0 10x

1x

0.1x

Market Share

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Portfolio Strategies After positioning all products (SBUs) on the BCG matrix, the company must decide if it has a balanced portfolio. (Too many of any one type means it is unbalanced.) It then must allocate objectives, strategies, etc. to each of the SBUs. Strategies suggested by the BCG matrix can be one of four: 

Build – (for Question Marks) to increase share, even if it means giving up short-term profit



Hold – (for strong Cash Cows) to preserve share



Harvest – (for weak Cash Cows where the future is dim or for Question Marks and Dogs) to increase short-term cash flow regardless of long-term effects



Divest – (Dogs and Question Marks draining resources) to sell off, liquidate or delete an SBU or a product.

Changes in Product/SBU Position The BCG matrix shown in Figure 3.7 indicates the life of an SBU which moves from Question Marks to Stars to Cash Cows to Dogs. The solid arrow shows the ideal route for any product, or SBU, as far as a company is concerned, with the dotted line showing the possible route a Cash Cow can take. Because the BCG plots the current position of an SBU, or product, it can be used periodically to assess any changes in position. It can also be used to project future positions, either likely or preferred. If we keep to our original example of products on the BCG matrix, Figure 3.9 shows how positions can change for four of them. Two are shown as "planned" and two as "forecast". For "planned" positions, strategists will be taking the initiative in one way or another; for "forecast" positions, defensive or remedial action may be necessary. In either case it will be the marketing mix which is used to achieve the desired objectives. Figure 3.9: Boston Consultancy Group Matrix High 20

Stars

Question marks (1)

Market Growth

(2)

Forecast position (3) and (4)

(3) 10 Cash cows

Dogs

(4) Low 0 10x

1x Market Share

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Conclusion The BCG model has the advantage over the Ansoff one in that it considers share and competitive positioning. It is also relatively easy to understand because of its visual nature. However it, too, as with most other models, has its drawbacks and you should always remember the shortcomings. The main problems with this model are: 

It is difficult to plot information accurately. The sizes of circles, unless done by computer modelling, can only ever be estimated.



It is not fair to expect all SBUs to have the same rate of return or market share, etc. The whole point of this method is to assess the position of each product, or SBU, and different markets will have different growth rates. It is therefore really better to plot only one product or SBU onto a BCG matrix.



If the model is used as a predictor of cash usage, valuable products may be left to stagnate and die owing to lack of investment.



The model only uses market share and market growth as variables. Remember that companies with a small market share can be highly profitable.



The model ignores environmental factors which may have an impact on performance.



Positioning can encourage planners to develop bad habits, e.g. not allowing enough funds to maintain the Cash Cows so that they grow weak. Planners can also sometimes leave them too many funds and fail to invest in other categories.

General Electric Business Screen (GE) The GE matrix is an improvement on the models we have looked at so far in that it covers more qualitative aspects. It allows for judgement on the part of the planner and takes into account not only the nature of the market, but also the capabilities of the company. SBUs are assessed in terms of the Attractiveness of the Industry and the Business Strengths of the company. Typical aspects which are taken into account are: Industry Attractiveness

Business Strength(s)

Market size (numbers/value)

Differential advantages

Market diversity

Share (number/value)

Growth rate (total/segment)

Sales (volume/growth)

Profitability (total/unit)

Breadth of product line

Competitors

Mix effectiveness

Social/legal environment

Innovativeness

Planners, with their knowledge of the market and the company itself, can decide how an SBU, or a product, can be assessed in terms of the market attractiveness and the company's strength and can then place that product, or SBU, on the matrix. Assessment can be based on "High", "Medium" or "Low" or, more likely, on a basis of "weighting" where the planner will give a score to each of the factors under consideration and then the total is taken as the point at which the SBU is placed on the grid.

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Figure 3.10: General Electric Business Matrix Industry Attractiveness High

Medium

Low

(1) High Business Strength

(2)

Share held by company

Medium

Low (3)

Although this model uses circles, similar to the BCG model, it is different in that the circles represent the overall market sales (BCG circles represent the income for the company only). The share held by the company is then shown as a proportion of the circle. Looking at Figure 3.10 we can see the characteristics of various products in a company's portfolio. The company has major shares in three markets: (i)

A highly attractive market, with a large overall market potential revenue; the company has high business strengths. The company is in a very strong position with this SBU.

(ii)

A market which is viewed as being mid position in attractiveness but the company has high business strengths. The overall market income is not major, in terms of the other SBUs, but activity could generate further interest which could increase the attractiveness of the market. Given the share held, this SBU could potentially be a future high earner for the company.

(iii)

A market which is not seen as being highly attractive coupled with the fact that the company does not have any high degree of business strength in that field. The fact that the company has such a major share of the overall market may indicate that the competition have withdrawn because of costs incurred, or some other reason, and the company has acquired share by default rather than activity. It is unusual to find a high overall market income in such a market but it can happen, e.g. the potential of selling specialist tooling equipment to manufacturers. The market may be lucrative in terms of potential earnings but not attractive in terms of size – hence the classification as a "medium – attractive market". It really does depend on what planners consider to be important when assessing market attractiveness. In the circumstances shown by the example grid, planners may decide to develop their business strengths in order to capitalise on the overall potential market and to keep the competition out of the field (providing the forecasts for the market show stability or growth). The placing of the SBU on the grid would then change in accordance with its new "classification".

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The other products on the grid in Figure 3.10 show a variation in the potential of the market(s), the share(s) held and business strengths. Strategic Options Strategic options for SBUs placed on the GE matrix cover three types of marketing management activity. Each strategy covers three of the nine cells as shown in Figure 3.11. Figure 3.11: General Electric Matrix Strategies Industry Attractiveness High

Medium

Low

Business Strength

High

t en h tm t es row v In or g f Medium

e ag n a M

y el it v c le se

s ng i n ar e r fo

/ st e v t a r es H div

Low



Investment for Growth This is a strategy for use with strong products in markets with high or medium attractiveness (similar to BCG Stars), where the company also has high or medium business strengths. Full resources should be used: innovations, product-line extensions, product/brand advertising, intensive distribution, good price margins, etc. Profitability expectations would be high.



Manage Selectively for Earnings Strong position in weak market (like BCG Cash Cow); company uses marketing to retain loyalty. Moderate position in moderate market; company can identify underserved segments and invest on a selective basis. Weak position in attractive market (like BCG Question Mark); company must decide whether to increase investment, concentrate on the niche(s), acquire another business or trim off activities.



Harvest/Divest Here the SBUs are similar to BCG Dogs. The strategy can be to minimise marketing activities and concentrate on selected products rather than the whole range. They can divest products from the range, closing down or deleting an SBU which is seen as nonproductive or to have little future. Profits are "harvested" because investments are minimal.

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Gap Analysis The idea of gap analysis links up with portfolio analysis, which asks if you are offering the right products to the specific market segment. Markets change and it is usually necessary to change with them. You are familiar with the example of the home music industry, which has gone from records to tapes and then to compact discs in a fairly short time. If you run a company that is still making records you had better do a bit of portfolio analysis – there is going to be a big gap to fill! 

New Product Development Gap analysis and product portfolio analysis can show the need for development of new products, so the strategy might be to go in for continuous new product development. This has some attractions – there are many people who would much rather work on new products than on the old-established models. There is an excitement about new ideas and making them work. However, there can be drawbacks too, and these are usually expensive. The electronics company Philips had a difficult time with their interactive CD player, which got off to a very slow start. Some years ago two types of video recorders/players fought a battle for market supremacy, and one won. (Incidentally, there seems to have been some rebellion among consumers against the increasing complication of video recorders, and one enterprising company has brought out a machine with simpler controls. Maybe that is the way forward? That manufacturer must have had a strategy of taking note of complaints and then modifying the product to suit the demands of the consumers.) In the earlier years of computing as we know it today, IBM and Apple went their different ways, but someone has now made it possible for an Apple computer to read IBM-compatible programs. A lot of effort and potential profit was dissipated on the way, and a strategy of cooperation at the start would have been better than straight rivalry.



New Market Development You may not need to change the product – there may be people out there who would be glad to have your "old-fashioned" products if these would be an improvement on their present situation. Wind-powered water pumps died out in Britain when relatively cheap electricity came along, but the makers of the pumps found new markets in parts of Africa where electricity was not available. Similar examples can be found in many industries and the extra costs of developing a new market can often be offset by the fact that there are no product development costs to pay. However, you must check that the market segment which looks good will really take your products. There are instances of whole market segments that want to skip a generation of development and go right up-to-date in one step instead of three or four. It is almost inevitable that the new market segment, if you can find one, will be overseas in a less-developed country, so there may be a need to change a lot of the promotional activities and maybe adapt the product slightly. If you are very lucky, consumers in existing markets may find new uses for your existing products and that could improve sales so much that the profit gap closes. It does happen sometimes.



Evaluating Services The evaluation of service is often harder than the evaluation of a product due to its intangibility and the fact that they are heterogeneous in nature, i.e. unique or different each time. Also for services it is only the customer that has any experience of the service and therefore it is only the customer's perception that is relevant.

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However, in order to develop marketing strategy, it is important marketers try to evaluate the quality of its services and a tool for doing this is call 'GAP'. The GAP model tries to analyse the difference between consumer's expectations and perception of a service. If customer expectations are greater than there perception of the service then there will be dissatisfaction and it is unlikely that the customer will use the service again and/or may switch to a competitor. The GAP model identifies four levels of potential differences in expectations versus perception



GAP 1

Difference between Customer Expectations and Managements Perception of Customer Expectations.

GAP 2

Difference between management's perception of customer expectations and the service specification.

GAP 3

Difference between the service specification and the delivered service.

GAP 4

Difference between what is the communicated to customers and what is delivered to customers.

Measuring Customer Expectations One of the difficulties with measuring customer expectations and perception of a service is that the customers may value different aspects of a service, using the example of an airline some customers may value the friendliness of the staff, some may value the punctuality of the flight, some may value the ease of check-in etc. The SERVQUAL model, therefore, provides us with a model for evaluating customer expectations. SERVQUAL assesses five dimensions of a service: (a)

(b)

(c)

Reliability (i)

Providing services as communicated

(ii)

Customer complaint handling

(iii)

Punctuality

(iv)

Getting things right first time

(v)

Keeping accurate records.

Responsiveness (i)

Customer communication about delivery

(ii)

Promptness of response

(iii)

Willingness to assist customers

(iv)

Readiness to respond to requests from customers.

Assurance (i)

Employees who instil confidence with customers

(ii)

Customers feeling safe during the transaction

(iii)

Courteousness of employees

(iv)

Knowledge of employees.

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Empathy (i)

Individual attention to customers

(ii)

Caring attitude of employees

(iii)

Understanding needs of customers

(iv)

Acting in best interests of customers

(v)

Convenience of delivery.

Tangibles (i)

Standard of equipment

(ii)

Standard of facilities

(iii)

Appearance of employees

(iv)

Standard of materials.

As you can see from the above the SERVQUAL dimensions can be used to develop questionnaires that can be used to evaluate customers perception and expectations of a service and this information can help marketers identify the activities that create value in the eyes of the customers and then develop service marketing strategy accordingly.

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Chapter 4 Marketing Plans Contents

Page

A.

Development of the Marketing Plan Purpose of the Marketing Plan Benefits of Marketing Planning Contents of the Marketing Plan

103 103 103 104

B.

Nature of a Marketing Plan Form and Content Method of Preparation SWOT Analysis Financial Projections Marketing Strategies and Tactics

105 105 107 108 109 110

C.

Implementing the Marketing Plan Barriers to Implementation Successful Implementation The Value Chain The Service Value Chain Relationship Marketing Internal Marketing Instilling a Marketing Ethos

110 112 113 114 115 115 117 119

D.

Control and Evaluation The Control Process Setting Objectives Measuring Performance Investigating Deviations from Objectives Corrective Action

120 121 121 121 122 122

E.

Evaluating Sales Performance Need to Evaluate Methods of Evaluating Sales Performance

123 123 123

(Continued over)

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Marketing Plans

F.

Evaluating Marketing Performance Marketing Cost Analysis Market Share Analysis Awareness Assessment The Balanced Scorecard Approach by Kaplan and Norton Benchmarking Management Reports Marketing Metrics - Financial or non-financial measurements?

124 124 125 126 127 128 129 129

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A. DEVELOPMENT OF THE MARKETING PLAN The growth of competition and pressures on finance over recent years have resulted in a much greater emphasis on formal planning for every area of business, not the least of which is marketing. These formal plans tend to be for the longer term and take in the general direction which the company and its various sections are heading towards. More detailed plans are developed to cover the shorter term and the activities which are necessary on a day-to-day basis. The annual marketing plan is one of the latter type. It gives details of responsibilities and programming of schedules, etc. which, when all put together in one document, give cohesion to the marketing effort.

Purpose of the Marketing Plan The marketing plan can be described as being both the "output" and the "input" of the marketing effort. It is the output because it is the culmination of all the planning and analysis which is undertaken by the marketers, and it is the input because it gives guidance and direction for all the activities which are needed in the marketing function. Accepting this viewpoint, we can see how the main purpose of the plan is to integrate marketing activities – planning, implementation, measurement and control. (This is, of course, underpinned by the requirement to achieve the corporate objectives.) If integration of activities does not take place, the plan is unlikely to succeed. Many marketing managers have difficulty in accepting the word "integration" because they think it takes away some of the specific planning aspects required for each section of the marketing function. They prefer to do piecemeal plans and then try to match them together – all of which can waste a lot of time and effort. This approach to planning is not to be recommended. It is far better to plan overall and then to expand on the various parts of the plan which need fine-tuning for specialist actions. At the very least, this will mean that the main sections of the plan are all in line with each other and objectives are more likely to be met. The main benefit of planning overall is that everyone knows what is happening and what is being aimed for. It helps to remove the risk of mavericks who try to work outside the agreed parameters, e.g. the advertising manager who wants to advertise in a prestigious panEuropean publication every month, when the main target market for the next six months is in Italy only.

Benefits of Marketing Planning We have already discussed the benefits of planning in general but, more specifically, some of the important benefits of marketing planning are that: 

greater understanding of customers will be achieved



decision-making will be improved



motivation levels will be higher because of involvement



less risk is attached to actions



diverse activities can be coordinated



there is less likelihood of the need for crisis management



measurement and control will be improved



corrective actions can be taken very quickly.

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Marketing Plans

You can see that the list I have given is very similar to a list of benefits to be gained from any type of planning. Common sense should tell you that once you begin to think in terms of what is to be gained from planning you do not have to learn lists of benefits by rote – you only need to understand to be able to discuss. Always think in terms of your own experience and what have been, or are, good and bad examples of planning in the companies you have worked for. It is always better to speak from experience.

Contents of the Marketing Plan You could argue that the contents of the marketing plan are: objectives, strategies and tactics – the same as any other plan. But simply saying that does not really give justice to what the plan covers. A marketing plan is much more complex and contains a range of "sub" or "mini" plans which all join together to form the whole plan. These sub-plans, in their own right, may well be very complex if the marketing function is serving a huge organisation. We have to accept that the complexity and depth of any plan will be determined by the size of the company and the enormity, or otherwise, of the task being undertaken. The marketing plan is no exception. Figures 4.1 and 4.2 show how marketing plans can change as an organisation becomes more complex. Figure 4.1: A company with 150 employees, operating from a single base and dealing in home markets only MARKETING PLAN

PRODUCT PLAN

SYSTEMS PLAN

PROMOTION PLAN

Covers

Covers

Covers

Research & Development Product launches Product deletions

Pricing Distribution Sales force Order processing

Advertising Literature Public relations Direct mail

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Figure 4.2: A company with 3,000 employees operating from US headquarters with subsidiaries in Europe and Asia MARKETING PLAN

PRODUCT R&D

PRICE CONTROL

SALES ADMINISTRATION

USA

Europe Asia (as for USA)

Promotion

Literature

Business Consumer

DISTRIBUTION

Sales

Advertising

Printed

Direct

Indirect

Broadcast

You can see that as the organisation becomes more complex and employs more people, more plans are needed but they all relate back to the original marketing plan. What we have is a hierarchy of plans for marketing in much the same way as we have a hierarchy of plans for the organisation – but now we are dealing only with marketing activities which, in turn, are related to the marketing mix elements.

B. NATURE OF A MARKETING PLAN Form and Content There is no ready-made standard marketing plan, because every plan is likely to be different as it refers to the situation in one company at one time. Even plans for the same company can differ greatly from year to year as markets change. Marketing plans are often quite detailed documents and a fully comprehensive plan would include the following elements: 

a management summary, for those who do not need to see the full text



mission or business definition statement



product and market background, with market shares and market size, trends, and outside influences



SWOT analysis – a statement of the perceived strengths and weaknesses of the company, and the opportunities and threats that are seen to exist



marketing objectives, properly quantified over a timescale (which is usually, but not always, a year)



marketing strategy, including target markets, product, pricing, distribution and promotion strategies, and possibly some indication of the tactics to be used

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Marketing Plans



financial projections and controls, including sales and profit forecasts, budgetary control procedures and the main budget levels



operational considerations, personnel and internal communications and marketing information system



controls and contingency plans



tentative ideas for next year



appendices showing the supporting information for the detailed items in the plan, including any market research results.

Various marketing authors present slightly different ideas on just what should be included in a marketing plan. In Marketing Management (8th edition) Kotler suggests that the strategic marketing plan should contain the following: 

an executive summary which gives a brief overview of what the plan contains this is not always given as it is really a matter of practice within an organisation



a summary of the current position in respect of products, pricing, competition, etc. this section may, or may not, be merged into the executive summary



opportunities and issue analysis MAJOR aspects only – the SWOT analysis; this may also be given as part of the executive summary



objectives for each section of the plan (volume, share, profit, etc.)



strategy the broad marketing approach that will be used



action programmes what will be done, who will do it, when it will be done, and how much it will cost



projected profit and loss statement forecasts of the expected outcomes



controls the way the plan will be monitored and measured.

Malcolm McDonald (1991, Journal of Marketing Management) suggested that the marketing plan should contain: 

mission statement



financial summary



market overview



SWOT analysis



assumptions



marketing objectives and strategies



programmes (with forecasts and budgets).

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If you consider the various suggestions here, you will soon realise that they are more or less saying the same thing. Basically, then, the marketing plan says: 

where we are now



where we want to be



how we could get there



which way is best



how to know when we have arrived.

This is all very well, but does it help to structure the plan? The answer is yes, it does, because, depending on what you think should be included in your plan, you can simply use those headings to form your structure. There are, though, no specific rules on how a plan should be structured. Remember, plans are statements of intent and the presentation of a plan can be done in any way that suits the presenter and is appropriate to the reader. Plans will include some (or all) of the following: written statements; models showing projections; tables of data. If you refer back to Figures 4.1 and 4.2 which show the hierarchy of marketing plans you can see that the common feature in marketing plans will always be the marketing mix. As long as you make sure that you cover all of the relevant mix elements, you can present plans. A useful system is to take, say, a four-year view of the business every year. The annual marketing plan will have appendices projecting forward the activities of each main department, and forecasts of sales for each product group, for four years. It will be accepted that years 2, 3 and 4 ahead will not be very accurate, but this system does at least set out the pattern.

Method of Preparation There are two main approaches to planning generally: 

Top-down is the type of planning in which top management sets the objectives and plans for the lower levels. This is based on the military example, where the senior officers tell the lower ranks what to do. It fits in with Douglas McGregor's theory X view of people – that they do not like work and responsibility so they have to be directed. However, what works in a military situation is not necessarily the best way to run a civilian company.



Bottom-up is the type of planning in which each department puts forward what they think is the best they can do, then top management sorts out what the whole company can achieve. There may be differences in the level of achievement that each manager thinks his or her department is capable of, and there may be no synchronisation of results, so there could be a lot of wasted capability.

Neither of these methods of planning quite matches the needs of a marketing plan, and the best plans are usually based on a blend of the two methods. As a result, marketing plans are often far from perfect when the company starts to use them; they get better with experience and practice. Top management will set objectives based on the profit figures which they think will satisfy the shareholders, and the departmental managers will suggest what they can achieve if they continue as at present, or have this or that new machinery. The planning process is usually one of iteration – ideas bounce up and down the management structure until all levels are satisfied that they have a workable, achievable marketing plan.

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Marketing Plans

There is potential for considerable conflict between managers of different functions. For example: 

The marketing manager may say she can only achieve a specific level of profit if prices can be raised, and that would be possible only if the products were of better quality.



The production manager may agree, if only he could get some better machines in and get rid of the old stuff.



The finance manager may say she could only accept that idea if more profit was coming in, or some costs could be cut.

Few managers will suggest that their department could be downsized, and it needs a strong chief executive to choose a course of action that all managers will accept and support wholeheartedly. We now need to look in some detail at the components of a typical marketing plan, some of which will be familiar to you from previous chapters.

SWOT Analysis SWOT stands for strengths, weaknesses, opportunities and threats, and every company has its fair share of all four components. It is not easy for a manager in a company to sort out just what the strengths and weaknesses of the company are, and it is important to allow for the fact that the perception of the customers is what really matters. A manager may see a feature of the company as a strength, but if the customers do not see that, the feature may be quite irrelevant. Make sure your SWOT analysis takes into account the views of the customers. 

Strengths are what the company does better than other companies; you could rate quality of staff as a major strength. Location could be a strength too and companies may gain by moving nearer to their major markets. A strength not to be missed is the reputation of the company – goodwill may not appear on the balance sheet but it does show in customer relations. Other strengths may include design capabilities, money in the bank, production capabilities and, of course, marketing skills.



Weaknesses are more difficult to define, because they could be seen as criticisms of the managers of the departments concerned. You must have a clear idea of what you are comparing the company with. It may be weak compared with competitor X but strong compared with competitor Y. It is usually only possible to know about the products rather than the manufacturing facilities of your competitors, but your marketing information system (MkIS) may be able to tell you enough to enable you to get some ideas together. It would be constructive to regard identified weaknesses as opportunities for investment, instead of criticisms of the people involved.



Opportunities include those which can be aimed at now and those which can be seen on the horizon. You will realise that all the work that may be done in a marketing audit could contribute to the marketing plan.



Threats may come in visible form – competition, new products and processes – and in less obvious forms such as action by governments (local and national) and the European Union.

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You will find it useful to plot a SWOT analysis on one page, like this: Figure 4.3: SWOT analysis SWOT Analysis Strengths

  

Weaknesses

Point 1 Point 2 Point 3

etc.

Opportunities

Threats

Financial Projections The allocation of resources can be a difficult area: departmental managers will all want to show they could do better, and that nearly always means spending more money on new machinery, more people, better buildings and so on. There is such a logical need for all these demands that there can be real jealousy if one demand is refused. Yet the top management must choose a course of action and get the agreement of the managers involved, because plans that are imposed instead of agreed will not work well. The job of the chief executive is to work out which course of action will give the company the best chance of achieving the objectives that he or she thinks the company must aim for. Eventually this is achieved by judgment, because there is nothing in planning that is anything like a guarantee. With so much investigation into the company's activities it is inevitable that control of working funds will be involved, and budgetary control is therefore a key aspect of the planning process. Every activity in marketing, except the selling activity, takes money out of the company, and that needs careful control. Briefly, budgetary control is a system in which an amount of money is allocated to each department at the start of the working year, and that has to be used to run the department for the whole year. There will be fluctuations in the demand for money, and there will be a need to check quite often that the budgeted amount for each period and for the year has not been exceeded. This control system works in well with the marketing plan, because the plan should include forecasts of sales for each month, and that will show when the money will come into the company. On a company-wide scale, the finance manager should be able to see when there will be a shortage of money that will involve borrowing or other ways to keep going.

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Marketing Strategies and Tactics Just as every other department comes under scrutiny in the marketing plan, so the marketing department's plans will be written in detail. The plan will show planned profit targets for each product line, possibly phased over the year, in some detail. How the targets will be achieved is probably the most important section of the plan, because the company stands to lose a lot if the ideas do not work. It should be possible to show the marketing strategy, describing the targets such as market share increase, market penetration, market expansion and new markets entered, if that is appropriate. Market penetration is a matter of increasing your share of an existing market, whereas market expansion is persuading more people to use the products to create a bigger market. If you maintain your share of a bigger market you will increase sales, just as you would if you penetrated the present-size market more deeply. The marketing strategy for a big company may leave a lot of the tactics to the individual brand or product managers, and their ideas may or may not be included in the appendices to the marketing plan. A brand manager may have seen scope for increasing his or her market share by making some product more attractive, and then telling customers of the change by a series of advertising campaigns. The marketing manager must ensure those tactics fit in with the marketing activities of other brand managers, and that production can cope with the increased work or subcontract it. There are other marketing tools available as well as advertisements, of course, and the appropriate mix of marketing tools will have to be considered when the marketing plan is put together. Every activity must benefit the whole company as well as the specific brand or product. This is the purpose of planning – to make sure all the activities of the company work together to achieve the planned objectives.

C. IMPLEMENTING THE MARKETING PLAN On several occasions I have referred to the importance of implementing plans correctly. No matter how good the planning is, if plans are not accepted and followed they will be of limited or no use to the organisation. Implementing a plan simply means setting it in motion. It means giving people instructions and letting them get on with it. It should not mean that one person does everything. A plan for a marketing department encompasses the activities of all people involved. These are the people who carry out the implementation – not simply the planner! The manager is the person who sets it in motion and then watches to see if it is working. If all the managers who have to implement the marketing plan do so with enthusiasm there should be few problems, but managers are human and it is always possible that some issues might arise. In theory, just as the finance manager will have budgeted for the allocation of money every month, so the marketing manager will be looking at sales figures to see if the month's quota has been achieved. Other managers will be comparing each department's achievements against the budgeted figures and against other departments. New products will require the R and D department to provide ideas and models, and that will be mentioned in the plan, but not in detail because that will be part of the R and D department's annual plan. They might also need new manufacturing processes and different materials as well as different packaging. The new products will have to be advertised and promoted – see again the need for synchronisation. The company's reputation will suffer if the new products are advertised and sold before they are ready. I have seen a whole range of new products, brilliant in concept and superbly made, fail to sell because no one bothered to set up a sales force, and the existing sales force were not

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encouraged to sell them. This was a case of extreme jealousy among managers who saw a newcomer getting more and more money allocated, whilst their budgets were being cut. A stronger chief executive would have seen the problem and done something about it. Above all it is important to realise that the market is not static – it is constantly changing and the marketing plan must take note of the changes. All the ideas mentioned on marketing audits must be applied and the reactions of customers, wholesalers, retailers and competitors must be analysed. The benefits of such activity can be seen in the example quoted by Sally Dibb (in Sally Dibb and Lyndon Simkin, The Marketing Casebook: Cases and Concepts, Thomson Learning, 2000) of JCB, which grew from a small lock-up garage in rural Staffordshire to become the dominating company in the world market for middle-sized earth-moving machines. Sally writes: "Planning and analysis have enabled JCB's marketers to better understand their marketplace. The company has invested heavily in researching its core customer groups throughout Europe, utilising well the strengths of its subsidiaries' personnel in the field. Extensive evaluations of their competitors' strengths and weaknesses, their competitive positions and likely strategies have led JCB to preempt successfully competitors' thrusts and to establish new product launches in target markets very quickly." It is essential, in all this planning, to keep in mind the impressions made on the customers by any changes. What looks good on your plan might be disastrous to a customer, yet if they are told of the plans before they are fully implemented, they may be able to adapt to fit in with your new schemes. If not, you will lose them to a competitor. When I was a sales engineer for an engineering company, every year we did a major study of the important customers for each product. If a product had a falling demand for a series of three years, it was considered for deletion from the range. However, we always had the chance to talk to our main customers before a decision was made, and quite often we found that customers were willing to predict how long they would need that product before their own development plans made their machines obsolete. On some occasions we found the customer could estimate their three-year needs and our company would supply them all at once, before ending production of the product. Our customers appreciated the consultation and we seldom lost out by this tactic. The same applies to other elements of the environment with which the company must cooperate, such as the suppliers of materials and services like transportation. Friendly discussion should not go so far as revealing information that would be useful to a competitor of course, but there is some merit in treating your environmental partners with consideration.

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Barriers to Implementation Reasons for poor implementation will be caused by environmental barriers either within or outside the organisation. At various times during this course we have considered these environmental factors to one degree or another. But, to summarise, barriers can be caused by a number of different aspects: Internal Management culture Leadership skills Organisational structure Resources Attitude to planning Measurement procedures Communications

External Political intervention Competition Distributors Suppliers Customers Economic conditions Changes in technology

We should perhaps recognise that while external factors are likely to result in changes to the marketing plan, it is the internal factors which bring most pressure to bear upon successful implementation. No one can doubt that the support of top management and the involvement of staff in the planning process are the main keys to successful implementation of any plan. The degree of success achieved in the plan's implementation will vary in accordance with how the two variables are balanced, as you can see in the model in Figure 4.4. Figure 4.4: Implementation variables

Staff Involvement

Senior Management Support High

Low

High

Successful implementation will occur.

Staff will struggle. Implementation will be impeded.

Low

Staff are likely to resist the plan. Implementation will be impeded.

Plan resisted in all ways. Implementation stage unlikely to succeed.

Gilligan and Fifield (1996) refer to the same variables of senior management support and staff involvement as being necessary for good implementation of the plan. They have used these variables to produce a matrix which gives an indication of the potential outcomes for a company trying to achieve customer focus – which we know is essential in any marketing organisation (Figure 4.5)

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Figure 4.5: Achieving customer focus

Staff Involvement

Senior Management Customer Focus

High

High

Low

Anarchy

Collaboration Compromise

Low

Apathy

Bureaucracy

Successful Implementation No matter which terminology we use to identify key factors, or how many models we use, we are really referring to organisational integration or synergy (or any other name you wish to apply, i.e. everyone working together and everyone being linked). McKinsey's seven Ss model (Figure 4.6) is a good way of representing the factors which are essential in marketing and which can affect the successful implementation of plans. This shows the links which, when present in a balanced format, will allow a marketing plan to be developed and will aid in its implementation. You could, if you choose to, also use this model as a representation of where barriers to the implementation might come from. Figure 4.6: McKinsey's seven Ss framework

Structure

Strategy

Systems

Shared values

Style

Skills

Staff

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The Value Chain Michael Porter, who has produced so many marketing models and concepts, has given us yet another concept which we can apply here. He suggested that the overall activities of the company are performed to: "design, produce, market, deliver and support its product". He identified key areas which create value and cost in any business. Four of them are seen as being "support" – the company's management structure, human resource (personnel) management, purchasing, and technology. The other five are seen as being "primary" activities – incoming materials, production, despatch, marketing and service. (Note that we are using the more common English names for these activities whereas Porter used the American ones. Porter's descriptions are shown in the model given in Figure 4.7.) Figure 4.7: Michael Porter's value chain Support activities

Company infrastructure Human resource management Technology development Procurement

Primary activities

Margin

Inbound logistics

Operations

Outbound logistics

Marketing & Sales

Service

Porter maintained that it was not only important for each department to do their own work effectively and efficiently, but that success also depended on how well the departments reacted to and related with each other. He claims that if departments are only concerned with their own activities, then delays will occur and customers will not be satisfied. This is another way of saying: 

synergy is required – the whole becomes greater than the sum of the individual parts



that the marketing concept must apply – organisational integration, customer satisfaction and mutually profitable exchange.

All we are doing is saying the same thing in different ways. Each part of an organisation can add something to the activity of satisfying the customer and they must work together or they will fail. United we stand, divided we fall! It is only by having good systems and processes that this will work.

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The Service Value Chain Services are a series of processes, linked together and known as the service value chain. Managers must be aware of the elements of the service value chain and those elements/dimensions that are valued most by customers. Some service value chains are very short, for example, a hairdresser or an accountant who delivers a service personally to customers. However, the delivery of some services is more complex and involves a chain of processes, for example, a flight which involves check-in, luggage handling, in-flight services etc. Technological advances in recent years have seen the internet being used as a way of delivering a service, e.g. online banking. Therefore value chain management equally applies to the delivery of services as well as to products. The addition of these soft elements to the mix and the acceptance of the value chain concept, has led to development of both relationship and internal marketing.

Relationship Marketing On several occasions throughout this course I have referred to the importance of building and maintaining relationships in marketing. You can see that no company can be completely independent and stand alone: every organisation obtains supplies from somewhere and provides something to someone. This means that there is a reliance chain linking organisations into multiple relationships. If the relationships are transient they may never need to be made secure and strong: for example, when you buy a souvenir of your holiday you are unlikely to repeat that purchase so the seller has no need to develop you as a long-term customer. However, if the relationship involves repetitive contact it needs to be worked at. Trust must be built up and each party must feel secure in the knowledge that they can rely on the other. Although this works at every level in both consumer and industrial markets, it is really between business organisations that relationship marketing is seen as being valuable. In pure marketing terms the value of a customer over a life period is difficult to calculate, but the value financially can be estimated. If a customer buys on average twice a year and spends £50,000 each time, it means approximately £1m in ten years from that one customer alone. If the customer is satisfied with every transaction they could buy more, or more often, and it could mean even more money. The financial value of a customer will vary with the nature of the product and its value, but long term a customer is valuable and should be kept satisfied. Marketing companies have always tried to take care of their customers, but now they are also likely to be getting involved in the customer's planning activities. It makes sense. If a company knows that a customer is intending to have a special promotion, or to run a special production batch, they can plan their own activities to match the customer's time and material needs. Likewise, if a customer gets to know that a supplier will have a certain product available at certain times, they can plan their activities to match. So, by each party talking to the other, plans become interlinked and a degree of interdependency is created. The very fact that each party is depending on the other means that the relationship becomes stronger and harder to break. This, in turn, means that there is less likelihood of losing a customer to the competition, or less possibility that another customer will be given preferential treatment. It is not uncommon for joint planning meetings to take place with several organisations being involved. Long-term plans are made which enable each organisation to schedule activities and save costs by reducing risk.

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The benefits of relationships can be immense. For instance, one example which has been quoted by Kotler and other authors is the relationships linking Levi Strauss, the jeans manufacturer, to its suppliers and customers, using electronic data interchange (EDI). At the end of each trading day Sears, one large company which retails the Strauss jeans, sends in details of which styles, sizes and colours of the jeans they have sold. This triggers off a replacement order from Levi. Their picking of the replacement order triggers off an order from Milliken, who supply the material for the manufacturing. Milliken, in turn, reorders fibre from Du Pont. Not only is this a good demonstration of the uses for EDI, but it also serves to show how major companies can work together to keep their systems operating and successful. Even though initially the efforts in forming relationships may be done for security reasons, eventually other benefits will be seen. Suppliers and buyers will pass on information they have heard about new developments which are more suitable for a product, or cost less to buy, etc. Warnings about competitor activity will be passed on and taken note of. Anything like this can be invaluable in carrying on day-to-day business. Relationship marketing can only take place after a strategic decision has been made. There may be good solid relationships between people at lower levels in two different organisations, but to involve a company in the activities of another is a serious step which will be taken only after full deliberation. How far to become involved is another aspect which needs to be decided. Occasionally there may be danger in locking yourself in to one supplier or too close to a customer who is not on a sound financial footing. Establishing a Programme of Relationship Marketing Recognising the need for a relationship marketing programme is not sufficient in itself; there must be logical system or the whole process could fail dismally. Steps to achieve good business relationships are: 

identify the key customers, suppliers, etc. who are likely to produce beneficial relationships



present your proposals to the identified parties



each party to select "managers" who will be responsible for monitoring communications and be recognised contact points for each other



set up a regular programme of meetings, forums, etc.



each party must understand the needs and problems of the other, and be prepared to adapt, and make allowances for each other.

I may be stating the obvious here, but it is essential that relationship marketing is carried out carefully – companies should commit themselves to the concept but be cautious. Just as relationships between individuals will grow if they are nurtured, so too will relationships in marketing. The underlying principle of relationship marketing is loyalty which comes from trust. Trust is gained only when reliability is assured. Reliance takes time to build. The implications of relationship marketing are very simple – time and effort need to be spent in forming, building and maintaining the relationships, but perhaps the biggest implication of all is that it may involve a change of culture within the organisations concerned. This is where internal marketing comes into being. The internet and use of databases can support the development of customer relationships because they allow organisations to understand their customers in far more detail than ever before, by using tools such as web analytics software and online feedback forms. This deeper understanding of customer satisfaction and needs means organisations can target marketing activity more effectively and even start to truly anticipate customer needs.

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The internet allows organisations to respond and communicate almost immediately and individually to customers, building a deeper relationship. Examples such as personalising web pages, responding individually to queries, and linking internet usage with email and mobile technologies, demonstrate how the internet can be used to develop customer relationships. An example of this is booking a cinema ticket online: customers are sent email confirmation and text reminders of the start time and future films that may be of interest.

Internal Marketing Imagine that you are a non-technically-minded customer who is thinking of buying a new camcorder camera. 

First of all you need literature to help you make your choice. If one company has produced literature with the customer in mind and another has produced literature with only technicians in mind, which literature is likely to influence you the most?



Next you may need to go to an outlet where you can look at the products, ask questions and perhaps buy. If one outlet has pleasant, helpful and knowledgeable staff and another has untrained staff who are dismissive of your problems, where are you likely to buy?



If your friends and family tell you that one company never delivers on time but another does, where are you likely to place your order?



Likewise, if your friends and family tell you that one company is very good for aftersales problems and another isn't, which company will you have more confidence in?

And so it goes on. You will only gain satisfaction if your needs as a customer are understood and catered for. From this example you can see that at each and every stage that a customer comes into contact with a company, there is a potential danger zone. Only by making sure that internal staff recognise the dangers and understand how their own efforts can help avoid the problems will true customer satisfaction be gained. Importance of Internal Marketing Most companies in the world readily accept the idea that they are dealing with "the market". What they really mean is that they are dealing with external factors such as customers, suppliers, distributors, competitors and other environmental aspects. Many often fail to recognise the importance of another (equally important) market, i.e. their own "internal market". The internal market of an organisation consists of every employee from the chairman of the board to the maintenance personnel who change the light fittings. Although some members of the company's personnel may be more "visible" to the buying customers, every employee in his or her own way is important in the process of satisfying the customer. It therefore follows that if the company is to succeed in its search for giving customer satisfaction, it must give due consideration to these internal personnel, to understanding their needs, their training and their motivation. This can only be done by having effective processes of internal marketing. Suppose, for example, that a marketing department decides to have a promotional push on certain products by giving a price reduction. They go ahead and advertise without giving advance warning of the promotion to internal personnel. What is likely to happen is that telephone staff will give conflicting information to callers, showroom staff may well dispute the fact that there is a price reduction, the production department will be unable to cope with increased demand, distribution may have vehicles off the road for servicing and be unable to meet deliveries, etc. The marketing department simply failed to recognise the needs of the internal market, i.e. information and time to be prepared.

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What a difference there would have been if everyone had known about the "plan". Activities could have been coordinated and not only would a more professional image have been projected by company personnel, but the personnel themselves would have felt more involved and would have had more job satisfaction. This could be described as the "core intention" of internal marketing – to keep everyone informed of the plans within the company, so that everyone knows what is going on and what is being aimed for. Underlying this, of course, is the commitment to customer satisfaction which the company is trying to achieve. Of course internal marketing is especially important in the delivery of services. Employees of a service organisation can directly affect the quality of the service, which will have an immediate impact on customer satisfaction. Therefore organisations must ensure that employees are well informed and kept motivated. Establishing a Programme of Internal Marketing Kotler has described internal marketing as: "The task of successfully hiring, training and motivating able employees who want to serve the customers well." If we take Kotler's definition in stages, we can see how an internal marketing programme can be implemented. 

Successful Hiring Careful recruitment of people who are capable of doing a job is vital. This means clear job descriptions and good interviewing on the part of managers. If an interviewer is not absolutely clear on the right kind of person for a job, there could be problems in store. The right person may be someone who, with training, could be ideal. The main requirement is that they will fit with the ethos of the company and recognise the importance of customer satisfaction.



Successful Training A programme needs to be set up whereby ongoing training and awareness is established within the organisation. Accepting that training for internal marketing is to create awareness of the need for customer satisfaction, and the importance of following the marketing concept, this training is often led by the marketing department. The training may take the form of meetings within various sectors, or workshops on certain issues, e.g. new products being developed, new objectives being set. Awareness is achieved by keeping everyone informed of what is going on. This can be done by notices, newsletters, email, etc. – any form of internal communication can be used. The point is that it is really the marketing concept and plan which is being "sold" to the internal customers. Convincing the workforce of the importance of customer satisfaction is one of the first steps in achieving it.



Successful Motivation Motivation is often linked with money, and it certainly helps in many cases. If staff are given incentives for their efforts, they will respond accordingly and try harder to achieve their targets. This type of incentive can be a bonus or commission, and can be based on any aspect of the job that the company chooses. However, money is not the only type of motivation that can be used and, in some cases, can actually cause problems, e.g. the salesperson who is more interested in his or her commission than actually satisfying customer needs. Personal motivation can often be much more effective than money. Motivating factors vary from person to person. For some people a sense of achievement is important, for

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others it can be recognition, status or authority. But everyone likes to feel involved and important and this type of motivation is easy to achieve. Organisations which give people responsibility for their own actions, involve them in discussions about future plans and are receptive to comments and ideas brought forward, soon find that the workforce becomes motivated into doing a better job of working together to achieve the desired objectives. This is sometimes referred to as "ownership of the plan" or letting people "buy into" the plan. It is quite simply involvement. The real aim is to try to turn the workforce into a united group working together. Simple things like social events, family fun days and so on all help to create unity and to foster a feeling of being proud to work for the company. Successful Internal Marketing Success will only be achieved by an organisation when there exists: 

support by senior management for the programme



clear objectives and strategies



an understanding of customer needs, both internal and external



a desire to achieve customer satisfaction



interdepartmental good will and cooperation



good communication links within the organisation.

Basically, internal marketing can be summed up as "respect and recognition". 

Respect for the People Involved External customers should always be listened to and treated with respect, and it is no exaggeration to say that suppliers need to receive clear instructions from a customer. If, internally, everyone respected each other as a "customer" or as a "supplier", there would be immediate benefits in a reduction of internal conflict and rivalry.



Recognition of the Importance of the Customer Everyone has heard the expression, "the customer is king", but that implies subservience which, sometimes, is simply not possible. It is much better to say "the customer is the core of our business", or "without the customer we cease to exist". It is even better to believe this and act accordingly. If everyone in the company knows and recognises the importance of the customer, both internal and external, the service levels given will be that much higher and customer satisfaction will be achieved.

Instilling a Marketing Ethos To get a marketing ethos accepted into a company may not be the easiest thing to do. Referring back to the section on internal marketing, you will recall that I gave a list of criteria necessary for internal marketing to work. Look at this list again, because these criteria are also necessary for the development of a marketing ethos. If these criteria are not met there can be no chance of a marketing ethos being accepted successfully into a company. It is as simple and as basic as that. Management may say they have adopted the ethos but it will not be true. Full support from senior management and firm belief in the value of marketing, by everyone, is the only guarantee of success. Accepting this, we then have to establish how we can get a marketing ethos accepted. Well, the first thing is to have a marketing plan which is very carefully designed covering all elements of the mix – including people. The plan gives a structure to work to. It outlines

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when activities will take place and who will be responsible for those activities. If planning has been done by involving people they will be more receptive and will work with the plan rather than against it. If that step is achieved, the marketing ethos is already beginning to be accepted. If it is not, you need to start at the top – convince the higher-level management of the benefits that can be gained and demonstrate the outcomes and how easy they will be to achieve. Once the senior management are convinced, the belief in marketing will cascade down through every level. After that, a concerted programme of education and motivation is needed. Persuasion from higher levels will soon ensure that lower levels begin to look seriously at what is being proposed. If training days can be added to this, the transformation will be that much quicker and, very soon, suggestions will be offered by staff as to how systems and procedures could be improved. Motivation will have begun. Motivation has its own force – it grows if it is allowed to. Once people become motivated they should be encouraged by some form of incentive. Remember that this need not be money – other rewards are important too, e.g. "best cost-saving idea of the month", "top salesman of the quarter", "most efficient department", etc. I would not deny that money is important, but it is not the only way! The main difficulties to be found in instilling a marketing ethos into the company may well come from a senior management who do not think it is necessary. Some may see the new way of thinking as being a threat to established systems which have proved relatively efficient. New thinking is often seen as being radical and, especially if the company has been established for a long time, there will always be people who resist it. People fear for their positions and the status they have acquired. They worry that people with new ideas will take over and that they will lose their jobs. If they can see that to accept the validity of the argument that the customer is important, and the significance of everyone working together, they will eventually change their opinions. Once the marketing ethos is accepted and functioning properly, the company will have an open culture. Innovation will be encouraged which will help in new product development and in improved customer care. Staff will be retained as they are happy in their work. Costs may be reduced because people find better processes. I could go on but I am sure you can see the benefits, too. The marketing ethos of a company is the same as anything else – it needs to be taken care of if it is to survive. You cannot just convince the entire organisation of the benefits of marketing and then leave it at that. Follow-on training on new products, new systems or anything else that is appropriate should be undertaken. Regular communications are essential or the old order will soon return where departments are isolated and people do not know what is going on, or what they are trying to achieve. Even company newsletters are important as they show employees that the company is at least communicating with them. Including comments in a newsletter about the success of various members of staff, or competitions, etc. is a good motivational tool.

D. CONTROL AND EVALUATION We have seen how marketing can be organised, and it is clear that there is often a substantial delegation of authority from the chief executive down to managers, section heads, salespeople and clerical staff. Delegating authority does not remove responsibility for the results, so the chief executive will wish to see how well the team is performing. That would be reason enough for the control system that is needed in marketing organisations, but the more significant reason is that the chief executive is responsible for the owners' investment in the company. It is easy to lose

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sight of the fact that the shareholders own the company, and the whole management team is in place to serve the interests of the shareholders. It is usual for the shareholders to have profit, dividends and growth as their key interests, so we can take it that the chief executive is also aiming for these. In order to keep some check on the way in which managers use their delegated authority the company must have a system of controls, and that is what we shall look at next.

The Control Process The control process consists of: 

setting objectives



measuring performance



investigating deviations from the objectives



corrective action.

This process is iterative – it is repeated continuously and the corrective action should make the results come nearer to the objectives. We need to look at the four activities in more detail.

Setting Objectives If the company is family owned, or owned by a small group of shareholders, it is usually easy to see what they want to achieve, which is often a balance between making profit and enlarging the company. Owning shares is an alternative to having money on deposit earning interest, so the minimum objective is usually to make enough profit to enable the company to pay out a good dividend. In a chapter of The Marketing Book, edited by M J Baker, there is a section by James R Bureau in which he asserts that most marketing policy decisions are made on the basis of speculation rather than facts, because of the cost of acquiring the facts. He goes on to add that marketing is so speculative that failure is a normal part of the activity. Whilst the R and D people can go on correcting faults in the design of a product until it is near perfect, faults in the marketing of it are difficult to correct and are more visible, so they could grow like a snowball. The Sinclair C5 tricycle is mentioned as the ideal example, and the inventor, Sir Clive Sinclair, is on record as saying that inventors have to accept failure as part of the price of success. So the objectives are set with a background of uncertainty and hope, but they must be set as well as possible, so they must be in terms which enable management to see whether or not they have been achieved. You may see objectives no more precise than: "To earn 15 per cent on the capital employed this year", or "To make 10 per cent more profit this year than last year." From such simple-looking statements the management team has to prepare complete marketing plans which include targets for each salesperson or branch office, performance targets for deliveries and customer care, etc.

Measuring Performance We will look into specific performance measurements later, but we need to take a general look at the subject first. You could compare a marketing plan with a journey plan: 

objectives equate with destination



strategy equates with method of travel



tactics equate with the route taken.

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When you have an objective you can decide your strategy, taking in all the resources and limitations that apply in your specific company; you can then pass that down to lower ranks who can decide the tactics. You could view this in the same way as the organisation chart, with the tactics at the lower levels and the objectives at the top. Whilst the directors may understand such objectives as "make ten per cent return on capital employed", there is little chance of the machine operator in the factory understanding how that could be related to his or her work. This means it is necessary to break down the objectives into understandable targets for all the operational people in the company. The marketing manager may suggest that a specific market segment is the one to aim at, and the branch managers will each be invited to agree to a target for their sales team. They, in turn, will ask each sales representative to agree on their individual targets and of course the total of all the targets will be enough to meet the objectives. The decision that then has to be made is how to achieve the sales or profit levels needed, and that will be reckoned on a monthly or weekly basis, using the knowledge of the sales representatives and manager.

Investigating Deviations from Objectives An annual target must be split into shorter periods, whatever its subject matter, and this needs a common sense approach. Demand fluctuates for many reasons, the obvious ones being holidays and local prosperity. It is important to know why a target has not been achieved, since it will be necessary to alter something to make up the deficiency. However, it is equally important to find out why a target has been exceeded, because the circumstance may be something that could be repeated and may be useful to other branches or individuals. The work of checking every fluctuation from target in detail would be too time-consuming, so it is usual to set a range of figures round the target and to accept any variations that lie within the range. After all, the starting point was not a calculated fixed figure, so there is little point in trying to be too precise. You may see this technique, which is called variance analysis, in exams and textbooks; this type of analysis can be applied to many different factors.

Corrective Action When a serious deviation from target is identified, it is essential that a fairly detailed investigation is made in order to find out why the target was either not reached or exceeded. There is no way that corrective action can be taken if the manager does not know the fault. Corrective action may involve making up the sales or other total that was missed, for example by doing something differently, or it may be necessary to accept that the target was missed and then make adjustments to the total objectives. Reducing the objectives may be necessary if the reason for the failure to meet the target was due to the loss of a major customer, for instance. At the marketing management level the corrective action may be a change in the advertising message, or a total rethink of the marketing strategy, and it is better to know about that early in the year rather than to wait until near the end. The whole process of control is easier to understand with the help of a diagram such as Figure 4.8.

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Figure 4.8: Planning and control feedback cycle Objectives

Forecasts

Plans

Activity

Comparisons

Results

Objectives achieved

Corrective action

E. EVALUATING SALES PERFORMANCE Need to Evaluate As in the case of job specifications, performance standards are usually associated with the production department. In the field of production it is much easier to measure work done, e.g. so many tons of raw material enter the production department and a given number of completed items should emerge. The production department is dealing with material which can be seen and measured. However salespeople's activities can neither be seen by head office nor, in some cases, can they easily be measured. In a simple sales operation such as van selling, the number of calls made, the number of orders obtained and the value of the orders can be ascertained with reasonable accuracy; but with more complicated sales contacts, it is much more difficult. The kind of performance standards which will apply must be relevant to the kind of sales operation conducted. Performance standards are necessary in order to ensure that the sales force is operating efficiently, but they need to be applied with considerable forethought and the salespeople must be consulted from the outset. Salespeople are often suspicious of quotas, performance standards and targets which are imposed unequivocally and without consultation. We shall look at some examples of the kind of performance standards which can be applied next.

Methods of Evaluating Sales Performance 

Simple Methods The simple methods are such as those just mentioned. For example: recording the number of calls made; number of orders obtained; value of the orders both in total and on average; number of new accounts opened; average number of lines sold per order; order/call ratio; number of new lines introduced; and the general increase in business on the territory.

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

The Transfer Order Problem The simple methods can only be applied when the salesperson is selling his or her products direct to customers. Many salespeople do not operate in such a simple manner. Many junior salespeople spend all their time booking transfer orders which are taken to wholesalers. The wholesalers are then expected to deliver the goods to retailers. This system means that the manufacturers' salespeople are working for the wholesaler as well as for their own employers. However, some of the orders may be from un-creditworthy customers and the wholesaler may be unwilling to accept them. The problem of measuring performance in such cases is much more difficult. Copies of transfer orders may be sent to head office, but there is no sure method of knowing how many of the transfer orders have been delivered. Few sales managers are willing to interrogate their wholesale customers about the precise success rate. The best method of dealing with the transfer order problem is to audit the wholesalers' purchases before the transfer campaign commences, and then to audit them both during and after the campaign.



The "Expense Ratio" We have mentioned profitability as a necessary factor in evaluating the salespeople's performance. This can be done by the cost accountants in the company but it is a difficult task. Profitability, in any event, is a nebulous term. Most companies usually settle for the more easily calculated and understood expense ratio. This is the relationship of expenses to turnover. In most companies the total sales expense as a ratio of the turnover is known. This ratio is used as a standard to which individual territories may be compared. Naturally expenses will be higher in sparsely populated areas where the salespeople have to travel long distances between calls, but the ratio does give a rough and ready yardstick.



Other Yardsticks Other performance standards may be applied through the analysis of salespeople's expenses, such as hotel bills, car running expenses and telephone calls. An experienced sales manager has a shrewd idea of the kind and amount of expenses which are incurred by salespeople.

F. EVALUATING MARKETING PERFORMANCE There is not the same clarity of outcome with marketing activities as with sales performance. The salesperson can evaluate the customer's reception of his or her sales efforts because they are there to see the results, but the marketing manager cannot see the reaction of people when they read the advertisements, or when they open and read a direct mailshot. A potential customer may walk into a store and out again without anyone ever knowing what the level of interest was. On a local out-of-town shopping estate there may be three shops selling some electrical equipment, and it is normal for potential customers to compare prices by walking into each store in turn. The marketing managers responsible for the products on sale have no chance of evaluating their promotions at this level. Evaluating the marketing performance is therefore more likely to be done on a company-wide statistical assessment, such as a continuation of last year's sales graph, or using a breakeven chart, or a market share analysis.

Marketing Cost Analysis Kotler suggests that it is wise to check on the ratio of marketing expense to sales achieved, and he specifically refers to the ratio of advertising expense to sales, plotted against time.

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Experience will show a "normal" level for this ratio, and that can be plotted as a horizontal line. Monthly achievements are then plotted and they ought to fluctuate around the line, as in Figure 4.9. Figure 4.9: Marketing evaluation chart 11

Advertising expenses/sales ratio

10

Upper limit 9 8 7 6 5

Lower limit

4 3 2 1 0 0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Time period Kotler points out that the continuous rise in the ratio in the last few periods is a cause for alarm, and the marketing management should investigate the matter. This technique has been used for many years in production control, where the upper and lower limits are the tolerances on the dimension being machined. Physical measurement and plotting used to be the inspector's way of checking that the cutting tool needed changing: now computer control can ring a bell or even arrange for the tool to be sharpened. The upper and lower limits for the marketing evaluation chart must, of course, be set with the benefit of experience. You will be familiar with break-even charts and sales graphs, so there is no need to go into them again. You should note that most statistical techniques can be adapted to suit small companies – for a one-person business you could use the "cost per enquiry" to evaluate magazine and newspaper advertisements, and a moving annual total to see how the business is going. Knowing the conversion rate for enquiries to orders, you would be able to work out the cost of acquiring each order. A monthly bank statement would tell you the immediate cash situation.

Market Share Analysis Many authorities believe that market share is the single most important indicator of the company's performance, and it is a matter of considerable concern to many managements because the market share analysis relates the performance of the company to that of the competitors. However, before a management can use this as a control factor they must be able to calculate the market share on a steady basis. It is not always easy to find out the size of the

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total market, so you must find some reliable statistics, published regularly, from which you can estimate the size of the market in which you operate. Reliable and regular statistics are published by the Office for National Statistics (ONS) and much information is available online (www.statistics.gov.uk/hub/index.html) or from The Stationery Office (TSO). Business monitors are published monthly or quarterly and they use information supplied by companies in the specific industries. ONS has a firm policy of publishing statistics which cannot reveal the activity of any individual company, so some of the product classifications are deliberately quite wide. You may have to do some statistical detective work to find just what the market size is for your product. The value of the market share analysis is that it removes the influence of the general economic environment: the share that is gained is from other companies, so changes in the economy and in total market size are left out of this reckoning. This is not infallible, of course, and if your company has just invested a lot of money in promotions you should see a gain in market share – or your promotions may be ineffective. If a new competitor enters the market successfully, it is clear that the sales they achieve will reduce the market share of all the other companies, unless the advertising done by the newcomer raises the general interest in the products. You may decide to go up-market and that will certainly reduce your market share but may well increase your profits, so you could be better off but more vulnerable to changes in the customers. If you sell food products you can buy surveys of the retail business, such as those supplied by Nielsen and others, which will tell you the sales over the counter for many products. From these you could calculate your share relative to competitors, and plot that periodically. There is a lot to be said for comparing your company's performance with that of other companies in a similar line of business, and this is usually possible by using Inter Company Comparisons (ICC) or similar publications. ICC produces inter-company comparisons and other similar analyses, which show the financial and other ratios for companies in specific industries. The information is from company accounts, lodged each year with the Registrar of Companies, so there is often a time lag in obtaining the information, and there may be very little available about some companies. You may be able to find an average for some statistics which could be a starting point. There will always be gaps in the information which is available to help you to evaluate your company's marketing performance and there are some outside influences that we must also look at.

Awareness Assessment When you spend a lot of money on the advertisements for a product or service it is natural to want to know how effective they were in telling people about the product. The measurement of awareness is one of the specialisms of some marketing research companies and some textbooks would have you believe that everyone should do this. Well, yes, everyone should measure awareness – you just need to get the salespeople to check with the wholesalers and retailers to see how enquiries and orders are going. However, if you are going to pay a lot of money to measure awareness just to evaluate your advertisements it may be a very expensive business. Ideally, every marketing manager should be able to relate awareness of a specific advertisement to sales of the product, and that would make it possible to estimate sales in the near future. That situation will only come with long experience and it is worth thinking about other ways in which you could judge the quality of the advertisements before deciding that an awareness survey is needed.

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The Role of the Internet in Measuring Marketing Effectiveness The internet has allowed organisations to measure the effectiveness of online and sometimes offline marketing campaigns. Web analytics means that organisations can count and track consumer behaviour during times of advertisements to see if online sales and website hits rise, or interest in a particular product increases during these times. Organisations are also able to determine which customers responded to an advertisement or sales promotion. They can measure the success of online sales promotions by tracing customers' routes through to the point of purchase. Other technological developments such as loyalty cards also play a role in measuring marketing effectiveness, as they are able to analyse customer purchase behaviour and detect if customers have responded to a promotion or not. Evaluating Service Performance Evaluating the service quality has an added dimension as the nature of the services is that each service experience is different. We'll pick up the issues about service quality and its measurement in Chapter 11.

The Balanced Scorecard Approach by Kaplan and Norton Kaplan and Norton's balanced scorecard approach is an attempt to incorporate the interests of a broader range of stakeholders through performance measures across the four perspectives of financial, customer, internal business process, and learning and growth. The balanced scorecard was originally developed as a management control tool. Over time it has been utilised in a similar way to Porter's value chain to analyse internal capabilities of organisations as well as mapping out strategy maps. The strengths of the balanced scorecard approach are that it gives a full perspective of the organisation's performance. It also facilitates setting robust and hierarchical objectives and strategies. It links control to the objectives and can bring employee "buy in" to those objectives set and the chosen means to measure them. Of course there are some drawbacks to the model, such as it requiring investment for proper use by management and for it to be embedded into the organisation effectively. It also requires sustained commitment on behalf of management. The balanced scorecard can be thought of as the "strategic chart of accounts" as it captures the financial and the non-financial elements of a company's strategy and discusses the cause-and-effect relationships that drive business results. It allows the organisation to look to the future instead of only looking back at historic indicators. This model puts strategy at the centre of the management process. Even if there are no incentives attached to the achievement of a particular objective, by simply measuring it will make management pay attention to the issue (see the model in Figure 4.10).

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Figure 4.10: Balanced scorecard model How do we look to stakeholders? I Financial perspective How do customers see us?

Goal

Measure

Customer perspective Goal

What must we excel at? Internal perspective

Measure

Goal

Measure

Innovation and learning perspective Goal

Measure

How can we continue to improve and create value? Adapted from Harvard Business Review Perspective

Generic Measures

Financial perspective

Return on investment and economic value added

Customer perspective

Satisfaction, retention, market and account share

Internal perspective

Quality, response time, cost and new product development

Learning and Growth

Employee satisfaction and information system availability

Benchmarking This is an analytical process that enables an organisation's performance to be compared with that of its competitors (Wilson and Gilligan, 1999). It is used to: 

identify key performance measures for each business function



measure one's own performance as well as that of competitors



identify areas of competitive advantage (and disadvantage) by comparing performance levels



design and implement plans to improve one's own performance on key issues relative to competitors.

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Benchmarking can be used in other functional areas of the business and can potentially help to change corporate culture. It is necessary to assess any possible response by competitors to any action that the organisation might take. This is an important part of management strategy, and the measurement tool may be used to establish best practice outside of the industry in which the organisation operates to help inform management decision-making with regard to various functions within the organisation. An example of this would be Tesco's desire to improve logistic and channel management just-in-time deliveries. Tesco consulted with the Royal Mail for advice regarding the process of mail delivery in order to improve their delivery process for customers.

Management Reports An effective management reporting system will assist the organisation to control activities in accordance with its objectives and planning. The process of controlling business operations depends on devising, and constantly revising, an up-to-date system of reporting which should result in better decision-making and improved coordination. Reports should be designed to emphasise factors that are important in the success of the organisation's activities, i.e. critical success factors. These factors would be characterised as follows: 

they are important in explaining success or failure



they are volatile and can change quickly



they might necessitate prompt action to deal with a change



change in them cannot be predicted



they can be measured.

Examples of critical success factors might be a new production process or product quality. The adoption of a structured approach to reporting will enable management to view the results and efficiencies of individual departments in the light of their contribution to overall performance and objectives.

Marketing Metrics - Financial or non-financial measurements? Financial performance measures are important for an organisation, but they tend to only show the economic dimensions of performance and neglect other more important goals (Venkatramen and Tamanujam, 1986). When looking at the measurement of organisational performance and success, it is necessary to consider measures to create efficiency and effectiveness. In order for an organisation to achieve both, it must achieve efficiency in its operations and be able to deliver customer wants and needs (i.e. be effective). Measurement tools tend to fall into the category of efficiency rather than effectiveness, and most financial measures evaluate at this level. The organisation's ability to survive over the long term is its ability to be effective and efficient. Efficiency measures reflect whether an organisation is using its assets to the best of its ability. This may have different connotations for different organisations. The range of measures used is generally categorised as follows according to Ranchhod (2004): 

capacity utilisation



research and development productivity



employee turnover



turnover per employee



distribution levels and efficiency

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inventory levels



speed of service delivery



IT efficiency



return on investment (ROI)



product availability in different geographic locations.

Effectiveness measures vary for organisations but some broad measures are as follows: 

unit sales



market shares by unit and volume



market share segment



number of customers



customer loyalty



customer complaints



relative quality



relative value.

The non-financial measures of performance tend to measure the effectiveness rather than the efficiency of activities such as customer satisfaction, market image and awareness levels, competitive position, market share and so on. Growth based on the analysis of the market potential and business opportunities should garner success for the organisation. The degree of success of a brand also needs measuring through qualitative research, and this takes into account the effectiveness of advertising as well as the customer service and product perceptions of customers. There is a need to look at different performance measures from the point of view that the organisation has to satisfy customers' need for value balanced against shareholders' needs for their dividend and a healthy return on investment. It is also necessary to look at the organisation's situation and the ability to balance internal and external needs. Brand Equity As a brand is an intangible asset, the type of information measured for the brand will be the perceived value and its general standing within a local or global marketplace. The success of a brand gives an organisation profits and the potential for future profits, thereby building the intangible asset. The marketer needs to consider the effects of advertising and general marketing activity which creates a positive image in the mind of the consumer. It therefore makes sense for marketers to integrate the financial and non-financial measures, which will lead to greater understanding of why an organisation is able to achieve a good return on investment (Lenskold, 2002).

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Chapter 5 Research for Marketing Contents

Page

A.

Introduction The Role of Information in Decision-making

133 133

B.

The Research Process What is Research? Why Research? The Research Plan

133 134 135 136

C.

Types of Research Research Design and Research Method Desk or Secondary Research Field or Primary Research Market and Marketing Research Quantitative and Qualitative Research

137 138 138 139 139 140

D.

Sources of Information External and Internal Sources Macro-statistical and Micro-statistical Information Government Sources External Databases

141 141 142 143 144

E.

Research Methods Interviews and Discussions Observation Questionnaires Test Marketing Sampling

145 145 145 146 147 148

F.

Using External Research Agencies In-house or External? Finding, Selecting and Recruiting an Agency

148 148 149

(Continued over)

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G.

Research for Marketing

Briefing Controlling

150 151

Information Systems Management Information Systems Marketing Information Systems Content and Purpose of MkIS

151 151 153 154

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A. INTRODUCTION The Role of Information in Decision-making In the past information on customers, customer behaviour, awareness levels and attitudes was available to organisations through marketing research methods of observation and survey techniques only. It is now possible for organisations to hold complex details about their customers through computerisation and database management, and the use of marketing information systems (MkIS). The availability of information such as customers' frequency of visits to stores, days visited, range of products purchased, size of packages purchased, the consistency of purchasing specific brands etc. has changed the role and nature of marketing research. Research, these days, tends to concentrate more on attitudes and behaviour of customers, and money set aside for marketing research may now be split to include database maintenance. Thus, organisations are now looking at an integrated approach to collection, recording, analysing and interpreting information on customers, competitors and markets (Wilson, 2008). There is a need for information for those organisations that adopt the marketing concept as their philosophy and policy, since this requires that all within the organisation are driven to deliver customer satisfaction. Information is critical if the correct products, services and communications are to be provided to customers and needs to be gathered from various sources. Management decision-making effectively requires information regarding its customers, its competitors and the external environment in which it operates. It is natural that managers work in a degree of uncertainty and so the collection and interpretation of this type of information is crucial to the success of management decisions. However, having more information does not mean that the decision-making will be better. What matters is collecting the right kind of information and therefore it is important that managers decide exactly what they need to find: in other words, what are the research objectives? So it is accepted that collecting information from a number of sources will be more reliable than using a single source. The process is regarded as triangulation, so that some sources will hopefully balance out any weaknesses in others. This means that a minimum of three sources should be used to be considered a balanced research. So this is why it is recommended that information be obtained from secondary data (research already carried out) and the two methods employed in primary data collection, i.e. qualitative and quantitative research.

B. THE RESEARCH PROCESS If you think back to the CIM definition of marketing you will recall that marketing is a needsatisfying process and it is necessary to identify and anticipate the needs and wants of the customer. What better way is there of identifying the needs and wants of customers than by asking them? It would be fine on a small scale, but the nature of consumers and manufacturing industry is such that it is not possible to satisfy the specific needs of each individual customer. It is necessary to get to know what a majority of customers want and then market products which suit them. Unfortunately, life is not so easy – most customers do not seem to know what they want! This is the basis of the risk which exists in all decision-making; managers will always want to reduce the risk in every decision they take. Sometimes it is easy – any manager will know

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the basics of life, such as "don't try to sell pork to Jews or Moslems" or "if you make cars for sale in the European mainland, they have to be left-hand drive." The problem is in knowing just how customers prefer the style of a designer product, or the pack size of a grocery product, or the colour of a suite of furniture and so on. If the manager can reduce the risk by using marketing research, then he or she will be more successful in his or her marketing efforts. However, the improvement in marketing success must be real – marketing research costs money and it is essential that the extra knowledge can be used to earn more profit than the cost of the marketing research. It is clear and simple to read about in a course, but not always so easy to achieve in practice. Having said that developments in website technology have meant that marketing research can be undertaken in a more ongoing manner, and website analytics allow organisations to track customer preferences, responses to campaigns and buyer behaviour. Online surveys and questionnaires are cheaper to implement, as there are no research costs and results can be analysed automatically. The internet has also made secondary research cheaper and easier to access. For example, many government statistics and research reports are available online to download. Search engines and portals make it easier to track information on a subject area, such as a competitor.

What is Research? Consider this definition: "Research is the gathering, recording, analysing and reporting of all facts relating to the transfer and sale of goods and services, from products to consumer. It is usually based on statistical probability theory and always uses scientific methods." (Max Adler – Lectures in Market Research) The process of research describes the steps taken in the research activity: 

gathering



analysis



storage



retrieval



dissemination.

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We can represent this diagrammatically as follows: Figure 5.1: The process of research RESEARCH is the GATHERING ANALYSIS STORAGE RETRIEVAL and DISSEMINATION of information to aid decisionmaking Understanding the process of research is very important to marketing students. To illustrate the concept I sometimes describe the research process as being similar to that of a primitive fisherman using an open boat and a net to catch fish for food. He would cast his net upon the water wide enough to allow the fish to enter. Once fish had entered, he would gather in his net and look at what he had caught. He would discard or throw back any that were no use to him, but store those that he could use. If he had enough he would stop fishing; if he did not he would cast his net again and repeat the process. This would continue until such time as he had met his immediate needs, then he would stop. He would then retrieve the fish he had stored and use them for his required purpose – eating. This is exactly what happens in research – gathering in information, analysing it, storing it, discarding it, and using it. The main understanding of the research procedure must be that information is gathered and assessed – decisions are made on the basis of the assessment either to eliminate options or to proceed with further research until such time as a final choice can be made. As you can see by this model, research is a systematic process and is one of the most common and often repeated activities to be found in the marketing discipline. There are very good reasons for this.

Why Research? If we accept that planning is a necessary activity for marketing effectiveness, it follows that we need to be as certain as we can of any decisions that we make. This certainty will only be present if we are confident in what we are doing. Remember that: 

confidence comes from knowledge



knowledge comes from investigating



investigating means research.

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There could be thousands of answers to the question as to why research should be undertaken – for example to: 

find out costs involved in advertising



find out what customers want to buy



determine which distribution methods are more efficient



analyse what the competition are doing.

The reasons shown here, and many more, could all be described as very valid reasons for researching. However, they are primarily "research objectives" in that they actually outline the task in hand. They highlight a problem which needs addressing and a proposal is then made to carry out research as a component of some form of assessment. The main reasons that lead to research being carried out are to: 

reduce risks



help in planning and forecasting results



aid "mix decisions"



improve decision-making capabilities.

Thus, research is necessary in marketing if the organisation is to reduce risks and carry out its plans successfully and with minimum effort. To put it another way: research is a management tool which, in tandem with other available management techniques, can help a much more effective outcome to be achieved.

The Research Plan Do not confuse the research process with the research plan. The process and the plan are related – but they are not the same thing! The benefits of research can be improved in two ways: by designing it properly, and by conducting it at the right time. This means planning the process. A plan for research is not really any different to any other plan. It should include all the normal elements of objective, strategies and programmes and, above all, it should be logical and structured. The key elements are: 

outline the problem – it could be investigation into new markets, research into buying patterns; trends in market size, etc.



define the objectives – obviously based on what the problem is



determine the target to be researched – crucial in a research plan



decide HOW the research is to be carried out – questionnaires, panels, etc.

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decide WHO is to carry out the research – in-house or external agency

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determine the timescales

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set or agree the budget – this may be done initially in order to help in making other decisions

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implement the plan – set everything in motion – this is where the PROCESS comes into being

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monitor and control – constant checking to make sure that all activities are being done and time targets, budgets, etc. are still on course



reach conclusions – report; action.

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Just as in every other plan, there may be amendments made because of changes which take place. A plan always needs to be flexible enough to cope with adaptations to meet the current situation. Having said that, if the planning activity is carried out correctly environmental conditions will have been anticipated and amendments should be minor. Some respected authorities reckon the acronym CATS should be applied to every proposal for marketing research and should underlie the research plan. The initials stand for: Cost 

Secondary information already exists and is less expensive to use than new research.



Some secondary information can be bought in standard, regular forms which can show trends.



The cost should not exceed expected benefits and benefits should preferably be much higher than costs.

Accuracy 

How accurate will the information you collect be?



How accurate do you want it to be?



Greater accuracy costs more money – do you really need it?



How good are the researchers and their methods?

Time 

Research takes time – can you wait?



Whilst you are waiting, could a competitor be taking your market?



Research can reveal your plans, or at least your intentions, so can you afford that?



Will your decision be any better for being delayed?



Will the research have to be repeated at intervals so as to keep up with changing trends – and if so, does the cost/benefit analysis justify the expense involved?

Security 

Some marketing decisions are best kept secret; marketing research may alert your competitors and may even encourage customers to hold back orders.



New products particularly may suffer from being revealed too early.



Even your own salespeople may slacken off if they suspect that a new product is coming soon.

C. TYPES OF RESEARCH The costs of research can be very high – even if the organisation uses its own staff to carry out the entire process – so it must be done in a structured and logical way, with clear objectives and an appropriate strategy related to those objectives. There are a number of approaches to consider in this.

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Research Design and Research Method There are three main categories of research that can be undertaken, according to Alan Wilson (2008): 

Exploratory Research This type of research is carried out to look at initial ideas or insights and to provide direction for any further research required. It is a preliminary investigation of a problem or opportunity that will not involve a large amount of cost and time. There may be very little other research to assist in knowledge, and is useful for new product research and ascertaining the priorities required for questioning and learning about an issue.



Descriptive Research This type of research covers studies that are of a qualitative nature and require the researcher to describe results rather than provide statistics as would be the case in quantitative research. This type of information will be collected in interviews and focus groups. For example, researching customer attitudes towards an organisation's communication messages and media, or examining the extent to which customers are satisfied with the service they receive.



Causal Research This research compares one variable against another variable and thus provides evidence regarding the relationship of one variable against another. It is possible to incorporate both causal research and descriptive research. For example, the hypothesis, or problem to be researched, may be the effect of price increases on consumer perception of the brand. This will involve both quantitative and qualitative research and therefore some of the evidence will be descriptive in design and content.

Desk or Secondary Research Desk research is carried out by using information which has already been published by another party, i.e. it is secondary. The information can be obtained from: 

internal information available in-house (past enquiries/sales records, etc.)



external information available from sources which have reasons to publish information (market surveys, annual reports, etc.).

Desk research is so called because it can literally be carried out from a desk in an office. Using published sources – books, journals, articles, statistical information services, the internet, etc. – researchers can obtain a vast amount of material which can help in making initial assessments of a market. Remember though, information collected in this way is secondary – i.e. it is not new, but second-hand. Further, such information will have originally been prepared, in its published form, for someone other than the organisation wishing to use it. This can present problems: 

It may be out of date.

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It may be irrelevant to the needs of the organisation.

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It may not be accurate (e.g. if collected for tax purposes).

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It may be presented on a different statistical basis to that used in the home country, which could make nonsense of the information.

Desk research can, though, help in eliminating unsuitable markets or segments, which can mean reduced costs and certainly reduced risk factors.

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It is only when researchers are satisfied with the results of their desk research that an organisation should consider moving on to more specific field research. Insufficient or incorrect information can lead to unnecessary costs and expenditure as this may mean that an entirely unsuitable market/sector was not eliminated at the appropriate time.

Field or Primary Research Field research is new (primary) research done by (or for) the organisation itself. It relates directly to the problem in hand and should never be undertaken until desk research has been completed satisfactorily. Field research can be carried out by an assortment of means – including visits, questionnaires, and surveys – all of which will involve some form of sampling. The size of sample researched will depend on the nature of the product and market being investigated, but the sample must always represent the whole target market. If it does not, it will give an inaccurate picture of the overall outcomes which can be expected. Field research should be carried out by people who have good knowledge and experience of both the product and the market itself. Failing this, they should at least be experienced in undertaking research. Field researchers should be capable of producing unbiased reports and recommendations. A major problem to overcome in field research is personal bias on the part of a researcher, or the "self-reference criterion", as it is sometimes called. This simply means that people hold such strong opinions that they superimpose their own ideas on what they hear or see – thus negating the results of the research activity. This is more common in international research in that, very often, researchers think that methods used in their home market will work in foreign markets and they do not "hear" what is being said to them by the people being sampled. Apart from aspects of interviewer bias which may occur, field research has two major problems – money and time: 

Field research can be expensive in that external agencies need to be engaged to conduct the research or, if personnel from the organisation are being used, time will be lost while researchers are away from their normal duties.



As field research is based on people finding out about people – their likes, dislikes, etc. – it can inevitably mean delays. People being researched may not be available; people undertaking research may be ill or tied up with too many projects; people who are responsible for analysis may have too many projects, etc. When planning field research, potential delays should be considered and, where possible, some time allowed accordingly.

Market and Marketing Research It is easy to get "market" and "marketing" research confused. However, the difference between the two terms is important to a professional marketing manager, so let us clarify the terms now, so there will be no misunderstanding in the future: 

Market research is an investigation into aspects of the market – the size, trends, competition, legislation, barriers to entry, etc. Market research assists in the audit stages of marketing planning. It is a general view of the market and is used as a basis for decision-making. It is really concerned with the comparative analysis of markets and market sectors.

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Marketing research means the investigations into how to reach, or serve, the customer and/or the end-user in the best way. Marketing research is concerned with the marketing mix elements – product, price, place and promotion and, in most circumstances, will include the soft elements of people, physical evidence and

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processes. This type of research is undertaken by an organisation to make sure that it is offering the best possible mix to its target audience. The confusion between the two terms may well be because of the fact that, when researching markets, the researcher will take into account such aspects as the level of pricing which is being charged in the market, the type of distribution which is preferred by the current market, the nature of the promotional activity undertaken by the competition. The researchers must do this if they are to form reasoned opinions. They then move on and carry out their own individual research to see which is the most appropriate mix to offer to the chosen segment and whether the organisation has the resources to cope with the ideal mix. If the organisation does not have the resources, further research may be carried out to see where costs can be reduced.

Quantitative and Qualitative Research "Quantitative" comes from quantity – meaning numbers. Results can be in the form of numbers or percentages. This type of research is used to assess trends, potential and actual growth or decline, etc. Data is relatively easy to collect and analyse and because of this, can be done by people who are not completely familiar with the product or market. However, researchers do need to understand what they are doing if they are to be effective. The internet and developments in web analytics software are able to provide marketers with continuous quantitative data, which they can use to analyse their customers, markets and marketing performance. As mentioned in Chapter 2, gathering, maintaining and storing this data is known as data warehousing and the primary purpose of this is to allow marketers access to quantitative information to support decision-making. For example, marketers are able to gather information on the number of visits to a website, a web page, or response to a campaign. With the use of data fusion techniques (using two sets of data to analyse trends) marketers are able to build a picture of which customers are responding to which campaigns etc. Qualitative research is all about ideas and opinions, or likes and dislikes. Because opinions are involved it requires greater skills on the part of the interviewer and the analyst. The results from qualitative research are often extremely difficult to analyse in a systematic way. For this reason it is common to construct questions which can be answered using some form of scale – such as the Likert scale or a semantic differential scale. This allows qualitative responses to be quantified. For example, questions are posed and the interviewee is asked to give the opinion which is nearest to their own – ranging from "very true" through a possible of five minimum options to "very untrue" (as shown by Figure 5.2). Figure 5.2: Semantic differential scale Strongly agree

Agree

Neither Disagree Strongly agree nor disagree disagree

The service is good. The showroom is spacious. The literature is wellproduced. The product is good value for money.

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Although I have shown five possible responses in Figure 5.2, it is better if there is an even number as this forces the respondent to make a decision. When there are five choices it is easy for respondents to choose the mid-option and opt out of giving any real opinions, which can produce a very bland result for the investigator. Of course, many companies use five boxes as they are happy to learn that people have no strong opinions either way as this means that the service offered is "acceptable". Brave researchers are not averse to receiving adverse comments!

D. SOURCES OF INFORMATION The information we are concerned with here is that which forms the basis of desk research. As we noted earlier, this will be published information and will come from a wide variety of sources and in a wide variety of forms. It will need careful sifting and analysis to establish its relevance to the specific research being undertaken. (In respect of field research, the source of information is the market itself – or more specifically, consumers themselves, whether they are existing customers, potential customers, individuals or organisations.)

External and Internal Sources One method of characterising the sources of published, documentary information is in respect of whether they are external or internal to the company. External sources include: 

government departments

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employers' federations

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trade associations

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private firms

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professional institutes

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public and private research agencies

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newspapers

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magazines

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TV and radio

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banks

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embassies

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chambers of commerce.

Internal sources include: 

past history of customer buying

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sales results

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return on investment

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money spent on promotional campaigns

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details of enquiries received from unserved markets

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production capabilities

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personnel details, etc.

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website – databases.

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Two external sources are worthy of additional comment here since they are rarely considered as specific sources in the research process. 

Suppliers Information from suppliers may be less formalised than the published documents or, indeed, a company's own internal records, but small items of information about industry trends can come out of discussions between sales representatives and buyers. It depends, of course, on the buyers understanding the need for information and their adoption of the marketing concept. It is often in the interests of suppliers to help keep their customers profitable and exchanging useful information may be to the advantage of both sides. The people involved must be aware, of course, of the necessity to comply with the professional codes of conduct and avoid giving information about any specific company.

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Competitors They may seem to be an unlikely source of information, but if you study the activities of competitors you might be able to deduce what their marketing policies are and how they will affect your business. I mentioned a conveyor belt manufacturer earlier, part of whose demise was due to the fact that their sales people only ever visited the head office of their largest customer. The sales manager thought his team would be wasting their time talking to people who did not have authority to make decisions. (He had read that in textbooks on selling.) However, the principal competitor ensured that his sales engineers visited every maintenance engineer involved with conveyor belting, because he knew the engineers were "influencers" contributing to the choice of supplier. Competition was so severe that prices were always very similar, so the fact that people asked for a specific brand ensured the competitor got most of the business. Watching job advertisements put out by competitors may give some ideas on how well they are managing to keep their sales staff; and the odd comment from customers should be reported by your salespeople. Several small items of information which look insignificant individually can add up to a trend when put together in a marketing information system.

Macro-statistical and Micro-statistical Information This is an alternative way of looking at the information needed for desk research. (a)

Macro-statistical Information Macro-statistical Information is the data produced by external organisations which relates to a country or a market as a whole. All governments produce this type of information, as well as many other public authorities and organisations covering whole industrial sectors (such as employer federations, professional bodies, etc.). Macro-statistics can help marketing organisations to: 

Assess the market share trends.

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Monitor the size/growth of markets.

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Count the numbers of potential customers.

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See who the main competitors are.

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See which countries are dealing with which.

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Monitor regional patterns.

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Micro-statistical Information Micro-statistical Information is data which is specific to the organisation. This type of data is compiled by monitoring the activities of the business itself, e.g. production, sales, labour supply and return on investment. In effect it is the result of the internal records system of the company. Every company has to keep copies of orders, invoices and payments for normal management purposes. If these records can be analysed in detail, they can provide a lot of useful information about which customers buy which products and when. With small additional inputs the analysis may be made more useful; if the system is computerised it will be fairly easy to relate details to other information collected from different sources. Databases which store raw data in an organised format and data mining (the term used to describe the analysis of this data) have made the storage, retrieval and analysis of electronic data more efficient and timely. Using databases and data mining with website data means that organisations have accurate, up-to-date, quantitative information available to them on a daily basis. It is important for records to be kept in the same way for long periods for them to be useful. Consistency is very important in the analysis of information. Micro-statistics can help organisations to: 

Plan for the future.

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Adapt their activities to meet changing market conditions.

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Attack competitors who are missing opportunities.

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Defend market share in the face of increased competitive activity.

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Grow in market share or size as and when conditions dictate.

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Shrink activities to defend themselves.

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Consolidate forces before renewed action.

It is arguable as to which type of information is most useful to a marketing planner, but you should remember that information is the lifeblood of the planning system and, as such, should be kept flowing into the company. To keep it flowing, research is needed.

Government Sources Most governments collect information about consumers and industries, and then publish summaries in a standard format at intervals. Clearly, the statistical offices must avoid publishing any information which could reveal the sales of any specific company, so there is often quite a lot of processing and amalgamation of categories. Even so, regular analysis of appropriate statistics will enable the detection of trends and maybe the identification of the causes of variations in company performance. In Britain, most government statistics are available from the Office for National Statistics (online) or on subscription through TSO (The Stationery Office) and include: 

Business Monitors, which show imports, exports, production and sales of specific industry groups, usually on a quarterly basis. Some production monitors are divided into product groups which can be quite specific and the Service and Distribution Series deals with the activities of shops, catering establishments and finance houses.



Census of Population, which is carried out every 10 years and gives a comprehensive analysis of the population of Britain. Every individual is required by law to provide quite detailed information about their status on a specific date. There are

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provisions for personal secrecy for people who live in lodgings and computerisation has speeded up the analysis, so some information can be available within two or three years of the census date. A ten per cent sample census is also taken halfway between the main censuses. The statistics are used extensively by organisations attempting to evaluate potential markets. Information is analysed for over 100,000 enumeration districts, each one having about 150 households, so you can see that the information collected is quite detailed. 

Employment Gazette, which publishes monthly statistics of people working, by industry groups; also movements in wages, hours of work and retail prices.

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Economic Trends, showing activity in terms of prices or volumes of imports and exports, retail sales, new car registrations, savings and borrowings and a lot of other information about the British market.

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Monthly Digest of Statistics, probably the most useful starting point for many marketing researchers because the latest information is published on a wide range of items.

External Databases There are many organisations which collect and interpret information regularly and provide a variety of statistical and other data to subscribers. Many industries have a trade association which may collect statistics from members and publish extracts. There are also many trade directories published which can give useful information. You will find that most large libraries have a "directory of directories"; many of the more important directories will be on the shelves. There are also several regular publications which can be useful, such as: 

Kompass Register, which is published annually for several countries and usually shows companies of any importance, listed by area, industry, turnover and employees. Names of directors are usually given, along with any associations with other companies or groups. Some businesses also take advertising space to add more information.



Key British Enterprises, published annually, shows ownership, directors, turnover and number of employees for about 20,000 companies, arranged alphabetically. There are also indexes based on geographical location and on industry.

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Times 1000, gives details of the top 1000 companies in Britain and some other information.

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Who Owns Whom shows the ultimate owners of companies in groups. Sometimes group affiliations are difficult to trace and if this publication is kept up-to-date by the librarian it is a big help.

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Extel Cards provide brief details of annual reports and statements.

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Research Index, published every two weeks, shows what has been published in a number of major newspapers and journals about specific topics and selected companies.

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Marketing Surveys Index, a publication supported by CIM, shows references to various market surveys published by a wide range of companies.

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E. RESEARCH METHODS Once you have a clear idea of the nature of the information you want to collect from field research, you can decide how to obtain it economically and at the right time. There are a variety of methods available, and the main ones are described next.

Interviews and Discussions Interviews – generally with one individual at a time – can be structured or informal. 

Structured interviews are easy to analyse as there will be a definite pattern to the questions put to respondents and to the type of answers received – usually based around the use of standard questionnaires.



Informal interviews are much more difficult to handle and analyse and require highly skilled interviewers.

Group discussions – often referred to as "focus groups" – are conducted with small groups of people who have been chosen as a representative sample of the target population. They can be "led" by an observer or be more formal in that the group undergoes tests at the same time. Often groups are kept together and re-interviewed several times over a period to monitor changes in attitudes and opinions. Such matters as new product research, for instance, often involve discussion of future developments of a company's product range. It is necessary for the researcher to have a good product and industry knowledge, so as to be able to recognise useful information when it appears in conversation. It is also helpful to be able to ask questions spontaneously and give some information to the respondent, so discussion does not get down to a newspaper reporter-style question and answer session.

Observation Watching people can be an effective means of collecting information – not the "private eye" type of watching you may see on television, but more likely the automatic watching provided by the machine which counts the number of people who enter and leave a shop. This is simply a beam of light broken by the passage of feet, the break in the ray of light operating a counter which can then be used to ascertain shopping flows, movements and behaviours. Observation may also be used to examine behaviour in respect of, say, the attractiveness of colour options or to monitor patterns of interaction – for example, the way a child plays with a toy, or the impact of different physical surroundings on customers in a shop. You may see occasionally a person with a hand-operated counter, clicking as they record some sort of activity, but it is not a frequent happening these days, often due the cost and time involved. Two particular forms of observational techniques are hall testing and laboratory testing. 

Hall Tests Hall tests are where members of the public are invited to take part in a product test, in a location large enough to handle the number of people to be tested. For example, an airline might use this method to test out new seating in an aeroplane. The company would hire a hall and have a mock-up of a plane with seats in it. They would then ask people to undertake certain activities – put the seat back into reclining position, switch on the seat video, reach for the bell to call cabin staff, etc. They would also have cabin staff serve meals and drinks to the "passengers". These activities would allow the company to assess such factors as passenger comfort and convenience, safety issues, ease of access for cabin staff and so on – all of which are vital to ensure safe and economical use of limited space.

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Respondents can be recruited by invitation or by simply asking them in off the street. Usually for this kind of test there is an incentive offered – perhaps a small fee, free meal or something of that nature. The point of a hall test is that all respondents are tested at the same time and results are recorded immediately. Not all tests touch the entire target population at the same time. 

Laboratory Tests Laboratory tests are where representative members of the target audience are asked to look at, for example, certain adverts, products, etc. Instruments are available which can be used for measuring the reactions of vision to colour, cameras which will record the speed with which the eye is attracted to certain aspects of an item, and instruments which will measure the changes in activity of the sweat glands (psycho-galvanometer) etc. The problem with this type of test is that it is held in artificial conditions and may not be accurate in reflecting the individual's responses under normal conditions.

Questionnaires Questionnaires are the most frequently used research method, mainly due to their flexibility – they can be as simple or as complex as required, and may be conducted in a variety of ways. They also ensure standardisation and consistency in both the questions asked and the responses. There are a number of general principles about the use of questionnaires – they should: 

be well planned, with strict objectives



be based on obtaining the required results

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not be too difficult for the respondents – if they are complex they may deter the respondent from answering fully

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avoid leading questions

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contain unambiguous questions

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follow a logical sequence



include some control questions.

If you are planning to use questionnaires, it makes good sense to get the details checked before the formal process starts. There are two ways to do this: either send questionnaires to a selected test sample and wait for replies or visit them (by appointment) and watch them fill in the questionnaires. This can be a very useful activity – if you can stand the comments on your masterpiece! There are various ways of using questionnaires. They may be used as the basis of individual interviews – for example, the surveys conducted by stopping people in the street – but we tend to think of the main types of questionnaire as being those conducted by post or by the telephone. 

Postal Surveys These are questionnaires sent to representatives of the market in order to clarify items being researched. Although these are relatively inexpensive to issue, there can be a great deal of wastage unless some form of incentive is offered to the respondents. Of course, once an incentive is offered it can cause bias to the results in that respondents may answer in a manner which they think will please the researcher. The one big advantage of the postal questionnaire is that you can reach everyone in the postal system, usually at the same predictable cost. If you enclose a reply-paid envelope you can raise the response rate considerably. Since it is possible to do this

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for many overseas countries now, you can operate almost worldwide. However, you do have to be careful with translations – when my boss decided to send a questionnaire to companies in Belgium and France he thought the French questionnaires would be good enough for the French-speaking part of Belgium, but our branch manager in Brussels insisted on altering some of the phrases. There were many more examples of that type, too. 

Telephone Surveys Modern telephone systems connect so quickly that it is tempting to use the telephone for questionnaires and there are some advantages in doing so. The main advantage is speed and it is possible to gather a lot of opinions in a short time. It is essential to keep the questionnaire short and simple to ensure the respondent is likely to be able to give an opinion without searching through records. On a specific survey I collected over 200 useful answers in 2 days of intense telephoning, from an office with no windows and no other distractions except a clock and a classified telephone directory. A dedicated, well-trained telephone interviewer could do even better and might well enter the responses direct into a computer database. There is a danger in such intensity – one of the respondents asked "Is that a machine or are you real?" and I realised my presentation had become rather mechanical and boring. It was time to stop for a break. It is also helpful if the interviewer tries to avoid giving the impression that they are simply working through a predetermined questionnaire. If telephone interviewing is not handled correctly it can become a nuisance to the person being interviewed, and this will result in answers being given which may be untrue (or given to get it over with) and the whole purpose of the exercise will be lost. It is sometimes useful to follow up a postal questionnaire with a phone call to clarify some point or to ask for more information, or to provide some reassurance to the respondent. With itemised telephone bills, it is now much easier to check on the costs involved in conducting a telephone survey.

The response rate from questionnaires may be increased if the respondent can be guaranteed confidentiality of any replies, which must be assured if the claim is made. There can be difficulties when the research is done by in-house staff, so the researcher must be sure of management support on this delicate matter. Some salesmen find it very difficult to accept they should not be given names and addresses of respondents. However, the information provided should be used only in such a way that it cannot be traced to the source. Professional researchers would automatically take care of the matter.

Test Marketing Test marketing is a much more extensive type of research in which the product is launched in a selected area; thus the product and marketing methods can be tried out in real life situations. It is then possible to judge whether or not a substantial amount of money and effort should be committed to a national launch. If the test marketing programme shows serious faults in the product, the costs of a full launch will be avoided. Test marketing requires very detailed preparation and analysis of results. There are lots of opportunities for false results to be received, indicating a successful product which may not turn out to be profitable. Also, the test must go on for an appropriate period – long enough for consumers to buy a second time if they like the product. That gives your competitors a chance to see what your ideas are and perhaps launch a similar product without waiting to test their version.

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Sampling All of the previous methods of gathering information are based on some form of sampling. This involves selecting part of an entire group (a population) which is representative of the whole group, since it is easier to take information from a small number of people than from an entire target market. Providing the sample is truly representative, the results gained will provide a relatively accurate prediction of the way the entire target market will react in any given situation. There are several types of "samples": 

random – any one item/person has the same chance of being included

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purposive – based on the choice of the selector (e.g. 18–25 year olds)

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systematic – definite system used (e.g. every 10th house in street)

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stratified – sample divided into groups (age, etc.) and then randomly selected

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quota – interviewer given basis of selection (50 per cent male/50 per cent female)

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cluster/area – breaking area into subdivisions and then random sampling

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multistage – e.g. country, then county, then town, district, street

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panels – groups who are interviewed at regular intervals on various topics.

F. USING EXTERNAL RESEARCH AGENCIES To some extent marketing research is a task which can be carried out by almost anyone, but it is really a specialised activity which needs careful planning and control if it is to achieve the outlined objectives. The basic question for any organisation wishing to undertake research is: "Who is to do the work involved?" It can be done in-house or by an external agency which may be specialised in certain areas of skill or knowledge depending on the prevailing circumstances.

In-house or External? Decisions on who is to carry out research can be difficult to make but, in actual fact, it is simply a question of asking questions such as: 

What do I want done?



Can I do it myself?



Can someone else do it better, quicker or cheaper?

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Can I afford to pay them?

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Will they follow my instructions?

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Will they cooperate with me on reporting and measuring results?

By answering these questions a manager will soon be in a position to decide on who should carry out the research. Aspects which need to be taken into account are: 

the degree of security needed for the research project



the level of technical knowledge needed by researchers

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the experience the agency has with the type of product or target audience

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whether the agency is already working for the competition

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the reputation and stability of the agency operations

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the available resources in-house

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the time available.

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We can summarise the advantages and disadvantages of each approach as follows. In-house Research Advantages

Disadvantages

Knowledge of personnel

Time away from normal duties

Tighter security

Possible biased views

Instant access to information

Lack of research skills

Can be less expensive

Agency Research Advantages

Disadvantages

Research skills

Possible lack of control

Access to target sector(s)

Lack of knowledge of product

Brings objective viewpoint

Agency dynamics may cause bias

May be quicker

Cost

Finding, Selecting and Recruiting an Agency The selection of any agency follows a similar pattern: 

Define Organisational Needs This is quite simply a matter of drawing up a list of your actual requirements or, in other words, outlining criteria for agency behaviour. It may be that you require an agency to be able to work in a very short timescale, or that you need a particular type of report issued, etc. Defining your own needs means that you are more certain of getting exactly what you want from your agent.



Desk Research You need to investigate which agencies are available. This information can be obtained from magazines, trade directories, professional associations, etc. but it may be available in-house if your company has used agencies before. You should never overlook the information already held in a company – it can save a great deal of time and effort.



Compile a Short List Compile a short list of possible agencies that meet your requirements.

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Select the Best Agency/Agencies Depending on the power of the client, a number of agencies may be asked to bid or "pitch" for an account. This means that they give a brief outline of how they would

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approach the task and show how the results will meet the requirements of the investigating company. The pitching will enable the client to assess how effective the agency will be and to analyse the costs involved, etc. Pitching is more common when dealing with advertising agencies but if the research task is complex, or very big, several research agencies may be asked to give quotations before a final choice is made. The selection criteria are as we outlined earlier – time, confidentiality, experience, etc. Recruitment of agencies is exactly the same as any other form of recruitment – you find the best agency for the job and then hire them. However this is not an internal relationship and, as such, will require careful handling. The main way of ensuring good agency relationships and that satisfactory work is completed is through the use of a research brief which, in most cases, is actually issued before a final agreement is made between a client and an agent.

Briefing The research brief is basically the means by which the client tells the agency what they want. The process is logical but managers need to be quite clear on exactly what needs to take place: 

Lines of communication are defined between the client and the agency.

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The client gives a formal briefing to the agency in writing.

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The client outlines the time/money constraints to the agency.

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The agency/client agrees on special requirements.

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Agreement is made on how/when the agency will report back to the client.

The research brief is a critical document as it sets the parameters of the relationship between the client and the agency. Many client/agency relationships have been soured because of a poor or inadequate brief; even worse, if a brief is inadequate in some respect it can lead to work not being done correctly and, in some cases, to expensive litigation when client or agency sue one another for costs incurred. If we consider the brief as being the foundation of an agreement we can see that it must contain precise and clear information on exactly what is required as part of that agreement. A typical example would contain: 

names of the client/agency

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brief background of the client company/product, etc.

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the reasons for the research being undertaken, e.g. finding new markets in an overseas territory/identifying how many buyers are likely to take up a new product

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details of the target population (audience to be researched)

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the agreed methods and techniques to be used

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the timescales involved, with start and finish dates

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the manner in which information is to be reported



the timing of reports



the member of staff (client) who is to receive the reports



the financial details such as cost and penalty payments.

We must not forget that an agency has the right to reject work if the task is not suited to their resources or is not a viable proposition for them. Agencies are businesses which must also make money to survive. Occasionally it may be necessary for a client to adapt requirements in order to make the work more acceptable to an agency but, in a competitive market, it is more likely that it would be the agency which would make adaptations.

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Controlling Assuming that an agency accepts a brief and is engaged for the project, the work should begin in the timescales agreed, with relevant personnel carrying out their duties as and when required. However, it is the client who holds the responsibility for seeing that everything is going according to plan. Although we use the word "control" in this context we actually mean "monitor and measure". Any client who is lax enough to allow agencies to work without regular reporting or supervision deserves to have something go wrong. If the brief has been done correctly there will be clear parameters for the agency to work within and it is simply a matter of the client allocating responsibility to someone in their organisation to keep an eye on things. Control can be achieved by: 

making sure that contracts are issued and understood



insisting on regular reports



setting clear objectives and parameters



checking that agreed schedules are being met



checking that budgets are being adhered to



checking that required results are being achieved.

Dealing with an agency can become a nightmare if control is not exercised. Spiralling costs, added to a "loose control contract", have caused many headaches for managers who often find that when something is going wrong, a research project is too far down the road to change agencies. This is one area that must be handled with care by any manager – marketing or otherwise.

G. INFORMATION SYSTEMS As we have seen the process of research is the gathering and storage of information for analysis and decision-making. Depending on the nature of the research task, there may be vast amounts of information gathered which need to be retained until such time as it can be analysed or translated into a suitable format for analysis. Storage needs to be secure so that valuable data is not lost in the system or destroyed accidentally. Such storage systems are in common use and are known as information systems.

Management Information Systems In an organisational context, information which will aid decision-making will be placed, by some process, somewhere which caters for: 

storage of information



interpretation of information



transforming of information into intelligence



retrieval of intelligence (and information)



transmission of relevant intelligence in an appropriate format.

The "place" where the information is put is called the management information system (MIS). The system may be manual or computerised, according to the size of the business and the resources available. It is often the case that when people talk about a management information system they are thinking in terms of computerised systems. This is because of the number of very large and influential firms which have access to networked computers – many on a worldwide basis.

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However, very small companies may not have the benefit of computer technology and the skills to utilise it, and there are times when an MIS can consist of pieces of paper stored in a filing cabinet. So management information systems are not exclusive to large companies. There are many individuals who work at their own trade (jobbing carpenters, plumbers, etc.) who would say that they do not have a management information system, but they do! With any information system information is fed into it, transformed into a format that makes sense, and then stored. It can stay stored for short periods of time, or for relatively long periods of time, depending on the nature of the information and the purpose it serves. Self-employed carpenters or plumbers are constantly gathering information on their own particular markets and potential customers, etc. They may keep this information in their heads, but the information will be recalled as and when appropriate. The principle also applies to you. You take in information on numerous things. At various times, information will be given to you that you do not understand and you set your brain to work and think about it. Eventually you come to terms with it. You then convert the original information into a format which you can understand and you retain it in your memory. Some information you will only need for a very short time and you will then forget it, but some information you will retain in your long-term memory until it might be useful to you. When the occasion comes that you need that information, you delve into your memory to retrieve it. Your brain is your own personal information system. You may have further sources of information – a diary, a Filofax, an address book, etc. Any way in which you organise information that is useful to you is part of your "system". Exactly the same principle is used in terms of business organisations but, of course, the systems used are usually more complex than a personal system. If you accept this, you could argue that a management information system is always present – irrespective of the size or complexity of the organisation. The effectiveness or otherwise of the system lies in the planning and organisation which is undertaken to make sure that the system meets the required standard. Information which might be held in an overall management information system includes: 

financial records



details of tax and dividend payments



personnel details



purchasing costs



production schedules, etc.

For an organisation, the overall management information system should cover every section. The system needs to be designed so that it is multipurpose and of use to everyone in the organisation. If one section of the organisation is left out the system is failing to cope. Each individual section of the organisation will have different information requirements but ultimately, all of the systems need to be interlinked in some way, so that information can be used to best effect. For example, the production department will have its own information requirements but there may be others in the organisation who will need access to it, e.g. the person who is checking an order for a customer may need to see which batch of a product is currently completed or in progress. The marketing information system (MkIS) will have information relating specifically to the marketing effort but other people in the organisation may at times need access to some of

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that information. Hence the necessity for the interlinking of systems across the whole spectrum of the company. If the systems do not link in together, there is a possibility that the corporate objectives will be confused and diluted and, consequently, will not be achieved.

Marketing Information Systems The MkIS is a subsection of the overall management information system. It will contain information which is pertinent to the marketing effort but, as we know, it must fit into the overall management information system. In a similar fashion to the way that the overall management information system is made up of a number of smaller information systems, so the marketing information system itself is said to consist of subsystems. The subsystems are: 

internal records system – the day-to-day recording of marketing activities



marketing intelligence system – the sources and methods used to collect information



marketing research system – the systematic and planned gathering of information



marketing support or analysis systems – the statistical systems used to analyse the information.

Collectively these subsystems combine to produce an effective method of gathering and handling the necessary information for the marketing effort (see Figure 5.3). Figure 5.3: Marketing information system Marketing Information System Developing Information Marketing Managers

Assessing information needs

Internal records

Marketing intelligence

Planning Control

Distributing information

Marketing decision support analysis

Competitors Marketing research

Marketing Decisions and Communications

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Target markets Marketing channels

Analysis Implementing

Marketing Environment

Publics Macroenvironmental forces

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Content and Purpose of MkIS It has been said that managers are only as good as: 

the information they receive



how well they interpret that information



how well they act upon that information.

This may or may not be a truly accurate statement, but we have to accept that information gained does help make life easier. Thus, the purpose of the MkIS will be to make available any information which will help in the marketing effort. So, by providing: 

the right information



to the right people



at the right time



in the right format



from the best source



at an acceptable cost

a marketing information system should: 

reduce uncertainties in adopting certain courses of action



improve decisions on which course of action to pursue



help in setting standards and measuring performance and



help managers to fulfil their responsibilities to the organisation.

Having already identified the numerous factors which are studied during a marketing audit it seems inappropriate to repeat exhaustive lists of the type of information which will be held in a marketing information system. However, do remember that the marketing information system will include details of: 

customers



competitors



market share



market conditions and trends



the general environment



marketing mix elements (all seven).

Information gathered and held in the system can be used for a wide variety of purposes: 

customer analysis



forward purchasing



profit analysis



planning and decision-making



sales force control



sales forecasting



competitor analysis



improved data retrieval

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cost savings



preparing product launches.

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The benefits are the same as those to be gained from planning of any kind, e.g. reduced risk, cost savings, better decision-making, improved performance and commitment. Each and every one of the previous examples of how an information system can be used is important in its own right. The uses for information actually bring us to the last stage in handling data from research: the dissemination of information, which is simply the circulation of information among those who need it. Throughout the organisation there will be multiple uses for any piece of information which is received, whether it originates from internal or external sources. It is the responsibility of those who use the marketing information system (and the management information system) to see that information is available as and when required by the people who need it. Hence the necessity to design user-friendly systems which meet the needs of several functions. If we take examples of two pieces of information, one internal and one external, we can see how information can be of different use to different functions. Information

Used by

For

Internal source Orders received

Marketing

Control and checking

Finance

Cash-flow planning

Purchasing

Forward planning

Production

Scheduling

Despatch

Storage and logistics

Marketing

Changes in promotion

Finance

Cost in plant changes

Purchasing

Sourcing new supplies

Production

Changed processes

Despatch

New handling procedures

External source New legislation

You can see from this that any single item of information can have repercussions throughout the company: because of this it is important that information does indeed get to the right people, at the right time, and in the right format. The internet has made a major contribution to the development of marketing information systems, due to the availability of data from analysis of website usage and also from the ability to access information more cheaply and easily than before. Taking the examples given before, information about orders received is available continuously to marketers, they can track the number of online orders, the customer profile, the time of purchase, and the decision-making process by tracing the customer's route through the website etc. They can also easily access information on new legislation by visiting government websites or news channels, so the information needed for the marketing information system is easier to gather, cheaper and more timely.

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Chapter 6 Understanding Consumers and Consumer Behaviour Contents

Page

A.

The Buying Process A Rational Decision-making Model Who Buys? Types of Purchasing

158 158 161 162

B.

Influences on Individual Buying Behaviour Cultural Social Personal Psychological Personality and Environmental Influences

164 165 166 166 166 167

C.

Classifications of Consumers Socio-economic Groupings (Class) The Family Life Cycle Sagacity Geographic/Residential Groups Life-style Groupings

167 167 168 169 170 170

D.

The Social Psychology of Consumer Behaviour An Initial Model Fulfilment of Needs The Influence of Groups Cognitive Dissonance Decision-making Sets "Hierarchy of Effects" Theories

172 173 173 178 182 185 186

E.

Organisational Purchasing Organisational versus Consumer Buying Types of Industrial Purchases Influences on Organisational Buying Segmentation and Targeting in Business-to-Business Markets

187 188 189 191 193

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Understanding Consumers and Consumer Behaviour

A. THE BUYING PROCESS The buying process is not just "the purchase". The process covers all the stages that a buyer goes through when making a purchase. As marketers we need to understand the process fully so that we can help the buyer through every stage. If we can do this, we are more likely to get a successful sale and the buyer is more likely to be satisfied at the eventual outcome.

A Rational Decision-making Model The process itself may involve the following stages: 

A need is felt which creates a problem to be solved.



A solution is sought for that problem.



Alternative solutions are analysed and assessed.



A decision is made as to which is the best solution to the problem.



The decision is implemented.



A review is made of the decision.

At any stage it may be necessary to go back to a previous stage and review earlier thinking. This is known as a feedback loop. This basic process is shown as a very simple model in Figure 6.1. Figure 6.1: The rational decision-making model Definition of problem

Setting objectives

Identification of alternative courses of action

Evaluation of alternatives

Selection of appropriate alternative

Implementation of selected alternative

Review, evaluation and feedback

Remember that review and feedback are also important in this process.

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Never forget that we are talking about a process and this involves a sequence of stages. As marketers we need to be able to understand the processes our customers go through so that we can overcome any barriers that may make them decide not to buy, or to buy from the competition. We want to establish ourselves as the preferred provider. Not many companies are in the enviable position of being the sole source of supply. To demonstrate the process, let us take a simple example of the buying process of an individual consumer – YOU. Example Imagine you have been kept late at the office and do not have an evening meal prepared. You are feeling really hungry and know that you need to eat pretty soon. 

Stage 1 You have a problem – you are hungry. You need to eat so you must find food. You move into Stage 2.



Stage 2 You have no meal prepared at home. Your first choice involves deciding on whether or not you will cook when you get home. –

Solution 1: you know that you have a nice steak in your refrigerator, so you decide you will cook when you get home. The search stops there – your problem has been solved.

–

Solution 2: you decide you are too tired to cook and want to have food provided for you. You remain at Stage 2 – your problem still exists but it has changed slightly – it has added dimensions.

The first added feature involves deciding where you want to eat: –

Solution 1: in a restaurant?

–

Solution 2: at home?

You consider the alternatives and decide that a restaurant will be expensive and take too long. (You have assessed your resources of time and money.) You decide you will eat at home. You remain in Stage 2. You now reconfirm your problem and assess your decisions to date. Yes, you are hungry and you need to eat. Yes, you are too tired to cook for yourself and yes, you don't want to go to a restaurant. Your decision is "firm" – your problem still exists but has moved into another decision phase. You are still in Stage 2. You now have to decide what kind of fast food you want to eat. You consider all solutions available to you, which may vary from fish and chips or beefburger to Chinese or Indian meals. You assess each option against various factors – time, convenience, money and preference. When you have finished your assessment you will make your decision. You decide on an Indian meal. You could move into Stage 3 immediately because there is only one outlet to buy from; or you could have further decisions to make on where to buy from before you finally choose. Your final decision might be based on the fact that there is an Indian take-away restaurant near your home. You've used it before and know the food is good. You also know that you can order by telephone and it will be ready for you to collect when you arrive. The end result will be that you can eat as soon as you arrive home. You are happy with your decision and you move into Stage 3.

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

Stage 3 You telephone in your order stating your requirements and giving the time when you will be collecting. You leave the office, collect your food, go home and eat it. The purchase is completed and the product has been "consumed". You now move into Stage 4.



Stage 4 After you have eaten your meal, you feel a little ill. You blame the food and think about the other options which had been open to you. Would they have been better? You might not be feeling ill if you had bought fish and chips. Maybe you should have gone to a restaurant or tried a different outlet. You are now doubting the wisdom of the decisions you made earlier. You are experiencing dissonance – an interference with, or jarring of, your knowledge and experiences. You think back over the process. You compare the options you had available but still think your decisions were right. You wonder why you are feeling ill. Suddenly you realise that you are really only feeling ill because you have eaten too much. You feel reassured – it is you that is at fault, not your decisions, the food or the outlet. Your confidence in, or loyalty to, the outlet is restored and your preference for Indian food is re-established – you did the right thing! You are likely to repeat the process at another time in the future.

Although the decision-making in this example is on a very simple level, it clearly indicates the stages in the buying process and the decision loops which will be taken. At each stage, whether consciously or not, all decisions are checked and verified before moving into the next phase. Resources are monitored to see if the decision is viable, etc. The process will be the same, whether it is for an expensive item or for something which costs very little money. What can vary is: 

the strength of the initial problem



the nature of the product being bought



the value of the item being bought



who is involved in the buying process



who will use the item being bought



the length of time that will be taken in the search process



the ease of the actual decision-making



the convenience of the actual purchase



the after-sales confidence of the buyer and the user.

If you consider these possible differences, you will see that some of them will be a direct outcome of another. For example, for a high-value purchase it is likely that more time will be spent in the searching stage. The level of reassurance necessary after the sale will also be greater. It is also possible that more than one person will be involved in the process. This brings us, as marketers, to a very important question – who is buying?

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Who Buys? You will note that in the previous section I have introduced the term "the user". This is because we often sell things to people who are buying on behalf of others. The customer buys. The user is the consumer. Of course a person can be both at the same time, but we should never forget that we may be dealing with multiple levels in the buying process and we have to cater for all needs. To simply make it easy for an intermediary to buy without thinking of the impact on the user is most unwise. Conversely, to concentrate on the needs of the user at the expense of the intermediary is equally unwise. We should be looking for a balance which most closely matches everyone's needs. This matching can be easy or it can create a number of problems. Problems often increase in direct ratio to the length and complexity of the distribution channel and the nature of the item being bought. The Decision-making Unit Buying can be done by an individual or by a group of people. We call the individual(s), involved in buying the decision-making unit (DMU). We have to accept that often purchasing is carried out to meet the requirements of more than one person, which can mean that more than one person will be involved in the purchasing decision processes. This applies equally in consumer and industrial purchasing. When more than one person is involved, the individuals may have a definite role to play in the process. The roles have been identified as follows: 

the initiator: the person who comes up with the idea of buying an item



the influencer: the person, or people, who will shape the outcome of the decision



the decider: the person with the power or authority to make the decision



the buyer: the person who makes the actual purchase



the user: the person who will eventually use the product

and, of course, in many purchases there will also be: 

the gatekeeper: the person who can prevent the decision from being made or make it more difficult, e.g. a receptionist who prevents a salesperson from seeing a buyer, or a friend who tells someone that a product is a waste of money – simply because they do not see the need for it themselves.

Although these descriptions are more often used to describe group purchases, the individual purchaser can also be playing many of the roles. For example: 

A father might think of the idea of buying some painting materials which would keep his children occupied while he is busy (initiator).



He allows his own tastes to influence his decision as he enjoys painting (influencer).



He goes ahead and decides to buy a set of watercolour paints (decider).



He goes to an outlet and buys (buyer).



Of course, he may decide that his children don't deserve the present and not buy (gatekeeper).

The only role not being covered in this example is that of the user.

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Types of Purchasing One way of considering the decisions that most consumers take is to classify them broadly as either "new buys" or "repeat buys". It is worthwhile looking at these two categories in some detail, because many organisational decisions follow a similar pattern. 

New-buy Decisions Your new-buy decisions may be for items of small value, such as changing your toothpaste or choosing a different food; they involve small amounts of money, so the risk of being dissatisfied is there but the outcome is not disastrous. You may throw away an item you dislike and accept you have wasted a tiny part of your resources. Some new buys are more serious because they involve products which cost more money and would not be thrown away so easily. There are many grades of this type of buying and you can easily put your buying into an order of importance. You might think of clothing, then kitchen equipment, furniture, a car, a holiday; for some of us, a house is the most expensive new-buy item.



Repeat-buy Decisions When you buy something you have used previously you have the benefit of experience to help you, so you have less difficulty in choosing the product. There will still be different levels of decision-making, because the products you buy may range from lowvalue items such as toiletries or foodstuffs to a second car or another house. In all these categories, the experience of previous deals will make the decision to buy or not to buy less difficult.

However this is a rather simplistic analysis for marketing purposes, and more light is shed by using a model which was originally introduced by Assael (1987). This asserts that the type or nature of purchasing is affected by two variables: 

the involvement of the buyer with the product, and



the differences available (between products/brands).

Figure 6.2 demonstrates the interaction between these variables: Figure 6.2: Four types of buying behaviour (from Assael) Degree of Buyer Involvement in the Purchase Low

High

Habitual buying behaviour e.g. basic foods

Dissonance reducing behaviour e.g. furniture

Variety seeking behaviour e.g. chocolate bars, breakfast cereals

Complex buying behaviour e.g. computers

Few

Significant Differences Between Brands Many

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Habitual Buying This is repetitive buying which takes little thinking about. Few differences are apparent between products and brands and the customer allocates little or low importance to the purchase. It may be that the customer has in the past considered alternatives and has found "the ideal". The customer is happy to stick with their decision and has, in fact, become loyal to the product or brand.



Variety Seeking This type of purchase will still involve relatively low importance in the mind of the purchaser, but there will be lots of choice and variety, e.g. biscuits, sweets, newspapers, magazines. If a product is tried and found to be lacking in some aspect, the buyer will simply try another one the next time they buy, or they may actively decide to keep trying different brands to see which is best, e.g. people who drink beer often try different types just as an experiment.



Dissonance Reducing Dissonance-reducing purchasing is the kind of purchasing which is designed to reduce post-purchase "doubt". Because the degree of involvement is high, usually because of value and the item being something which is only bought rarely (e.g. an electric bed), the buyer may have no previous experience to use as a base for comparison in the search process. If you add this lack of experience to the fact that there are only minor differences between the types of product available, it is easy to see why the buyer needs to ensure that the item they buy is good. The search process may therefore be extended. This type of purchasing can also mean that, because there are so few differences in the models or brands available in the market, the actual purchase itself may be made relatively quickly.



Complex Buying High product involvement and lots of choice make this an extremely hazardous type of purchase for a buyer. If we take buying a computer for home use as an example, you can understand the problems. You may have already had one make of computer and been quite happy with it, but now you have outgrown your machine and need another. It is going to be expensive so you have to make sure you get good value for money. There is such a wide range of computers on the market that your choice will not be easy. You have to consider machine capabilities, software, compatibility with your existing media and printer, etc. This type of decision can take a lot of time in the search for information and assessment of alternatives before a purchase is made.

Impulse Buying Although impulse buying is not mentioned in the Assael model, we must consider it as it certainly happens. Producers are aware of the existence of impulse (or non-rational) purchasing which is why so much money is spent on promotional literature and point of sale displays. There is really no accounting for this type of purchase and yet we all do it from time to time. We are attracted by an advertisement or a point of sale display, and we leap in and buy without thinking about it. Sometimes impulse buying works and sometimes it doesn't. If it works that is OK. We acquire confidence in the manufacturer, or the outlet, and feel quite happy. If it doesn't we have all the time in the world to regret what we have done. We may think "Never again!" and blame the manufacturer, or the outlet, for our own error. The effects of this blame can last for a considerable time and can actually influence our more rational purchasing – with the organisation which was blamed losing custom.

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You may think that impulse purchasing does not meet the recognised stages in the buying process. In my opinion it does. All that has happened is that the process has been gone through very quickly or some stages have been more or less bypassed: 

When you buy something on impulse you will be thinking it is a good idea as it will be useful for some purpose or another – you are solving a problem. You may not have been aware until then that the problem existed, but some factor makes you recognise it.



Circumstances shorten the search phase – maybe it is because you know you can't get back to the outlet, or there are only a few of the items available.



You still make the purchase decision and complete the purchase.



You still carry out the post-purchase evaluation.

Therefore you have still gone through the purchasing process.

B. INFLUENCES ON INDIVIDUAL BUYING BEHAVIOUR Marketing managers are in the "people" business. Even though they may be trying to make profits, they must understand individual and group behaviour both from the internal (what the company can supply) and external (what is asked for – demand) points of view. Behaviour stems from: 

needs (requirements), and



wants (desires).

It has been said that today's wants are tomorrow's needs and a great deal of marketing effort is put into trying to make this the case where buyers are concerned. 

Needs can be basic (physical) or higher (psychological).



Wants are "desires".

For example, I "need" to earn enough money to live – but I "want" to earn enough money to buy a speedboat. Internally, within the organisation itself, managers need to ensure that basic needs are met and that personnel are satisfied with pay, conditions of work, involvement, style of leadership, etc. and that the personnel are not demotivated by any activities taking place. They should also take into consideration the wants of the staff as a means of motivation. Knowing the aspirations of a member of staff, or what will motivate them, can be of considerable help when trying to achieve their cooperation. It could be said that if behaviour is not understood, marketers are unlikely to be successful in obtaining their objectives and in overcoming conflict. It would be every manufacturer's dream to produce products that every buyer in the world wanted to buy, but we know that is impossible simply because buyers are people, and people differ in many ways. Marketers therefore have to understand what makes people different from one another, if they want to help the customers to satisfy their needs.

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These differences are caused by various influencing factors, as the model illustrated in Figure 6.3 shows. Figure 6.3: Influences on Consumer Buying Behaviour CULTURAL

PERSONAL

The Buying Consumer

SOCIAL

PSYCHOLOGICAL

Cultural The influences under this heading can be subdivided into three sections: 

Culture Culture includes both abstract ideas and beliefs as well as physical artefacts which are important to a society. It summarises the learned values and attitudes of a society as a whole. It is while we are growing up that we acquire expectations and standards that fit with the society in which we live, and these acquired values and expectations generally stay with us throughout our lives. For example, the different standards between the Muslim and Christian religions impose different levels of acceptance on certain behaviour and, therefore, on purchasing habits. As an individual grows, they will absorb and acquire behavioural norms which are acceptable to their particular society; these inbred beliefs will be very strong. It is an accepted fact that the society in which a person lives and has been reared is one of the greatest influences on the final character of that individual. It is relatively easy for any marketer to understand the culture in their own country as they will be part of it, but understanding cultural influences in foreign markets takes a little more care. It is therefore particularly important that, when dealing with markets different to the home market, time is taken to identify and understand the cultural norms of acceptability in the foreign market, as these may vary dramatically from those in the home country.



Subculture Cultures of all kinds will contain smaller groups or subsections. The differences may be based on lifestyle, religion or on belief in some ideal, e.g. in Spain you will find the Basque separatists, who are part of the overall culture of Spain but can be regarded in their own right as a subculture.



Social Class Despite the claims for classless societies which we hear from politicians, class systems still exist around the world. Social classes are the divisions which a society accepts and they may be based on status, money or education. In the UK the social class system (A, B, C1, C2, D and E), which is still widely used, is defined on the job of the head of the household but, because of the changes which have taken place in the UK society, this method may not always be an appropriate measure as we have noted before.

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Social Influences under this heading can come from family and friends or other reference groups, such as clubs and interest societies. The individual role and status of the buyer is also another influence – how we want other people to see us! For example, if your father has always bought Ford cars, you may be influenced into buying a Ford when you make your first car purchase. However, should you be part of a group that has adopted another make of car, e.g. university students who buy a very basic type of car as a status symbol or statement, you could be influenced by that attitude in your wish to conform to the norm of the group. Once you get your first major job as a manager, though, you may realise that a BMW car would fit your status better than the one you have and you will make another change.

Personal Personal factors relate to the individual, e.g. age, lifestyle, occupation, wealth and character. For example, a young man of 21 who enjoys danger is more likely to be attracted to a powerful motorcycle, with innovative paintwork, than another wealthy young man of the same age who enjoys the theatre. A lady of 45 will want different clothes from a lady of 25. A company director will have different purchasing expectations from those of a mechanic in a garage. As we move through our lives, we change our purchasing habits according to the prevailing conditions.

Psychological Wilson, Gilligan and Pearson (in Strategic Marketing Management, 1992) identify four psychological characteristics as being important: motivation; perception; learning; and beliefs and attitudes. 

Motivation This is what drives us to do or want something. It stems from a range of human needs, from basic to higher, as identified by Maslow in his hierarchy of needs model (discussed later in Section D).



Perception This is how we "see" things. We are conditioned to expect certain things and this conditioning means that we take in images but convert them to what is acceptable to our minds. It is our own way of organising the information we take in each day. Two people subjected to the same advertising message, at the same time, may "see" the message in completely different ways. For example, one person at a holiday timeshare demonstration may see the salesperson as being very good and knowledgeable on the subject, but another person at the same demonstration may see the same salesperson as being a slick fast-talker, who is just interested in taking money.



Learning This comes from experience. As we learn, we change our expectations to meet with the newly acquired knowledge. For example, if you enjoy working or playing with computers, you gradually build up your knowledge until such time as the existing machine is not good enough for you. You then move up to another category of machine and begin the cycle all over again.



Beliefs and Attitudes A dictionary definition of "belief" is "principle, proposition or idea accepted as being true without positive proof". From this you can see that "belief" will be personal to each individual. If we are convinced through our socialisation, learning, etc. that one

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particular brand is better than another, we will buy that brand until something happens to change our belief. "Attitude" is defined as being "the way a person views something or behaves towards it, often in an evaluative way". Therefore we will be influenced in our buying by how we regard the item being purchased. For example, you may see an item as being "good value for money" or "cheap and nasty". We shall examine these various factors in more detail shortly. Moving on from this simple model, there are other influences that the marketer must take into consideration.

Personality and Environmental Influences People are influenced in their buying behaviour both by their own opinions and attitudes and by the opinions and attitudes of various groups. Personal

Group

Family

Work

Education

Leisure

Residential area

Hobbies

Acquired knowledge

Protest groups

Likes/dislikes

Support groups

It is these types of influences which give rise to the broad classifications of consumers which are used extensively in marketing and are examined next. Note that group attitudes may be acquired from formal (structured) or informal groups. The influence from peer groups and opinion leaders is very strong indeed – particularly so in the young. In any kind of marketing these influences must be considered by the planner as they can ultimately have an effect on the outcome of the entire marketing effort. If opinion leaders can be captured, the "followers" will also adopt the product on sale.

C. CLASSIFICATIONS OF CONSUMERS Socio-economic Groupings (Class) Perhaps one of the oldest and most recognised ways of splitting people into categories is based on perceived social and economic status – class. Every country in the world has upper and lower classes. The differences may be based on the position of a person or their family in society or on wealth, but it is still a division recognised and accepted by all – even though many object to it. In the UK, the following social classes are recognised: A

Upper middle class: higher managerial or professional levels

B

Middle class: middle to senior management, rising professionals

C1

Lower middle class: junior and supervisory managers, clerical grades

C2

Skilled working class: manual trades involving individual skills

D

Working class: semi and unskilled workers

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E

Benefit takers: pensioners, widows, anyone using state benefits.

The idea of social class remains well used in the UK. The whole premise, though, is based on the job and income of the head of the household who is often taken to be male. But times have changed and many women now earn more than their partners which, in effect, could mean that together the couple should really be categorised in a different class. Time has also eroded the perceived differences between those born to upper and lower classes.

The Family Life Cycle The family is arguably the most important purchasing unit in any particular country because of the total value of sales which are generated in the domestic markets. The theory of the family life cycle (FLC) is meant to show that purchasing motivations can be predicted and that they will change over time. The basic concept makes an assumption that every adult, as they age, will move through various stages of life, demonstrating certain purchasing preferences at each stage. These are illustrated in Table 6.1. Table 6.1: The family life cycle Stage

Description

Purchase Preference

Bachelor

Single young people not living at home. At start of career. Low income – main aim to find house/have good time.

Leisure interests/clothing/alcohol/ eating out/holidays/stereos/cars/ cheap accommodation.

Newly married couples

Young, no children, financially OK if both working.

Domestic appliances/furniture/ durables/holidays/financial services.

Full nest 1

Mother at home with one child while father works. Reduction in income.

Children's clothes and toys – few, if any, holidays. Home purchasing may be limited to durable goods.

Full nest 2

Now with two children under five. Father improved salary but costs of family higher.

More expensive children's toys. Still little money spent on the parents. Maybe short, inexpensive holidays.

Full nest 3

Family growing up. Mother returns to work. Increased income but also increased costs for household.

Replacing worn-out furniture and durables. Better class of holiday – more purchasing for the parents. Wider interest in food and entertainment.

Empty nest 1

Some of family have moved away from home. Parents now "help out" on living costs for children living away.

Luxury purchasing. Maybe homeimprovements.

Empty nest 2

All children left home. Parents back to "new married" stage. Home will be fully furnished and group interests formed.

"Reckless" purchasing on unnecessary items. Interest holidays, cruises, etc.

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Stage

Description

Purchase Preference

Solitary survivor 1

One partner dies but other is still active and working. House is now paid for.

"Insurance" purchases to secure future. Buying for grandchildren. Little, if any, home purchases.

Solitary survivor 2

Last one living – not working.

Medicinal and health aids. Security purchasing for safety in the home. Most spending done on children and grandchildren.

Problems with using the FLC In many areas of the world it is accepted that it is usually the woman of the household who will make the purchase decision in low-cost/often-repeated purchases. For more expensive items (e.g. consumer durables) it will be either a joint decision or a decision made by the controller of the finances within the family – often still the woman. For major purchases it is likely to be the male in the family who will be the ultimate decider (e.g. new car). However this attitude is changing, particularly in industrialised nations, as more and more women either remain in or return to work after having children. Not only are women more likely to have money of their own, but they also have more self-assurance and power to influence family buying decisions. This and other changes that have taken place in society have led to the opinion that the previously accepted version of the family does not cover everything in the modern world. For example, many young people choose not to marry at all, or to wait until such time as they have amassed enough money to be secure. Their purchasing behaviour will be changed because of these decisions. There are also many young people who take a conscious decision not to have children. This means that as they become more established and have more disposable income they may retain their initial purchasing characteristics or be in the market for high status purchases. The worldwide increase in the divorce rate as well as in the number of non-married people living together as couples has meant that there can be "double families" with two sets of parents and grandparents, buying for children. Despite this changing aspect, the reasons for buying are unlikely to change in the normal type of nuclear family of parents and children, and the marketer is still largely able to design campaigns accordingly. But you should remember that, as with Maslow's model, although this model can be used as a guideline it does not give a perfect picture.

Sagacity The inadequacies of the FLC and social classifications led to the introduction of the sagacity lifestyle model of influences on behaviour. The model uses life cycle as its main base and suggests four stages of life: dependent, prefamily, family and late. It then splits up each stage in accordance with income and then income is split up according to white collar (managerial/higher) or blue collar (skilled/lower) occupations. The underlying suggestion of this model is that people will have different hopes and buying behaviour as they move through their lives and will be influenced by their current situation. This is, in fact, a very similar concept to the family life cycle.

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Research work has taken the viewpoint of the sagacity model further and suggests that it is not necessarily true that age and progression through the accepted life cycle are the most important influences on buying behaviour. The suggestion is that influences on behaviour will be psychological, and that it is attitudes and expectations which will be more significant.

Geographic/Residential Groups There are several types of classification based on geographic or residential factors – for example, MOSAIC or PINPOINT. However, ACORN is the most quoted of these systems and is widely used in the UK by analysts and planners. ACORN stands for "A classification of residential neighbourhoods." Similar types of systems are used in other parts of the world. In the UK, the ACORN system uses categories of housing: A

modern family housing for manual workers

B

modern family housing for higher incomes

C

older housing of intermediate status

D

very poor quality older terraced housing

E

rural areas

F

urban local authority housing

G

housing with most overcrowding

H

low-income areas with immigrants

I

student and high-status non-family areas

J

traditional high-status suburbia

K

areas of elderly people.

The premise of this type of classification is based on the assumption that people who live in similar areas will portray similar buying preferences, allowing marketers to target on a geographical basis. The problem with this model is that although in general residential areas will house people earning similar salaries, this will not always be true: 

There may be families living in urban local authority housing that have quite a lot of money – which puts them in the market for high status purchases – but they choose to stay living where they are because they like the area or the neighbours.



There may be young couples who have extended themselves to buy a really expensive house in a high status area – but they may have no money with which to buy furniture and carpets and may be struggling to survive.

Again, we have a model which can be useful in general terms, but is not perfect.

Life-style Groupings The changes which have taken place in levels of affluence and consumer awareness overall, coupled with increased competition for markets, have led to an increasing interest in analysing and understanding individual lifestyles. These include: 

AIO – Activities, Interests and Opinions Customers are tested by questionnaires which are analysed and the customer is then categorised.

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VALS – Value and Lifestyle Arnold Mitchell produced this model of understanding individual behaviour. He suggested that people can be classified as one of four types: 

need-driven: "survivors" and "sustainers"



outer-directed people: "belongers", "emulators" and "achievers"



inner-driven people: "I am me", "experientials", "societally conscious"



combined (outer/inner): "integrated".

In much the same way as Maslow suggested people move through a hierarchy, Mitchell suggested that people move through the four stages, from being a survivor until they become integrated. However, Mitchell added the possibility that people can achieve "integrated status" by two possible routes. All people are survivors, then sustainers, and then become belongers. At this point Mitchell suggested that, depending on the basic nature of the person, one of two routes could be taken: 

outer-directed people will become either emulators, or achievers



inner-directed people will become I am me, experientials, or societally conscious.

Following from this each individual will become "integrated". The emulators and achievers route is more akin to the traditional path through Maslow's hierarchy, but the greater awareness of individual rights and choices, together with increased awareness of environmental issues, has meant much more individualism on the part of the buying public. Marketers can capitalise on this and target very precisely. 

Cross-cultural Consumer Characteristics (4Cs) This classification was devised by the Young and Rubican advertising agency and classified people into one of three overall groups which could then be subdivided: The Constrained

The Middle Majority

The Innovators

Resigned poor

Mainstreamers

Transitionalists

Struggling poor

Aspirers

Reformers

Succeeders 

Other lifestyle groups Following the universal acceptance of the identification of the "yuppie" (young upwardly mobile professional), there have been various other attempts to place consumers into groupings in accordance with their lifestyles. The following list is adapted from an article "Goodbye Yuppies, Hello Yaks" written after a customer research project carried out for a major credit card company in the UK: (a)

Yaks (young, adventurous, keen and single): 18–24; living at home or in rented accommodation; fashion followers; live well; high entertainment expenditure; often little regard for savings; often high credit card users.

(b)

Ewes (experts with expensive styles): 24–35; trained/skilled in highly paid job; often married but usually two incomes; some in rented, some in mortgaged accommodation; ability to meet payments; fashion conscious; disposable income

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to keep up with latest trends; 2–3 holidays per year (Mediterranean in summer/USA skiing in winter); high credit card users. (c)

Bats (babies add the sparkle): 24–35; married or living together, rented/mortgaged; previous (or latent) fashion consciousness suppressed by other priorities and loss of second income; 1–2 holidays per year often with friends or camping in UK or France.

(d)

Clams (close check against money spent): 34–44; married but children growing; mortgage commitments at their peak; often paying school fees; some in midlife crises – divorcing or remarrying; 1–2 holidays per year either package or visiting friends and relatives in UK; budget carefully; pay credit cards on time or leave very small outstanding balance.

(e)

Mice (money is coming easier): 44–54; children grown – some left home; often inherited property giving financial security and ability to purchase luxury items; 1– 2 holidays per year – often now without children – usually in UK but often special places they have always wanted to see or visiting old friends who have moved abroad.

(f)

Owls (older with less stress): 55+; children grown and left home; financial security; 2–3 holidays per year – maybe visiting friends abroad in similar life situations; still conscious of money but determined to enjoy themselves; major expenditure is on holidays and presents for children and grandchildren; use credit cards but often sparingly and always pay in full and on time.

These classifications were pertinent to the company which undertook the research, and demonstrated the lifestyles of their customers at that given time. Other companies may devise their own classifications in accordance with their specific needs, and categories will change because of environmental aspects – there will always be the "latest method" which will outdate previous categories. Ultimately though, it makes little difference how consumer groups are identified or categorised; the various methods are really a way of understanding why people buy, and what influences the buying decisions.

D. THE SOCIAL PSYCHOLOGY OF CONSUMER BEHAVIOUR It is difficult if not impossible to plan marketing activities without some understanding of how ordinary people behave when they are in the marketplace as consumers and as customers. In this section we shall look at some simple models of human behaviour, in the hope that this will help us to understand it better, and help us plan more effective activities.

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An Initial Model Engel, Kollatt and Blackwell (1978) proposed a development of the systems approach to apply to the decision-making process as a framework for highlighting aspects of the influences which have a bearing on the process. This can be shown in a simple diagram illustrated in Figure 6.4. Figure 6.4: Simplified version of the Engel, Kollat and Blackwell model PERCEPTUAL SYSTEM

EVALUATIVE SYSTEM

MOTIVATING SYSTEM

CENTRAL CONTROL UNIT DECISION PROCESS

CHOICE SATISFACTION OUTCOMES DISSONANCE

As you can see there are many inputs into the central control unit and only one output, the decision. This is a simplified version of the model and the full version has much more detail. The block shown here as the "perceptual system" can include such items as past experience, advertising, recommendations, perceived need, funds available and even wishful thinking. Similarly, the block shown as the "evaluative system" could include such items as attitudes, hereditary beliefs, knowledge, advice, information search, motives, lifestyle, group compliance. Note that the outcome can be satisfaction or dissonance: you do not know how good a product is until you try it and you may be pleased or not. Your knowledge will feed through a loop into the evaluative system, ready for the next buying decision. Such feedback loops can be added to all the items in the model, making it much more complicated.

Fulfilment of Needs The two classic theoretical models on the nature of needs as an influence on behaviour are: 

Maslow's hierarchy of needs, and



Hertzberg's two-factor theory.

These provide the underpinning for our first area of study.

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Maslow's model can be very useful in demonstrating the changes which take place in the individual over time (see Figure 6.5). Figure 6.5: Maslow's hierarchy of needs

Self-actualisation

Ultimate satisfaction

Esteem needs Social – affiliation – love Safety and security needs Basic need Physiological needs

Maslow suggested that each individual has certain needs, basic and higher, and that only when one level of need has been satisfied will the individual move up into the next level. This model can be very useful for marketing purposes as marketers can target activities at people who are seen to be at one level and help them to reach the next level. The problem with this model is that it is very difficult to know exactly which level someone has reached at any given time. People may be at several levels at the same time for different reasons. For example, someone who has a high powered car in order to impress people, may not have a permanent and secure home base; someone who is held in high esteem as being an expert in a certain topic or skill may not have enough money to go on the holiday they want to. All that marketers can do is to accept the overall meaning of the model and use Maslow as a guideline for general targeting purposes. Maslow's hierarchy of needs is a fascinating and useful theory for all kinds of people, but particularly for marketers since it explains to us why people want different things at different times. In particular, we gain from it an understanding of the strictly hierarchical order of human desires. So there would be no point, for us as marketers, talking to people about the satisfaction of aesthetic (level five) needs, when our potential customers are still feeling their physiological (level one) needs have not been met. The reverse is also true: once a particular level of need has been satisfied, a new level comes to the fore and it is a waste of effort to dwell to any great extent on those below. So, for instance, if you are in the fashion business it would be folly to try to appeal to your customers on the basis of warmth and comfort. It has also long been recognised that the way people move from awareness of a need to the point where they act to satisfy it is by no means necessarily simple. For instance, we can say with some certainty that everyone who goes without food for a day or two will begin to feel hungry (at least, under normal conditions). What we cannot say with the same degree of certainty is that the person will act to satisfy that hunger. Religious ascetics for instance, may

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deliberately induce hunger because they believe it is a good thing to deny their own appetites in the interest of strengthening their spiritual discipline. For most of the 20th century psychologists tried to discern a relationship between felt needs and actions intended to satisfy them, but there has been no great agreement on the subject. However, most writers have recognised certain mental states or movements that may be components of the process. Herzberg's work indicates that satisfaction of needs is not always of the same kind. In his research about what motivated people to work for a particular employer, he discovered that there were several factors that needed satisfying (like good wages and pleasant conditions) but which of themselves did not motivate. In contrast other factors were powerful motivators, causing people to put themselves out, sometimes greatly, for the opportunity to work. These were things like job satisfaction, responsibility and a sense that one's work made a difference to the world. Herzberg proposed what he called his two-factor theory, in which he stated that factors of the first kind were hygiene or maintenance factors (they needed satisfying, but they did not, of themselves, motivate) and those of the second kind were satisfiers. So a person who was badly paid but had a job where they felt they were making an important social contribution might well stay, despite being offered the opportunity to work elsewhere for better wages but in a job which seemed pointless or unimportant. This theory translates well into the world of marketing. It seems that consumers have certain needs (hygiene factors) that require satisfying, whose absence will cause dissatisfaction, but which are not so strongly felt as to attract a buyer from one product to another. There are others (satisfiers) that are so important that their absence will cause the consumer to engage in a search for an alternative product. In the context of work, Herzberg summed up this theory by saying that hygiene factors affected the decision to work here, whereas satisfiers affected the decision whether to work at all. In a marketing context, we can imagine a washing-up liquid that smells strongly of carbolic but which cuts through grease like a knife, and another that is perceived to be less efficacious in cleaning but which smells sweetly of pine needles. If the consumer is really keen to keep pots and pans sparkling, they will stay with the unpleasant-smelling brand because, although they would prefer a sweeter smell, it is not the main benefit being sought. The smell is (in this case) the "hygiene factor"; the powerful degreaser is the "satisfier". If the consumer is not already a user of the strong product they may well switch to it from the nicersmelling one, but if they are a current user, they will not switch away from it. We shall now consider three aspects of behaviour designed to fulfil needs and their impact on consumer actions. (a)

Personal Roles and Self-image When we examine people's attempts to satisfy their needs, it is all too tempting to assume that all people are alike and that any given individual is always the same person. Unfortunately neither supposition is true, and people vary widely in their behaviour. What is important to me may be sublimely unimportant to you, so the purchase decision I agonise over for days may be accomplished by you in less than half a minute. Less easily recognised is the idea that within each individual there are several "persons", one of which will be dominant and the others hidden at any given time, depending on what that person is doing, with whom, and who is watching. This multiplicity of personality has two sources: one social and the other psychological. Socially, we may be said to be "more than one person" because adult people are required to adopt more than one role from time to time.

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For instance, I am a writer, a teacher and an administrator in my job and I am a husband, a father, a son and a brother in my family life. I am also a friend, a fellowmember of a voluntary society and a neighbour among my social contacts; and I am a council taxpayer, a taxpayer, a voter and a householder within civic life. The "me" who takes seriously his responsibilities when voting, who believes that we should all share equally the burden of bringing up the community's children, may well behave much more selfishly when my neighbour's children run over my carefully mown lawn and break down my flowers with their ball. The "me" that seriously counsels commonsense and gravity when lecturing the children on their choice of career is the same "me" that once threw up a good, well-paid job to go off and work as a self-employed gardener, for the sheer joy of being out-of-doors among living things. Psychologically, we are "more than one person" because our perception of ourselves is a source of considerable anxiety. Malhotra has postulated three different "selfconcepts" or self-images: 

the actual self-concept (my picture of myself as I really am)



the ideal self-concept (the "me" I would like to be, were it not for my faults and flaws)



the social self-concept (the "me" as I believe others see me).

(There is, of course, the possibility that the "real" person is different from all three of these, since all three depend upon the biased self-perception by an individual of himself or herself.) For the marketer this idea is important, since different purchase decisions will be made on the basis of different motivations arising from these pictures of the self. If I am buying a small pack of peanuts in a shop miles from home where there is no chance of my being recognised, and if the person serving in the shop is someone I feel no desire to impress, then I might well choose the cheap packet of salted roasted peanuts. On the other hand if I am buying in a bar when my friends are present, I may well choose the expensive, foil-wrapped, dry-roasted product. I might do this either because I want to be seen as generous (the ideal self-image) or because I believe that is what a health-conscious, green consumer should buy, this being my social self-image (although I may be completely wrong about how others see this aspect of me). Ever since Veblen floated the idea of the symbolic value of possessions at the end of the 19th century, marketers have been fascinated by the evidence that seems to show that people buy things not just because of what the things are or what the things can deliver as material benefits. They also buy things because of what the purchase says about the purchaser: what is often referred to as "conspicuous consumption". We buy to conform with, or to enhance, our self-image. And since, as we have mentioned, there is a degree of anxiety associated with self-image, the notion of risk is inextricably tied up with the act of purchasing. If we buy the wrong thing, it may damage our image or our lifestyle. (b)

Purchase Risk The idea of purchase risk needs disentangling from that of objective (i.e. real) risk. Undoubtedly when I make a purchase, there may be a physical, tangible, objective danger of the purchase being unsatisfactory. When I open the box, there may be a piece missing; if I am unlucky, I may have bought the loaf upon which the baker sneezed. That is actual risk, and the chances of the bad thing happening can be estimated to some degree, and quality control procedures can in some measure prevent it happening. What we are talking about here however is perceived risk – the risk that the purchaser feels is attendant upon his or her own act of choosing. This has two sources: lack of

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information (the less information is given about the product, the more the purchaser feels they are taking a risk in buying it), and the possible consequences of the purchase. The consumer may feel little anxiety and that they are running only a very small, acceptable risk, when buying certain products. If the product is one on which they do not feel the need for much information (buying a new handkerchief does not require an extensive information search) or one where the consequences of making a mistake are not severe (the handkerchief, if it turns out to be faulty, can be thrown away without much loss in money or time), then the perceived risk will be low. If on the other hand the purchaser feels that the purchase is a complex one, demanding a great deal of information in order to avoid the wrong decision, and if the consequences of a mistake are likely to be severe (buying a house, for instance), then they will perceive the purchase as involving a high risk. Marketers characterise their products as low-risk or high-risk products and obviously certain strategies are necessary for high-risk products which are not needed for low-risk ones. For most marketing managers, strategies are needed that reduce the perceived risks associated with purchase. (We say "for most managers" because there may be a category of products where risk is actually a desirable state, such as some forms of investment products, gambling products, "adventure" holidays and personal services such as dating agencies.) Such strategies to reduce risk may be functional or psychological.

(c)



Functional strategies would include mechanisms that reduced the downside consequences of the "wrong" decision, such as money-off promotions, guarantees and warranties, free samples, offers of a test drive of a new motor car, detailed instructions and manuals, and promises of free after-sales service, help and advice.



Psychological means of reducing perceived risk would include advertisements that showed how easy the product was to use or how socially acceptable it was or endorsements by people who are seen to be opinion leaders among the group being targeted. A stairlift manufacturer, aware that many of the old people for whom their product is designed are very resistant to purchase because they fear the physical risk associated with being carried upstairs, used the actress Thora Hird in its advertisements. She was seen as an "ordinary woman" who can be relied upon to speak truthfully about fears. She was seen in the advert saying how easy the product is to use and how safe it is.

Problem-solving Behaviour Mental discomfort associated with risk or lack of information is apparently not a steady state in consumers. There is quite a lot of work that seems to show that people move through a cycle of purchase behaviour and that different people have different levels of tolerance to risk and uncertainty. Let's look first at the idea of cyclical behaviour. 

Extended Problem-solving (EPS) When a person is faced for the first time with a new product (new to them, not necessarily new on the market) it seems that they may exhibit a particular kind of behaviour. This involves:

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searching for information (perhaps talking to other consumers, reading articles in newspapers or magazines or searching for reports by consumer groups)

(ii)

processing that information in order to categorise the product, i.e. to fit it mentally into a grouping of similar products

(iii)

considering their own attitudes and preferences ("am I the sort of person who would want/need/use this?")

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(iv)

consulting the social and fashionable pressures that are evident ("everyone else I've met this week seems to be buying one of these")

(v)

assessing such factors as price, availability and all the risks associated with the purchase.

As a result of this an intention may be formed, either to buy the product now, to defer purchase until later, not to buy it at all or to re-engage in the information search. 

Limited Problem-solving (LPS) Once the product has been purchased and tried out, it may be that the consumer's experience leads them to feel much more comfortable with the product than they were before (or at least with the product category – they may not necessarily stay with the brand first purchased); so much so that the mental factors needed for subsequent purchases are fewer. The information search is much more limited, the sources consulted fewer, the sense of risk may be reduced and the consumer may feel that they now "know their way around" when looking for the product – they know what to look for, what kind of outlet stocks the product and how to use it and gain full enjoyment from it. Now therefore, subsequent purchases might involve consideration only of the price of this brand against that, the social cachet associated with this shop over another or whether to change the colour or specification of the article.



Routine Problem-solving (RPS) After a while, the consumer may become habituated to buying the product and knowledgeable about where and for how much it may be had. They may even have established a firm and unshakeable preference for one particular brand or conversely may have decided that there is really no difference between any of the competing brands. In this state, they pick up the product hardly thinking about it at all. There is some evidence that consumers may become so bored with their RPS state that they actually engage in brand-switching behaviour, simply to alleviate the tedium of repeatedly buying the same product time after time.

The Influence of Groups The interactive way that some groups of people influence others is of great importance to marketers. A good deal of research has been done in this area and we shall examine three of the key concepts here. (a)

Diffusion of Innovation The cycle of behaviour from EPS to LPS to RPS is fairly well documented in most consumers. But it does seem as if different people move at different speeds through it, and that there is some interaction between different types of people in their movements through it. It seems that there are people who greatly enjoy consuming new things (here, as elsewhere, when we talk about products we mean all kinds of products, including intangible ones and services). They are the kind of people who readily discount the risks associated with newness (Will it come down in price? Will it soon be obsolete? Will I quickly become tired of it?) for the pleasure they feel in being seen as leaders among their friends and associates. They are usually also quite prepared to pay a premium price for something that is new, where other people might be more cautious and wait until price competition has brought the price down to a level they are more comfortable with. These people are referred to commonly as innovators and people like this are thought to constitute only about 2.5 per cent of the population.

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Innovators are also important, not just as initial buyers of a new product, but as opinion leaders for people of other psychological types. Whilst they themselves may move quickly through the EPS-LPS-RPS cycle, there are lots of other people who move less quickly. For these slower types, innovators often become one of the sources of information to be consulted during the information search phase of EPS. The model of the diffusion of innovation – developed by Rogers – continues with the idea that people move through the decision-making process at different speeds. 

Following the innovators in taking up products are the early adopters. These (perhaps 13.5 per cent of the population) are people who are not temperamentally inclined to take the risks associated with discovering and trying out new things for themselves, but who are keen followers of fashion. Early adopters are often readers of magazines like Vogue. They watch television programmes about design, the home and garden and new cars and they are more likely to be watchers of commercial TV than public service (non-advertising) TV. All of this behaviour is so that they can feed their need to be up there with the leaders. It matters to them to be "in fashion", though as we have seen, they are not themselves leaders of fashion. Instead, these people watch closely what the innovators are doing, and tend to follow them. They too are quite likely to pay fairly high prices for articles that are seen as new and fashionable. Their EPS is likely to be heavily influenced by their observation of the innovators. They move quite quickly, as a result, through the EPS-LPS-RPS cycle, though not as quickly as innovators.



The next group is the early majority. These (34 per cent of the population) will generally not try a product until it has been well tried by others before them. They are not inclined to search hard for a product so if it is not on the shelves of their regular shops and stores, they will not go to the trouble of seeking it out, as innovators or early adopters would. These are people in whom the EPS is shortlived as they rely quite heavily on others having done it for them, as it were. They are also unlikely to come into the market until the prospect of large-scale sales has prompted a reduction from the original premium price.



Another 34 per cent of the population are the late majority, who do not feel comfortable with a new product unless there is clearly little risk associated with its newness. They prefer to choose between several competing brands and they need the low prices associated with fierce competition to tempt them into the market. They exhibit practically no EPS behaviour at all.



Finally, there is a group of some 16 per cent who are known as laggards. These people are distrustful of anything that is not seen as traditional, well tried and tested, familiar, even old fashioned. Curiously, although these come very late to market for products, they are among the most loyal of consumers. Once a product has established itself in their minds as having some measure of tradition, they will buy it and continue to buy it for as long as it is available, often going out of their way to discover remaining sources when mainstream outlets have delisted it and moved on to newer products.

We can represent Rogers's theory of diffusion of innovation diagrammatically as in Figure 6.6.

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Figure 6.6: Rogers's model of diffusion of innovation Early majority

Late majority

Early adopters Innovators

Laggards

34%

34%

2.5% 13.5%

16% Time

(b)

Reference Groups People often see themselves as members, potential members or aspirant members of particular groups. When we make everyday decisions about how we should and will behave in various situations, we seem to do so by reference to what people would expect in the groups that matter to us. Psychologists call these groups reference groups. One of the most common reference groups in early life is the family. We learn a good deal of behaviour from the expectations of the people to whom we are closely related. We are also subjected to a good deal of socialising in environments such as schools and colleges, and it is here that we learn to value certain character traits and to depreciate others. As adults, we are more mature and able to think for ourselves, but it seems that our wish to belong to reference groups and our willingness to be influenced by them remains strong throughout life. Three broad types (or functions) of reference group have been identified. 

Normative Groups These are groups to which we would like to think we belong and so we behave in ways which we think appropriate to membership. For instance, if I like to think of myself as middle class, I will read a broadsheet newspaper, wear a collar and tie, encourage my children to think of going to university, work in a professional or near-professional occupation and so on. The family is the first normative group for most of us but regional, class and occupational groupings are common normative groups in later life. Normative groups reward us when we behave as they do by accepting us into membership, and punish unacceptable behaviour by denying membership or ostracising us. Marketers use this tendency, for instance, by showing advertisements that suggest that failure to buy or use the product will lead to ostracism by a particular group ("good" mothers, "good" cooks or fashionable youngsters) while buying the product allows membership of the desired group.



The Comparative Function Here the members of the group we belong to influence our behaviour by approving certain choices we make and making clear their disapproval of others. So if I feel that the group I find most attractive is more likely to drink filter coffee than instant, I too will be powerfully influenced to do the same. A marketer will

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work on this tendency by using some channel that is appropriate to those who feel they belong to a particular group. Thus, if the marketer has discovered through research that there is a sub-group of the middle class that aspires to "the good life", in which high-quality products with a high degree of "naturalness" are valued, and that many of this group are readers of the Guardian newspaper, then the marketer will use advertisements in the Guardian showing typical members of the group choosing and using filter coffee. This influences my choice accordingly ("People like me choose this rather than that."). 

Expert Groups This third group are seen as expert in choice and use, either by virtue of their own natural, inherited or acquired knowledge, or because by having already bought and used the product they have become so. For instance, if we were wondering about how effective a particular mouthwash was in killing bacteria, the opinion of a dentist would carry a good deal of weight. Equally, if we want to choose the "right" washing liquid, the opinion of an experienced housewife who has been washing clothes for years would be seen as highly influential. We have all seen advertising that makes use of this kind of reference group.

(c)

Credibility Marketing activities aim to change people's feelings and attitudes towards various products and often to persuade people that a product fits well with a particular reference group or lifestyle. However an important consideration in this respect is the credibility of the person (or other source) from whom the message is received. One of the reasons for the growing use of public relations (where at one time advertising would have unquestioningly been chosen) is the belief that most consumers nowadays distrust advertising. It is thought that they tend to discount the message of an advertisement, whereas an article in a newspaper written by an independent journalist is seen to be a credible message source – the reliable opinion of an apparently disinterested opinion former. The same principle is being increasingly applied in advertising itself. Here, great emphasis is placed on using trusted personalities to provide credibility to the messages. The use of Thora Hird in stairlift adverts is a good example of an actress chosen for her credibility. TV personality Carol Vorderman (whose background is thought vaguely by most people to be in science) advertises many "scientific" products, from hair conditioners to technology magazines, on the basis that, if a scientist says so, the products can be relied upon to work. The reverse effect can happen when a figure used as an advocate falls out of public favour, e.g. Pepsi-Cola's battle to recover from the embarrassing publicity arising out of the fall from grace of rock musician Michael Jackson. This raises the question (or should do, in marketers' minds) how credible a spokesman is and what benefits this kind of association with a well-known figure can provide. In the field of consumer psychology, the work of Osgood and Tannenbaum has been valuable. In the formation of their congruity theory, they examined the relationship between an idea (such as a brand value) and the person who advocates it. They concluded that where the audience's feelings about the idea and the advocate start out at different points on a scale of approval, those feelings will move toward each other, arriving at a point where they are equal – the point of congruity. So, if I disapprove of bungee jumping but I approve of Fred, then when I hear Fred speak approvingly of bungee jumping, both my feelings about Fred and my feelings about bungee jumping move towards each other until they are at the same point of my scale of approval – the point of congruity. The question is, how far and how fast do those feelings move? And where do they end up?

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Osgood and Tannenbaum concluded that in such situations, strong feelings in either direction (i.e. either towards favourability or unfavourability) move less readily than weak feelings. So if I begin strongly approving of Fred, but only mildly disapproving of bungee jumping, then my feeling about bungee jumping will move more readily (since it is the weaker feeling). The point of congruity will be found at a position of mild approval. However, if my approval of Fred is only weak, but I strongly disapprove of bungee jumping, then the point of congruity will be on the disapproval side of the scale. I shall finish up still disapproving of bungee jumping, but less vehemently, while my opinion of Fred will have moved from mild approval to slight disapproval (see Figure 6.7). Only when feelings start out equally strongly held, said Osgood and Tannenbaum, will they move equally readily and meet at a point midway between their starting points. Figure 6.7: Osgood and Tannenbaum Congruity Theory Disapproval –4

–3

Neutral –2

Bungee jumping (weaker feeling)

–1

0

Approval 1

distance moved: 3

2

distance moved: 1.5

3

4

Fred (stronger feeling)

Point of congruity Disapproval –4

–3

Bungee jumping (stronger feeling)

Neutral –2

distance moved: 1.5

–1

0

Approval 1

distance moved: 2.5

2

3

4

Fred (weaker feeling)

Point of congruity For the marketer, it is clear from this that the credibility of the source of any message is of great importance and careful research is needed before use is made of reference figures (or "advocates" to use Osgood and Tannenbaum's term).

Cognitive Dissonance All the foregoing makes it evident that our actions as purchasers and consumers in society (either individually or as part of a decision-making group, such as a family or a work group) are fraught with all kinds of anxieties. It is therefore worth spending a minute or two in considering what people do when, despite all the attempts and stratagems to make the "right" decision, anxiety persists after the decision has been made. It seems that it often does. The psychologist Leon Festinger did extensive work on this question and, although his model is by no means uncritically accepted, it is another of those landmark ideas that has helped to shape marketers' thinking – or at least to raise worthwhile questions in their minds when strategy is being planned. Festinger formulated the theory of cognitive dissonance. "Dissonance" is a musical term that signifies the unpleasant effect of two or more conflicting sounds being produced together, as when you strike two neighbouring keys on the piano. The resulting discord is painful and requires resolution by moving one finger to play a note further away from the other (at a

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greater interval apart). This creates harmony. Festinger recognised that people are happiest when they have to deal either with only one unchallenged idea (like playing a single note on the piano) or with ideas that do not conflict and are widely separated (like playing an interval of a third or a fourth on the piano). What makes us uncomfortable is having to cope simultaneously with two ideas or sets of ideas that are so close to each other as to seem to conflict. Once again, an example may be useful. I buy a new car. I am moved to make my choice principally by the sexy red colour, the reasonable price and the car's great comfort. I leave the showroom a happy man. I return home and get out of the car. The man next door looks over the fence and compliments me on my new possession. He asks what it is like for speed. He asks what its consumption of fuel is like. He asks how often it has to be serviced and how much parts cost. Having gone indoors with the manual, I look up information on the points he has raised. Within ten minutes I am downcast. The car seems to be built for comfort, not for speed; its greater weight and lack of aerodynamics means that it uses a lot of fuel; being a foreign make, parts are difficult and costly to get hold of; and it requires a routine service every four thousand miles, where six thousand is the more usual requirement. Festinger suggests that when a person makes a decision (any kind of decision, not just a purchase) the mind is rather like a weighing scale or balance. On one side of the scale are the positive factors that make one tend towards a particular decision and the negative factors that make one tend away from the alternatives. On the other side of the scale are the negative ideas about the chosen option plus all the positive things about the alternatives. So in our example my mental weighing scale contains, on one side, the colour of the car and its comfort (positive factors about the choice I made) and the high price of other cars I could have chosen but didn't (negative factors about the alternatives). On the other side are the negative factors about the chosen option (I've now discovered the expense of the fuel and servicing) plus the positive factors about the alternative options (other cars are speedier and more stylish). What will happen to the scales, loaded with these factors on each side? There are three main possibilities, with infinite gradations in between. Either the scale will tip sharply this way, or it will tip sharply that way, or it will be in perfect balance. This is illustrated in Figure 6.8.

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Figure 6.8: Festinger's theory of cognitive dissonance

Satisfied with the decision

Positive aspects of the chosen option

Negative aspects of the chosen option

Negative aspects of the rejected option

Positive aspects of the rejected option

Cognitive dissonance; in balance, or nearly so

Dissatisfied; attempts to change or rationalise

Festinger demonstrated that when the scale tips sharply in either direction, we are mentally comfortable (we experience "assonance" or harmony). We feel that the evidence shows we made the right decision or that we definitely made the wrong decision and so we act quickly to reverse it (I take the car back to the dealer's and swap it for another one). What makes us uncomfortable is perfect balance or near balance, as this means the evidence is inconclusive so we are unable to decide whether we did the right thing or the wrong thing. A decision too close to the point of balance is like those two neighbouring notes on the piano: it produces dissonance – an unpleasant conflict of closely related ideas. In the modern commercial world many purchase decisions are difficult because, as a manufacturer becomes more knowledgeable about people's needs and wants, he works hard to make the product suit us but so too do all the competing manufacturers. It becomes harder and harder to make a product that is genuinely different from all its rivals. This means that when we make a purchase decision we are very likely to experience cognitive dissonance because, as sophisticated, knowledgeable consumers, we are unlikely to make very obviously "wrong" decisions and, as we have said, there are very few incontrovertibly "right" ones, so closely similar are the goods on offer. In other words the scale is unlikely to tip sharply one way and, unless we have been uncharacteristically careless, it will not tip the other way. Most decisions will be at or near the point of balance. Marketers value Festinger's ideas for two reasons. One, it reminds them that in a world where competing goods are so closely similar physically, they need to build brand values that make the consumer, before the act of purchase, recognise their brand as positively different from the near competitors. Two, it reminds them that the mental state of the consumer after purchase is equally important. Someone who experiences cognitive dissonance is unlikely to be a repeat purchaser and that, after all, is the goal of every serious marketer. Much of the advertising you will see, especially for high-risk, high-involvement goods, is aimed less at persuasion to purchase than at reducing or eliminating post-purchase dissonance.

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Decision-making Sets Some people may disagree with what we have just been discussing, on the grounds that goods do vary widely in all kinds of ways and therefore there is ample opportunity for us to make very wrong decisions. For instance, a BMW sports saloon is a very different purchase from a cheaper South Korean import. Of course this is true, but it does not invalidate Festinger's theory. The reason lies in the idea of "decision-making sets". Most consumers, in a sophisticated market, mentally separate products or brands into discrete sets. Rather like Russian dolls, each set is smaller than its predecessor and they fit inside each other. When a consumer is in the market for a particular kind of product, there are several competing brands she could buy. Some she knows, others she has never heard of and probably never will. Put them all together and you have the total set of brands from which she might choose. Out of the total set can be distinguished this particular consumer's awareness set; she does not, as we've said, know all the brands on offer and she will not therefore choose something she does not encounter. (An extensive information search, if she embarks upon it, may enlarge her awareness set, but it is still unlikely that she will ever know absolutely every brand of computer, car or instant coffee that exists.) So, within the total set lies the awareness set. Among the awareness set are those brands she is prepared to think about buying – the consideration set; the rest are brands that for some reason or another she excludes from her choice-making process. For instance, she may decide that some are just too expensive for her budget, not sufficiently stylish or not easily available. Among her consideration set there may be one or two brands she quickly decides against, again for a variety of reasons. Perhaps one is a foreign make which, though she admires it as a product, she is not prepared to buy because she feels she ought to buy a product made in her own country. The ones that are left, after these casualties have been removed, constitute the choice set. It is from these few that she will make her final decision (see Figure 6.9). Figure 6.9: Decision-making sets Mars Bounty Wispa Snickers Snack Topic Twix Double Decker Time Out Milky Way etc

Total set

Mars Bounty Snickers Topic Twix Milky Way

Awareness set

Mars Bounty Snickers Twix

Consideration set

Mars Snickers Twix

DECISION

Choice set

DECISION

You can see fairly easily that a sophisticated consumer who has this mental landscape about a product is unlikely to make drastically wrong decisions. The brands that would cause Festinger's scales to tip sharply in the negative direction may be in her awareness set but they get no further than that. As we have seen, modern brands are so carefully researched

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and designed that the final choice set is likely to include brands that are very similar indeed, so there will probably be no single brand that would tip the scales sharply in the positive direction. The idea that people choose to purchase from sets is also confirmed in work by Andrew Ehrenberg, who looked at the evidence of brand loyalty among supermarket grocery shoppers. He discovered that, in the main, shoppers do not fix on one single brand and remain faithful to it. Perhaps because of the boredom of consistent repetition that we mentioned earlier, or perhaps because they like to convince themselves that they have some control over their choices and actions, it seems that consumers establish a "repertoire" of brands in each category. So if I am buying floor cleaner, I will sometimes buy Flash, sometimes Jif and sometimes the supermarket's own brand. I move cyclically between these three (perhaps more). What is even more interesting in Ehrenberg's work is his finding that when a new brand comes onto the market where there are already several established brands in the same category, the new brand must be tried and accepted into the consumer's repertoire within twelve months from launch. If it fails to do this, it will probably never be accepted by that shopper.

"Hierarchy of Effects" Theories Generations of marketing students have been presented with various models of the route by which the consumer comes to an act of purchase; each purporting to guide the executive in how the process of marketing – particularly marketing communications – can be used to assist the process. Strong's model, dating from a book in 1925 and universally known as the AIDA model, is one of the earliest (and still influential today). Strong suggested that the person who may become a customer must be moved through successive stages: 

Attention You cannot get a message to someone until you have arrested his attention; hence, for example, the need for advertisements to have large and striking headlines and involve illustrations.



Interest

Once you have got the attention, you must convince him that the message is actually relevant to him. Your message might be beautifully crafted, but if I cannot see what it has to do with me, I shall ignore it and pass on to something of more relevance.



Desire

Having persuaded me that the message is about something that concerns me, for instance, my health, you must now awaken a desire in me; perhaps the desire to be less likely to catch cold. Only when you have aroused my desire for something am I likely to feel the need to assuage it.



Action

Now that I know what you are offering and that it is something I have a need for, you must show me how I can go about getting it. Hence, the popularity of cut-out coupons or reader-response mechanisms in press advertisements. Alternatively, you might tell me who stocks your product so that I can go and enquire for it myself.

This model has spawned many others, as various scholars sought to improve upon it. The generic name for all these models is "hierarchy of effects" models, since they all postulate an ordered process of successive mental stages. Here are just a few: 

Colley (1961) unawareness  awareness  comprehension  conviction  action

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Lavidge and Stainer (1961) awareness  knowledge  liking  preference  conviction  purchase



Rogers (1962) awareness  interest  evaluation  trial  adoption



Howard and Sheth (1969) attention  brand comprehension  attitude  intention  purchase



Engel, Blackwell and Kollat (1978) perceived information  problem recognition  search  evaluation of alternatives  belief  attitude  intention  choice.

From our discussions in this section, you will by now be extremely wary of any model that seems to offer a comprehensive understanding of how people behave in markets or of what is happening in their minds at any given time. Of course none of these models can be entirely satisfactory. But they are commendable attempts to model a complicated process so that marketers can at least think about what is going on and perhaps avoid some elementary errors of practice. In particular, their usefulness lies in perhaps two simple but important observations. First, the link between making someone aware that you have something to sell and their buying it is by no means a simple one. Several things have to happen on the way and at any one of those stages the process can break down. Second, there is an order in which communications should be managed. Trying to arouse interest before awareness exists or desire before interest has been kindled is almost certainly not going to work. We may quarrel with the stages that must be gone through and over what we call them, but none of us should doubt that the process should follow a logical order. One last observation should be made. Throughout this section, we have spoken of the process of marketing communications being directed at the individual consumer as a purchaser. However this is not the only situation in which these ideas are applicable. They are equally applicable to group decision-making (as in a family planning where to go on holiday or a commercial firm planning to buy a new production line) as to individuals. They are equally applicable to the marketing of services as to that of tangible products. They are also equally applicable to the marketing of non-profit-making organisations, such as government departments or charities, as they are to commercial companies. It is to these organisational purchasers which we turn to in the last section of the chapter.

E. ORGANISATIONAL PURCHASING So far we have been looking at general factors in the purchasing process. The process applies equally in both consumer and industrial markets, but we have to accept that there are differences between the two markets. Organisations buy differently from individual consumers for a number of reasons: 

Purchases tend to be of higher value.



Purchasing tends to be for higher quantities.



Purchasing tends to be better documented.



Buying tends to be done in a logical manner.

The main difference between industrial purchasing and consumer purchasing is that industrial purchasing is predominantly done by people on behalf of others and that, apart from the one-person business, there is nearly always more than one person involved in the buying process.

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Organisational versus Consumer Buying In the consumer market the organisation directs its selling efforts to persuade individual consumers to purchase goods and services. In industrial marketing the target of the marketing is another organisation. Table 6.2 shows the differences between consumer and industrial purchases. It has been argued that organisation markets are driven by derived demand, or the demand for industrial products created by the demand for other products by consumers. As a result, it is supposed that organisational purchasers will be more rational, knowledgeable and geographically concentrated. In many situations demand is derived, as mentioned previously, through the need to fashion materials into something else. Organisations also buy products for primary demand purposes such as computers, printers etc. for their own office use. Although groups frequently make organisational buying decisions (DMUs), there are instances where consumers also engage in group decision-making, e.g. a family unit making decisions regarding an annual holiday. There are similarities between the two inasmuch as both types of buyer may negotiate on price, i.e. when buying cars. Table 6.2 compares and contrasts organisational and consumer buying behaviour across six dimensions (Mowen, 1995). In some instances the buying processes may be quite similar. For example, if a family needs cooking oil then they will go to the local supermarket and buy the item at the quoted price. If MacDonald's buys cooking oil then the organisation will take competitive bids, provide specifications for the product, develop long-term relationships with the supplier and involve management, research and development teams and nutritionists in the decision. Table 6.2 Organisational versus consumer buying Dimension

Business Purchase

Consumer Purchase

Product

More technical; greater quantities purchased; focus on services offered with product.

Less technical and more standardised; smaller quantities purchased.

Price

Frequent competitive bidding; list prices on standard items.

Generally buy on basis of list prices.

Promotion

Rely on information from sales personnel and trade magazines.

Relatively greater emphasis on advertising.

Place

Short channels; often purchased directly from manufacturers.

Longer distribution channels; most frequently purchase from retail stores or mail-order companies.

Customer relations

More enduring; complex focus on establishing relationships.

Often transaction specific and quite simple; frequently no longterm relationship formed.

Buying decision process

Involvement of more people in organisation with diverse sets of needs; use more structured decision-making process.

Fewer people involved in process; buying process frequently unstructured.

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When making decisions organisational buyers move through a decision process that is similar to that of consumers. The organisational buyer will recognise a problem, search for information, evaluate alternatives, make a choice and then go through the post-purchase process. Due to the complexity of organisational buying decisions, researchers have developed a more detailed set of decision-making stages that the organisation will move through. These stages are shown in Table 6.3. Table 6.3: Buying Stages of Organisations Stage 1

Anticipation of a problem and/or recognition of a problem.

Stage 2

Identification of the characteristics and quantity of the needed product.

Stage 3

Development of a description of the characteristics and quantity of the product.

Stage 4

Search for and qualification of possible suppliers.

Stage 5

Acquisition of and the evaluation of alternate proposals.

Stage 6

Selection of suppliers based upon careful use of choice rules.

Stage 7

Selection and negotiation of how the order will be made.

Stage 8

Evaluation of the performance of the supplier.

(Source: based upon Hutt and Speh, Business Marketing Management 1992)

Types of Industrial Purchases Industrial purchases have been well documented as being one of three types: 

straight re-buy: simply repeat purchasing without changes of any kind



modified re-buy: where some aspect is changed, e.g. specification or supplier



new buy: involving new specifications, new supplier, etc.

As the degree of change increases, so does the complexity of the buying process and the time taken. More people may need to be involved in a new buy than for a modified re-buy, e.g. it may be a purchase of new plant for an entirely new production purpose which will involve a great deal of technical input from design engineers. On the other hand, a modified re-buy may simply involve a change of supplier which the purchasing department can deal with quite effectively on their own. Needless to say, straight re-buys are the easiest of all and need no specialist input; all they need is a repeat order to be raised. There are three broad categories of organisations making buying decisions – industrial, wholesaler/retailer, and non-profit organisation (NPO) – and different considerations apply to each. However, the SME (small and medium-sized (business) enterprises) should also be remembered. Small and Medium-sized Enterprises The SME is likely to be working in a limited number of markets, probably with a limited range of products or services. The scope of the organisation is therefore likely to be less of a strategic issue than that of larger organisations. Unless the organisation is specialising in

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some way with its product or service, it is likely to be under pressure to compete. Decisionmaking is likely to be quicker and more flexible due to the smaller management structure, and SMEs will be able to challenge their larger counterparts on costs. However, the approach to purchase decisions will not differ from that of other organisations. Industrial Buying Decisions The buyer in a factory will purchase three kinds of things: 

housekeeping supplies such as cleaning materials, brushes, dusters and so on



machinery with which to make the products that the company markets for profit



raw materials which will be made into products.

The housekeeping supplies will often be repeat buys and similar in many respects to the repeat buys of the consumer. The difference will be in the suppliers, terms of trade and quantities involved. None of them will make the repeat-buy decision significantly differently from that of the consumer for similar products. The decision to buy machinery may involve past experience of similar machinery, or at least of the suppliers of previous machinery. However, it is likely to be a much more serious decision than for housekeeping supplies. A decision to buy machinery will often involve several people, as well as the buyer; the group of people will often be called a decisionmaking unit (DMU). Because buying machinery is an important decision, it is likely that the production manager may be asked to comment on the suitability of various machines. The finance manager will probably be asked to arrange a loan or other scheme to make sure that cash flow in the company is not badly affected by the scheme. If the machine is bought, the human resources manager may have to arrange for training, extra insurance, shift working and a whole range of matters concerned with worker safety. The managing director may have the final word on important decisions. Similar ideas can be applied to buying services such as advertising and other publicity matters, as all these decisions are complicated by the fact that, in the long run, industrial purchases are due to derived demand, which is more difficult to anticipate. Wholesaler/Retailer Buying Decisions The wholesaler and retailer share the same purpose – to make profit by buying products from manufacturers then selling the same products to other people. It renders their decisionmaking process quite different from that of the industrial buyers. Usually, the wholesaler buys in bulk from the manufacturer and sells smaller quantities to the retailer, who then sells individual items to the consumer. There are long-term and short-term aspects to the supply business which must be considered. Short-term aspects are fairly straightforward: the purpose is clearly to get goods to the places where consumers will buy them and to make a profit by doing so. The products concerned may be anything consumers buy and also many of the repeat-buy items which industrial buyers have to get in, so as to keep their factories running. In the long term, wholesalers have the obvious function of supplying retailers, thus saving manufacturers the job of delivering to thousands of shops and then dealing with numerous accounts. However, wholesalers have another function – they disconnect the production line from the consumers. By taking goods into stock, wholesalers enable factory managers to run their production lines at the best speeds for efficiency. Production lines depend on continuity – they are set up to produce identical items for long periods. The products have to be moved away from the end of the line so as to keep the line going. Consumer demand is very variable and it would be difficult to make most of the products just when they were about to

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be bought. So the wholesaler sometimes provides a useful buffer between the demand and supply aspects of business. The decision-making process will have short-term and long-term considerations, which for the retailer will be concerned with potential demand for a product in the immediate future. In retail operation, demand can be turned into profit: the retailer has to judge what to buy so as to maximise the profit level. For the wholesaler, there are other considerations – the wholesaler is providing a service to the manufacturer as well as to the retailer, and so must expect to be paid for that service. Wholesale decision-making is complicated by the service aspect of the business. Non-profit-making Buying Decisions There are other organisations which cannot be classified as industrial or wholesaler/retailer, and many come under the heading of non-profit-making organisations (NPOs). Such organisations need supplies just like others, but they do not buy them with the purpose of consuming for their own benefit in the same way as domestic consumers, nor do they buy products with the intention of selling them for profit. The most obvious examples are the many local services, such as the police, hospitals, ambulance and fire services (although the notion of profit not being applicable in some of these cases looks set to change). Then further afield there are the armed forces, mountain rescue services, lifeboats and coastguards. Less obvious are the charities, which usually buy products to use for someone else's benefit, or to send on to people who are disadvantaged for some reason. Some charities work for the welfare of animals or the countryside, and they all have the characteristic of being nonprofit-making.

Influences on Organisational Buying Organisations buy differently from individual consumers, for a number of reasons. (a)

They have multiple objectives/needs These objectives/needs are:

(b)



profits



reduced costs



meeting needs of employees



legal and social restraints.

A lot of people may be involved in the purchasing decision The roles of the DMU may be fragmented around the organisation, which adds to the time taken to reach any decision. Some people may think they have power when, in reality, the power lies with someone else.

(c)

Buying patterns may be formally set by the organisation The buyer may have to buy in bulk, or buy from only one source, or buy at the lowest price, etc.

(d)

The value of the purchase is often high The buyer is spending money on behalf of the organisation. They need to be sure that they do not waste it or their job could be in danger.

Add to this the stress of internal organisational politics and you can appreciate just how difficult industrial purchasing can be.

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The influencing factors on buying will vary from organisation to organisation and it would be an impossible task to produce a comprehensive list of all of the variables that might influence industrial purchasing. However, factors might include: 

Market availability and choice of products legal aspects competitive position recession or boom



Organisational attitude to risk availability of resources policies regarding trading/not trading with other parties the nature of the DMU (e.g. few or many people)



Personal status and power internal conflicts and politics individual morality and ethics knowledge or lack of it.

If we say that influences on organisational buying behaviour are a combination of influences from both the internal and external environments, you will realise just how difficult it can be to understand organisational buyers. Add to this the fact that these buyers are also individuals who are subject to all the individual consumer influences, and it gets even more complex. It is often said that industrial buyers are difficult to approach because they are very loyal to their suppliers. Marketers or, to be more specific, salespeople, should always be aware that this loyalty may simply be because the buyer is complacent and has not investigated other sources of supply, or even that salespeople have not tried an approach because they have been put off by the response "we are happy with our present suppliers". Good industrial marketers or salesmen will know that industrial buyers are subject to the same human pressures and motivating factors as the individual consumer, in addition to the constraints and motivating factors imposed upon them by the organisation (availability, quality, time, price, storage costs, etc.). An understanding of behavioural patterns will result in more successful marketing communications – and therefore more successful marketing. Clever use of communications can overcome the difficulty in getting to any buyer – whether it is a consumer, or an industrial purchaser buying for a transnational organisation. Recent technological advances in the internet, mobile technologies and databases have aided the marketers' understanding of buyer behaviour. Databases have been used to store information about consumers and website analytical software has allowed marketers to track customer behaviour online. The fusion of these two sources of data means that marketers can understand not only who is purchasing their products but when they purchase and the decisions they are making, by looking at the web pages they visit. Being able to manipulate data in this way means organisations know much more about their customers and their buying behaviour.

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Segmentation and Targeting in Business-to-Business Markets The process for segmenting in the business-to-business (B2B) market would generally cover industry geographic area, technological advancement and organisational size, rather than more usual classifications for business-to-consumer (B2C) such as behaviour, needs and motivations. However, this will be addressed later. However it should be noted that market segmentation is less well developed in business marketing than in consumer marketing, which may explain why it is more common to find build up of one-to-one relationships between supplier and customer. The following segmentation structure has been suggested by Shapiro and Bonoma (1990): 

Background company characteristics Factors most commonly used by businesses to segment are industry type, customer size and location, technology and capability.



Industry type Standard Industry Classification (SIC) provides a first stage for identifying target industries and dividing them into groups of companies with different needs or differing approaches to buying. For example retailers and hospitals both buy computers, but they have differing buying strategies.



Company size Size may be very important – small companies have needs that are different from the larger companies; therefore it would be significant to look at the number of employees, sales turnover etc.



Customer location This may be a good way to segment the market for business products as location will impact upon sales and distribution costs and competitiveness may be high if there are strong local competitors.



Company technology The stage of technological development will directly affect the manufacturing and/or product technology and thus affect its demand for different types of product. High technology businesses may require different distribution methods – Tesco, for example, requires suppliers to be able to cooperate in electronic stock control and cross-docking to avoid retail stockholding. Increasingly, firms wish their suppliers to be integrated into their computer systems for all stages of the purchase process.



Customer capabilities Business customers may differ in their strengths and weaknesses and thus in their demand for different types of produce and service.



Purchasing organisation There may be differences in the way the purchasing is organised in the organisation. This may well be a good way of segmenting the market, thus selection being dependent on the dependence or otherwise of technology.



Power structures An influence in selecting a target customer may be the strengths of the organisation matching those of the supplier.

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

Purchasing policies The way in which organisations approach their purchase may also be a source of targeting information. For example, companies that wish to lease and those that wish to purchase equipment.



Product application The uses of the product will also influence the purchase process and supplier choice. For example, the purchase of machinery for continuous use in a large factory will differ from that for a small machine used intermittently.

Attitudinal Characteristics B2B organisations tend to have fewer but larger customers and deal with a range of buyers in the decision-making unit (DMU), such as buyers, decision-makers (financiers), influencers and gatekeepers. Different members of the DMU will often have different perceptions of what the benefits are, both to their organisation and to themselves. In communicating with the different members of the DMU, it may be necessary to emphasise the benefits of the product or service rather than the features of the product or service. B2B products and services tend to be complex, and therefore organisations use sales forces to deal with the complexities through building relationships with the customer organisations. Behavioural Characteristics Although there are organisational policies that will influence the purchase of goods, the products are still purchased by individuals within the DMU and therefore it is necessary to be aware of issues such as: 

buyer-seller similarity – compatibility in technology, culture and company size may be an influence



buyer motivation – different members of the DMU will differ in the degree to which they look at alternative suppliers and source products and services, and may wish to remain loyal to existing suppliers



buyer risk perceptions – there will be an influence regarding the status of the person making the purchase decision and the personal style of the individual.

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Chapter 7 Product Management and Development Contents

Page

A.

Nature of Products and Services Some Introductory Definitions Services and Products Classifications of Products

196 196 197 197

B.

Product Management Main concerns of Product Management Product Portfolio, Range and Mix Product Management Decisions Product Mix and Customer Benefits

199 199 203 204 211

C.

Product Branding Brand Strategy Threats to Branding

212 213 214

D.

Product Packaging Practical Aspects Decorative Aspects Informative Aspects

215 215 215 215

E.

The Product Life Cycle Problems with the Product Life Cycle Usefulness of the Product Life Cycle Management of the Product Life Cycle

216 217 220 223

F.

Extending and Expanding the Product Life Cycle Extending the Market Expanding the Market Extended Product Life Cycle Graph

224 225 226 226

G.

New Product Development Process of NPD Success and Failure of NPD The Product Plan

227 228 232 233

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Product Management and Development

A. NATURE OF PRODUCTS AND SERVICES Some Introductory Definitions Skinner defines a product as "anything that satisfies a need or want and can be offered in an exchange". He goes on to say that a good is a tangible object (one you can touch), a service is not tangible but provides a benefit, and an idea is a philosophy or concept. All can be included in the word "product". Kotler also offers the following definition: A product is anything that can be offered to a market for attention, acquisition, use or consumption: it includes physical objects, services, personalities, places, organisations and ideas. Theodore Levitt, in his text Differentiation of Anything, puts forward four concepts which go to make up his idea of the total product: 

The physical product or service



The expected product, which includes price, packaging, availability, after-sales service and so on



The augmented product, in which augmentation is the way in which the manufacturer differentiates his products from others by adding some extra benefit



The potential product, which is the ultimate combination of product and service which it is possible to achieve.

This introduces the idea that products and services have depth – or different dimensions – to them which consumers find attractive and contribute to the decision to buy. We can say that a product has three main dimensions: 

Physical This refers to the materials from which a product is made, e.g. cotton for bed linen, metal for shelving units, etc. The actual raw material may have no real value until it is formed into a "product" of some kind, which is there for a purpose.



Functional Functionality refers to the use of the product. What is it for? What does it do? It may be that it plays music, or it keeps out the cold, or whatever. The fact is that the raw materials have been turned into something which has a purpose. The "function" of a product may change at times because someone has found another purpose for it, e.g. house bricks can be used as supports for beds, seats or shelving units.



Symbolic The symbolic attributes of products are also sometimes known as "psychological" attributes. This is because the symbolic attributes refer to the "value" which a user gives to a product. Value is intangible and will vary from person to person, e.g. the value ascribed to a pair of Nike training shoes by a style-conscious teenager is much higher than that given to a similar pair of shoes by a middle-aged keep fit enthusiast. It is the "symbolic" attributes that play on the "esteem" and "belonging" needs of the buyer and, consequently, help in the marketing of branded and high value goods.

Another explanation is that a product has three "layers": 

Core or generic product What the product does – its function. For a refrigerator, for example, this could be that it stores, preserves and cools.

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Tangible product What is offered – the features, style, quality, packaging, etc. For the refrigerator, this could be that it fits under worktop, is self-cleaning and is offered in a range of colours.



Augmented product The add-on benefits provided along with the product – after-sales service, guarantees and warranties, credit facilities, availability in the market, delivery, etc. For our fridge, this might include image, guarantee, free credit and the particulars of the after-sales service.

In addition to these two methods of explanation we could describe a product as a "solution to a problem" or a "bundle of benefits". Using these last two descriptions also allows us to take into consideration the supply of a service.

Services and Products When you buy the product you automatically get the benefit of a lot of service which you may or may not know about – after-sales, guarantees, etc. However, when we talk of "services" in the marketing sense, we do not mean the backup behind the products you buy, but rather those services which are marketed in their own right. Examples include airline, train and bus travel; hotel accommodation; doctors, dentists, hairdressers and so on, where the result of the "service" is what you are buying. The most important difference between products and services is that services cannot be stored; if a hotel bedroom is not occupied tonight, a profit opportunity is lost for ever. Is a service any different to a physical product? Well, of course it is, in some ways. Services differ from physical products, in terms of their: 

Intangibility – they cannot be seen, touched or tried before purchase.



Inseparability – they are used or "consumed" at the time of purchase and, as such, cannot be separated from the provider.



Perishability – they cannot be stored for use at a later time.



Variability – they are dependent on the person who is providing the service and, as such, will vary from time to time in accordance with when they are being provided and the circumstances surrounding the provision.

The characteristics of a service can add difficulties for marketers but, at the end of the day, it is still "the item that is being exchanged" – it is the product. The product of an accountant is the expertise which is being sold, and the product of a hairdresser is the skill in cutting and styling that he/she provides. Thus, "products" and "services" are not really any different. A product is a service and a service is a product. For the rest of this chapter, when we refer to "product" please remember that we are also referring to "service".

Classifications of Products If you recall we have basically two types of markets: consumer and industrial. It follows, then, that we have basically the same two types of product and service. (a)

Consumer Products Consumer products are classified in three ways: 

Convenience The minimum of effort is needed because the customer knows about the product before they shop.

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Brand substitutions are easily accepted as these products have low "value". They are the products which are bought automatically and repetitively, e.g. butter in a supermarket. The marketing implications of this are that:



(i)

The product must be easily accessible to the buyer

(ii)

Advertising is needed to strengthen branding and gain loyalty

(iii)

Differentiation is achieved by using other mix elements.

Shopping Those products where customers do not have full knowledge and where they can be influenced to accept an alternative product (during their "search" phase) by the benefits being offered. They are higher in "value" than the convenience type of product and therefore involve more risk in purchase. The marketing implications of this are that:



(i)

Benefits offered are critical – sometimes more than price

(ii)

Persuasion may be involved, (e.g. by the retailer or salesperson)

(iii)

Distribution will not be as widespread as for convenience goods.

Specialty This type of purchase is where customers have hard and fast ideas of which product, outlet, brand, provider, etc. they wish to use. The customer will go to great lengths to ensure that they obtain the actual product they require and will not be easily converted to a substitute. These purchases are high in "value" and therefore carry the greatest element of risk to the buyer. The marketing implications of this are that:

(b)

(i)

Promotion needs to be targeted very carefully

(ii)

Image and reputation are critical

(iii)

Price is secondary to other features

(iv)

Distribution will be very limited/exclusive.

Industrial Products Industrial products can also be classified into three categories: 

Raw Materials and Components The actual fabric, etc. from which an end product is made. Manufacturers buy these items from suppliers and buying tends to be on a regular, repetitive basis once a production line is established. The marketing implications of this are that:



(i)

Supply and price will be major factors

(ii)

Promotion tends to be in business publications and catalogues

(iii)

The level of quality required will depend on the quality of the end product

(iv)

Relationships can influence the buying processes.

Equipment/Plant Computer systems, production plant and other types of equipment needed in the operation of a business fall into this category. The nature of the purchases often

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involves high prices and, as such, a great deal of research and deliberation will go into the purchasing decisions. The marketing implications of this are that: (i)

Product features and performance are critical

(ii)

Price may not be highly important

(iii)

Support services take on extra importance

(iv)

Promotion, highly targeted, may be direct or in business publications

(v)

Personal selling may be required

(vi)

Decision processes will be complex and take time

(vii) Distribution is likely to be limited to direct or distributors. 

Supplies The "consumable" items that are needed for day-to-day operations. These products are similar in nature to convenience goods in the consumer sector. Purchasing can be habitual and may carry little psychological "value" to the buyer. The marketing implications of this are that: (i)

Delivery is not normally direct from the manufacturer

(ii)

Price lists and any catalogues need to be comprehensive

(iii)

Promotion will be more general than for other industrial purchasing.

It makes little difference how we describe the product, or even how it is classified. The product is what is being sold and what is being bought. In other words, it is the item that is being used in the exchange process that is taking place between buyer and seller. However, the more qualities there are to the product, the more valuable it becomes to the person who is acquiring it and the more likely the chances of success for the marketer. Hence the emphasis on the augmented aspects of image, after sales, delivery, etc. and it cannot be denied that the best products for a buyer are those which give an "added value" of some kind: they give something more than the basic function. For example, designer clothes cover the body but they also give esteem and status; personal computers now give the benefits of built-in modems which can be used to communicate with people around the world.

B. PRODUCT MANAGEMENT The level of responsibility and autonomy given to managers of products will vary in accordance with the size of the organisation as well as with the style of management which is currently being used. Some product managers will have wide-reaching responsibilities and freedom for decision making; others will be limited in their scope.

Main concerns of Product Management Product management is concerned with both existing and potential products. (a)

Maintenance of existing products Products need support in terms of other marketing activities – promotion, pricing exercises, distribution management, etc. Product managers must constantly monitor product performance.

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Information on how a product is faring in the market will help a manager to decide if it is time to make any changes to the range, or part of it. In cases of poor revenue generation, it may be that a product needs to be dropped or extra promotional activity is called for. Decisions such as these are made on a regular basis in the process of product management. (b)

Development and introduction of new products We know that not every product is blessed with a never-ending life and, if only because of changing customer requirements, new products will be needed. We will cover new product development in more detail later, but at this point we must remember that it is a vital part of product management.

Part of both these concerns is how the product is placed in the market in terms of customer perceptions, e.g. high quality, value for money, etc. This is product positioning. (c)

Product positioning Product management is concerned with getting the positioning right, keeping it right, or changing it until it is right. Perceptual maps are used to show positioning. These maps can be used by a manager to compare positioning with the competition or to show the overall picture of a company's product range, as in the following Figures. Figure 7.1: Competitive Positioning (Leisure Activities) HIGH PRICE  Golf Club Theatre 

 Squash Club  Swimming Club

POOR VALUE

Cinema 

GOOD VALUE

Bingo Hall   Council Sports Centre LOW PRICE

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Figure 7.2: Leisure Product Range (Local Authority) HIGH PRICE Golf 

 Tennis  Swimming

Hockey  POOR VALUE

GOOD VALUE  Museum

Sports Fields 

 Art Gallery LOW PRICE

Changes in product positioning (forecast or actual) can also be shown by perceptual mapping, as in the following two Figures. Figure 7.3: Competitive Positioning Changes (Leisure Activities) HIGH PRICE

Theatre 

POOR VALUE

GOOD VALUE

Bingo Hall   Council Sports Centre LOW PRICE

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Figure 7.4: Leisure Product Positioning Changes (Local Authority) HIGH PRICE Golf  Hockey  POOR VALUE

GOOD VALUE

Sports Fields 

LOW PRICE

The variables which can be used in the construction of perceptual maps can really be on any aspect which the company wants to use, e.g. distribution : price; guarantee : length of time taken to complete the order; or price : quality. It will depend on what the management has identified as being important and just what is being "measured". Influences on positioning can, in most cases, be directly related to customer perceptions and expectations. At this point we should be asking why these influencing factors are so important to a product manager. Well, the whole idea of marketing is to satisfy customer requirements and it is the company best at doing that which is likely to win the rewards of market share/profit, etc. By understanding the influences on buying behaviour, a manager can fine-tune his product and position it in such a way that it will not only satisfy, but "delight" the customer. This is what most product managers want to achieve. Obviously there are benefits to be gained – happy buyers, repeat purchasing, kind words said about the company and its products, etc. (d)

Improving Customer Loyalty There is an expression quoted in marketing and selling which says: "We want customers that come back, buying products that don't". Translated, that means we want good quality products and satisfied customers. Customers and consumers alike are now very knowledgeable on their rights. They have high expectations of products and do not hesitate to complain if a product offering does not match up to its promise. All of this, coupled with increased competition, has resulted, overall, in a general raising of the quality of products which are available in the marketplace. The higher quality expectations for products have, in turn, resulted in more emphasis being placed on the added value aspects of products in order to gain customer loyalty. Customer loyalty is of prime importance to any marketer, even if buying the product involved is a one-off, or very rarely completed, purchase.

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The majority of purchases, however, are repeated on more than one occasion and, as such, the marketer wants to build up a relationship which will mean that the customer will come back another time. Apart from the aspect of satisfying the customer, there are very good managerial reasons for establishing customer loyalty, such as: 

The cost of gaining new customers is much higher than keeping existing customers happy



It is easier to promote to existing customers than to unidentified buyers



It is easier to encourage satisfied customers through the buying process than to start from scratch with new prospects



It is easier to manage the product range when buyer needs are known.

You can see from these points how important it is to develop a long-lasting relationship with a customer. Long-lasting relationships MEAN customer loyalty. The stronger the ties are between a seller and a buyer, the less likely the breakdown of the relationship. Marketers try very hard to create and maintain this type of relationship.

Product Portfolio, Range and Mix (a)

Portfolio If a company has just one product then all its efforts and resources will be devoted to it. Since all the risks in the marketing environment will fall on one product, most companies would try to avoid such dependence. Yet as soon as another product is marketed, there is the need to reallocate some of the company's resources and the scene is set for conflict, even in the best run companies. The benefit of having more than one product would be obvious if we could foretell the future accurately; we could just allocate resources to those products which are going to make most money, and change when the future changes. As you know, life is not so simple and every decision carries some risk of being wrong. The idea of a portfolio of products is sensible; if you can arrange your business so that as one market dwindles away another is just growing, you can have profit continuously and inherent risks will be reduced. When the theory works in practice it is not by chance. Information has to be acquired and decisions made so a progression of new products can be phased in. At the same time, management will want to make as much profit as possible from their investment in the old products before they are retired.

(b)

Range Many simple products are supplied in different sizes, to suit the needs of different customers; you will have seen big and small packs of foodstuffs in grocery stores and there are plenty of examples of size ranges, as in shoes and clothes. The same situation applies in factories – gears and chain drives, belt drives and machine tools all come in different sizes to suit specific purposes. A product range (or line) has some similarities; if the products are not related in some way, they are in different ranges. For instance, a supermarket may have in stock 5000 product ranges and some may include four or five different sizes. Packs of sugar may be in two sizes and three varieties, but they will all be in the "sugar" line, as distinct from the frozen chicken line. Similarly, for a product which does not have size variations, the number of models in the range may be considered. Take pens, for instance; they are roughly the same size and the differences are in the quality of the nib, the filling mechanism and the casing. Packaging has some importance, too.

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This leads us to consider the product mix, which can be a serious matter for a manufacturer. (c)

Mix Lancaster & Massingham, in Essentials of Marketing, show a neat description of the concepts "mix", "depth" and "consistency" in connection with products adapted in this figure: Product line 1          = 9 Product line 2              = 13 Product line 3         = 8 The "depth" of the product range is shown by the longest horizontal line and the "width" of the range is shown by the number of different lines. When studying companies the "consistency" of their product range depends on the closeness of the products in terms of end use, production facilities utilised and distribution systems. Stronger consistency will give a company a greater strength in the market, whilst a greater depth will extend the consumer types. Extending the width of the product mix will give the company more scope for providing profit from different sources, for protection against a decline in one range. In the above example, Lancaster & Massingham go on to show that the company has 30 items in the portfolio, in 3 lines, and the average depth of the product mix is 10. These "ratings" can be used by managements to assess company strengths. We can take a closer look at the idea of a product mix.

(d)

Implications of product mix A company which is dependent on one line of products is clearly vulnerable to changes in the market, so it is usual for companies to develop a number of product lines or ranges. Quite often they start off sharing the same production and marketing facilities, then develop separate departments or even divisions as the products grow. One of the most useful theoretical concepts which can help the marketing management to find the best product mix is the idea of a product life cycle. We shall examine this in detail later in the unit, but for now we can briefly state that it describes the way in which sales of a product develop and then decline over time. It is usual to plot this a graph, producing a curve which grows, slowly at first, through the stages of development and introduction and then more vigorously in the growth stage, before reaching a relatively consistent level of sales in the maturity stage and then seeing sales fall as the product enters decline. It is clear that a wise management will try to have new products coming into profit as the old ones fade away; and there might well be a time when it is best to withdraw an old product so as to concentrate on a new one. Planning such product progression is essential where the marketing management can see there is a pattern to their product life cycles. However, it is important to note that the life cycle may be drawn for the product range, rather than for an individual product; and a new product (or a variation of an existing one) can prolong the profitable phase of the whole range.

Product Management Decisions Decision-making is usually helped if the situation can be simplified through the application of clear models and here we shall revisit some of those considered earlier in respect of planning marketing strategies.

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Ansoff matrix The Ansoff matrix can be used to show the possible ways in which a company might look at product strategy: Figure 7.5: Ansoff Matrix Existing

New

Existing

MARKET PENETRATION STRATEGY

PRODUCT DEVELOPMENT STRATEGY

New

Market

Product

MARKET DEVELOPMENT STRATEGY

DIVERSIFICATION STRATEGY



Market penetration strategy involves getting more from present markets, possibly by improving or adding to distribution (flowers in petrol stations) or extending the service or product to parts of the country not yet reached.



Product development strategy is a matter of finding new products using the same production and distribution facilities to earn more profit for the company. Many ideas may come from the customers, some of which can be used to add to the product range.



Market development strategy is a matter of finding new markets for the products, such as when Amstrad introduced computer-based word processors to the home market. At that time "serious" computers were only used in offices. Some people say that extending the geographical spread of the product belongs in this strategy, rather than in the market penetration strategy. I would agree if the geographical spread involved international marketing, or extending the marketing from one state to another in the USA or Australia, but not for extending within a small country like Britain.



Diversification strategy involves launching a new product in a new market, usually achieved only by strong companies which can afford to take the high risks involved.

The four basic strategies shown in the matrix have different risks attached and have been estimated in principle as in the following table: Risk Factor Current product, penetrating deeper into the current market

1

Current product, entering a new market

2

New product, entering current market

4

New product, entering a new market

16

Although the Ansoff matrix must not be seen as a decision-making tool, it is useful as a way of clarifying the next stage in the process of ensuring profit growth, which is the investigation of the possibilities. The choice between the strategies shown in the

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matrix will involve a great deal of information collecting and analysis, so it is useful to show the risk involved in each strategy right at the start of the process. Some managements will rule out the riskier strategies and concentrate on less risky procedures, so narrowing the amount of information to be collected and analysed. You may see many variations on the simple matrix shown here; some go as far as 16 squares to refine the risk assessment. You may see matrices with "HIGH" and "LOW" instead of "Current" and "New", or different factors instead of "Products" and "Markets"; however, all have the same purpose – to clarify the decision-making process. Obviously, when a manager uses the Ansoff matrix, each square will show factors relevant to the specific situation, and "Market Penetration Strategy" would become something like "improve the distribution", or "offer some extra product features", or "increase the advertising", or "sponsor the London Marathon". Boston Consultancy Group Growth/Share Matrix The Boston Consultancy Group (BCG) is an international group of management consultants which has built up a substantial reputation as leaders of their profession. They have the advantage of dealing with a lot of companies, from which BCG can develop their knowledge of "cause and effect" in marketing. The BCG Growth/Share Matrix uses "Market Growth" on the vertical axis and "Relative Market Share" on the horizontal axis. The axes are both divided into "high" and "low", as you can see in Figure 7.6. Figure 7.6: Boston Consultancy Group/Share Matrix High 20

Stars

Question marks Large – cash flow

Modest + or – cash flow Market Growth

(b)

10 Cash cows

Dogs

Large + cash flow

Modest + or – cash flow

Low 0 10x

1x

0.1x

Market Share Market Growth refers to the growth of a product, a product range or a Strategic Business Unit (SBU). Any division or department may be a SBU, if their costs and profits can be identified separately from those of other parts of the company. Most people regard an annual growth rate of 10% or more to be high and less than 10% to be low. You can see already how arbitrary are the decisions on what to include in the matrix.

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Relative Market Share is a different matter, which depends on a comparison of the company's market share with that of the largest competitor. The comparison is expressed as a ratio, so that if the company has a market share of 10% and the largest competitor has a share of 20%, the BCG Relative Market Share is 0.5. If the positions were reversed, the company's Relative Market Share (RMS) would be 2.0. Some people use the "x" after the figure, others do not, but it is generally agreed that any RMS higher than 1.0 is "high". An RMS equal to 1.0 shows that the company is a joint market leader. Another innovation on the BCG Growth/Relative Market Share Matrix is the use of circles of different sizes to show the relative size of the sales involved. These circles only give an approximate idea, because it is often difficult to visualise the relative areas of circles. It should be clear that using the BCG Growth/Relative Market Share Matrix needs a lot of time, as well as a lot of consistent information. There are many critics of the principles behind the matrix, and there is an obvious simplification of the total market situation. In many cases some of the "information" used will be the manager's own estimates and I always reckon that if you multiply one estimate by another estimate, the result is no better than a guess. Finally, on this topic, always write out the title of the BCG matrix in full so that you will not forget the importance of "relative market share". It is very easy to slip into thinking of this as "market share" and that is a different matter. (c)

General Electric Portfolio Analysis This is a development of the BCG Matrix and uses much more information, as well as judgement of the managers concerned. The General Electric (GE) matrix relates competitive strength and industry attractiveness. To bring this down to basics, you might be pleased to have a very high market share, but that may not be of much value if the industry is declining rapidly. Figure 7.7: General Electric Portfolio Analysis

Market attractiveness

Strong

Industry attractiveness Medium

Weak

High

Medium

Low

Business Strengths Invest for growth – these are the best positions to be in attractive markets Harvest or withdraw – the business is weak in unattractive markets Invest selectively and with caution, but the markets are medially attractive

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Note: When placing products or SBUs on the portfolio matrix it is normal to use a circle to indicate the overall size of the market. Bigger circles equal bigger markets, and the shading of an area indicates the firm's current share of that market. Thus, in the following illustration, A indicates a market about twice the size of B, with the operation having 50% of A and a 25% share of B. A

B

Some people use the title "Competitive Position" instead of "Industry Attractiveness" and the matrix is based on Return on Investment, not just cash flow. You can see from the shading on the matrix just what indications there are for managements trying to plan future strategies. However, you can also see that there is a need for even more information and a lot of judgement. One of the problems in using matrix analysis is that the simplification of the information tends to ignore factors that cannot be expressed in commercial terms. The matrix may suggest the closure of a SBU, or the withdrawal of a product, yet there may be good reasons within the company for keeping them going. One product supports another, perhaps, by using the same machinery or raw materials. A company, in which I worked for a time, bought raw rubber at a very good price, then used the raw material to make mouldings, drive belts, conveyor belting and waterproof sheeting. If one of the SBUs had been closed, due to failing in the matrix analysis, all the other SBUs would have suffered from the higher buying price of the smaller quantity of raw material. Can you find enough information to draw up the GE matrix for your company? Maybe you could discuss the matter in general terms with colleagues or your manager. You will remember the principles much better if you have tried to compile the matrix, even if you are not successful. Don't think that matrix analysis is useless if you cannot make it work in your situation – remember that this is a technique for the big companies with ample resources. (d)

The Shell Directional Policy Matrix This is a development of the GE Portfolio Matrix, and uses the "Company's Competitive Capability" on the vertical axis, instead of "Market Attractiveness". The title on the horizontal axis is often "Prospects for Sector Profitability" instead of "Industry Attractiveness" and you may think there is not much difference. The Shell Directional Policy Matrix does take into account the company's competitive capabilities and if the nine squares of the matrix can be completed, there can be recommendations for future strategy, as shown in Figure 7.8.

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Figure 7.8: The Shell Directional Policy Matrix Prospects for sector profitability Unattractive Average Attractive Company's competitive capability

Weak

Average

Disinvest

Phased withdrawal

Double or quit

Phased withdrawal

Custodial

Try harder

Cash generation

Growth

Leader

Strong (Source: Lancaster & Massingham, Essentials of Marketing) Although the matrix usually does include strategy recommendations in the nine cells, Shell say that each strategy should be evaluated against all foreseeable scenarios, and if the results in all nine cells are acceptable there should be no disasters. But how do we foresee scenarios of the future? Quite often a manager can predict events, such as a general election, but they cannot foresee the effects of the event. (e)

Porter's Model of Industry/Market Evolution Michael Porter uses a different matrix, with only six cells, and he has developed this on the basis of the differences in strategies needed as industries evolve. He shows that there are three stages: 

Emerging industry



Transition to maturity



Decline.

We can look at this at a very basic level – you probably take for granted the use of a fax machine or computer to transmit messages down a telephone line, but it is not so long ago that this facility was developed. The change from "wired in" telephones to the modern "plug-in" types has enabled a whole new industry to develop, probably within your working lifetime. The strategy for selling the old type of telephone was very simple, and was hardly noticeable as a strategy. However, when the new uses for telephones were in their early development stages, there was a need for a quite different strategy, because of the new versatility of the equipment. In Britain there has also been the introduction of competition from cable companies to replace the old monopoly situation. This has made the telephone industry evolve their marketing strategies very quickly. Another example of evolution is the compact disk used on computers: that has gone from novelty about ten years ago to now being a basic part of computers sold to householders. I leave it to you to work out the changes in strategies – they have happened in your working lifetime.

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Figure 7.9: Porter's Industry/Market Evolution

Growth Strategic position of organisation

210

Stage of Industry Development Maturity

Leader Cost leadership Keep ahead of the field

Imitation at lower cost Joint ventures

Raise barriers Deter competitors

Differentiation Focus

Decline Redefine scope Divest peripherals Encourage departures

Differentiation New opportunities

Follower (Source: Lancaster & Massingham, Essentials of Marketing)

Porter suggests that industries have particular characteristics which change as the industry changes from emerging to maturing then to declining, and we should look at these stages. 

Emerging industries have to deal with uncertainty among buyers about product performance, potential applications and future developments. They also have to cope with uncertainty among sellers about the customer needs, demand levels and technological developments that might make the product obsolete before the sellers have recovered their costs of developing a market. This is a common problem in the late 1990s as computer systems, which were installed at great cost, are seen to be outdated within a couple of years. Many buyers are reluctant to remove the systems, buy new ones and re-train their staff, for the small improvements in performance that they could achieve. In some technologies, customers have shown some resistance to the capabilities of some of the new machines. Video recorders are a good example – some researchers have seen people asking for a simpler version, easier to operate.



Maturing industries have to contend with customers who become more knowledgeable, falling profits, slower growth, more competition, lower innovation and reducing customer interest.



Declining industries have to deal with customers' changing needs, changing markets and competition from substitute or alternative products. Prices are lower, so revenues are reduced even if the same sales volumes can be achieved.

Porter classifies companies simply as "leaders" or "followers" and you can see in Figure 11 how the strategies change as their industries move from "emerging" to "maturity" and then to "decline". Have you noticed that Porter has moved towards the Product Life Cycle (PLC) concept? You could almost superimpose the PLC on some of the matrices that we have been looking at. Do that if you wish, but remember that all these ideas depend on a lot of information, a lot of management thought, a lot of patience and some conjecture. There are not many companies that have enough spare management capacity to be able to use these analytical tools fully.

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However, that does not reduce the value of the concepts and some managers can adapt the ideas to reduce the complexity and make the concepts workable in their marketing activities.

Product Mix and Customer Benefits The selection of the product mix would be easier if the decisions depended simply on production management; but the whole purpose is to satisfy customers, so what they want comes into the decision-making process. It is tempting to make decisions just on the profitability of each item in the range, but to do so could cause a lot of problems. For example, the pack sizes of some food products may appear expensive to the production manager; yet if the small sizes were to be withdrawn, there would be complaints from old people who live alone, or from couples without big families to feed. The complaints would be made to the supermarket or grocery store manager and might take a long time to reach the food manufacturer. Whilst that is going on, the customers will have looked at competing products and may well have switched from one brand to another. The same can happen in the industrial markets, in which even tradition can play a part. When I worked for a chain and sprocket maker there was some talk of withdrawing some unprofitable sizes, yet a postal questionnaire revealed we would lose much more profit by withdrawing those sizes than we did by supplying them. Improvements in the manufacturing processes were a better solution to the problem. Customers get benefits in several different ways and it is worth knowing what your customers think about the features of your products. I was amazed when a customer complained about a change in the position of the nameplate on a gearbox; he had designed his machine so the nameplate showed and his product literature included the remark that only "top quality" components were fitted. Our company name was one of the benefits he offered his customers. Benefits can be classified as symbolic, functional or physical and the nameplate on the gearbox was obviously symbolic. A taxi service which used only Rolls Royce limousines would be offering a symbolic benefit to their customers; you can probably think of many others. Functional benefits are often due to quite ordinary features which customers may not appreciate until they are told about them. "Wipe-clean" aprons look just like any other aprons, but have a particular surface which allows the wearer to wipe off any spillages. Automatic chokes and gearboxes on cars are commonplace now, but when the automatic choke first came out it was a serious benefit. (If you do not know what a choke is, ask an older motorist!) Physical benefits are often so obvious you might wonder what they are, but think of the sizes of many products – take motor vehicles again for example. The physical size of a car can be a benefit or not, depending on where you want to drive; a small car is best for parking in the city but probably not best for long journeys. Airlines offer wider seat spacings in their first class cabins, and there are many similar examples – you may prefer an upper deck when you go on cruise. (After the exams!) Service Value and Customer Benefits As outlined above services have very different characteristics from products, i.e.: 

Intangibility



Perishability



Inseparability



Variability.

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Therefore, value is not added with physical features but by creating value with a set of processes, it is through the management of these processes that organisations will create value and benefits for its customers. The management of service processes requires the use of resources and marketing similar to that of products. However, the major resource in the delivery of a service is usually employees. Employees' knowledge, competence and behaviour will all affect the processes and therefore, the value and benefits to a customer. The service characteristic of variability means that the service can vary each time it is experienced, therefore, consistency in employee knowledge, competence and behaviour needs to be managed and therefore, employee training and appraisal plays an important role in providing consistency of service delivery. However, technology is playing an ever increasing role in delivering service processes (e.g. on-line banking) but the issues of consistency, keeping content up to date etc still applies. Although the service/processes themselves are intangible, service does have some tangible features, such as physical surroundings, quality of supporting materials etc. and managers can use these resources to add value to a service, e.g. business class lounge in an airport. The inseparability characteristic of the service being the fact that as the customer uses the service at the point of delivery and it is the organisation that delivers the service through its processes, the customer and the service processes are linked and cannot be separated. In fact, the customer is part of the process itself. So, the way an organisation adds value through its processes is by engaging the customer in a relationship. The primary aim of building a relationship with customers is customer retention. The more engaged a customer is with the service provider the more likely he is to return or use more of the service.

C. PRODUCT BRANDING Kotler tells us that the American Marketing Association gives the definition of branding as being: "...a name, term, sign, symbol or design, or a combination of them, intended to identify the goods or services of one seller, or a group of sellers, and to differentiate them from those of competitors". Essentially, a brand is the flag which signifies, to the buyer, what they can expect from purchase in terms of quality, service, functionality, etc. A brand is a recognition factor which, particularly at the point of sale, can help a buyer to reach a purchase decision. Consider the following brands and what they could mean to an individual: 

Cadbury – good quality milk chocolate/fattening products



British Airways – good flight schedules/high prices



Sony- excellent quality/poor quality



McDonalds – pleasant outlets/poor nutritional value



IBM – solid quality/outdated technology.

You can see from the above (remember, they are only examples – I am not stating them as fact) that a brand can mean good and bad things to people. Buyers are attracted by certain brands and not by others. There may be good reasons behind the rejection of a brand by a buyer, e.g. poor experience in customer service, or in product quality, or perhaps because of influences coming from a family member, etc. but "brand rejection" does occur.

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Because of the danger of this phenomenon, marketers try hard to protect a brand image with vast amounts of money being spent on advertising and publicity. At the end of the day, marketers see the brand as being a major asset which works in their favour. The more loyalty that can be created, the better it is. The better the branding, the more likely it is to create loyalty.

Brand Strategy To develop a brand takes time and involves long-term planning and investment. This means that decisions on the type of branding to be used will not be taken at the operating level. These decisions are strategic in nature and involve higher-level decision-makers. Brand strategies that can be followed are: 

Corporate Umbrella Branding This is where the name of the company is used as the main "identifier" to the customer, e.g. Sony, Kellogg, Heinz. (Some major companies are now using the term "monolithic" when referring to their corporate brand. This appears to be happening when there are multiple brands under one parent group.) Brands of this type can be very powerful. The name "Hoover", for instance, became synonymous with the vacuum cleaner. "Biro" became a common name for ball pens. Of course, such branding can also be very dangerous. If for some reason a brand name becomes damaged by adverse conditions or publicity it can reflect on the entire product range and, consequently, affect earned revenue.



Family/Range Branding This is where a company has products being sold under a recognised name which is different to the company name. Family branding can apply to all products which are sold by the company, (e.g. Marks and Spencer use "St. Michael") or for some of the products only (Woolworth uses "Kingfisher"). Family branding can also apply to individual ranges. This type of individual family range branding is very common with high street fashion retailers, e.g. C & A use "Canada" and "After Six", Littlewoods have recently introduced "Berkertex" (a play on another well-known fashion brand), Evans use "Essence" – each of these names signifies the particular qualities of the range to the buyer.



Individual Product Branding This is where the name of the product does not have any relationship to the company name at all but the product is recognised for its own merits, e.g. Lucozade, Seven Up, Benylin.

A company may decide to adopt one, or all, of these strategies depending on what it is they want to achieve. We can quote many examples: Corporate

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Family

Individual

Van den Burgh Foods

Ragu

Chicken Tonight

Nissan

Frontera

Frontera Sports

Volkswagen

Golf

Gti

Warner Lambert

Health Care

Benylin

214


Often the brand strategy decisions will be based on the type of products which are being manufactured. If they are broadly similar the company may choose to be known for its corporate name rather than for individual products. Where the product range is diverse and aimed at different target sectors they may choose to adopt a policy of "family" or "individual" branding. It is impossible to give a good, general guideline. The ethos of the company and its long-term intentions will dictate how branding is carried out. When brands need to be developed, either from scratch or changed in some way, decisionmakers cannot simply come up with a catchy name or new logo and hope that the buyers will like it. The brand must be very carefully planned in terms of its particular characteristics. Consideration needs to be given to several aspects including: 

Impact on Existing Brands To introduce a new brand, or change an existing brand, that would have an effect on other brands being offered by the same company would be rather foolish, to say the least.



Suitability for Global Operations Products are available in most parts of the world so the "translation" of a brand needs to be universal. A name which is offensive, or difficult to say, or a colour which signifies disaster would be inappropriate. There can also be savings on promotional material if brands are adapted to cope with multiple cultures.



Potential of the New for Brand-stretching A brand name that can be used to cover other products which may be introduced later can be highly attractive. When a company has acquired a good reputation for a brand it makes sense to use that brand for other products. For example, Marks and Spencer originally were known for clothing under the brand "St. Michael". They have now stretched that brand to cover food, gifts and toiletries, home furnishings and furniture. Each new line has benefited from the security of the established brand name.

Threats to Branding The presence of strong branding can, in itself, be a threat to an organisation. Managers can become complacent and, at times, arrogant and dismissive of customer needs. Acting from a power-base can be a powerful drug and warning signs may sometimes be ignored. Resentment of the power of a supplier can cause problems which will build up and then suddenly develop into a major issue. One of the main outcomes of this, throughout the world, has been seen in the actions of major retailers in the consumer sector. Many have developed their own brands which now compete with each other and more established brands, on the basis of price or value for money. Buyers who try the own-brand goods will often find that there is little difference in quality and taste but there can be a big difference in the price they pay. If the price they are paying does not equate to the "value" they receive, they change brands. They shift loyalty from one brand to another! Brand managers don't want this to happen so they do everything they can to keep their customers happy.

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D. PRODUCT PACKAGING You may think that packaging is only for protecting the goods on their way from factory to user; but just stand in a supermarket, look down the rows of shelves and imagine what the scene would be like if all the packages were in plain brown. And think what a struggle it would be to find the product and pack size you want to buy. The same applies to most other types of store; so it is clear that packaging does more than protect the product. We can look at packaging from three aspects: practical, decorative and informative, to get a better view of the importance of packaging to the marketing manager.

Practical Aspects Some aspects are obvious, such as containing the right quantity of product and keeping it safe during transit from factory to warehouse, then to the store shelves and finally to the customer's home. It is equally important for the packaging to protect distribution staff, customers and associated people from the product, if it is hazardous. Some products sold in grocery stores could be very dangerous if spilled onto people or property. Oven cleaner is an example; I bought an aerosol in a hardware store which could be a real killer if the packaging failed to protect the user. There is scope for ingenuity in the design of packaging, to make the pack more useful or attractive to the user; examples include "easy-pour" spouts on cans of engine oil and "tuckin" flaps on cardboard cartons for various products. I always look for hand-holes to help me to get a grip on heavy packages. If the pack can be re-used (for a different purpose rather than re-filling) there may be a benefit for some customers which will be another reason for buying the product. This applies in industry, too; some large packing crates are used as offices, sheds, workshops and even as homes in some places overseas. You may like to ponder on the supply of foodstuffs before packaging by processors became the normal activity. I can remember the grocer weighing out sugar, flour, dried peas and beans, pouring them into paper bags and then folding over the tops neatly. I never knew who had produced the groceries and hygiene was of minimal importance. Can you imagine returning to life before plastic bags?

Decorative Aspects The obvious "prettiness" of packages is not the important matter here. A package can carry the logo or symbol of the brand, which adds to the message appearing in advertisements. Repetition of a logo helps identify the product to customers with some satisfactory experience of the same brand. It also "reinforces" the message in the advertisements and helps persuade customers to buy the product. Some products have quite distinctive packs; the colours and designs used become synonymous with the product, such as Kodak film, Mars bars and After Eight Mints. Here, the design of the pack and the colours used are identified with the product just as strongly as the coloured shirts of a football team. The packaging may not be on the shelf – the logos of petrol suppliers are on their tankers and on the forecourts of petrol stations, not on the product.

Informative Aspects This really is important in view of the potentially dangerous products sold over the counter these days. The information can be simply how to open the package – not easy with some of the "protection" devices which appear for our benefit!

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In other cases the information shows us how easy it is to use the product, as with the lawnmower operated by a gorgeous young lady in a clinically-tidy garden. In fairness, the same packaging tells you how to use the machine safely and even tells you how to carry it easily. Some packaging includes information on the safety aspects of the product. Many products can only be sold if labelled with specific information.

E. THE PRODUCT LIFE CYCLE We have already mentioned the product life cycle model which is perhaps the most easily recognised and well-known model in marketing theory. You will know that the concept is best illustrated by a diagram of the "life" of a product covering the time from when it is introduced onto a market until it is deleted or phased out of a product range. The variables used in the model are Time and Sales Revenue (or Profit). Over the course of its life, the product moves through a number of stages, each of which has its own implications for the management of a product. Figure 7.10: Typical Product Life Cycle Model

Maturity

Revenue

Growth Decline Introduction Time The five stages in the life cycle are as follows. 

Development This can be a protracted stage and will involve activities such as design, planning, costing, test marketing, etc. Costs are high, with no earned revenue (and thus it does not register as a stage on the diagram at Figure 7.10). Promotion for awareness may commence in advance of introduction of the product to the marketplace.



Introduction This is another heavily expensive stage with promotion being intensive even though it may be selective initially. If the product is truly innovative there may be little or no competition at this stage, but market education will be required so promotion costs may be even higher. The distribution network will have to be established with dealer incentives being offered to secure business.



Growth If the product is taken up by the market, this stage will produce the greatest increase in sales and profit. The competition will be catching up and promotion will be aimed at creating favourable attitudes to the product as well as establishing buyer loyalty. The growth stage gives opportunities to solve problems which may have been found in the marketing effort (distribution, packaging, etc.) but pressure from the competition makes this a tense stage and there are still relatively high costs to be incurred.

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217

Maturity/Saturation The market has matured and competition will be at the maximum. Profit levels may begin to show falling trends as market share is lost to the competition or the market becomes saturated. At this stage promotion will be aimed at reminding the target audience about the product and at overcoming the competition. There may still be good revenue to be earned from the product and managers may extend the life cycle by marketing effort – new packaging, increased promotion, new market sectors, regions, etc.



Decline The market is falling and results in low profits. There is a possibility of high support costs and considerable management time spent in considering the merits and demerits of the product. The product may need to be withdrawn if new markets/uses cannot be found or if adaptations to the mix are not effective in increasing sales. At this stage organisations may be introducing new products to take the place of those which are about to be deleted. The decisions on product deletions and introduction are strategic decisions and will be dealt with at higher levels of management – some companies make a practice of deleting products regularly and others stick to making adaptations to extend the PLC; yet others will have an "open" policy of considering each product on its own merit.

Problems with the Product Life Cycle We know that most marketing models are not perfect and can be criticised for various reasons. The product life cycle model is no exception to this and there are a variety of problems in using the above basic concepts. (a)

Shape The typical life cycle model shown in Figure 6.5 illustrates the four "stages" that a product can go through: Introduction, Growth, Maturity and Decline. Occasionally, you may see another category, Saturation, which comes immediately after Maturity. The model in Figure 7.10 can immediately be criticised because it makes no allowance for any activity, costs incurred or time taken before the product is introduced to the market. It is, in effect, a "sales" life cycle as it shows the revenue gained and falling over time, although this could be related to the life cycle of the product from launch only. Figure 7.11 gives a better illustration of the concept: Figure 7.11: Product Life Cycle Model Revenue Maturity

Growth

Development

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Decline

Introduction Time

218


The model in Figure 7.11 is more realistic in that it shows activity and resource utilisation at the development stage, before market launch. We could therefore argue that the true shape of the product life cycle diagram is "S" shaped. But then we come across the problem that not all products are alike. They are launched under different circumstances, for different target sectors and for different uses. They will also involve different levels of resources during the development stage. This implies that the shape of the individual life cycle model will change. Consider Figures 7.12 and 7.13: Figure 7.12: Product Life Cycle – Rubik's Cube Revenue £2m

Time: 2 years

Figure 7.13: Product Life Cycle – CD Players Revenue £100m

Time: 30 years

The model for the Rubik's Cube shows little development costs incurred, a very rapid growth phase, a short maturity and a rapid decline. This reflects the nature of the product – it was a game that took the market by storm in the mid-1980s with everyone trying to beat the puzzle, but it quickly fell out of fashion with the resulting loss of sales. You can still buy the cubes but they do not take a large share of the games market – other favourites, or fads, have taken their place. Figure 7.13 shows a different history, with massive development costs, a slow introductory phase and then a steady growth with a long maturity phase. This reflects the fact that the CD player was a highly technical product which needed intensive development and production costs before launch onto the market.

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The product was bought in small quantities at first because people could not really see the benefits of changing how they listened to music. Additionally, CD players were seen as being a waste of money because the gramophone records that people had collected could not be used on them. Gradually, as the benefits of the superior sound reproduction were recognised, more and more people bought them with the growth stage increasing steadily until maturity was reached. Some music is now only available in CD form and, for those who like that music, a CD player is essential. The long maturity stage, as shown in Figure 6.8, is typical of where an industry has adopted a standard. Until something even better comes along, CD players are here to stay. Note that the model for the CD player is not for any particular product – it is for a generic, or core, product – a class of product. A life cycle diagram for an individual product may look completely different. In actual fact different product life cycle diagrams can be drawn for product class, product forms and products or brands. In Figure 7.14 we have used the vacuum cleaner as an example. Figure 7.14: Product Life Cycle – Vacuum Cleaners

Hoover

Product class all forms Cylinder Vax

Time

You can see that the life cycle of the product class is continuing. The product form (cylinder) was popular for some time and then declined in popularity with another growth stage at a later date. The curve for the individual brand (Vax) shows that the product has been a relative latecomer into the market and it is still in its growth stage. The scalloped curve for the Hoover brand, however, shows an on-going history of rising and levelling of sales. This variety in the possible shape makes it rather difficult to accept the idea of a "standard product life cycle" and this is a major problem for managers. They would like to be able to draw a simple product life cycle and then have everything go according to their expectations. Unfortunately, life is not that simple. (b)

Influencing Factors Product life cycles are a reflection of sales over time. We all know that sales can be affected in numerous ways and, no matter how good the forecasting or planning, there can always be a reduction in sales. The product life cycle takes no account of environmental influences such as competitive activity, legal pressures or customer buying behaviour. 

Accuracy As it is not possible to be 100% accurate in forecasting sales in advance, the only way that the product life cycle model can reflect a true picture is if it relates to sales already achieved. It follows, then, that only historical product life cycles can be accurate.

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

Location of Products Another problem that managers face is in knowing exactly where each product is in its life cycle. The growth stage may be protracted or very short. The potential size of the market may have been underestimated, which could result in a manager thinking that the product had reached the maturity stage when, in fact, there could still be opportunities for growth.



Over-reliance Sometimes a reduction in sales revenue can be because of some influencing factor, (e.g. recession). Just because the product appears to have reached maturity does not mean that it will go naturally into decline. An over-belief in the concept of the life cycle can mean that a manager will withdraw support from a product when sales slow down. Doing this can actually create decline and the product will fail. This is known as the "self-fulfilling prophecy syndrome" and has caused many products to disappear from the market earlier than necessary.

Usefulness of the Product Life Cycle Because I have covered the problems associated with the product life cycle first, you could be forgiven for thinking that I see no great use for this concept or model. On the contrary, I think it can be extremely useful if it is used with caution. As a general aid to planning it is excellent and can offer several benefits. (a)

Planning and control Once levels of revenue to be achieved have been established, a manager can calculate how many units of a product need to be sold in the time period covered. Using a desired product life cycle will show what possible sales could be achieved based on sales force capabilities (number of customer visits : likely conversion rate, etc.). It also means that the manager can liase with the production department on schedules and product availability. If the possible sales, coupled with the product availability, are in line with the revenue objective, the objective is given greater credibility. It also means that resource utilisation can be planned much more effectively. Using the model as a control mechanism is perhaps an even greater advantage. When a forecasted, or desired, chart is drawn it can be used as a measurement of actual results for any product. Comparisons can be made between the take-up rates of a range of products in order to see which marketing activities produced the best results. This type of post-campaign monitoring will help when formulating strategies for future product launches.

(b)

Strategy formulation The stages of the product life cycle give good general guidelines on the characteristics which can be expected for aspects of the marketing activity and consequently aid decisions on the type of marketing strategy that might be appropriate. These are set out in the Table following (Figure 7.15). I stress the word "general" because there will be exceptions. Environmental influences should always be taken into consideration when formulating strategies.

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Figure 7.15: Characteristics of Strategic PLC Planning Characteristics

Introduction

Growth

Maturity

Decline

Sales

Low

Increasing

Slowing

Declining

Profits

Loss

Peaking

Declining

Low to zero

Cash flow

Negative

Moderate

High

Low

Customers

Innovative

Mass market

Mass market

Laggards

Strategic focus

Expanding market

Market penetration

Defensive marketing

Productivity

Marketing expenditure

High

High – declining

Falling

Low

Product plan

Market to innovators; early adopters; high product failure rate; basic – developing

Expand for early & late majority; less product distinctiveness; improve models

Widen product lines, rationalise brand; less competition; differentiate

Niche marketing; reinforce brand loyalty; rationalise

Competitor reaction

No reaction

Maximum new entrants – high

Marginal competitors exit

Competition declines

Pricing plan

High skimming

Differentiated for each segment

Lowest – competitive

Price cutting rises for niches

Distribution plan

Unstable pattern – widen channels, seize shelf space

Increasing pattern – competitor activity increasing

Control passing to fewer firms

Segmented, fragmented, and localised

Promotional plan

Push for awareness

Create "pull"

Withdraw

Cease

If managers were to follow the guidelines given in Figure 7.15 too rigidly they may come up against a number of problems. Take the example of Distribution at the growth stage. To simply say that because a product is in its growth stage you should intensify your distribution activities may not always be true. Product and customer requirements may make that a nonsensical proposal. For example, think in terms of producing a highly specialised and innovative design tool. To have intensive distribution would be almost impossible, and customers would need personal attention. On the other hand, intensifying distribution for a product aimed at the consumer market might well be appropriate when the product is in its growth stage. Therefore, it follows that the product life cycle is not, and can never be, a formula for marketing management. (c)

Targeting and Positioning The diffusion of innovation is a concept which was introduced by Rogers and it refers to the characteristics of buyers. We looked at it briefly earlier in Chapter 5.

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Based on the normal distribution curve, the model shows the rate of diffusion at which a product will normally spread into a market. Figure 7.16: Diffusion of Innovation Early majority

Late majority

Early adopters Innovators

Laggards

34%

34%

2.5% 13.5%

16% Time

As you can see from Figure 7.16 the theory splits buyers into four categories: 

Innovators These are buyers who are always at the forefront of the market. They buy new products as they like to experiment and be seen to be first. These people are the "opinion leaders" of society. If this category can be convinced of the value of a product, and they buy, there will almost certainly be a growth rate for the product. It is also likely that if this category do not take up a product, then success will be limited and the product will die at birth or very soon afterwards.



Early Adopters These buyers are never the first to try new products, but they always follow opinion leaders fairly closely. They are not confident or adventurous enough to be leaders, but like to be "fashionable". They need to see that a product has some value before they buy.



Early Majority Once a product is established, the early majority will take it up and buy. By the time the early majority are buying, the product has been on the market for some time and has been proven to be successful or useful in some way.



Late Majority The late majority buyers are those who wait until the product is almost at maturity stage. They require much persuasion and it is often only when a product is widely available that they will buy. They are conservative buyers who need reassurance of performance.



Laggards These buyers are behind the time. They buy products when they are going out of fashion or may even have been outdated by new technology. They are the most resistant buyers to convince as they are the most risk-aversive. Products in the decline stage which have been reduced in price may be attractive to these buyers, but a marketer would not necessarily devote very much attention to them.

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By superimposing the theory of the diffusion of innovation onto the product life cycle, it is possible to understand the typical characteristics of buyers. This means that positioning can be done in such a way that it will be more effective and changes in positioning can be made as the product moves from introduction through to decline.

Management of the Product Life Cycle By constructing a desired product life cycle at the beginning of a campaign, monitoring results and then plotting actual figures, a manager can see how any product is performing. The visual representation helps in planning ahead to phase out obsolete products and in knowing when to introduce new products. The ideal situation for any company is to have a relatively steady income and it is by product planning that this can be achieved. In Figure 7.17, the horizontal dotted line shows the required level of revenue for the company. You can see that: 

Product A is now well into the decline stage and revenue is falling.



Product B is moving into maturity. This product was launched and managed to reach maturity as product A began to fail.



Product C is in the growth stage and is timed to reach maturity as product B is expected to fall.



Product D has been launched and is being managed to reach maturity as product C moves into decline.

The expected revenue is more or less at a steady rate which means that the cash flow will be constant and resource utilisation will be planned. Figure 7.17: Recurring Product Life Cycle Revenue required A

B

D C

C B D

A

This recurring product life cycle will be appropriate for those companies who are involved in new product development, rather than in product adaptation. Where product adaptation takes place, the result will be a scalloped, or extended, life curve, such as the one for the Hoover brand in Figure 7.14. Most managers would agree that the ideal product life curve would indicate little development cost, rapid growth and very long maturity. However, the reality is that most products are not fortunate enough to achieve that and product life cycles will vary in shape according to: 

The nature of the product



The management decisions taken

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

The activities of the competition

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The tastes of the buyers

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The influence of governments.

So we could argue that there is no ideal product life curve. The nearest we can come to that is if we create product life cycles and manage the product to fit our requirements, rather than simply launching a product and accepting the way the market behaves. Thus, then, we can say, in summary, that the product life cycle: 

Is very useful in targeting and positioning



Can give general guidelines on strategy



Is useful as a control mechanism



Is useful as a comparative tool



Can never be 100% accurate in advance



Is only effective if used with caution



Should be created rather than accepted.

F. EXTENDING AND EXPANDING THE PRODUCT LIFE CYCLE When a new product is introduced to the market there is usually a lot of expensive investment involved, on which management must try to get the best possible return. Remember, the owners are shareholders who judge management partly on the dividend paid on their shareholdings. There are other factors, but in general it is fairly safe to bring the operation down to money terms. Managers cannot control markets, which consist of customers who have their own ideas, but skilful managers can influence customers in such a way as to lengthen the life of a product by extending or expanding the market. 

Extension involves maintaining production levels by seeking a wider market as demand begins to fall in the existing market. No new investment in manufacturing operations is required.



Expansion involves trying to increase demand for an existing product and thus increase production levels. Hence it is a strategy which does require additional investment, either in support of local manufacture or foreign market facilities.

As for examples, the original domestic market for Perrier spring water was extended by repositioning and a change in advertising and pricing. The market for Japanese cars and motorcycles was expanded by setting up satellite manufacturing facilities in overseas countries. Be warned that there are no generally accepted definitions of these two terms (a common problem with marketing terminology). If you have to use any problematic terms in answer to an examination question, it is entirely acceptable to begin with your own reasonable definitions and then apply them consistently in your answer.

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Extending the Market I am taking "extending" to mean going deeper into an existing market, as would occur if Disney World were to add more attractions to their theme park in Florida. I reckon that when Disney opened a theme park in France, they were "expanding" the market. So if we have a market which we wish to extend, what are we really saying? We want to get more of the market in which we now operate. We already have some market share and if we increased it we would probably achieve more profit. That would enable us to get a better return on the original investment. Take an example such as Walls Ice Cream – they have always been strong in shops, but a lot of ice cream is delivered by vans which tour housing estates or park outside sporting events and similar places. Walls were missing out on part of the market and when they decided to supply van salesmen with ice cream, they extended their market. There are many benefits to be gained from this type of activity – the company already knows how to make the products and in many cases they will have a reputation which is an asset worth developing. Quite often there will already be some of the support services in place and able to cope with more work. There are also potential problems too, since every development carries some risk, so we must look at the activities involved in extending the present market. 

First, marketing management requires information on present performance, including market share if known. (Textbooks take it for granted that everyone can estimate their market share, but there are some markets for which statistics are not available in sufficient detail.) It would be nice to know the strengths of the company compared with those of each main competitor; and if you can work out strengths, you can work out weaknesses, too.



The marketing management will also want to know the nature and size of the opportunities available for extension of the market; where they are and what they are like. How do they differ from present markets? Is the present distribution system adequate or even appropriate? Is there any way in which we can spread our message to potential new customers? Can we use the same type of advertisements? What will it cost?



Can the marketing management expect to be able to move into a new extension of their market without competitors fighting to keep their market share? Surely the best of them will try to stop anyone from taking their market share? Their reactions might be a threat to our extension plans.

It is commonplace in marketing texts to refer to a SWOT analysis; the initials stand for Strengths, Weaknesses, Opportunities and Threats, which are all words used in the preceding paragraphs. It is easy to suggest a company does a SWOT analysis, but it is not always realised that there can be a great deal of work involved. A good Marketing Information System (MkIS) will have some of the information already on file, of course, but other material will have to be gathered and analysed. A company may be lucky enough to be able to choose from a number of possible extensions to their marketing activities; hence it will be necessary to decide which of them will bring the best increase in profit. In addition, there are few fixed points in this sort of analysis; most possibilities will have some element of doubt about them. Fortunately, computer analysis programs are available to help marketing management predict what might happen if they take specific actions. They are fine in their way but depend on having a lot of information to feed into the program. This type of analysis is often called "what if?" analysis. A more formal name for the activity is "modelling".

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Expanding the Market This is similar in many ways to extending the market and many of the ideas mentioned above will apply. A SWOT analysis will be necessary and it will be important to ensure that production and financial arrangements can cope with the costs of the work involved. The big difference between extension and expansion is that expansion does not involve winning more market share from competitors; expansion means making the total market bigger, which might be a much more difficult job. Expanding the market means the company will have to pioneer the product or service to customers who have not encountered it previously. It will involve more than just product marketing; it may be necessary to promote the company name and image too, if the company has not operated in the new market before. Expanding the market for a product will be easier if the company already markets some products in the new location, because an existing good reputation will "rub off" on the product which is being moved into the expanding market. We will look at branding in more detail later. Kotler states that markets are seldom fully saturated by the companies which pioneer them, because some of the potential customers have needs which are not covered by the pioneering company. This leaves small numbers of potential customers who cannot get their needs and wants satisfied by the main suppliers. If another company chose to satisfy those customers, it could be done without clashing with the main suppliers. Such a strategy may provide a smoother way to expand your market than going in head-on at existing suppliers. This type of marketing is often called "niche" marketing because of the small sections of the total market which are involved. Some textbook diagrams show the niches as corners of a square, with the middle being occupied by the main supplier; however, it gives the dangerous impression that there is geographical location of niches, which may not be true. The people in a market niche for million-pound necklaces may be scattered around the world; it is the nature of their needs or wants which matters, not their specific location. Markets tend to evolve rather than appear suddenly, so it is fairly logical for a company to move into several niches, then gradually start to supply the whole market. The alternative, if the market already has some suppliers, is a head-on attack on the market leaders, which may be the right way for some companies. It is interesting to note that the marketing activity of a company which enters a niche will usually involve placing advertisements, which will add to the total advertising exposure of the whole of the market. Sometimes it will bring benefits to the entire market, not just the new entrant.

Extended Product Life Cycle Graph The idea behind expanding and extending the market for a product is to bring in more profit in order to obtain a better return on the original investment and development costs. This also enables the company to finance development of new products. The product life cycle graph which we discussed earlier can be modified by market extension and expansion to look like Figure 7.18.

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Figure 7.18: Extended Product Life Cycle Sales/ Profit (£)

Market extension or expansion

Probable sales curve if no action is taken

Sales

Profit

Time For a well-managed company there might be several such curves for different products. They would be plotted from actual sales and profit figures, so they would show the total profit and help management predict future profits. Product life cycle graphs can be predicted if the company has experience in comparable products, which is a bit like having "hindsight" in advance. A very useful bit of knowledge!

G. NEW PRODUCT DEVELOPMENT The market stance adopted by the company will, to a large extent, dictate whether a company will be an innovative leader and involved in extensive new product development (NPD), be a follower and copy the leaders, or whether the products will only be refined over and over again to make them appear "new" to the buyers. Companies who do not have the benefit of one perfect product which will always be in demand by loyal customers and will never be attacked by competition, need to be involved in NPD to one extent or another. NPD can be amendment of existing products in order to produce products which are "new" to the market or it can be totally innovative, in which case products entirely new to both market and company will be developed. The advantages of NPD are that it can: 

Give advantages over the competition



Mean increased customer loyalty



Lead to increased sales/stability of profits



Spread investment risks

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Increase the prestige of the company

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Utilise production equipment.

The disadvantages of NPD are those of money, time and risks – the opposites of the advantages.

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Process of NPD The process needs to be thorough and systematic but flexible. All costs should be considered but short-termism should be avoided, as often there may be high costs/low profits initially but ultimate profits will be excellent and costs can reduce through experience. The main emphasis on NPD is that there should be a process – planning is crucial if NPD is to be successful. Everyone involved should know the policies of the company where new products are concerned and should understand the stages of the development process itself. Poor communication and liaison will inhibit the development and successful launch of a new product. The main priority in NPD must be to monitor constantly so that activities can be controlled. The new product development process for many years has been viewed as a linear, sequential process involving several stages of analysis and review. The model most frequently quoted for this is the Booz Allen Hamilton model, identifying logical sequences in the process as follows: 

Idea generation



Screening



Concept testing



Outlining marketing strategy



Business analysis



Product development



Test marketing



Commercialisation.

Whilst the model does give a good basis for risk reduction in new product development, we can see, by looking at each stage in turn, that it can be a time-consuming process and therefore may not be perfect in today's highly competitive marketplace. (a)

Idea Generation Ideas are collected from perhaps the sales force, distributors and customers/consumers. The company will be actively looking for opportunities, and new products can be produced in response to a perceived, or recognised, demand. The process of gathering the ideas may take weeks or even months. The ideas have to be collated, considered for feasibility and eventually passed to the people who are responsible for screening.

(b)

Screening The company will have set certain criteria, e.g. we must be able to produce this product without further investment in production plant or personnel; the product must "fit" with the rest of our range; there must be a recognised level of demand; it must give a stated level of profit; it must be different to what the competition is offering, etc. The people who are responsible for screening the new ideas must try to "match" the ideas against the stated criteria wherever possible. Assuming some of the ideas meet the criteria, they are then passed on to the people responsible for the next stage in the process. The screening stage is crucial, as it is here that non-viable ideas are shelved.

(c)

Concept Testing This is not a "product test" but an "idea test". The concept is taken to potential buyers as well as to the internal processing people to check on manufacture, packaging, distribution, etc.

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At this stage people are being asked such questions as: "Do you think it is a good idea?"; "Would you buy it at x price?"; "Can we make it?"; "Will it be easy to store and distribute?". Once again, a time-consuming process, before the next stage is begun. (d)

Outlining Possible Marketing Strategies The results of the concept testing can help a company to decide just how it will market the product. Will it be distributed direct, or through specialist channels, or will it be made widely available to cater for a mass market? What positioning will it be given – high quality, good value for money, or cheap and cheerful? Will the communications be heavily biased towards direct marketing, or in the major media? What strategy would cause least reaction from the competition? How can results be most effectively measured? Decisions made at this time depend a great deal not only on the results of the concept testing but also on knowledge of the marketplace and the planning skills of the marketers involved. Knowledge of the marketplace is something which requires research. Research needs to be on-going and takes time!

(e)

Business Analysis This stage is crucial to the NPD process. It is here that the potential profits are compared to the production and marketing costs to see if it is worth proceeding. Competitive activity, market trends, environmental aspects, etc. will all be analysed in order to give as accurate a picture as possible. It is at this stage that products are often rejected because they do not demonstrate enough potential earnings in a given period of time, whereas given the appropriate support they may actually be products which could give huge profits over a longer period of time. Assuming that after the business analysis the product idea is still a viable proposition the next stage then comes into effect.

(f)

Product Development To begin manufacturing a new product is a risky venture and there can still be some doubt as to the viability of the product. Because of this, some manufacturers will choose to produce a prototype, or small batches, in order to test effectiveness before they give full commitment to production. The effort in producing small quantities adds to the expense and time involved, not to mention the possibility of the competition becoming aware of what the company is doing. It is during this stage that final planning for the other elements of the marketing mix (brand names/pack sizes, etc.) will be completed and this is often the time when something completely unexpected will crop up – meaning higher costs for the company.

(g)

Test Marketing This is where the product is introduced to a representative sample of the potential market and aspects of the marketing effort are tested. This is an opportunity to adapt any of the mix elements which prove to need adjustment. It is important that the test area chosen is representative of the entire target audience. For industrial products, selected customers may be approached to "test" the product and they will be surveyed for their responses in view of effectiveness, price and other attributes. For consumer products, testing regions will be chosen. In the UK, and indeed throughout the world, certain areas are known to be good testing sites. Usually this is because the region has a representative cross-section of the community, with good communications and distribution facilities available. Although it increases costs, it is better to use more than one testing area so that comparisons can be made. Different prices, advertisements, methods of distribution and perhaps even packaging may be used in the different areas so that the company can see which methods are most effective.

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The results of the test will then dictate whether or not the product moves on to the final stage of the NPD process. However, before we move on to the final stage, it is worth considering the possible problems in test marketing. The problems can come from: (i)

Buyers – people will often buy a new product just to try it. They may like it and tell a researcher so, but they will then revert back to their normal purchases because of brand loyalty or for some other reason.

(ii)

Distributors and suppliers – they may be willing to give a new product exposure because of an introductory incentive, but once the incentive is withdrawn they may not be so willing to cooperate or devote space to the product.

(iii)

Competition – if they have relatively similar products, competitors may take defensive action and introduce promotional activity that will undermine the testing. This could be in the form of increased advertising, reduced prices or some other form of incentive to keep the attention of the target audience away from the product being test-marketed. Competitors have even been known to buy up new products in large quantities which results in distorted sales figures that can lead to over-optimistic forecasting of demand on the part of the company introducing the new product. On the other hand, if you are introducing a truly innovative product which has no competition, you are likely to become subject to "following action", where competitors will investigate your product and your marketing activities, find some way of improving on what you have done and then capitalise on your weaknesses by launching an "improved" version.

Other factors which research has shown can cause problems in test marketing are: 

Failure to understand the needs of the target market adequately



The wrong sector is chosen for the test and it is not truly representative of the whole market



The size of the market sector being tested is not big enough



The timing is wrong, e.g. testing products in July, when they are likely to be purchased for Christmas gifts or entertainments



The length of the test is too short, or too long, which can give distorted results



Not enough resources are put into the advertising and promotional aspects



The results of the test are ignored because of an over belief in the product by one influential executive in the company.

Irrespective of the problems which may be encountered, there is no doubt that this stage in the NPD process takes time and effort (both time and effort to any company mean one thing – money!) before the new product finally reaches the last stage in the process. (h)

Commercialisation This is the full-scale manufacture and launch of the product onto the marketplace. If all of the stages have been carried out correctly, the product should have a good chance of success, and yet research indicates that anything up to 80% of new products fail to progress from the introductory stages of their life cycle.

If we accept that the sequential NPD process as outlined in the Booz Allen Hamilton model is valuable in that the process can weed out obvious failures and, at the very least, reduce the risk factors, we must also realise that in the aspect of "time to market" it can be severely restrictive.

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A sequential approach implies that one stage must be completed satisfactorily before the product is "pushed over the wall" and another stage begins. Add to this the fact that often different teams of people are responsible for the various stages and it is not difficult to see why producers have had to come up with new ideas on how to cope with NPD. 

Consider that, instead of each stage being done in sequence by the relevant people, the company changes its approach completely and parallel processes are introduced where various stages are carried out simultaneously. You may well think that this is a high risk process and that some aspects may be overlooked, which could still result in failure for the product. But it is a fact that manufacturers are moving increasingly to this innovative style of NPD.



Venture teams, or new product teams, are drawn together for the sole purpose of introducing new products to the market. These teams may be ad hoc in that they are brought together for one project only, or they may be more or less permanently established in that they are constantly looking at new product ideas. It is necessary that the team represents ALL sections of the organisation: marketing, finance, purchasing, production, possibly personnel and maybe even any trade unions. In other words, any parties involved in the production and launch of a product should be involved. The team meets and "brainstorms" ideas. Just as with the Booz Hamilton sequential approach, these ideas can be as collected from customers, or the sales force, or may simply be ideas that have been generated by the personnel in the company. Because the team is comprised of people from different functional areas, there will be immediate responses as to the likelihood of turning an idea into a distinct possibility for development. So, using cross-functional teams, a lot of ideas can be subjected to simultaneous initial screening which will get rid of some totally unsuitable ideas almost immediately and identify those ideas that are at least possible. The various team members then go off to their own areas and "work" the ideas. Production thinks about whether, and how, the product could be made; marketing research demand and draw up outline plans for the mix elements; personnel look at whether new people or skills training will be required; and purchasing investigate sources, prices and quality of the required materials. Other involved personnel consider the aspects relevant to them. In some circumstances even potential buyers, or users, of the product could be involved with these teams. The team must meet regularly to report on progress and discuss any changes that may be necessary as a result of the activities undertaken. As a lot of the work will be "research based" many inconsistencies will be ironed out as the development process continues. This means that decision making is much easier and decisions made should be far more reliable, with the result that risk factors can be reduced to a great extent. If a team such as the one we have described is formed, the members should be working together from the idea generation stage to the ultimate commercialisation stage, so that they carry the product through all of the problem stages. In effect, the product becomes "their baby" and they are interested in ensuring success. Obviously, this approach to NPD will only work if the culture of the organisation is conducive, and supportive, to this type of cooperation. The whole ethos of the company needs to be innovative and encouraging towards innovation on the part of its employees. There are numerous examples of companies which have successfully adopted innovative cultures, but perhaps the most quoted is 3M. This company actually allows its workers time to come up with new ideas. If an idea is accepted, the person whose idea it was not only becomes part of the project team and helps get the product to market, but also gains a percentage of the profits made by the product.

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All of this has resulted in a workforce which is constantly generating new ideas and is dedicated to getting those ideas produced – with obvious benefits to the company and its customers. A real "win-win" situation for all concerned. 

Recent years have seen companies moving away from producing entirely new products and concentrating instead on product adaptation or extension. When you consider that it can cost far more to introduce a new product than it does to adapt one, it is not difficult to see the sense in this. Sometimes even a slight change in some aspect of the mix elements can extend the life of a product and this need not incur high costs for the company.



Coupled with this trend, we are seeing more and more companies who, when they produce either entirely new or adapted products are dispensing with the test marketing stage. Decisions on whether to test the market or not will often depend on the confidence of the decision-maker. If the early research into the new offering is viewed as being fully reliable, they may decide to take a calculated risk and get to market early in order to defeat the competition. One outcome of this, of course, is that the product may not be as perfect as it could have been (not to mention the marketing effort). However, it is always possible to refine an offering after it has been launched, whereas it is often too late if the competition get to the market first.

Success and Failure of NPD The adoption of any product depends on the rate of acceptance by the buyers. This acceptance rate is often described as the rate, or process, of adoption. Basically it is the rate at which people become aware of something, then enter the buying process. The speed of adoption will depend on the intensity of activity by the company, on product characteristics, etc. The rate of adoption and the diffusion of innovation categories and buyer characteristics are linked. Research into successful new product launches indicates that, to be successful, there must be: 

An innovative culture within the organisation



Encouragement from senior levels



Committed development teams/personnel who will "champion" the product



Close cooperation between all functional areas of the organisation



Adequate resources invested in the development processes



Good understanding of the target market



Confident decision-makers.

Failures in product launches are quite often related to the timing of the launch, but they may also occur because of inadequate market research, and failure to anticipate changes in technology, customer preferences or competitive activity. They can also arise quite simply because of excessive faith in a product by the company or one of its more vocal or influential managers. Recent research has shown that failures in NPD can be caused by: 

Poor/inadequate actions at the test marketing stage



Lack of research into the needs of the target market



Time taken to get to market

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Inadequate investment in promotional aspects



Risk-aversive management teams.

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The Product Plan Both existing and new products will involve managing aspects such as timing of launches and promotional activities, scheduling sales effort in liaison with production departments, etc. which means that activities need to be planned. A product plan is a mini-version of a full marketing plan. While concentrating on aspects relating to the product, it must fit with the plans for other elements of the marketing mix. Indeed, many brand and product managers will have responsibility for, or be involved with, decisions on pricing, distribution, etc. At the very least there must be liaison or all plans will be reduced in effectiveness. Accepting that the product plan can be a plan in its own right, we can see that there must be strategies, tactics and programmes as well as controls. The level of the product plan can be either strategic or operational. 

Strategic product plans can include the type of branding to be used, the levels of quality to be given, whether or not (and how often) new products will be introduced, etc.



Operational product plans will be much the same as with any other operational plan – they will identify timing, costs, responsibilities and measurement techniques. They are more detailed than the strategic level plans.

A well-structured product plan helps to identify opportunities and to ensure that there is a good mix of products in the overall range, as well as giving the capability of assessing the performance of range items in order to see which need support, deletion or adaptation. Lack of formal planning for the product is likely to result in failure in the marketplace, with the obvious outcomes for the company.

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Chapter 8 Pricing Policies and Price Setting

Contents

Page

A.

What Does a Price Represent? Price and Customers Management Views of Price

236 236 236

B.

The Pricing Decision Pricing Plan Pricing Policies Influences on Pricing Decisions Pricing Strategies Changing Prices

238 238 239 241 244 246

C.

Breakeven Analysis and Price

248

D.

Price Elasticity The Price Elasticity of Demand Formula Factors Influencing the Elasticity of Demand

250 250 252

E.

Marginal Costing The Principle of Marginal Cost Practical Implications The Concept of Contribution

253 253 253 254

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Pricing Policies and Price Setting

A. WHAT DOES A PRICE REPRESENT? What does a price represent? At first the answer to this question may seem fairly obvious – it is the amount of money being charged by the seller of a product, and the amount of money being paid by a buyer for that product. But this response does not really say what a price represents. Price means different things to different people – it depends on who we are talking about. Price is one of the celebrated four Ps of marketing – price, product, promotion and place. All the other elements cost money, but price is the exception – price is the one element that brings in revenue. Some of the variables in marketing cannot be controlled by the marketing manager, e.g. the environment, government actions, political events and so on, but price is one of the variables that the marketing manager can control.

Price and Customers To a customer, the price represents the level of value they ascribe to the item being bought. Value changes from one person to another, so what is a "good" price to one buyer may be a "bad" price to another. The following definition comes from a 1990 issue of the CIM newsletter Marketing Success: "Price represents the amount of income that has to be given up in exchange for the package of benefits to be derived from the product." Note the word "benefits" – the newsletter goes on to add that value is far more important than price, and that leads to the idea that the total collection of benefits is more important than just the price alone. For instance, suppose I have to send some goods to another part of the country, and I have the choice of a 24-hour service, or a 48-hour service, or just a service which does not guarantee the delivery day. All these services have different prices, yet they all end up delivering the goods to the destination that I specify. The time of arrival may sometimes be such an important benefit that I will pay extra for the faster service. Most products have a number of benefits associated with them, and when we talk of price per unit in customer terms we are usually speaking of the total benefit, not just the product. Clearly, the customer must consider the other aspects of the purchase, and price is just one of many factors that are involved in a buying decision. I am interested in computers because I earn part of my living by writing and computers can be very useful to a writer. However, many of the advertisements show prices that are higher than I am prepared to pay, so those prices turn off my interest. One of the reasons for this is that the products are developing so fast that if I wait a year, the model that I cannot afford just now will be offered at a lower price that I might be prepared to pay. If I really needed the features in the products, I would allocate money that way now instead of some other way. There are many factors which influence a customer's view of price. If you are thirsty, you will pay a high price for a drink, even though you think the price is too high, especially if you have little choice or are in a closed situation such as a concert hall.

Management Views of Price Various managers have different views on price, and the word "price" is too simple for use in the deliberations of company managements. There is always a need to specify which "price" you really mean. 

Production Manager's View of Price To the production manager, it is often a matter of price being related to costs, with a percentage added on for profit.

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This is an old-fashioned method of setting prices which is still used quite extensively, and the effect on the production manager is that they will often be asked to reduce the costs, because "the customers will not pay the price". As you can imagine, that causes problems for the production manager, who would certainly be able to reduce the costs if they could get authority for making bigger batches of the product, because unit costs fall as production levels rise. But would the lower costs, and lower prices, ensure that there would be higher sales levels? Maybe they would, but maybe not. It is easy to see how production managers can feel that they are being asked to do the impossible to cover up for the inefficiencies of salespeople. 

Finance Manager's View of Price The finance manager is managing a very emotive raw material – money. They are concerned that the revenue should be bigger than the costs of making, marketing and selling the goods. If it is not, then why are we in business? The finance manager is also concerned with the time of payment – revenue in the bank today is better than a promise of revenue tomorrow, and timing is more important than it may appear from the outside. The finance manager must ensure that the company does not run short of the "raw material" (i.e. money) that they manage, because the company could be closed down, however busy they are in production and sales. (All companies in Britain must be able to pay their debts at all times, or they can be closed down, and they may often have to borrow money to keep themselves running.) If revenue does not come in quickly enough to cover costs, the finance manager must borrow from the reserves or the banks, and that is a matter for concern. The worst thing about financing the marketing activity is the uncertainty – everything that is done by marketing staff costs money and the whole activity is based on the expectation that money will flow back eventually. But when will money flow back? And how much will flow back? The finance manager wants to see a high price, but only if there are going to be a lot of units sold.



Sales Manager's View of Price In theory, any salesperson of average ability can sell a good product – it is just easier if there is some flexibility in the price so that a "tempter" can be offered. Sales managers tend to be judged on the success of their team in shifting quantities of the product, and the quantities are often written into targets with little consideration of the difficulty, or the competitors. Within reasonable limits it should be possible to sell more at lower prices. There comes a time when people have enough of a product, and shopkeepers soon get to know when their customers will not buy any more at any price, but generally speaking price does have an effect on sales levels. For the sales manager, lower prices often mean higher sales volumes, and that can be a sign of success.



Distributor's View of Price The price paid by the distributor is not the list price paid by the customers, because the distributor has to be paid for the service that they provide in stocking the product and delivering the small quantities that shopkeepers need. So the price to the distributor is the trade price, and that may be as much as 50 per cent lower than the retail price. The "price" referred to by the finance manager, the production manager and the sales manager is the trade price, not the list price.

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Whatever the terminology, the outcome is that the trade price is what the company can expect to receive, and all their financial considerations must be made on that price level. The distributor may see the price in two ways: (i)

the price that is charged by the shopkeepers, which will have some effect on the demand from customers

(ii)

the price that they have to pay for the goods.

Their profit lies somewhere in-between those two levels. Time is also important to the distributor. If the supplier will allow a few weeks' credit, the distributor may get some of the money in from the shopkeepers to whom they have supplied the goods. A longer credit period from the supplier may offset a higher price, so the distributor, just like the customer, is looking at the total package and not just the prices.

B. THE PRICING DECISION The influencing factors on pricing can make the setting of prices very difficult for marketing managers. Too high a price and the manager does not get the sales; too low and there is not enough revenue. So the question must be: "How do we set a price?" The answer is that there are basically two ways: 

From the point of view of the customer and the marketplace, the manager must take note of the current level of prices being paid for similar products on sale in the market. They should then work back through the chain of distribution to manufacture, analysing the costs incurred at each stage and building up a total cost for that particular item. When all costs have been considered the actual revenue received for that product can be checked to see if it is viable or otherwise. If profit levels are not adequate then managers need to consider other issues, such as whether the product could be regarded a loss leader which would, in time, lead to sales of other related products; or perhaps it is necessary that the company has a place in that particular marketplace for competitive reasons.



Working from cost of manufacture, by building up all costs incurred from production, marketing and distribution until the product actually reaches the customer. If the final price is too high, and unrealistic as far as the customer and current market levels are concerned, the manager then needs to investigate how (if possible) they can reduce costs incurred in order to lower prices. The converse also applies. In the case of highvalue items it could well be that the price reached would be too low and would not reflect the correct image. Image is important and customer perceptions are affected by price, so that price needs to be right.

Pricing Plan In the last chapter I said that the product plan was a mini-version of the marketing plan. In some respects, the same could be said of the pricing plan. It has objectives and strategies and will obviously need schedules and controlling to see if it is being effective. But the pricing plan has a different role to that of the product plan. The pricing plan has to make sure that the customer is happy, but it must ensure that revenue is kept flowing and that costs are met. It is not an easy plan to produce. Managers involved in pricing are called upon to make decisions which will maintain the delicate balance between the organisational aspects of earning money and the marketing

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aspects of satisfying the customer. They need to know the best strategy to use at any given time and in any given circumstances. There are so many influencing factors that pricing can become a minefield if it is allowed to. It is only by following laid down pricing policies and strategies, and adding value judgment, which is a result of knowing the market and the customer, that a manager can be sure of any degree of success. In other words, pricing needs to be structured, creative and based upon knowledge. Despite the different structure of the pricing plan, it must still fit with the other plans. It is no good deciding to adopt a policy of high pricing if the product quality does not match. It is no good deciding on low prices when the product is unique. It is no good deciding to maintain prices when a market has reduced in size – the price will need to be reduced or raised according to the competitive players who are left operating. Last but not least, it is no good regarding pricing as a minor issue – it is important.

Pricing Policies As with most activities, in any organisation there will be stated policies underpinning the dayto-day activities which are taking place. Policies are set and agreed at the higher levels of management and then passed down to the relevant personnel for adoption and action. Pricing policies may be complex or straightforward depending on various factors such as management style, cost structure, etc. The policies are there to give guidance on the manner in which prices should be set. Because marketing managers may have to make decisions on prices both for the home market and countries overseas, it follows that pricing policies need to be all-encompassing. They should be clearly stated and easy to understand. Pricing policies can be established in three ways. They can be: 

cost-oriented



demand-oriented



competitor-oriented.

(a)

Cost-oriented Policies Here the company knows the costs involved in manufacturing the product and then adds on a percentage of the cost as a markup in order to set the price (a "cost-plus" policy). There are two ways of carrying out this policy: (i)

A standard across the board markup on all products is produced. The markup is designed to cover potential profit. Example: A company has a standard markup of 25 per cent. Product X costs £5.00 to manufacture. Production batches are 500 units. The selling price would be £5 plus 25 per cent  £6.25. To simply cover costs the company would have to sell 400 units. If they were guaranteed to sell that number, and were able to sell the other 100 units, they could have an extra £625 revenue or profit. But, unless the product is made to order, there is always a risk that some will remain unsold.

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(ii)

A standard markup plus expected level of profit. Example: The company has a standard markup of 25 per cent before profit. Product X costs £5 to produce. Production batches are 500 units. The company wants to make £1,000 profit. Total production costs are £2,500. If we add 25 per cent markup and the £1,000 required profit we get £4,125. We can then calculate the price at different levels of sales, by dividing the quantity into that amount. Sales Quantity

Selling Price (£)

200

20.63

300

13.75

400

10.31

500

8.25

There is a big difference between the lowest price using the method in (ii) and that found by using the straightforward markup in example (i). The difference is that an allowance has been included to cover required profit. This is a refinement on the basic cost-plus pricing policy. In a situation such as this the marketer has then to decide which price to use, balancing influencing factors against each other to see which scenario is likely to be the most productive. These modest examples serve to demonstrate just how difficult it can be to set a good price which will be acceptable to the market and yet still bring in the required revenue. Forecasting of sales needs to be as accurate as possible, but the marketer needs to be able to sense what the market will bear. You may consider that cost-plus pricing is a rather dangerous method but many companies use it quite successfully. In my experience those that do use it do not operate simply on a standard markup; instead they have varying levels of markup to suit the particular products or markets. There may be a stated policy such as: "minimum of 25 per cent, maximum of 400 per cent before (or including) profit" and then the marketing managers are given freedom to set the prices within those parameters. Calculation lists, such as the one used in Example (ii) – but much more comprehensive, of course – are drawn up so that planners can see at a glance how much profit they are likely to make at any given selling price. This type of list is very useful in the process of new product development and can save a lot of time in repeating calculations. You usually find the policy of cost-plus pricing in those markets where there is more than one seller of a product and they are broadly similar in nature; products are differentiated by means of added benefits. (b)

Demand-oriented Policies High demand means high prices – low demand means low prices. This is a common perception of demand orientation. However, there is the aspect of keeping prices high to meet a special demand, such as in the case of luxury goods (Rolls Royce cars, etc.).

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In other words, demand can be created by using a pricing structure that meets the needs of a specific market demand. In the case of Rolls Royce it would meet the exclusive or elitist aspects of the buying market. There is also the reverse aspect of keeping prices low to create a high demand. Keeping prices low relies on very high turnover, e.g. FMCG (fast moving consumer goods) products. To price low to create demand requires that a company is strong in the marketplace. (c)

Competitor-oriented Policies This type of pricing is usually found where a group of organisations is selling the same product (petrol, finance, etc.). The overall market knows the costs of certain items and buyers are only happy to pay what is accepted as the "market price". If one of the companies or organisations were to reduce their price drastically it would simply mean a huge loss of revenue – conversely, if they were to increase their prices it would mean that buyers would buy from the competition. In these circumstances the safest policy is to keep pricing at a level that is the same, or near to, that being charged by the competition. This policy applies equally to large and small operators. Consider the case of three market traders selling fruit and vegetables within close proximity. If one of them charged higher prices they would simply lose out to the other two. Although they may charge a little more on one or two items, the prices of all three will be broadly similar. The policies of cost-plus and demand can also be applied to this scenario. If one trader simply wants to cover costs it is easy to do so and of course he can include a percentage for profit before he works out his price. If he manages to get some exotic fruit which the other two have missed, he can price that in accordance with demand.

Influences on Pricing Decisions From what we have said, you can see that pricing can be difficult. We have to accept that no price can be set up in isolation as it will depend on multiple variables or influencing factors. The influencing factors on price are no different to the influencing factors on any other element of the marketing mix. Figure 8.1 summarises this. Figure 8.1: Influences on pricing decisions COMPANY OBJECTIVES COSTS

CUSTOMERS EXISTING COMPETITORS

COMPANY MARKET STANCE PRICE

NEW COMPETITORS

MANAGEMENT CULTURE SUPPLIERS

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These factors can be grouped into a number of categories. Organisational Factors 

Corporate Objectives As we have already seen, different companies will have different objectives. Where financial gains are more important pricing may be aggressively high; where power or prestige is considered to be important, prices may be kept low. Management ethics and culture will undoubtedly have an impact on pricing. For example, in times of shortages of supply which result in an increase in demand one company may raise their prices to capitalise on the short-term situation, but another may hold their prices to be fair to the customers. In times of shortage the company which maintains a loyalty to their customers will inevitably reap the greater reward in the long term.



Quality There can be no doubt that there is a direct correlation between price and quality. The better an item is, the more the customer will pay. Companies can set prices in accordance with the quality of the product, whether it is high, medium or low. The model in Figure 8.2 illustrates this situation (source: Wilson, Gilligan and Pearson). Figure 8.2: Price/quality matrix Price Low

Medium

High

CHEAP-VALUE STRATEGY

OUT-OF-STEP STRATEGY

EXPLOITIVE STRATEGY

ABOVEAVERAGEVALUE STRATEGY

MIDDLE-OFTHE-ROAD STRATEGY

OVERCHARGING STRATEGY

SUPERB-VALUE STRATEGY

HIGH-VALUE STRATEGY

PREMIUM STRATEGY

Low

Product Quality

(a)

Medium

High 

Product Life Cycle Theoretically the product life cycle (PLC) can be used to set prices if it is used in conjunction with marketing strategies such as: introduction  market penetration  aggressive pricing for share (low) introduction  market skimming  aggressive pricing for share (high) growth  penetration and defeat competition  low/differential maturity  protection of share and defeat competition  low decline  recovery of costs  high or low pricing.

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However, this is a very generalised approach. In view of the fact that it is difficult to know exactly where a product is in its life, it is unlikely that a marketing manager will set pricing strategies entirely on the PLC. 

Product Line The price of one product may affect another because of interrelated demand or costs, e.g. the same resources are used in production. In cases such as these pricing decisions will be based on management values and judgment after full consideration of all influencing factors.



Segmentation/Positioning It is an accepted fact that when a company holds a good position in the market it can set higher prices as it will be operating from a position of strength, providing its segmentation and positioning are set correctly. If segmentation and positioning are wrong, the competition will soon attack on the weaker fronts. Brand position and strength also feature here. When a brand is strong people willingly pay higher prices to obtain the product. Although this will not attract every single potential buyer, those that do become loyal are reducing the elements of "perceived risk". Once they have fully accepted the brand, product or company, buyers will feel secure in their purchasing and tend to stick with it. They will carry on paying the higher prices until such time as they can be enticed away by yet another brand, product or company. Pricing based on brand may be extremely high depending on the strength of the particular brand.

(b)

Customer Factors 

Demand As demand changes prices may fluctuate. This can cause gluts in the market and prices will reduce because of oversupply, (e.g. oil, housing) or peak buying times, e.g. holidays. Marketing managers who are prone to suffer peaks and troughs in demand will be pricing in such a way that any revenue gained will offset the lean times.



Customer Benefit Customers will accept a "basic" price for any commodity but many will be prepared to pay more for added benefits. Companies therefore try to provide the benefits at minimal cost in order to keep profits high. They can also use the "reduced benefits" approach to attract buyers, e.g. the growth of own-label brands that promote on the basis of no fancy promotional costs in their prices.



Perceived Value A customer will pay more for what they consider good value but only if the price reflects the value ascribed. Ascribed value can be on any aspect that is considered important to the buyer – quality, delivery, image, etc. Sometimes manufacturers do not initially recognise an obvious asset, and do not raise their prices accordingly. This is a failure to recognise competitive advantage which can result in needless loss of market share.

(c)

Market Factors 

Competition Managers know that the prices charged will be noted by competition, as well as by buyers, and this will affect how the prices are set. Companies may adopt a pricing policy which signals "we are not aggressive" to reduce competitive activity – or the opposite, "we are strong, keep off, you cannot touch us" to frighten off attackers and inhibit new entrants into the arena.

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Competitor pricing information is widely available and easily monitored by organisations and consumers on the internet. There are websites dedicated to comparing competitor prices on behalf of consumers. The result is that organisations' prices are far more transparent than ever before. This has not necessarily led to a reduction in prices, but has led to the necessity for organisations to compete on factors other than price. The internet is also used to gain competitive advantage using price. Examples of this can be seen in the music industry, where consumers can download individual music tracks to their computers at a reduced price, e.g. a single track CD will retail at approximately £3 or £4 whereas an individual music track can be downloaded for around 75 pence. 

Environment Government intervention for any reason can have an impact on how a company sets its prices, e.g. fair trading, monopolies. Intervention can be for a number of reasons: to protect the consumer, to protect manufacturers, to encourage or deter importers, or simply to gain political points.



Geographic Distance can add extra costs for delivery which can make pricing difficult. For many products customers expect to pay the same price no matter where they are. This is dealt with by a system of either uniform pricing or zone pricing. Under uniform pricing items are sold at the same price irrespective of the location where they are sold or delivered (e.g. the price of newspapers does not depend on where they are printed). Under zone pricing transport and delivery are part of the price, but the price varies in accordance with the distance travelled. For example, some retail furniture outlets add an amount to the price based on the number of miles that delivery has to be made – within ten miles free, 20 miles plus £10, 30 miles plus £25, etc. The added cost may not be the entire cost of the delivery but the customer is expected to contribute. The nature of the product, its value to the customer and the level of service which the company wishes to give will all be determinants of the price where distance is concerned.

Pricing Strategies The underlying intention of any pricing policy is to set standards, which can be used to price in such a way as to maximise profits in the long and short term. There are several strategies and actions that can be used in conjunction with the policies just described. 

Penetration Pricing (Low Prices) This strategy will be used to stimulate market growth, to capture market share or to defeat competition by stealing share or by inhibiting new entrants. Some companies believe that they can earn long-term profit by pricing in this way. Kotler quotes Texas Instruments as a company that builds excess capacity and is prepared to accept low profits for a few years. Then when the market share builds up, the excess capacity is useful. To do this the company must be strong and the management determined to continue along this line. The market must be one that can respond to low prices by growing, and the production processes must be of the type that will cost less as experience is built up.

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The danger in this strategy for marketers is that they may suffer from the reduced revenue because of low prices. They may also find that they are unable to increase the price from its low level. You will often see this strategy called "market share pricing", "market penetration" or "swamping the market". 

Skimming Pricing (High Prices) Skimming is aimed at capturing the top end of the market, i.e. to sell on "perceived value" aspects. Sometimes the entire activities of the company will be based on market skimming strategy (e.g. Rolls Royce, Rolex, Yves St. Laurent) but quite often this strategy is used by innovative market leaders when they are launching new products. They aim to get as much profit as possible before the competition catches up. In the case of new products, this strategy will only work if the product has enough market appeal to warrant a high initial price. Market appeal can be based on any aspect of "value" to the buyer – taste, image, service levels, access, etc. Eventually the price may have to be lowered to match the price of followers.



Early Cash Return If a company has cash-flow problems they will take short-term corrective action. They may opt for low (or lower) prices which will give them a rapid return on the resource investments they have made and try to recover their initial outlay quickly. However this approach can lead to problems. How can they then increase the prices to a more realistic level? What if the competition moves faster and captures a large share of the market at the correct pricing? These are the problems that managers face with this strategy, but for companies working with minimal resources it is often the only way to operate.



Satisfactory Rate of Return Sometimes a company is happy to make a certain level of profit and not interested in going beyond that figure. Prices will be set and aimed at achieving that profit and no more. It is often the smaller company that operates on this basis, e.g. small family businesses or semi-retired consultants who only want to earn nominal amounts. This strategy tends to be found in those companies which use a cost-plus policy.



Differential Pricing Companies may operate a differential pricing structure – charging different prices in different market sectors. This strategy is usually adopted by companies following a demand-oriented policy. In order for differential pricing to work efficiently, the different target markets/sectors must be clearly distinguishable. They must show different demand patterns and be separate enough to avoid overlapping consumer knowledge of the different price structures being used. Therefore it follows that this type of pricing is more likely to be found in international markets than in home markets. Differential pricing can be difficult for the following reasons: (i)

increased activity on part of the competition

(ii)

intervention by governments (home and overseas)

(iii)

improved communications means that people are more aware of what is going on in other parts of the world

(iv)

increased trading agreements between countries has led to standard pricing in entire regions of the world.

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

Competitive Pricing Pricing can be used to build a competitive advantage. There are a number of tactics that can be deployed and a selection of these is given next. These tactics are meant to be short term and can be implemented without damaging the overall pricing strategy. (i)

Volume discounts These are designed to encourage repeat purchasing and contribute to brand and customer loyalty. They are frequently used in business-to-business markets to reward customers who purchase larger quantities or who buy fixed volumes over a given period of time.

(ii)

Menu pricing This allows the cost to be broken down into different elements. Customers are then able to choose their requirements from the menu. This system offers customers a degree of choice when they are faced with bills for large purchases. For example, car servicing costs can be broken down into different parts so the customer can select from the menu.

(iii)

Promotional pricing This is a popular form of pricing used throughout the marketing process. There are five main categories: –

money off current purchase

–

money off next purchase

–

cashback offers

–

more product for the same price

–

discounts on multiple purchases.

Other approaches include premium pricing and all-inclusive prices as offered by hotels, garage service companies and finance/lease schemes.

Changing Prices There are some situations in which a price must stay level for a time, such as catalogue stores where the catalogues are printed in quantity and have to last six months at least. It is possible to amend the catalogues in the store, but the claim is that you choose the products in your home, so price changes would be undesirable. Equally, there are market situations where the price is a daily negotiation between suppliers and shopkeepers, such as the vegetable markets in towns. In principle, stable prices which do not change frequently are desirable, so that customers can know what to expect when they go shopping. That is easy to achieve if you run the biggest store in town and can exert great influence on the rest of the traders. The difficulty comes when the prices of raw materials rise or staff get a pay rise, which would reduce the profit if the prices were kept level. A clever management may be able to reduce production costs so as to absorb the increases, but there are many managements which do not have that opportunity. If you buy different raw materials from which you make a machine, you have more chance of balancing one cost rise against another, and maybe some reductions, to keep your own prices level. But if you get vegetables from a wholesaler and then sell them from your shop, there is little scope for keeping prices down, especially as your overheads go up without any choice. Just recently I have had to compile an advertisement for a directory which will show my price for a year, starting about eight months from now. That advertisement commits me to a price for nearly two years. It's a good job I have only one product range with few prices!

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If everyone else is raising their prices, you could gain some temporary differential advantage by keeping yours down – or you could give the impression that you do not need to raise your prices because you have enough money. Customers, or at least some of them, will say that is due to overcharging in the past. (a)

Price reductions Speaking in general terms, marketers do not like to reduce prices because they fear the danger of a price war with the competition. Consequently, when a price is reduced there will always be a very good reason for it, if not more than one. It may be a situation which forces the change in price, or a deliberate action on the part of management in an attempt to revitalise activity in the market. Prices can reduce because of one or more of the following reasons: 

competitive activity



leadership strategy



excess production



falling brand share



low quality tarnishes image



recession.

In fact, not all price reductions are destructive and create price wars: sometimes they simply increase volumes of purchasing so that profits are increased. However, when price wars do occur they are usually between companies which have similar pricing structures and policies. A downward spiral will often mean that one company has to withdraw from the fight leaving the winner the overall market. The winner is then able to put up the prices again. This shows that although the customer will gain from price reductions in the short term, they can lose in the long term because of lost opportunities for choice and stable prices. The only way to avoid price wars is to operate in such a way that competitive activity does not become over-destructive. This may require a level of cooperation with a competitor in order to keep the market stable or to secure the company's future position. Remember that price fixing by agreement between competing companies is illegal in Britain. It may not be in other countries and you need to find out before going into international marketing. (b)

Discounts When a discount is given, it means that an allowance has been given from the price for one reason or another. Different companies may have different names for the types of discounts they give, but they are all similar in nature. Marketing managers use them as and when appropriate in their pricing strategies. Some of the more common types are: 

trade – "special" within the distribution chain



quantity – incentive to buy more



cash – incentive to help cash flow



promotional – to create "instant" sales



individual – the strength of the negotiator will determine



psychological – high prices initially in order to give good "discounts".

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Sometimes a price cut, or a discount from a standard price list, may be offered so as to encourage sales and move some stock out so that the factory can keep up production. (When you keep on making products, you need somewhere to put them.) (c)

Price increases Price rises are far more popular with marketers than price reductions but, even then, marketers recognise the danger in raising prices. It is a fact of life that customers expect prices to rise over time – but not too rapidly. If a company puts up prices for no apparent reason they will soon fall out of favour in the marketplace, so price increases are only brought into operation if there is good reason. Reasons may include: 

inflation



increased cost of raw materials



increased taxes



currency exchange rate changes



excess demand



increased quality/buyer benefits.

For managers to raise prices successfully there are some basic rules that should be followed: 

Do it at same time as everyone else.



Increase a little at a time and not too often.



Try to lower one price as you raise another.



Look after your main customers.



Give good reasons for putting up the price.

Always remember that no price is absolute. Your strict terms and reasonable price may not be as good as your competitor's high price and reasonable terms. Sympathetic payment terms can help close the sale.

C. BREAKEVEN ANALYSIS AND PRICE Marketing planning is all about the future, and so it is not surprising that people want to get a good idea of what the future might look like, especially in money terms. You will often meet the idea that marketing is about spending now to earn more in the future. Breakeven analysis brings together the various types of cost that are involved in making products. It then relates them to the quantity that must be sold – and paid for – to cover all the costs that are involved and leave the company with no debts for that product. The problems start with costs – just what does it cost to make a product? If you have never been involved in costings in any sort of business, you may be surprised to learn that it is very rare to know the real cost of making anything. If you get a jeweller to make you a tiara, you will be charged a price and that will include some costs such as: 

raw materials



labour



overheads and profit.

It is with this last item that the difficulty arises, because the amount of raw material can probably be reckoned up quite closely, and there should be some record of the time that each craftsperson spent on the item. (Do not worry if you are out of touch with tiaras – the same principles apply to paper clips, but the numbers are different.)

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Overheads consist of all the costs of keeping the factory open and fit for the production process. That includes a lot of items that cannot be allocated to specific products, and most of the overheads will still be incurred if the factory is not actually producing anything for a time. Even if it is closed altogether, there will still be rent to pay and whatever local taxes are involved, as well as the wages of the security guards, and some heating and lighting bills. It is common to ask at what level of sales the company will break even or get out of debt. That brings in the matter of revenue and with it the question of what price to charge for the product. Economists take the simple view that if price goes up, demand will go down, and if price goes down, demand will go up. If we stick with this oversimplification for a time, we can look at the effect of different prices on the breakeven point. The best way to do this is to draw a hypothetical model of a one-product company's situation, using the terms "fixed costs" for overheads and "variable costs" for the wages and raw materials that are involved in making one product. Fixed costs are considered to be constant for the year, for convenience of reckoning, so they can be shown as a straight horizontal line at the appropriate level on the "money" scale (see Figure 8.3). Figure 8.3: Breakeven chart Revenue/ Cost £000

40 Sales 30 Breakeven Point Total Cost (Fixed + Variable)

20 16 10

Fixed Expenses

2,000

4,000

6,000

8,000

10,000

Volume of Output

Revenue starts at the zero point, because we will plot the numbers of products sold in each month, against the revenue (not profit) from the sales. For every product sold there is a variable cost and that can be plotted as a line rising to the right from the left-hand end of the fixed costs line. So if we take a horizontal line at any volume of sales, we can see the total of the variable and the fixed costs. We can also see the revenue to be earned from this volume of sales, so we can see whether or not the company is in profit at that volume. There are figures shown on this breakeven chart so that you can see the breakeven volume. However, I simplified this example to show the principle, and in real life it would be quite common to see the revenue line curving downwards after a certain level of sales – people will only buy what they need or want of anything, whatever the shape of your breakeven chart. At the same time, the variable cost line could have kinks in it when you reach specific quantities, because of quantity discounts for material and production line economies.

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For an existing product, already being sold, the breakeven chart will be built up as sales and cost information is built up during the year, and the chart will be a factual record of the situation. However, price setting can be helped if the marketing manager can see at what level of sales the breakeven point is reached for various prices, so it is common to try to use the breakeven chart to see what price to charge. If the marketing manager knows from experience or from a test marketing activity the effect on sales of various price levels, it is useful to plot several revenue/sales lines to see what the effect may be of setting high and low prices.

D. PRICE ELASTICITY Elasticities are relationships and it is possible to consider several different types of elasticity. As we are dealing with price setting, we will stick to the price elasticity (p.e.) of demand. In order to understand price elasticity we have to consider volume sales, so let us consider compact discs, sold in their thousands to many different types of people. At the simplest level, if the demand for a specific CD goes down when the price goes up, then the CD is said to have an elastic demand relative to price. This often happens when the goods are not essentials. The opposite would happen if the price went down – the demand would rise, but only for a time. When all the people who wanted a specific CD at that price had got one, the demand would fall off again. If the CD was then offered at a lower price there would be some more demand generated, by people who had a lower idea of the value of that CD. On the other hand, if the price of bread went up, people would still buy bread, for quite a long time. It would take most people a long time to find a suitable substitute for bread, so people would pay the higher price and the demand would not fall dramatically. Demand for bread would be considered to be inelastic relative to price. Some goods are just so essential that some people will buy them at any price – life-saving medicines, for instance, although in that case the buyer may not be the consumer.

The Price Elasticity of Demand Formula The formula for price elasticity of demand is worth knowing: P.e. of demand 

Percentage change in quantity demanded Percentage change in price

You will see that the numerator and denominator of the equation are both in the same units – percentages – so the price elasticity of demand is a number, although it is common to write it in the equation as "e". 

If e < 1: then the demand is relatively price-inelastic and it would need a big change in price to make any change in demand.



If e  1: a specific change in price results in a change in demand of the same proportion and this is unit price elasticity.



If e > 1: then the product is price-elastic relative to demand, and demand will move in the opposite way to price.

Just occasionally there is a product which will be bought at whatever price is charged – the p.e. is infinite, but this is not the normal state of affairs, so you do not need to do anything about that. Practical examples will make this clearer: suppose that you are one of the thousands of people who will buy a toothbrush next Saturday. Some of the thousands of buyers will have

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some idea of price, from experience or looking around. If there were 10,000 buyers and the price went up from £1.00 to £1.20 (an increase of 20 per cent), it is likely that there would still be a lot of buyers, let's say 9,500, a reduction of 5 per cent. Then the p.e. of demand for that brand of toothbrush would be:

5 <1 20 and the demand would be relatively price-inelastic. Suppose we take the example of a music CD – not really an essential item. If the demand for a specific CD was 10,000 at the expected price of £10.00, and then it was found that demand dropped to 5,000 (a 50 per cent fall) when the price went up to £10.40 (a 4 per cent rise), the p.e. of the CD would be:

50 >1 4 and the demand would be very price-elastic. You may see this more clearly with a diagram: Figure 8.4 is a graphical indication of the effect of price on demand. Figure 8.4: The effect of price on demand Price

Price/Demand Relationship

Quantity This is a common sight in textbooks on economics, although you will seldom see it drawn in such a simple form. It is necessary to understand this clearly, so I will go into some detail: If you know this subject well, just skip this bit. If this was a graph drawn from real information, it would show the quantity of product bought (i.e. demanded) at each price level. As the price gets higher, the demand gets lower, indicating a demand that is price-elastic. The slope of the curve indicates the degree of elasticity: if the slope is shallow, so that a small change in price makes a big difference in demand, the demand is very elastic in relation to price. If the slope is steep, and the demand changes little with higher prices,

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indicating that most people will still buy the product even if the price goes up, that shows a demand that is not so elastic in relation to price. Note however that the graph shows price and demand, whereas the elasticity of demand relative to price depends on the percentage change in each of these factors. As far as we are concerned, there is no difference in the result. There is a lot more to the matter of price elasticity of demand, and quite often it is in the mass market rather than the individual consideration where the importance is noticed. Management will be looking at the total revenue from a product, and the speed at which that revenue arrives. Knowledge, from experience of the probable price elasticity of demand for a product, would enable the marketing manager to set a price that suited the company policy. For example, a clearance price would only work if the manager knew that there could be more demand at a lower price, in other words if the demand for the product was price-elastic. Remember though, that this is assuming that price is the only factor that changed. In real life, just moving the goods to another location might make them sell better.

Factors Influencing the Elasticity of Demand (a)

The availability of substitute products Take, for example, coffee. If the price were to fall dramatically, many tea drinkers could switch to drinking coffee instead. Thus a fall in the coffee price leads to a decrease in the price of tea. This is an example of positive cross-elasticity (when the price elasticity of one product was related to that of another).

(b)

When complementary goods exist Where groups of goods are consumed together, a price change on one affects the quantity sold of the other. For example, if the weather turns hot and strawberry sales take off, the demand for the accompanying cream also rises. Similarly, if computer hardware comes down in price, and demand shoots up, there will be a corresponding increase in the sales of software applications. This is an example of negative crosselasticity.

(c)

Purchasing power and income Income elasticity is the extent to which the amount of a product demanded varies according to changes in the income of consumers. As purchasing power increases, people can afford to buy new cars, extend their homes, invest in a new video or hi-fi equipment and so on.

(d)

Importance of purchase within budget The purchase of new furniture can represent a large proportion of the buyer's budget and so if prices increase, it can cause a dramatic drop in the quantity demanded and vice versa. Demand for these items is therefore elastic. But in the case of everyday items such as newspapers, groceries and other foods, if the price goes up, it does not significantly affect the quantities sold. The cost is relatively small and the increase is not really noticed that much. Here, the demand for the goods is inelastic.

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E. MARGINAL COSTING We met fixed costs and variable costs earlier in this chapter and now we need to look just at the variable costs of making products. Again, we shall just consider simplified examples because you only need to understand the general principles here – we shall leave the intricacies of costing methodology to your accounting studies.

The Principle of Marginal Cost If we have several products being made in a factory, it is difficult to apportion properly the cost of the total lighting, heating, cleaning and maintenance activities. It is common to apply a multiplier to the material costs and another to the employee costs for each product, because these are figures which are known or can be found out. The multipliers used are based on experience of the business in previous years and the expected level of business. So if you buy a tiara, it could be costed as: material  £1,000, labour  £2,000. The overheads could be calculated as "5 per cent of material costs" plus "7.3 per cent of labour costs", and these amounts would be added to the variable costs to calculate the total costs. (The actual percentages would be decided from experience and would be used for all products in that production line.) Then the sales manager would add a percentage for profit to calculate the final price. However, if the manager had been trained in marketing, she would have a good long discussion with you about style, the purpose of the purchase and various other matters, to estimate what you thought the value of the tiara would be to you. Would it improve your chances of catching a rich partner, and just how desperate are you? The sales manager's assessment of the value of the item to you might well be a lot higher than the total cost, plus profit, that had been calculated. There would then be a decision for her to make on just how much money to take from you. Suppose now that you decided that you ought to have another product, just like the one that we have just costed out. You would expect to pay for the material and labour just as before, but would the manager be justified in adding the same percentages to the material and labour costs? After all, the additional effort to make the second item would be covered in the labour costs and the material would be just twice as much. All the cleaning, heating, lighting and other overheads are already covered by the percentages added to the previous costs of making the first item. So, maybe you could persuade the company to make the second product for just the variable costs (plus profit) only and that would save you a lot of money.

Practical Implications In the real world, the marketing manager may well be faced with a factory that is running profitably at 80 per cent of full capacity and is covering all the fixed costs. If they can get the factory running at 90 per cent capacity or more, there will be even more profit and that is good for everyone. If the marketing manager can get an order for a quantity of products that will use up the spare capacity they do not need to cover the cost of the overheads in the price of each product, because the other work is already covering them adequately. So, if the regular production orders are covering the overheads, the marketing manager can offer the spare capacity at "marginal" costs. That means they charge for the material and labour, and add whatever profit they think is reasonable, but leave the overheads off. You may have seen textbooks which refer to the marginal cost as "the cost of producing one more item", and that does not fit in well with ideas of production lines. It is reasonable to

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think that if the material and labour costs are covered in the pricing of the additional order, then the average total cost per item of production will be lower, and that is the main reason for using marginal costing, when it is used. There are several potential dangers in the marginal costing approach to getting more business. The first one is that the manager must understand the ideas behind marginal costing and know the facts about the costs in the factory. Quite often there is hardly any extra cost involved, other than material, if the products are made on machines. This is because it is just as costly to set up for (say) 1,000 components as it is to set up for 1,200. That is why it is common in the printing trade to expect the customers to accept and pay for "overruns". This idea is also particularly applicable to such products as mouldings made of plastic, or other processes such as chemicals, where the plant is set to run for a specific time and the production has to be sold. The other main danger is that the customers do not understand the system and start to expect to get lower prices for all their orders. That is especially difficult if one principal customer boasts about having got you to cut your price extremely low – then they all want such favoured treatment. It is essential to make sure that each order which is marginally priced is regarded as special and not repeatable.

The Concept of Contribution The most important thing to remember about marginal costing is that the idea depends on the regular sales covering all the fixed costs (overheads) that are involved in running the factory and storing goods, then delivering them to the customers. It is only after that has been achieved that the idea of marginal costing can apply. A useful example involves the pricing of a range of products that were related by size. These were chain sprockets and the company was a major manufacturer of roller chains – the sort that you see on motorcycles, and some much bigger than that but similar in design. It was essential to sell the sprockets in order to sell the chains and the sprockets were made in a separate factory (generally sprockets should be replaced at the same time as chains in order to avoid excess chain wear). Sprockets are identified by the number of teeth at the rim, and they go up in steps from 13 to 114 teeth, with the diameters of the sprockets increasing in proportion to the number of teeth. One manufacturing process was used for sprockets up to 25 teeth, there was a gap from 25 to 38 teeth, and a different process was used for sprockets with 38 teeth or more. It was logical to set prices in relation to the sizes of sprockets, but because of the difference in manufacturing processes the "cost plus profit" price for the 38-tooth sprocket was out of line with the rest of the range. It did not fit in with the "up to 25 teeth" range, and it was also too high for the rest of the range over 38 teeth. The customers wanted the full range but they saw no logic in paying a price that was out of line so we had to sell the 38-tooth sprocket at a logical price, which was lower than the calculated price based on material, labour, overheads and profit. The reason for this was twofold. We had to satisfy the customers and ensure the machinery in the factory was kept busy, along with the operators. The action was justified because the revenue from the 38-tooth sprockets made a contribution to overheads and profit. Contribution pricing takes the variable costs (material and labour) which are easily identified, then adds an amount which is the contribution to overheads and profit. So instead of each product having a price fixed by the variable and fixed costs plus a percentage, the price is the variable costs plus a figure determined by the manager. It is essential to cover the full costs of operating the factory, of course, but the contribution to overheads and profit is a pool of money which can be added to by every product sold, even if the variable costs are barely covered.

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You might have recognised that contribution pricing is very similar to breakeven analysis, and the two ideas might work well together. The breakeven graph is different for contribution pricing, but the result is similar (see Figure 8.5). Figure 8.5: Breakeven graph £ Revenue

Total Costs

Variable Costs Fixed Costs

Quantity

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Chapter 9 Distribution Policy and Management Contents

Page

A.

The Importance of the Place Element The Distribution Plan Distribution Management Distribution Decisions

258 258 259 260

B.

Channels of Distribution Direct and Indirect Channels Factors Affecting Channel Choice Characteristics of Different Channels Distribution Strategies Industrial and Business Markets Export Markets

261 261 262 264 266 266 268

C.

Dealing with Intermediaries Wholesalers Distributors Retailers Franchisees Agents Contractual Agreements

268 269 270 270 273 274 275

D.

Distribution Channel Maintenance and Change Relationship Marketing

276 276

E.

Physical Distribution Management Benefits of Logistics Management of Logistics Using Availability as a Competitive Advantage Logistics

279 279 279 281 283

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Distribution Policy and Management

A. THE IMPORTANCE OF THE PLACE ELEMENT The "place" element of the marketing mix does not only relate to the actual location where a buyer can obtain a product; it is also concerned with the entire process of distribution management. This means that place covers all processes which are involved in getting the product or service to the buyer (and, ultimately, to the users) in the most economical manner, i.e. order receiving and processing, stocking, transportation, delivery and display. Responsibilities will also include receiving back and checking items returned from buyers because they have been found to be faulty or damaged, or for any other reason. From the marketing point of view, there is a sequence which is important and it goes like this in most companies: Spend money making products  Get enquiries  Receive orders  Make products  Deliver  Invoice  Receive payment. Usually nothing is invoiced until the goods are made and despatched. For some substantial jobs there are payments when specific stages have been reached, but for the majority of products the sequence shown here applies. You will see that there are many points where there could be delays, any of which could slow down the payments. This means that proper management of the distribution system is an important part of the company's total marketing system, and it can make a significant contribution to the cash flow needs of the company. In some companies distribution will be under the direct control of the marketing department – in others it may be under production or even purchasing. If marketing is not in direct control, there must be a high degree of liaison or the whole process of satisfying the customers' needs may be endangered. Decisions on distribution channels are very important because they have great effect on other decisions made in the marketing process. In addition, once decisions have been made on distribution aspects, they tend to be difficult to change. The distribution industry has seen many changes in recent years, with systems becoming predominantly technology based, which has improved efficiency and reduced costs quite dramatically in some cases.

The Distribution Plan The distribution plan is yet another "mini-plan" which goes towards the overall marketing plan. You can see that the plan for distribution is in many ways a "facilitating" plan, which is aimed at identifying the most appropriate distribution method to suit the product on offer. The management of the distribution activity then comes down to dealing with people and controlling costs. The plan itself will take a similar format to other plans. Although they may not all be expressed in quite the same terminology, there must be sections relating to: 

A Situational Audit This is the research that is necessary to find, select and establish channels.



Objectives Objectives will be aimed at coverage, costs, timing and control.



Strategies These are the choices that are available to get the product(s) to the user.

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Tactics This covers the implementation, monitoring and control, etc. of the distribution channel.

McDonald lists a straightforward approach to the planning of distribution: 

determine marketing objectives



evaluate changing conditions at all levels



determine distribution task within overall marketing strategy



determine distribution policy in terms of type, number and level of outlets to be used



set performance standards for the distribution organisation



obtain performance information



compare actual with anticipated performance



adjust where necessary.

The distribution function deals with minutiae – in volume and on a continual basis. Its role is supportive but crucial. Marketing is concerned with the exchange of satisfactions on a continuing basis and the product must be delivered, in good condition, at the right time and to the right place. Errors in invoicing can probably be corrected with minimum problems. A similar error in distribution can cause a serious loss of revenue both to the customer and the supplier. The distribution plan is developed from objectives, strategies and the main marketing plan. It is therefore tailored to suit the company products, the market segments targeted, and the performance criteria and standards set. Providing the planning is done in relation to the marketing and corporate plans, a distribution plan will be effective.

Distribution Management Cost-effective distribution is a specialised management skill – one which an increasing number of organisations are contracting out to specialists. In some cases the subcontractors are strategic business units (SBUs) within the organisation but run as independent trading operations, often carrying associated lines from other manufacturers to maximise efficiency. Every major high-street grocery retailer has its own distribution network and negotiates special delivery/collection arrangements with suppliers. No physical distribution management (PDM) system can simultaneously maximise customer service and minimise distribution cost. Maximum service implies large inventories, in close proximity to customers, with very flexible transportation availability. Minimum cost implies slow/cheap transport, low stocks and few depots. Kotler suggests eight areas for which strategies must be set: 

speed of filling and delivering normal orders



willingness to meet emergency merchandise needs of a customer



care with which merchandise is delivered, so that it arrives in good condition



supplier's readiness to take back damaged goods and resupply quickly



number of options on shipment loads and carriers



supplier's willingness to carry inventory for a customer



price of services – are they free or separately priced?

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The relative importance and formulation of these various customer services must be researched for the target customers. Competitive policy, promise and achievement must be monitored; only then can the necessary distributive strategies be set. Cost-effectiveness is crucial. At one time costs of distribution could easily run as high as 20 per cent of sales revenue. This has been halved in many industry sectors, and reduced to around four per cent in some retail sectors. The achievement of profit leverage through cost reduction is of significant importance. A 5 per cent reduction in distributive costs can boost profits by 50 per cent. This gearing effect is well known, but maximising its benefits requires constant monitoring of the PDM operation by specialised management.

Distribution Decisions Initial considerations on this aspect of the marketing effort will be mainly based on four factors: 

Requirements of the Product What kind of storage is needed? Is it perishable or does it have a long shelf-life? Are there any hazardous or other aspects which require extra security in handling and storage, etc? The product may be for mass markets and have a high rate of turnover, or it may be for industrial markets which will be high value but of limited frequency. It may be a seasonal product which only requires distribution at certain times of the year. The characteristics of the product will dictate the type of distribution channel that can be used.



Requirements of the Buyer How does the buyer wish to obtain the product and where? Do they want to buy it from a catalogue, a multiple store, a warehouse, a specialist retail outlet or a trade outlet? Sometimes it is necessary to have the product available in several types of outlet in order to reach the full potential market; alternatively it may be better to restrict the availability of the product in order to maintain an exclusive appeal.



Kind of Transport Required/Available Can the product be moved easily? Does it have to be moved quickly? Can it be flown if it is going overseas? Are there points of entry in overseas markets? What kind of transport is available? Who will bear the transport costs – buyer or seller? Does the image of the product require a special type of transport?



Requirements of the Seller How much control does the supplier want to have? How much of the overall potential profit are they prepared to pass on to an intermediary? Do they want to have information on the end-user? How much protection do they need from competition?

You can see that these areas are all interdependent and none can be taken in isolation.

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We can summarise this by saying that decisions on distribution should be based on a combination of factors relating to the four Ps of distribution: 

product



producer



purchaser



physical movement and storage.

B. CHANNELS OF DISTRIBUTION When we refer to a channel of distribution we are speaking about the chain which links the manufacturer and the user. The shorter the chain, the fewer the links and the closer the ties between the manufacturer and the user. As channels lengthen, problems associated with loss of control and profit become more pronounced and the responsibilities of the manufacturer will increase.

Direct and Indirect Channels The basic decision in the choice of a distribution channel can only ever be between a direct and indirect channel. 

Direct Channels Direct distribution means that the manufacturer delivers the product straight to the buyer – the product goes directly from the producer to the consumer without the use of a specific intermediary. We are seeing a growing trend for farmers to bypass wholesale markets and sell their produce direct at farmers' markets. These are proving very successful, particularly as the call for organic produce develops. Many companies who want to reach a wider audience use the pages of the national newspapers and magazines to sell off the page. This method of selling is now being transferred to the internet where ordering and payment are made easy. Initially, it was mainly travel and book companies that used the internet to sell their goods and services. Today, we are witnessing an explosion in many other fields, including property, jobs and cars. Organisations are using more e-commerce, which has had a significant effect on market structures, with one or more intermediary/members of the distribution chain being bypassed – disintermediation. Disintermediation has allowed organisations to cut costs and gain more control over their products and services. It has also allowed organisations to build closer relationships with their customers, because they have direct access to customer purchasing information via the website. One of the major examples of disintermediation has been in the insurance industry, where insurance companies no longer rely on financial or insurance brokers but sell direct to consumers. However, in recent years the internet itself has seen the growth of its own intermediaries, such as search engines like Google, virtual retailers like Amazon and Lastminute.com and even virtual shopping centres. Guarantees have to be given to buyers in case the merchandise is not what they want and so a full refund has to be offered. Direct channels mean total control over quality, price and profit and more involvement with the customer. This closer involvement adds many responsibilities – order processing, transport arrangements, marketing, promotion and after-sales service. This can be too much for some organisations, so they prefer to use indirect methods of distribution.

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

Indirect Channels Indirect distribution means that delivery is made through an intermediary of some kind. The intermediary is a "link in the chain". There may be multiple links in the chain with many intermediaries before the buyer, or user, comes into contact with the product. Using indirect channels means that manufacturers will lose some element of control and profit. They may never get to know, in great detail, anything about the actual users of their product, which could result in a reduced capability to know what the users are looking for. We must also recognise that using an intermediary can never be as quick as going direct to a customer.

Both the number and types of intermediaries, selected in designing a channel, depend upon the range and nature of the tasks required in moving goods and services from the manufacturer to the final buyer. They also depend on the extent to which one channel is superior to another. That said, the following table highlights a variety of factors influencing choice between direct and more indirect channels of distribution. Direct (Shorter)

Indirect (Longer)

Industrial products

Consumer products

Services

Tangible products

Few, more concentrated customer groupings

Larger numbers of customers, geographically dispersed

More control required, e.g. quality, installation, after-sales service

Control less important

Customer purchases in large amounts at frequent intervals

Customer purchases frequently but in small amounts

Products which are bulky, expensive to handle, custom-built, high unit value or perishable

Less bulky, cheaper, standardised, nonperishable products

Factors Affecting Channel Choice For many products it may be possible to use several methods (channels) of distribution, which implies that the seller must decide which channel(s) will be the most beneficial to their requirements. This can be a difficult choice to make and a number of factors come into play. (a)

Market Characteristics These include location, purchasing preferences and patterns, overall number, segments, communication media used. 

Where the number of customers is large, long channels are normally necessary. (The role of the bulk-buying multiple has changed this to some extent.)



Wide geographical dispersion of customers may require long channels.



High frequency in the purchasing pattern of low unit-value items may indicate the need for long channels because of high cost of direct sale.



Consumer preference for dealing with a specific type of outlet affects choice.

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263

Product Characteristics The most important characteristics are:

(c)



Price: the higher the price and the lower sales costs as a percentage of price, the more direct sales become attractive.



Seasonality: seasonal products require a reseller system that can handle the stress caused by seasonality in sales.



Product complexity: highly technical products, requiring assembly or installation or service, need specialist middlemen. If these are not available, direct sale is indicated.



Perishable items: these often require a direct channel. Note that because of improvements in science and technology, many traditional perishable products are being developed into long-life products, such as UHT milk.

Characteristics of Intermediaries The availability of suitable intermediaries, their ability and willingness to perform the various marketing functions and their willingness to take on the particular product affect choice. Other factors include capabilities, premises, sales force, customer base and credit rating.

(d)

Characteristics of Competitors The extent to which competitors dominate existing channels and the extent to which manufacturers wish to compete directly against competitors or avoid them affects channel choice.

(e)

Company Characteristics The size and reputation of the company, its product mix, past channel experience and present marketing policies will affect its channel strategy.

(f)

Legal Aspects Any government-imposed restrictions or incentives, difficulties in setting up or cancelled contracts.

You can see that the information which is required is as for the full marketing audit – you should be recognising by now just how comprehensive a full marketing audit can be and how important research is to the marketing effort. Either before or after the basic decision to use direct or indirect channels has been taken, research into the factors just identified will help in determining which type of distribution channel comes closest to meeting all requirements. However it may well happen that the "ideal" channel is non-existent in the intended market or, for various reasons, is unavailable to the seller. If this is the case the seller may decide to diversify by vertical integration and take over some existing distributor, build up his own distribution outlets/chain, or even develop a completely different method of selling. The final choice between channels will depend on a balance between: 

cost

– investment – maintenance



coverage – large/small area – many/few outlets – all/few products

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

control

– maximum/minimum – strict/lenient



continuity – channel growth – channel stagnation – channel decline.

Characteristics of Different Channels The various channels are displayed in Figure 9.1 in terms of the directness of contact between the producer and the consumer, and the length of the distribution chain. Figure 9.1: Channels of distribution Decreasing directness

Decreasing length

Producer

Consumer

Producer

Retailer

Consumer

Producer

Wholesaler

Retailer

Consumer

Producer

Agent

Wholesaler

Retailer

Consumer

In order to decide which distribution channel or combination of channels is preferable, the marketing manager should quantify the costs associated with the alternatives. Let us now examine the advantages and disadvantages of different channels – the chain of intermediaries involved such as the wholesaler and the retailer, and finally the process of selling direct to the consumer. We shall consider the characteristics of the various intermediaries in more detail in the next section. (a)

Advantages of Using a Wholesaler There are a number of advantages for a manufacturer in using wholesalers. In general, manufacturers of consumer goods tend to use wholesalers where: 

the manufacturer is new to the market and prefers to rely on the wholesaler's contacts



demand is irregular or seasonal



the manufacturer cannot carry out certain functions e.g. warehousing



the manufacturer would not find it cost-effective to send a salesperson to a number of small retailers (one large order from the wholesaler is preferable to many small, retail orders)



administration costs (e.g. postage, typing) are reduced by using wholesalers because the number of accounts is reduced (also, less of the manufacturer's salesmen are required).

For industrial goods a similar pattern emerges. For example, steel stockholders handle steel for steel companies. The wholesaler here can employ their own sales

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force, make immediate delivery from stocks, and provide credit and technical backup to customers. These points illustrate where it is advantageous for the manufacturer to use a wholesaler, but there are disadvantages. (b)

Disadvantages of Using a Wholesaler 

The manufacturer loses control over where their products are finally sold. They cannot dictate a distribution policy to the wholesaler.



Call frequency is dependent on the wholesaler.



The wholesaler sells other competing lines and therefore the manufacturer has no control over what products the wholesaler generally pushes.



Promotion in-store/warehouse is not possible unless merchandisers are used.



In certain cases, the manufacturer has no control over price.

Some manufacturers operate dual distribution, e.g. Mars (the confectionery company) sell direct to big customers, but also sell to wholesalers who service the small retailers – outlets which the Mars sales force leave alone. (c)

(d)

Advantages of Direct Sales to Retailers 

Manufacturers have greater control over where their product is sold.



The sales force can concentrate on particular products or new products, as required by company policy.



It is useful where technical service or a large flow of information is required. To use a wholesaler would increase the number of communication channels and this could lead to a distortion of facts.



Greater control is maintained over prices, call frequency and in-store merchandising; in-store promotions are most easily organised.

Disadvantages of Direct Sales to Retailers 

There is an increase in costs of sales, administration and distribution.



Some customers continually place small orders which are hardly economic; roughly 20 per cent of customers provide 80 per cent of the turnover.



More working capital is tied up.



There are more bad debts.

You should bear in mind that some retailers will not, on principle, deal with wholesalers because they feel that wholesalers are "inferior" to the manufacturer. This is often an attitude of mind rather than a fact. Also, some retailers are so large (e.g. Boots, J Sainsbury) that they have enough buying power to contract direct with the manufacturers – their orders alone would eclipse those of many wholesalers! (e)

Selling Direct to the User This channel is used for some industrial sales, e.g. machinery, chemicals and processing plants. Some are unusual, e.g. a company which builds ammonia plants for industrial use both in the UK and overseas. Contracts here may be with governments or companies.

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Direct sales to the ultimate consumer of consumer goods may be achieved in one of the following four ways: 

Mail-order selling: this may be done through catalogues or advertising through "bargain squares" in the national press.



Door-to-door selling: this is carried out in various ways, e.g. some companies such as Avon Cosmetics do a direct canvass, while others use leads in response to press advertisements. This latter method is exploited by many small businesses.



Internet selling: this is fast becoming a key area in direct sales.



Forward integration: this occurs where manufacturers own their own retail outlets (e.g. Boots) through which they sell their own products.

Generally, using these methods, the costs of distribution to the final consumers are relatively high, but this has to be balanced with the supplier's complete control of the marketing.

Distribution Strategies We have examined some of the factors which will influence which outlets you wish to distribute to and here are three options that can be engaged as part of a distribution strategy: 

Intensive Intensive distribution aims to achieve the widest coverage of outlets and is sought by suppliers of high-volume, low-value products that are in mass demand. This strategy is usually adopted for fast-moving consumer goods. They are in high demand all year round and the aim should be to gain distribution in every available outlet possible.



Exclusive Exclusive distribution is where distributors/stockists are granted exclusive rights in specified areas. This makes a lot of sense where high capital investment is required, and especially where detailed after-sales service is needed. It is applied where the product is expensive and infrequently purchased, and so the motor car distributive networks exemplify this type of distribution. For example, with top-of-the-range cars like BMW or Mercedes, distribution should be matched to areas of population that can afford luxury goods. Prospective customers are likely to visit you (maybe initially via your website) before visiting the showroom.



Selective Selective distribution can be adopted when the product is fairly expensive and bought occasionally but not top of the range. This strategy is used by consumer-durable manufacturers. The product is not placed in all potential outlets, thus selected dealers can specialise and afford after-sales backup and support.

Industrial and Business Markets So far we have discussed distributing products or services to the consumer – those who actually use up what they buy. In business-to-business channels, many of the same principles apply as with consumer markets. However, there are some differences: 

Business-to-business operations tend to have professional buyers who control the main sales contact. For example, Halfords, the high-street retailer of motor accessories, has a buyer for automotive paints only. As Halfords account for around 25 per cent of all car paint sales you can see the important role that the buyer will play.

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

The decision-making unit (DMU) can be much more complex. As marketers you have to establish who makes up the process and often tailor different messages to them. Take, for example, Leyland Trucks. The managing director, financial director, fleet manager and the truck drivers will all have an influence on choice.



Deliveries are likely to be larger (e.g. kitchen furniture to a B&Q warehouse) and will be needed more frequently.



Business customers often require ongoing supplies, often on a routine basis. It is important to ensure that your customer services department can respond to customers' needs at all times.

Figure 9.2 illustrates the various channels available for industrial marketing. Figure 9.2: Industrial distribution channels MANUFACTURER

Branch or Depots

Agents

Brokers

Wholesalers – Merchants – Factors – Franchises – Distributors

CUSTOMERS/BUYERS

Largely because of the nature of industrial markets and the type of product, much of the business is conducted with the customer on a direct basis. Often this might be done through a branch or depot which may carry stocks and service parts. However, you should note that many of the channels listed under consumer markets will also apply to industrial markets. For example, an industrial concern in the UK may buy its biros from W H Smith and catering supplies from Asda. With the growth in self-employment and working from home (currently there are 2.5 million businesses whose owner is also the manager) companies have had to develop new distribution strategies for reaching this lucrative market. A good example of this is Viking Direct, an American organisation that was set up in the UK to supply direct to businesses, both small and large. Using large catalogues which are mailed out to customers and prospects, they offer a huge range at keen prices and deliver to your premises the following day (or the same day in some areas) free of charge for orders over a very modest value. Their customer retention methods are first class. They regularly write personalised messages offering customers special offers. The computer industry – both manufacturers and software wholesalers – have also been particularly adept at penetrating this market.

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Export Markets If a company is engaged in international marketing, i.e. having separate marketing operations in overseas countries, the distribution channel options will be similar to those we have already illustrated. If the company is engaged in export marketing, i.e. manufacturing at home and selling overseas, the following channels may be used: 

Buying agencies in foreign countries: several large retailing concerns located overseas, and certain foreign governments particularly in Eastern Europe, have buying agencies located in the United Kingdom.



Export merchants: these people take title to the goods, which they ship to their own overseas agents or customers. They may publish their own catalogues featuring assortments of goods.



Manufacturers' export agents: manufacturers may employ export agents located in overseas countries who operate on a similar basis to manufacturers' agents in the domestic market.



Overseas branches: the company may have overseas sales offices or depots selling to and supplying the overseas market.



Overseas import houses: these companies receive and take title to goods, relieving the manufacturer of overseas manufacturing operations.



Joint venture operations: the company may enter into an association with an overseas company which agrees to market the firm's products.

C. DEALING WITH INTERMEDIARIES An intermediary is an external agency that is acting, in some form or another, as a link in the distribution chain between manufacturer and user. Using intermediaries is something which manufacturers do as and when necessary, but the decision on the type of intermediary to use will be based upon many influencing factors. Such decisions can never be taken lightly as so much depends on the satisfactory distribution of a product. Thus when choosing intermediaries, manufacturers will be concerned with such aspects as: 

Does the intermediary have access to the target market?



Will the intermediary help exploit the advantages of the product?



Will the intermediary help in promotion costs, etc?



Will there be enough profit for the manufacturer?



Will the intermediary be dealing in competing products?



What contractual obligations are involved?

Earlier in the course we discussed relationships with research agencies. Basically, finding, selecting, briefing and controlling any external agency is similar in home or overseas markets, but we have to accept that the added dimensions of dealing with another language and culture can create additional problems. What you must remember is that an intermediary is a customer. They are entitled to be treated with respect and given as much consideration as the individual user of a product. Indeed, treatment of intermediaries may be crucial to the long-term success of a manufacturer.

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The internet has allowed organisations to develop a closer relationship with their intermediaries, to improve processes and improve communication via intranets (internal computer networks which use internet technology). Organisations can use intranets to link customer ordering between supply channel members, so that stock is automatically replaced and/or orders automatically shipped. Communication with distribution channels can be improved through the use of intranets with, for example, online notice boards, online training, technical and support manuals to assist with after-sales service, and promotional material to download. Some of the advantages to an organisation of creating these links with suppliers are: 

the ability to gather more information about customers and the market



reduced costs, for example by not having to send technical manuals



improved service to the end customer, for example by improving delivery time and improving after sales service.

We shall now look at different types of intermediaries.

Wholesalers The wholesale trader is one who purchases in bulk from the manufacturer and sells in smaller quantities to the retailer. The true wholesaler operates neither as a manufacturer nor as a retailer but as a link between the two. The wholesaler, therefore, is a merchant whose functions are: 

to buy from manufacturers and sell to retailers



to forecast, stimulate and interpret the desires of their customers



to be the arbiter of what shall be produced by the manufacturers by forecasting changes in fashion and suggesting the type of goods and materials likely to be required



to help manufacturers concentrate on production without having to be concerned with the problems of marketing small quantities of goods through numerous retail outlets



to assist retailers by supplying goods in the quantities and of the qualities required, obviating the retailers' need to carry heavy stocks which would tie up their capital for long periods



to keep prices steady by buying when trade is slack and prices low, and selling when prices rise due to increased demand, thereby relieving the manufacturers and retailers of much of the risks of market fluctuations and price movements.

Wholesaling can be classified into three major groups: 

Merchants Merchant wholesalers are the largest single group of wholesalers, accounting for roughly half of all wholesaling. The merchants are independently owned and take title to the merchandise they handle.



Brokers or Agents The difference between merchant wholesalers and brokers and agents is that the latter perform only limited functions and do not take title to the goods. Brokers bring buyers and sellers together to trade, and assist in negotiations. There are several types of agent, the most common of which are manufacturers' agents, who often use their wide contacts to sell their clients' products such as clothes, furniture and electrical goods. Buying agents make purchases for their clients and often receive goods, warehouse them and ship them on to their clients. These are particularly common in the apparel markets. This system also operates quite extensively in international marketing.

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

Manufacturers' Sales Depots and Offices The third classification of wholesaling is carried out in manufacturers' sales offices and depots by sellers and buyers themselves rather than by independent wholesalers. Up to one third of all wholesaling is carried out in this way, e.g. building supplies and DIY furniture kits.

Distributors The main difference between distributors and wholesalers is that distributors take the products in the form that the buyer requires. Payment may be made to the manufacturer for the products or they may be despatched on "consignment" basis – which is simply another way of saying "sale or return". Distributors are strategically placed in the market to ensure coverage of the target sector and can relieve manufacturers of a lot of basic marketing problems. They like to be exclusive (i.e. be the only distributor used by the manufacturer) as this cuts down on competition and adds to their own competitive advantage in the marketplace. They may be dealing with a wide range of products manufactured by various companies, or they may limit themselves to only one particular type of product. Distributors are often used for electrical goods – both consumer and industrial.

Retailers Retailers, large and small, provide a point of contact for buyers. High-street retail shops will have decor that is suitable to the type of customer they are selling to. For example, the fashion store Top Shop is "brighter, noisier and less formal" to cater to the tastes of its young market; Country Casuals, on the other hand, caters to a more selective audience which tends to be older, so the outlets are tastefully decorated with more gentle background music than the frenetic pop music which is played in Top Shop. Both stores, despite the differences, are supplying a convenient location for buyers to see and try garments before buying. Retailers may be a long way from the manufacturers of the clothes they are selling, but they are a direct link to the users. (a)

Retailing Functions The functions of the retail organisation may be listed as follows: 

establishing premises to which the consumer is attracted



obtaining, at prices which are economic, a sufficient source of supply of the goods demanded



competing successfully with other retail organisations.

While these functions may appear formidable, they are by no means a deterrent to the entrepreneur. Many thousands of retail businesses exist throughout the world. They range from the village general stores run on a sole trading basis to the multiple shop and chain store ventures operated by large, public limited companies (PLCs). (b)

Growth of the Multiples There is no doubt that one of the more significant developments in retailing in many economies has been the growth of the multiples. As the term implies, the multiple type of retail outlet includes those retail organisations which operate a number of retail branches with a common ownership and a high degree of centralised control. Because such organisations frequently control a chain of stores operating often on a nationwide basis, they are often referred to as chain stores.

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The phenomenal success of the multiples is due to a number of factors, among the more important of which are: 

their willingness, and ability, to introduce innovations in retailing, e.g. self-service



a very market-oriented approach based on exploiting changes in consumer spending patterns.

Essentially, these factors have enabled the multiples to offer their products at very competitive prices. In turn, and as they have grown in size, their centralised bulk buying of goods has enabled them to negotiate advantageous price terms with suppliers, and to enjoy marketing and promotional support from the manufacturers. This has enabled growth to be sustained. The key features of multiple stores are their size and concentrated buying power, which enable them to buy large quantities of goods and foodstuffs at the lowest prices. From the manufacturer's point of view, there are fewer calls to be made by sales representatives and much of the negotiating is done by high-level managers rather than shopkeepers. Early in 1987, the managing director of Campbell's Soups (UK) Ltd was quoted as saying that four customers bought 50 per cent of their output and the top seven customers bought about 65 per cent of their output. With such buying power, these customers are visited by national account managers who are at a much higher level in their organisations than sales representatives. (c)

Power of the Multiples To a large extent, power has passed from the producer and wholesaler to the retail multiple, mainly because of the growth in buying power of these multiples since the 1990s. The multiple, because of the need to maximise the use of shelf space and volume sales, can be very selective over the product lines to be carried. Decisions over which new products (if any) to carry are made in many cases by considering what should be delisted in order to make space for the new lines. This will mean that the producer will have to offer very attractive terms to make a convincing case. This power is not confined to the grocery trade. Multiple power exists particularly in mixed retail business and the hire and repair business. Overall, up to 75 per cent of retail trade is in the hands of multiples. The profits made by these organisations indicate the degree of power that they enjoy.

(d)

Development of Hypermarkets and Out-of-town Shopping Centres Patterns of retail trading have been undergoing constant change, particularly since the 1990s, and in many other countries throughout the world the general tendency is to adopt increasingly the American way of life. 

Hypermarkets Supermarkets are a typical example of a development which took people away from the idea that shopping had to involve visiting a number of small, specialist shops, perhaps in different parts of the town, in order to purchase the weekly requirements. Much larger buildings were required for the new method of shopping, but eventually most if not all of the goods required for the week could be purchased under one roof. Unfortunately however, there were and still are attendant disadvantages. These include the lack of space in town and city centres to build the supermarkets, and the lack of facilities for car parking in and around the shopping area. This is not made easier by the attempts of planners to reduce the impact of cars in city centres.

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So from the planning viewpoint, it would seem completely logical to attempt to solve these problems by building, or allowing to be built, an ultra-modern shopping complex, ideally under one roof, in a location outside the city, but with good communication facilities to nearby areas. Here, the shoppers could park their cars and, if required, spend the day at the centre, which would provide restaurants and recreational facilities in addition to shopping facilities. In this way, shoppers could buy everything they need, not only food and clothing, but other items, such as toys, gardening equipment, washing machines, televisions, carpets and so on. These large complexes are known as hypermarkets to distinguish them from supermarkets. They have been successfully established in the United States, Canada and Europe. This is a trend which has been particularly strong in France, where there are about 1,000 hypermarkets (each with an area of 5,500 square metres going up to over 20,000 square metres). These mostly belong to three chains: Leclerc, Carrefour and Casino/Rally. They cover huge areas with a very wide range of products and for the consumer they are one of the best places to shop for choice and price. 

Out-of-town Shopping Centres The lack of space in town and city centres for hypermarkets has led to the introduction of out-of-town shopping centres where virtually anything can be bought. This has led to a concentration of outlets and, in many cases, to a strengthening of power for the owners of the sites. In the UK, a notable out-oftown centre is the Arnadale Precinct in Manchester. This covers an area of 1.3 million square feet on two floors and has some 200 shops selling an extensive range of products and services: clothes, shoes, travel, leisure, household goods, banks and so on. Also in the UK we have the Metro Centre (Gateshead), Lakeside (Thurrock) and Meadowhall (Sheffield) to name but three. These centres attract huge numbers of shoppers and day trippers and are very profitable for both the site managers and the retail outlets. For example, Meadowhall claims to have an average of 400,000 visitors each week and is ideally placed with over 9 million people living within one hour's drive of the complex. However the popularity of these centres has caused much resentment from smaller traders in town centres who have seen the number of shoppers (and thus trade) reducing over the years. Governments are now concerned with control of the growth of these centres, and France and the USA in particular have tightened up on regulations controlling new centres. The UK government has also said that growth will be restricted, although since then another huge centre, Bluewater (near Gravesend), has been built.

Both hypermarkets and out-of-town centres are likely to take an increasing proportion of retail business in the developed economies, representing, as they do, a convenient and economical form of one-stop shopping. You should be able to discuss some of the main factors that have contributed to the success of these large retail stores. For example: 

The growth of car ownership and the importance of the car in our everyday lives. Hypermarkets and superstores (large supermarkets) such as Asda are often located in out-of-town sites. Car ownership provides a greater catchment area for these stores, enabling customers to travel to them. Parking facilities are very important to the consumer, particularly with the increase in city centre traffic congestion, and such stores provide extensive parking facilities.

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

Car ownership enables the consumer to buy large quantities of goods at once; some people purchase one month's groceries at a time. They are able to transport these large purchases to their home by car.



Today more women (particularly women with children) work and do not have the time to spend hours shopping. They are able to visit a hypermarket, often quite late in the evening after work has finished, and purchase the majority of their requirements at one retail establishment within a short space of time. Weekend opening also means that more shopping is done as a family than in past years.



The widespread ownership of home freezers enables consumers to store a large amount of perishable food products. Hence they are able to purchase more items at once.

(e)

Retailing in the future The retailing industry suffers with fierce competition and therefore it is important for retailers to choose their target markets carefully and position themselves correctly. They will also need to take the developmental drivers into account when planning their strategy. There is a tendency for the life cycle of retailers to become shorter as a result of technology advancement and fierce competition from rival chains. According to the "wheel of retailing concept" (McNair and May, 1978), retailers often first appear as low costs, low price, low-profit margin operators. They are a challenge to the established retailers who have allowed costs and margins to increase over time. In time the new innovative retailers upgrade their products and services, and so they become vulnerable to new retailers entering the market. Eventually the new retailers can be identified with the established retailers they were challenging, and thus the wheel of retailing continues to turn. An example of this circle is the growth of Tesco when it challenged Sainsbury’s and others in the supermarket arena some years ago, taking market share through low cost and achieving economies of scale ("pile it high, sell it cheap"). With the onslaught of the recessionary economic conditions Asda has successfully challenged Tesco as the cost leader in the supermarket industry. This concept shows clearly the success of organisations as they enter the market, but time erodes the differentiation and economies of scale efficiencies they achieved that set them apart from competitors as they become as large – if not larger than the competitors they challenged and replaced in the first place.

Franchisees Many companies now use franchising and licensing as a means of distributing their products around the world. Using a franchise system means that the company's name and image can gain much greater exposure without the need to have owned outlets. Franchisees are controlled, to some extent, to operate within certain parameters set by the franchiser. Fees are payable for the right to the franchise and any support which is given by the franchiser. Some franchisers give full support, whilst others expect the franchisee to pay for it, e.g. in promotional material or product training. Franchises are in operation for a wide variety of products – food, office supplies, photocopying and carpet cleaning to name but a few. This system is popular with people who want to set up in business in their own right but do not have the resources available. They in effect become "managers" for the franchiser but take profit from the business they are running.

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Agents An agent is someone who acts on your behalf. They are used both in home and overseas markets, and are a "link in the chain". The term "agent" can mean many things, from one person to a complicated organisation as we noted. An agent can be responsible for few or many activities – depending on the relationship required, current legislation and prevailing circumstances. There are various types of agents, including: 

commission



stocking



spares and service



del credere (accepts financial risk).

There are strong advantages in using agents for both the home and overseas markets, as shown in the following table. Home Market

Overseas Market

Coverage of the market

Local knowledge/contacts

May find customers

Easier importation/paperwork

May help with promotion

Acceptability in the market Language problems eased May have good distribution contacts

There are disadvantages in the use of agents. For example they: 

can have split loyalties



may have poor resources



may not work to your system



may mean reduced profit/control



can affect image.

The advantages and disadvantages must be balanced before any decision can be made, but the ultimate choice will be based on some of the following aspects: 

area covered



experience



resources



location of customers



willingness to cooperate



costs/profits involved.

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Contractual Agreements Problems in dealing with any type of intermediary may be overcome, to a large extent, by the contract agreed between the intermediary and the manufacturer. At times contracts may not be necessary as the relationship between the manufacturer and the intermediary is a straightforward buying and selling activity. In these circumstances the terms and conditions of sale and/or purchase will determine the ease or complexity of the transaction. Where contracts are necessary they are very important and must be agreed with the utmost care. All aspects should be covered to the optimum satisfaction of both the manufacturer and the intermediary. Intermediaries may well have the protection of legislation which could mean non-cancellation clauses or punitive fees in certain circumstances. Each party has to ensure that the contract will not inhibit its future activities in any way. For example, if a small manufacturer in the south of France agreed to let one local store be the only distributor of his products he could, in the event of growth, be restricted from engaging any other distributor anywhere in the world. If the manufacturer had discovered a unique product which was in high demand everywhere he would lose a great deal of business and money simply because he had allowed himself to be tied to one small outlet in the south of France. However, the distributor could make a lot of money because he had been better at negotiating a contract. If the manufacturer decided to take a risk and appoint a distributor in another country he could find himself being sued and at the worst could end up losing his business altogether. Examples of points covered in contractual agreements are: 

area involved – region, country, continent



product – full range, selected items



validity period of contract



commission to be paid/and how to be paid



exclusive agency or one of many outlets



promotional support arrangements



authority to change prices



training commitment



any after-sales arrangements



expected turnover



dissolution clause.

If a contract is not clear, then it can lead to confusion or disputes which are likely to result in poor relationships, loss of profits, loss of "face", loss of market share, etc. However, a good contract means security. It also lays down operating systems and procedures which make day-to-day activities within any organisation that much easier to arrange and control.

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D. DISTRIBUTION CHANNEL MAINTENANCE AND CHANGE Most of what we have said so far has related to the setting up of a distribution channel and has taken no account of the continuity aspects of channel management. Continuity is equally important. Distribution managers want good channels, and good channels only happen if they are well managed. There should be no channel conflict – there should be channel harmony. Channel conflict is caused by not treating channel members equally. For example: if one distributor is given better discounts than another it will cause problems; if one channel member is given product training for the sales force and another is not, it will also cause conflict. Fair treatment of channel members on every aspect of the business is of utmost importance if a distribution channel is to remain effective. Once relationships begin to suffer business can be lost, and it can take a great deal of time to recover lost ground. Managers should be working towards the development of their distribution channels. Although this may simply be a case of managing and controlling existing channel members in terms of supply, targets, reporting, etc., there may be times when a channel needs to be changed. Change may become necessary because of environmental factors such as legislation, competition or customer preferences. The fact that channel members have proved to be incapable of giving the level of coverage that a manufacturer requires, or are failing in some other aspect (e.g. spiralling costs) may also lead to the need for change. Whatever the reason for changing a channel, change can only be effected with care. The original supplier needs to consider all aspects: 

What will the effect be on the other channel members?



How will the customers react?



How will the competition react?



What costs will be incurred?



What level of profits can be expected?

Put another way, making any change to a distribution channel is a similar exercise to setting up a new distribution channel. The same type of research has to be undertaken and similar decisions made. If we assume that it is not simply a case of getting rid of a channel member who is performing badly, changing a distribution channel can, in some circumstances, be made much easier if channel harmony exists. Harmony among channel members leads to smoother operating procedures, better communications and a greater willingness to cooperate. This is helped by building relationships.

Relationship Marketing Increasingly competitive markets, resource restrictions and buyer power have heightened the need for good relationships in distribution. When manufacturers and intermediaries work together, communicate well and discuss plans, etc., they become interdependent and the relationships formed are less likely to suffer. Not only will control be much more effective, but it will also be much easier to make changes to improve efficiency and effectiveness for both parties.

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But there is a danger here. Relationship marketing is excellent in all ways apart from the fact that it can cause complacency. If a manufacturer becomes too lax in his treatment of an intermediary (or a supplier) he may miss some factor which is indicative of an underlying problem. If that problem is not settled it can lead to a break-up of the relationship. This also applies to intermediaries being careless in their attitude to manufacturers. Technological advances in the use of intranets for providing information, improving communication and linking processes, have all helped improve relationships between organisations and their distribution channels. Organisations have also been able to use technology to create close relationships with distribution channels, to try to stop competitor organisations moving in. An example of this can be seen in the retail industry, where suppliers create technology links with retailers so that when a customer purchases their products they are immediately reordered and despatched to the retailer; this prevents the valuable shelf space in a retail outlet being lost to a competitor because of a lack of stock. The key relationships which need to be managed are set out in Figure 9.3.

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Figure 9.3: Relationships in distribution SUPPLIERS' DISTRIBUTION CHANNEL OBJECTIVES Market/segment share Profit objective by market segment Channel member allegiance Consumer brand loyalty

SUPPLIERS' CHANNEL REQUIREMENTS – SUPPORT REQUIRED TO ACHIEVE DISTRIBUTION CHANNEL AND MARKETING OBJECTIVES

ULTIMATE CONSUMER NEEDS – SATISFACTION REQUIRED BY ULTIMATE CONSUMERS Price/value

High penetration

Convenience

High service levels

Availability

Wide range inventory

Choice

Promotion Market intelligence Market development

Intermediary support programmes

Consumer satisfaction

DISTRIBUTORS' REQUIREMENTS – COMPENSATION EXPECTED BY INTERMEDIARY FOR PROVIDING SELLER SUPPORT Satisfactory rate of stock turn Gross margin and overhead contribution ROI on inventory/selling area Promotional allowance and other below-the-line benefits Distribution exclusivity Continuity of supply Market development Credit

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E. PHYSICAL DISTRIBUTION MANAGEMENT Physical distribution management (PDM) is often referred to as logistics. In the British Army, certain officers (usually those of the Royal Army Ordnance Corps) are responsible purely for the movement of goods from one place to another, i.e. all equipment, food and fuel supplies. Every detail has to be thought out, organised, planned and executed since under no circumstances could troops afford to run out of ammunition, food, or any essential supply in a war-like situation. The same reasoning can be applied to marketing.

Benefits of Logistics In their book Essentials of Marketing, Lancaster and Massingham make the point that properly managed logistics can provide the supplier with cost savings and a differential advantage which will go a long way towards ensuring future orders. In fact, they say that in some industries you cannot get orders unless you can work to just-in-time (JIT) schemes. On the other hand, a stock shortage on a modern assembly line can be an expensive disaster, so there is some justification for the demands of the manufacturers. Although this looks like an industrial matter, the same ideas apply to some of the products sold in supermarkets. You see fresh flowers in superb condition in some supermarkets and even in department stores such as Marks and Spencer. You might wonder how they keep the flowers so fresh: the answer is in the contracts for daily deliveries with local growers. This is not quite as dramatic as the assembly line, but is another example of JIT marketing logistics which you have probably seen but not thought about. Examples of marketing logistics are all around you, but the fact that they are so efficient stops them from being noticeable.

Management of Logistics There are entire books devoted to the management and improvement of marketing logistics, but for now we can confine ourselves to the following, adapted from Lancaster and Massingham. The process of physical distribution management involves the following steps: 

find out customer service needs



find out the present performance of our company and of competitors



determine the costs and benefits of improving our performance levels, so as to maximise profits



establish specific objectives for logistics performance



plan, implement and control the logistics system.

We can take each item and look at the implications for the company. (a)

Customer Service Needs It is clear that a scheme to look into logistics would involve a lot of work for marketing and other departments, the first item being the collection of information about just what the customers really want. Do they want us to deliver the goods just at a specific time or do they simply want to know that they can rely on us to keep our delivery promises? It is usually easy to see what products they want, but not always as easy to see exactly when they want them, and how much they are prepared to pay for the service element of what they are going to receive. Some buyers ask for better delivery than they need, just to avoid being caught out by unexpected delays.

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If a company is to enter into special delivery arrangements with specific customers, then there must be trust on both sides, and the whole truth is needed. It is likely that full details of production plans will have to be exchanged so that the two companies can work together: that sort of collaboration goes beyond the normal relationships of customers and suppliers. (b)

Present Performance – Competitors and Ourselves You may have some idea from your sales representatives' reports on how the customer views your performance levels, and it is worthwhile trying to get a comparison with your competitors. That may involve a different approach – sometimes a buyer will be more forthcoming when talking to a marketing researcher or even to a sales manager and any different approach is worth trying. It is often easy to get criticism of performance – everyone remembers the disasters, but not the more frequent good service that is taken for granted. It is essential to get a balanced view of the situation, so as to determine how much needs improving, if anything. There is no point in setting up to deliver JIT if the goods are then going to lie in the goods inwards store for several days.

(c)

Maximising Profits Whilst we are looking at the possibility of improving logistics for the customers, it is essential that we keep an eye on the costs that may be involved. Although we talk of JIT deliveries, the goods have to be manufactured and the machinery in our factory may not be adaptable to small batches every day or two. Production economies usually come from large batches, or long production runs, and it is normal practice to plan for economic production runs, and then store the products for delivery to customers on a planned schedule or just when orders are received. If the customers no longer want to hold stocks and if they prefer to depend on frequent deliveries, we might have to use different delivery methods. We might even have to set up a small stock depot near their factory. This is not a new idea – many years ago a company based in the West Midlands won an order from Volvo for forged steel brackets on condition that they set up a stock depot to keep four weeks' supply near the Swedish factory. Stock depots are expensive items and may not be necessary if the customer is not too far away, but the point has to be considered. Some car firms working in several countries in Europe run their own mini-airlines so as to have full control over the delivery of vital parts.

(d)

Specific Performance Levels Although we are considering providing the customers with a delivery service that matches their production needs, we must not let the customers demand unreasonable standards. The whole idea of working on the logistics of marketing together is to make the system better for both partners in the deal. It is only by setting performance levels by agreement that both parties can be better off.

(e)

Plan, Implement and Control If a supplier and a customer get together in a marketing logistics scheme, there must be proper planning and control. That usually means that there has to be one senior manager appointed at each end of the agreement, with the responsibility to make the scheme work and the authority to make changes when it does not. One manager in a manufacturing company may cope with several schemes of this nature, of course. I have seen this sort of scheme work within a company, where the design offices were a long way from the production factory: a senior manager who was respected in both

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establishments had the job of keeping production rolling, and he often had to make small design changes on the spot. These were formalised in the design office later. Where two or more companies are involved, it is essential for full cooperation to be established and there are many ways in which that can be achieved. For instance, it is usual for Japanese companies to buy some shares in the other company as a sign of good faith. In Britain the cooperation is more likely to be assured by means of meetings of directors. You will see from all this (which only skims the surface of a vast subject) that the deals involved go beyond the mere generation of short-term profits. Much of what we have looked at would take a year or two to settle down into a pattern, and it is only where there is scope for long-term profit that this sort of activity is worthwhile. However, companies take note of what their competitors are doing, and if an agreement is seen to be working well, there may be some demand generated for more of the same for different companies. On a shorter time-scale it is possible to get something similar going, especially in mail order, with a declaration such as "all orders received before 3.00 pm will be despatched the same day". In Britain that is enough to guarantee delivery next day, or in two or three days, depending on the level of service that you pay for. If you make such a promise, make sure that you know where the carrier's depot is – you might be taking the goods to the depot if you miss the collection time.

Using Availability as a Competitive Advantage Many of the so-called new ideas have been around so long that they are not recognised in their old form. For instance, the idea of JIT deliveries is not new at all – for many years engineering companies have persuaded their customers to place big orders that could make use of the economies of scale of big machines. Some years ago it was not unusual for a company to place an order for the quantity that they expected to need for six months, and for the manufacturer to hold the stocks for call-off as needed by the customer. The customer had the satisfaction of knowing that the goods were always ready and the manufacturer had the benefit of making use of machinery at the optimum rate. Both companies were better satisfied than they would have been if the orders had been placed for small quantities more frequently. That was availability under a different name, and is still adequate for most orders. 

Guaranteed Delivery A company which sets out to gain a differential advantage, by offering the availability of their products at the times which suit the customers, must do more than simply manufacture the goods and despatch them. As soon as the goods leave the manufacturer they are out of their control and the promise of availability is no longer valid. With the best of carriers there can be problems that are beyond the control of their management, such as a breakdown in the transport which is used, or a consignment which is misdirected. The manufacturer has no control over such problems and may be just one of many clients suffering from the same predicament. If the manufacturer wants to ensure that the offer of availability at specified times can be guaranteed, they must either use a priority service, which promises delivery in a specific timescale, or control the delivery service themselves. In Britain there are various companies which provide a collection and delivery service for items ranging from small parcels to whole truckloads. Usually these companies promise delivery either on the next working day, or in two or three days, depending on how much you are prepared to pay. For very urgent packages there are schemes which are quicker than that.

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The same sort of guaranteed delivery overseas is offered by some carriers. My experience of just one of these carriers has been good – they handled all the documentation for customs and the airline, then delivered to Brunei in three days, and Jeddah in two days, exactly as promised. Ordinary airmail would have been less expensive, but my clients distrusted the local mailing service so they asked me to use a specific carrier which they had learned to trust. 

Customer Satisfaction In my small way I provided the equivalent of a JIT service for these two clients, to increase their satisfaction. It cost me extra, and if I were to do this regularly I would probably charge extra for the fast service. As it was, I got the benefit of a recommendation: business which comes in when a satisfied client recommends you to friends avoids the cost of advertising. A spread of such recommendations can then be used as part of the publicity message and the advantage gained multiplies each time. Years ago I was a sales representative working for a company that took a pride in delivering as quoted, and customers came to rely on delivery promises. When a series of events caused a delay, the customer demanded action, and the best way that I could help was to strip my car of all loose items (to reduce the weight), then take the parts in the car. It took three trips, and I was not selling anything during the journeys, but I was helping the company to maintain its image as a reliable provider of availability. In that company everyone put the customers' interests first, and the reputation of the company was as high as it could be.



Service Elasticity Therefore it is important for an organisation to introduce flexibility into its logistical management. Organisations need to decide on the best way to store, handle and move products so that they are available to the customers in the right quantity, at the right time and in the right place. It is about managing the flow of products from the manufacturer to the customer or end-user. Inventory management might mean that there is not enough stock to meet urgent customer needs or unforeseen peaks in demand and this will affect customer satisfaction. Developments in electronic technologies such as radio frequency identification tags (RFIT) are improving the efficiency and effectiveness of the logistical activities and how they are managed and implemented. In the retail sector order-processing technologies provide quick response programmes which assist in the management of inventory replenishment. Electronic warehousing systems, or database systems, are being used for the storage of products which are digitalized so that the system can be searched electronically. An example would be ScienceDirect, which is an electronic database dealing with customer searches for information.

Convenience is a driver of innovation in logistical management. It requires speed and ease in obtaining products and services which should take account of elements such as access (easy to get to), search (information search to identify need), possession (easy to obtain) and transaction (easy to purchase and return) (Seiders, Berry and Gresham, 2000). The message is – if you promise availability, you must be able to provide it, and that may mean some unorthodox activities. There are many factors to consider, and they do not all fit nicely into the fast availability achievement that customers would like to see. Cost is probably the most important single factor that affects availability: the transport manager wants to use the low-cost service so as to keep department costs down, but the accounts department wants the goods to be delivered quickly so that they can start asking for payment. The packing room want to use the cheapest materials but that may increase the breakages, which leads to replacement and customer dissatisfaction. The optimum location of warehouses can save the customers some time, and increase availability, but costs the company more money.

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Kotler points out that the location of the manufacturer's plant may seem to be obvious – as near the market as is possible within reason – but that may mean a high-cost location in the city suburbs. On the other hand, a location some miles out of the city may be so much lower in costs as to offset the transportation costs and make the total operation less expensive. There is so much to consider, and if the company is setting up a new factory it will be possible to choose the best site, for the time being. However, few people are in that position, and it is usually necessary to do the best you can with the location that is available.

Logistics Although some firms view physical distribution as being separate from marketing, the opportunities to be gained from integration are enormous. The objective is to achieve a balance between services to buyers and customers, in terms of time, place and operating efficiency. We have to remember that all sensible marketing depends on the provision of the goods at places where people can buy them. Effective logistics can lead to the maximisation of benefits for the company as a whole. The term "logistics" encompasses all the activities that are involved in getting the right goods to the right place at the right time, in the right quantity, and with the right sort of support. There is more to that than just distributing the goods from one place to another, although that is a big part of the activity. It includes the following areas: 

transportation – choice of transport method (road, sea, air, rail, etc.), vehicle utilisation (own, hired or leased), vehicle selection, scheduling and routing, load planning

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materials handling – in-plant movement, palletisation, packaging, unitisation, handling systems

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warehousing and delivery – space, layout, facilities, utilisation delivery policy and returns

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inventory – stockholding policy, inventory levels, security, insurance, stock checks

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location – choice of warehouses and depot locations for market cover

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processing – order processing and administrative systems

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cost control – audit procedures, cost allocation, account profitability analysis

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policy formulation – strategic issues, motivation, planning, communication, JIT.

Logistics considers the cost of all the activities and of course the aim is to keep the costs per unit to a minimum. So much of the cost of a product goes into the packaging and movement of the product from the factory to the customer that it is necessary to evaluate every activity and trade off one cost against another. There is little point in reducing the cost of packaging or the speed of handling if it increases the cost of handling and breakages. In assessing the physical aspects of the logistics operation, the following criteria need to be considered. 

Transit time: this is very important for perishable goods such as food, and less important for some others; the destination of some perishable foods may have to be changed if there is a delay in the transport system, or even if the weather changes dramatically.

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Reliability: this must be considered in total, because customers can often buy a substitute for the product if it is not available at the right time and place. Also, the goods should be safe from pilfering.

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Accessibility: the warehouse and carriers must be easily available to move the goods over the best network of roads, railways or waterways.

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Capability: the warehouse and carrier's transport must be able to provide cold storage for some products, or safety for such products as gases and fuels.

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Coordination: the warehouse company must be willing to coordinate activities with other companies.

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Traceability: it is often necessary to find out just where a consignment is, to give an idea of when it will arrive at the store. This is tied up with the policy for dealing with claims for late or non-delivery.

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Cost: there are times when the minimum cost is best, but other times when a higher cost is more acceptable, if the trade-off includes faster delivery.

Whilst all these matters make for plenty of difficult decision-making in connection with the warehousing and transportation of goods, you must remember that in the long run, the marketing manager has to take these matters into consideration too. If the best interests of the customer clash with the best solution of the logistics model, the marketing manager may have to persuade higher management to put the customer's needs first.

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Chapter 10 Marketing Communications Contents

Page

A.

A Strategic Approach to Promotion The Promotion Mix Integrated Communications Planning Marketing Communications Strategies Budget Allocation

287 287 291 293 294

B.

The Communications Process Communication Objectives The Message Target Audience Timing and Implementation Evaluation and Control Planning Communications

295 296 296 297 298 298 299

C.

Advertising Why Advertise? Classification of Advertisements Using Advertising Agencies Advertising Media

300 300 300 302 303

D.

Sales Promotion Advantages and Disadvantages of Sales Promotion Exhibitions Conferences/Seminars Sales Literature Merchandising Effective Sales Promotion

306 307 309 310 310 311 312

E.

Personal Selling Sales Force Objectives and Tasks The Seven Steps of Selling Coordinating Sales and Sales Promotion

313 314 314 317

Organisation of the Sales Force

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286

Marketing Communications

Sales Forecasting and the Sales Plan

319

F.

Public Relations What is Public Relations? What Public Relations is not! Purpose of Public Relations Public Relations and the Marketing Mix The Public Relations Message Methods of Public Relations Importance of Integrated Activities

319 319 320 321 322 324 325 329

G

Direct Marketing Direct Mail/Email Relationship Marketing

333 333 334

H.

International Marketing Communications Introduction Challenges for International Marketing Communications The Components of Culture Communication – Standardisation or Adaptation? Planning and Coordinating the International Communications Strategy

335 335 335 336 338 339

I.

Evaluating Performance Pretesting Post-testing Financial Analysis Likeability

339 340 340 340 340

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A. A STRATEGIC APPROACH TO PROMOTION In this chapter we address the last of the four Ps of the marketing mix – promotion. Promotion is often viewed as being more operational in nature, but this is not entirely true. Strategic decisions need to be taken and here we shall consider the processes and decision areas involved in strategic promotional planning, as well as examining individual aspects of promotional activities. As you know, the marketing plan covers the activities related to every element of the marketing mix and is a combination of several sub-plans. The promotional plan itself is a sub-plan of the overall marketing plan and, in turn, covers a variety of activities.

The Promotion Mix The entire range of activities is known as the promotion mix and covers the activities involved in advertising, sales promotion, PR, direct marketing and personal selling. (a)

Advertising Advertising is the paid for time and space in media not owned by the advertising organisation. Tasks such as design and efficient buying of media may well be left to the operational manager but other decisions, such as the nature of an advertising campaign and the timing and frequency, will be taken at strategic level. Advertising is seen by the public and it must be done in such a way that the company and its products are not harmed by any adverse reactions on the part of the public. This may seem to be within the realm of public relations but it is really control of advertising and a prime concern for senior levels. Many people think that advertising is a short-term activity which cannot be planned in advance. While this may be true in some circumstances, it is certainly not true in all cases. If a company needs to make major changes, their advertising planning will certainly be over a long period. They may decide to change the type of media they use or they may wish to change their image. For instance, when Guinness was suffering from a reducing target market (they were literally dying) the company knew they had to change their image. Instead of using the tried and trusted toucan for their adverts, they used a well-known personality and advertisements that were modern and intriguing. The approach worked – Guinness attracted a younger audience and sales grew again. Guinness did not just act on a sudden impulse. The strategic planners made sure that everything was done correctly. The change took place over a long time period – arrangements had to be made to make sure that the campaign would be effective. A great deal of money was spent and it was a risky time for Guinness – too risky to leave to operational managers. The internet has provided organisations with a different advertising medium. Websites themselves support a "pull" communication strategy as the customer is actively seeking out the product or information about the product. Customers will still need to be directed to the organisation's websites either by traditional media or by internet advertising – as banner adverts on other websites such as portals (e.g. AOL), which aim to "drive" traffic/users through to the organisation's website. Organisations can also try to encourage traffic onto their websites by using search engines, such as Google. This works by organisations trying to include keywords in their advertising message, hoping that customers will search for those keywords when looking for information.

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The internet, as a medium, can also offer the capabilities of interaction with the customer and one-to-one communication through personalisation of website pages. (b)

Public Relations Public relations means the activities taken to foster good relations with stakeholders and other relevant publics of an organisation. Because public relations is so important and reflects the overall ethos of the company it is seen, in many companies, as a major strategic responsibility. Operational marketers may well be responsible for the implementation and control of any plans, but they will be following the "company line". The company line will be based on how the company is to be presented to the public at large and will ultimately be aimed at achieving corporate objectives. A sub-activity of PR is publicity – free exposure, whether good or bad, to the publics of the organisation. Companies will go to great lengths to gain good publicity and to even greater lengths to avoid or overcome bad publicity in order to protect their image and reputation. At the higher planning levels decisions will be taken as to whether the company will actively seek publicity and which methods to adopt. It is usual that the people who deal with publicity are the same as those who deal with PR. Certainly the strategic thinking will be the same and similar considerations will influence any decisions made.

(c)

Sales Promotion Sales promotion means all other efforts taken to support the advertising and publicity activities of the organisation. "Sales promotion" can include a multitude of activities: database marketing; free gifts; television selling; online loyalty schemes such as offering discounts for purchasing online; customer loyalty cards, which give points for purchases that can then be redeemed against future purchases or used to purchase other goods or services, and so on. The term is a catch all for everything that does not fit into the other categories of public relations and advertising. The main difficulty with sales promotion is in getting the balance right. Customers can get very tired of the same old things and the company can easily gain a reputation for being "offer-based" if they are not careful. It is the balance and the approach to sales promotion that are decided at strategic level, rather than the day-to-day activities involved. Will the company give free gifts? If so, to what value? Will exhibitions be used? If so, where and when? How often should incentive promotions be held? These are the types of questions that strategic planners will be asking and finding the answers to so that strategies can be passed on to the relevant people.

(d)

Personal Selling Personal selling means activities taken to ensure that the sales transactions are completed. The sales force comes in various shapes and sizes – from a large number of retail assistants, to one highly-skilled technical executive. They may be taking orders, delivering products, collecting payments, giving after-sales service and so on, but they all have one thing in common – they deal with the customer direct. It is this fact that makes the sales force an excellent promotional tool.

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Direct Marketing "Direct marketing" is the definition for the marketing activities an organisation undertakes directly with the customer, e.g. e-commerce, direct mail, email marketing, and telemarketing. The role of direct marketing is to communicate directly with customers with a view to building one-to-one relationships and increasing customer loyalty. Direct marketing can also be used to support traditional advertising by using direct response telephone numbers of return coupons or as a sales channel itself. Technological developments of the internet, messaging and email have supported the growth of direct marketing and increased the range of media available. Direct marketing media include: 

the internet

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email

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direct mail

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interactive television.

The advantages of these media over more traditional media such as television is the speed of delivering the message, the speed of response (which in some circumstances can be instant), the ability to personalise the message and the measurability of marketing activity. The internet and email allow organisations to accurately measure response rates of campaigns. For example, websites can measure "click throughs" from other sites such as search engines and so be able to accurately calculate the cost per new customer (or potential customer), the cost per number of visits to sites, cost per purchases etc. Through the use of direct marketing organisations are able to gather more detailed data about their customers. Organisations can gather data on what customers buy, when they buy, how they buy, their demographic information etc. Technological advances in software have supported the collection, storage and analysis of data by storage in databases. This allows organisations to analyse and manipulate the data, providing them with detailed information to gain a deeper understanding of their customers, resulting in a closer customer relationship and increased customer loyalty. Wilson, Gilligan and Pearson (Strategic Marketing Management) offer a diagram expanding the promotional mix, which demonstrates very well how the totality of promotion consists of yet further subsections. If we accept that each of the identified activities in Figure 10.1 will need its own sub-plan, we can see that the promotional plan will be a combination of miniplans in much the same way as the marketing plan.

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Figure 10.1: The promotional mix expanded ADVERTISING SUB-MIX

DIRECT MARKETING SUB-MIX

SALES PROMOTION SUB-MIX

The role of advertising Target audiences Creative approach Deciding on the message Deciding on the media Selection of an agency Deciding the advertising spend Evaluating effectiveness

The role of direct marketing One to one New media Role of database Measurability Gathering information

The role of sales promotion Sales promotion techniques Sales literature Sales force, distributor and customer incentives Merchandising and POS Exhibitions Sponsorship

THE PROMOTIONAL MIX Advertising Sales promotion Public relations Personal selling Direct marketing

PERSONAL SELLING SUB-MIX

PUBLIC RELATIONS SUB-MIX

The role of the sales force Determine buyer behaviour Selling methods/strategies Sales force support Sales force size and structure Recruitment and selection Training Direction and motivation Remuneration Evaluation and control

The role of PR Corporate identity and image Publics Internal marketing Media relations Agencies Sponsorship Exhibitions/PR events

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Integrated Communications Planning Integrated communications planning relies on each element of the promotional mix being used to strengthen and complement the others. The strategy concentrates on the message and not the medium – it is the mix of media that is important. Media should be chosen as appropriate to deliver a cohesive picture to the target audience. "Cohesion" is the key word. We are all subjected to so many different messages every day that we actually do not see a large proportion of them. Promotional managers know this, so they need to take an approach which will ensure that we do see them. They work on the assumption that a buyer does not "see" or receive a message from one source only, but that the messages are coming from different sources and at different times. The buyer actually builds a picture or an image of the product or the company. The promotional manager therefore needs to make sure that they are using a variety of media to present a constant message to the potential audience. Advertising will be supplemented by sales promotional techniques such as exhibitions, free gifts, competitions, sponsorship and so on. I know of one company which does this to very good effect. 

The company advertises on local television and in the local press. They distribute desk calendars and memo pads showing the company name. Every visitor to the company premises is given a small gift which shows the company name. They have a sponsorship programme for young people in sports. They regularly support parent and teacher associations in schools. They distribute information packs for people moving home – with the company name being shown, naturally. They hold seminars for local groups and exhibitions in public places. Their vehicles are clean and bright. Their staff wear smart uniforms. Their information leaflets are attractive and easy to read. Their name is known to everyone in their area! Their core product is double glazing! You could be forgiven for thinking that none of this is new – these are the old promotional tools being used effectively. Well, I happen to know the managing director of this firm quite well and I know that the strategy of using a combination of different media was quite deliberate. Initially they used to advertise by sending out flyers and placing advertisements in the local papers. The adverts did have some success but they discovered that their entry in the Yellow Pages was actually producing more enquiries, although still not enough. Advice was sought and a new approach was taken. They decided to cut down on the advertising in the press and flyers, and begin to use other media. It did not happen overnight. New methods were introduced as resources allowed, but the decision had been taken and strategic plans were made for the longer term. The company became the market leader in its own region and grew to such an extent that more than 50 people were employed. The gross turnover for 1996 was in excess of £8m. Not bad for a company that started off, in 1985, as two redundant men with £15,000 capital between them. They are now firmly convinced of the benefit of integrated communications.

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Let us take another example. 

The Ford motor company ran a campaign for their Probe car. Their target sector for this car was the adventurous person who likes to be at the leading edge, and loves speed and technology. The theme of the campaign was "fly me to the moon" and the screen broadcast commercial was a combination of beautiful imagery and unspoken messages. There was no commentary about the car. The commercial relied simply on the visual aspects and on the linking of imagery that would take place in the minds of the target sector. The use of space footage and technology-related aspects appealed to just the right kind of audience. And yet there was no information about the car! Ford used other media to get the details across. They used database marketing to send mailshots to identified targets. They used printed media to reinforce the images. They used publicity to gain exposure. They used exhibitions to show the car. They used everything. Obviously we are talking about a lot of money here, but the point is that Ford deliberately took an integrated approach to attract the buyers. You could argue that they are still just using the promotional tools – but it is the thinking that is different – it is integrated. Integrated communications will work for any company but it is a challenge. It is not as easy as just dealing with each promotional element separately. Close planning is called for, as well as good budget allocation.

The internet is an alternative media for communicating with customers. It is interactive and can be personalised, and it can be used to inform customers about products and assist them in the decision-making processes and create brand image. Therefore it is important that the internet is seen as complementary and supportive of the other elements of the marketing communications mix, such as advertising, direct marketing and sales promotion. As well as an advertising medium itself, the internet can be used to support advertising campaigns. It can do this by supplying customers with a website address to visit for further information about product features and benefits, thereby reducing the costs of advertising by having the more detailed technical information available online. The internet can also allow customers to personalise the information they require. For example, instead of downloading a whole brochure from a tour operator, the internet can allow consumers to pick the pages/content that they are interested in. The internet can support a sales promotional campaign by encouraging customers to order online, offering discounts or perhaps by supplying customers with a promotional code to receive a free gift if they respond. The use of the internet in integrating marketing communications is huge. Customer details such as age, address and email address can be captured in databases which can then be used to build customer profiles and effectively target customers. The internet allows organisations to analyse customer purchase behaviour and to intervene with promotional activities at appropriate points, to encourage the completion of a purchase. For example, organisations are able to track a customer's route through and exit points from their websites, and if a customer has visited to website to gather information, the organisation can intervene and offer a sales promotion such as an incentive.

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Marketing Communications Strategies Communications strategies are predominantly based on two things: the type of campaign, and media selection and use. (a)

Type of Campaign Apart from some obvious aspects, such as whether a campaign will be intensive, sporadic, aggressive, low key, etc., there is one major decision that needs to be taken – is the campaign to be "push" or "pull"? 

Push campaigns are aimed at the distribution channel – often referred to as "pushing the product down the channel". The whole concept of a push campaign is to get suppliers to stock the product in order to make it available to the customer and to encourage the channel members to sell it. Incentives may be offered on quantity, turnover or some other basis.



Pull campaigns are directed at the eventual buyers and users, to make them seek out the product – "pulling the products off the shelf".

Push and pull campaigns cannot work in isolation – each needs the other. No push campaign will be totally successful if there has been inadequate pull advertising. The opposite also applies. If a massive advertising campaign is undertaken directed at users but no promotion is done to channel members, suppliers will not have adequate stocks and the users will be unable to obtain the product. This is partly what happened when Cadbury introduced the Wispa chocolate bar in the UK. The consumer pull advertising was very successful – much more so than the channel push campaign – which meant that there were inadequate stocks available in the retail outlets. When retailers began asking for the product the company had insufficient stocks of the chocolate prepared. The product had to be temporarily withdrawn leaving dissatisfied customers, unhappy retailers and, no doubt, some red faces in the planning department of Cadbury. This problem does not only occur in the FMCG sector. For example, one company I know, which we shall simply call company X, was dealing in mobile communications equipment. They did a very good pull campaign but their push to the distribution channel was not so good. Unfortunately for them, a major competitor had decided to adopt a pre-launch push strategy on a very similar model before taking any activity on the pull side. They had motivated suppliers to take up stocks and their products were widely available. The suppliers were told that a massive advertising campaign was to take place in the near future; suppliers like this kind of support and they were ready to take advantage of the exposure. However the campaign never took place as, when requests began to be made for the product which had been advertised by company X, the suppliers simply "converted" the buyers and sold the competitor's products which they had in stock. A lot of money and ground was lost by company X with the competitor reaping the benefits of a "free" campaign which had fostered the overall demand. To rub salt into the wound, the money the competitor saved was later put to good use to press home the message of "being first" to the market. Company X failed to keep abreast of what was happening and they suffered badly. The examples I have referred to show how dangerous it can be if communications are not planned with every aspect being taken into consideration. Too much of one kind is just as bad as too little. A balanced approach is necessary and this is where the strategist comes in. It is the strategic planner who should be dictating the overall approach – not the operational planner.

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(b)

Media Selection Media selection is based on the characteristics of the target audience. If a manufacturer is selling high-priced industrial equipment they do not advertise it in a magazine which is read by teenagers. Conversely, if a company deals in mass products they do not advertise in The Philatelic Review. These are obviously extreme examples and would be unlikely to occur, but it is surprising how many companies fail to streamline their communications and waste resources by not using the correct medium. We shall examine the selection of media in greater detail when considering each of the elements of the promotional mix later in this chapter.

Budget Allocation You should know that budgets are appropriated by using some measure which can be: 

a percentage of sales (past or future)



last year's spend plus (or minus) a percentage



equal to (or more) than what the competition are spending



enough for the job.

None of these methods is perfect in its own right. Many writers have disputed the validity of basing promotional budgets on results achieved as, very often, no direct correlation can be found between advertising and sales. This can be caused by the delay in a buyer actually taking up a sales proposition. Equally, the other methods can be disputed. For example: last year's spend may have been inadequate; the competition may have better resources; "enough to do the job" is open to abuse – people will waste money. So perhaps the best way of appropriating promotional budgets is to assess from a results perspective. Instead of beginning to plan with the question: "How much money can we have?" if promotional planners began by asking: "How much can we achieve with any activity?" budgets may be much more appropriate. They will certainly be better justified as there will be projections to support any bids. In most cases promotional and other budgets tend to be set as a result of a combination of factors and may well be based on one or more of the methods outlined previously. The reality of life is such that many promotional budgets are very tight and managers will be given a limited amount to spend. It is here that the skill of the strategic planner comes into its own. If once a budget has been set the planner can use that money creatively, the overall success will be that much greater. Using all promotional tools and techniques works to this end. Basing the allocation of a promotional budget on the effectiveness of the medium will result in better customer awareness which should end in more revenue for the company. Allocation by weighting is very common in promotional planning. If one medium is likely to be more effective than another it is given a higher weighting and gets more of the spend allocated to it and so on. Careful research and assessment needs to take place so that managers can identify which medium will be most effective for any particular target sector. Without research, and objective decision making, budget allocation may well be done on some basis which is illogical, e.g. the manager likes TV advertising even though, in the past, it has not been as effective as personal selling.

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B. THE COMMUNICATIONS PROCESS You may find the promotional mix being referred to as the "communications mix". This means the same thing, only some people think that "promotion" infers advertising and persuasion, whereas "communication" better expresses what is really taking place – the passing of messages from one party to another; or, to put it another way, passing messages from a seller to a buyer and other interested parties. We know that in any communication there will be: 

a communicator – the sender of the message



a message – the information being passed

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a channel – the means of passing the message



a recipient – the individual or group the message is aimed at.

Of course it is also preferable to have feedback to assess the success of the communication. If you ever have to produce a model of communication to support an examination answer, either of the simple models shown in Figure 10.2 should be adequate. The model in Figure 10.2(a) shows the four basic components of the communications process, with a feedback loop. The model in Figure 10.2(b) shows that there is encoding and decoding taking place: the sender is translating the message into a suitable format for transmission; the receiver is interpreting the message in order to understand. Figure 10.2(a): The components of communication Communicator

Message

Medium

Audience

Feedback

Figure 10.2(b): Communications Activities Sender

encodes message

Medium

decodes message

Receiver

Feedback

The communicator can be an individual, a group, an organisation, a society or a government. If they have a message to pass to another person, they need to communicate. Successful communication relies on a balance between the components of the process, plus adequate feedback. We can see this simply by considering the different aspects of the communications process in respect of a promotional campaign. When communication takes place there are certain basic criteria which are necessary if the communication is to work.

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Communication Objectives Communication objectives will be based on solving a problem that is currently being faced or on long-term plans that have been made. These objectives can be for various reasons including to: 

enter markets with a "new" product

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promote "new" products in established markets

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support/maintain sales in established markets

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inform/educate users/dealers about the organisation or products

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influence attitudes towards the organisation

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inform/instruct internally.

The "information" nature of marketing communication means that most objectives will be predominantly qualitative in nature – but this does not mean that they cannot be expressed in quantifiable terms. For example, the following could be valid communications objectives: 

To increase awareness from 40 per cent to 65 per cent within 12 weeks of the campaign launch among 25–35-year-old females in the area covered by Carlton Television.

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To announce the introduction of a new chocolate bar, in the Tyne Tees region, creating 50 per cent awareness of the new product one week prior to launch.

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To position the iPod as the best, and trendiest, on the market within 6 months from the date of launch, among 85 per cent of 18 –25-year-old ABC1 males and females.

The Message It is important that you appreciate just how significant the message can be. The message must reflect the objectives of the communication which will have been designed or defined to overcome some problem. For example, suppose you had a problem of falling sales because some of your customers have not remained loyal in the face of competitive activity: 

Your objectives would be based on keeping your loyal customers and recapturing those who have left you.



Your message would be aimed at reassuring your loyal customers, and reminding the lost customers, of your services/benefits, etc.

If you have creative people who can produce a message that will cater to both target sectors that is fine. If not, you may have to use more than one message and more than one medium. Messages can be informative or persuasive or a mixture of the two: 

Informative messages will contain simple facts such as: price, outlets, times, locations, new formulations, contact names or telephone numbers.



Persuasive messages play on the self-image of the recipient or target audience. They concentrate on needs, wants, aspirations and desires.

Messages do not just happen. They need to be designed and this is a highly skilled task which is why we have so many creative agencies earning vast amounts of money. The criteria for successful messages are that they must be relevant and credible to the target audience and relate to the nature of the objectives. They must also be ordered and unambiguous if they are to be transmitted and understood properly.

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Target Audience Whatever the message or the reason for it, the target audience must be identified and targeted or the objectives of the communication will not be met. We covered segmentation in an earlier chapter so we do not need to go over it again. Suffice to say that audience research and segmentation go hand in hand. When you know your audience you should know what kind of communication to send because you can design your message around the factors which influence them. The message may need to be serious or frivolous, depending on the campaign and the product in question – but it must reflect the nature of the audience for which it is intended, and it must be capable of being understood by that audience. Audience selection has become very sophisticated in today's marketing environment. Strategists now concentrate on good targeting in order to reduce wasted costs incurred in promotional activities. You already know from our study of buying behaviour that marketers have improved on the traditional methods of audience selection (age, income, etc.) by taking into consideration how people live and what motivates them. This has considerably improved marketing communications: not only are the communications more specific and relevant to the audience, but wastage (promotion reaching the wrong audience) has also been reduced, with the result that costs have been lowered. Audience selection criteria are exactly the same as for segmentation: the audience must have a demand pattern, be big enough to warrant activity, be reachable, etc. Once the criteria have been matched to a sector, promotional activities can begin. You can see from everything that I have said here that the main audience research is really part of the overall situational analysis that is undertaken at the audit stage. But there may be additional research undertaken to investigate the coverage of one or more types of media so that results can be forecasted. I have previously mentioned the importance of internal communications and how marketers should play a leading role in these. Sadly, strategic marketers often neglect internal audiences and fail to communicate adequately with them. If internal audiences are not given the same due regard as external audiences, the entire marketing process can be damaged. Internal communications can be handled in exactly the same way as external ones. They can be one way or two way, and can be for information purposes or for motivational purposes. Themes can be frivolous or serious. Communication can be intensive or infrequent. They can be directed to one person, a selected target, or a mass audience. Of course, within an organisation we have the benefit of being able to use formal, established lines of communications (e.g. from operative to manager, manager to director) or informal channels. Formal lines of communication may well give a degree of security in how or when any relevant information is passed, but they can also be slow and unwieldy and can result in some people feeling isolated and left out. On the other hand, informal channels – using the grapevine, word of mouth or gossip, etc. – can be a very fast method of communication but it can be dangerous to rely on these methods as information may be distorted as it is passed from one person to another. Strategic decisions on internal communications will generally be made on a basis of: "Who needs to know?"; "What is the best way to tell them?"; "When should we tell them?" etc. If you compare these questions to the aspects which any communicator needs, you will see that they match. Internal and external communications are exactly the same except, perhaps, that the cost of communicating internally is likely to be much lower than communicating externally.

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Timing and Implementation The timing of any promotional campaign is crucial – too early is as dangerous as too late; too often and the audience become bored; too infrequently and the audience can forget you. This is why decisions on the timing of campaigns tend to be taken at the strategic level: they are too important to leave to less experienced people. Strategic planners will also make the decision on whether to advertise often, infrequently, in bursts or in drips. The operational managers will arrange the schedules, and implement the campaign, in line with the instructions they get from the strategic level. The implementation stage of any plan can be both exciting and tense. Get this wrong and everything else has been wasted. Managers know this and that is why great care is taken to see that responsibilities and resources are allocated wisely, all timing aspects are synchronised, costs are controlled, arrangements are verified and results are monitored. If these activities are carried out in a disorganised fashion the overall plan may fail miserably.

Evaluation and Control Knowing how successful any plan has been is of major concern to a manager at any level. In communications it is crucial. If the communications campaign is not working the target audience will not buy, there will be no money coming in, capital will be tied up in stock, etc. Standards, which can be used as measurements, are set at the objective stage, such as "increase awareness to 85 per cent from current level of 30 per cent". The current level of awareness comes from pretesting undertaken either with the situational analysis or by a specific market test. It is done before a campaign to see what the current situation is. Once a campaign has been implemented, post-testing is carried out. The results should match the objectives. If not, why not? Does something need to be changed? Did we get the audience selection wrong? Have we used an inadequate message or medium? Do we need to fine-tune or make major changes? If no measurements are taken against expected performance, the company may well be throwing money away. Measurements for communications may be done internally or by an agency. Internal control is often allied to quantitative aspects, such as sales achieved or the numbers of people telephoning for further details in response to an advert. Measurements of a qualitative nature, such as assessing changes in awareness or perception, are often better handled by an external agency with experience in this kind of research. Decisions as to who will measure will depend on the resources available and be determined by strategic planners at the outset of any campaign. If these decisions are left to operational levels, the responsibilities might simply be passed on to an agency, with no concern about the costs involved. On the other hand, the operational managers may decide to do the measurement in-house to save money when, in reality, the time and effort it takes will, in the long run, cost more than using an agency. Because strategic planners take an overview, they will be aware of all of these considerations and make their decisions accordingly. However, the internet provides organisations with quantifiable data to assess business and marketing performance. Website analytical software allows organisations to measure the number of visitors to a website and the number of purchases. By tracking the journey of potential customers through the website pages organisations are able to measure response rates of campaigns, and by tracking the entry of customers into the website organisations are able to measure the success of advertising campaigns. Such marketing metrics (measures) could be:

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new customer acquisition generated by the website

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sales revenue generated by the website

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customer retention (by measuring customers that return to the website)

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cost per campaign.

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Planning Communications The organisation of this section highlights the process of planning for communications. You can see by studying the model in Figure 10.3 that communications planning is similar to all other types of planning in that all aspects are related, and each activity is joined in a neverending circle – take one away and the circle could disintegrate. The process applies to planning for any of the individual promotional sub-mixes as shown in the expanded promotional mix model in Figure 10.1. Figure 10.3: Communications planning process MESSAGE OBJECTIVES

STRATEGIES

CONTROL

AUDIENCE SELECTION TIMING AND IMPLEMENTATION

By accepting that the process of communications planning is common to all elements of the main promotional sub-mix, it is possible to formulate plans which are appropriate for any of the individual elements. Objectives, target audience, strategies to be used, timing, budgets and controls appear in every one of these plans. The differences may simply be on whether an agency is used or when a particular promotion is to start, etc. In promotional planning, as with all planning, strategists are concerned with setting, and achieving, realistic objectives. Just as overall strategic marketing planners use the elements of the marketing mix, strategic promotional planners use all elements of the communications mix. The elements of the communications mix are used to: 

attract and remind buyers – advertising

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attract and interest buyers – sales promotion

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help buyers and to close the sale – personal selling

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build images and feel-good factors – public relations.

Each element of the promotional mix is used to communicate with the buyer. The success of the communication effort will be dependent on the plans which are laid down. One thing which is absolutely certain is that if individual plans are not integrated, they will never be as successful as they might have been.

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C. ADVERTISING Why Advertise? The purposes or reasons for advertising can be many and varied. For example, the purpose might be to: 

announce a new product

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announce a modification (price change, special offer, etc.)

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challenge the competition

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maintain sales

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remind people to purchase the product again

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educate users and buyers

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retrieve lost sales

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keep retailers/distributors satisfied and/or motivated

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catch new customers entering the market for the first time.

New products obviously need promoting and launching onto the market, but a great deal of advertising is for products which have been in existence for some time, e.g. Coca Cola, Cadbury's chocolate. The reasons for advertising existing products vary from one manufacturer to another, but there are general reasons for all manufacturers to advertise regularly and repetitively: (a)

The changing needs of the target audience As people move through their lives, they have different requirements and purchasing motivations. Advertisers should be aware of these changes and aim their messages accordingly.

(b)

Products being updated and improved Advances in technology and customer expectations often mean that a change is necessary in the basic presentation of a product, e.g. the introduction of convenience foods which can be used in a microwave oven or the awareness of health and safety factors relating to consumer products.

(c)

The increased sophistication of advertising Advertising helps to build and maintain a product's brand image and adds to its value (as perceived by the customer). If an advertiser does not keep pace with the advertising of the competition the relative value of the product may be lowered in the opinion of the buyers.

(d)

The competitive nature of the marketplace People forget about products if they are not constantly reminded of the benefits to be obtained from using them. With so many advertisers trying to attract the same buyers it can be very dangerous if advertisers relax their efforts.

Classification of Advertisements Most advertisements could be considered as belonging to a class, or category, and will have aims which are relevant to the prevailing circumstances. Some examples of the various categories are given next (this is not a comprehensive list). Note that some adverts will fit into more than one category and some will not fit into any!

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Persuasive This is the most obvious kind of advertising. Selling hard, trying to attract attention and convert it into desire and, finally, purchase. Vast amounts of money are spent on this type of advertising. This is because it is important that the consumer is properly informed of the product, and that the suppliers or distributors are backed up by the advertising which will create a demand for a product to which they are giving up space.

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Informative This style is often adopted for advertising more expensive products such as cars, video cameras, etc. It will contain technical information and be presented in a readable manner. This type of advert may not always result in a purchase being made, but may well result in the consumer being interested enough to take up the offer of a test drive or demonstration, etc.

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Generic Not all advertising is for individual branded products. Sometimes controlling bodies or groups of producers will combine to advertise the benefits of using one type of commodity, e.g. eggs, milk, apples, wine. The term "generic advertising" is also often used by large organisations when they are referring to the advertising of their entire product range or the product range of one of their subsidiary companies. The best way to think of "generic" is to consider it to be referring to a "type" rather than an individual product.



Retail Retailers will spend money on advertising their own outlets, (e.g. Tesco, Currys) and will give the consumers a picture of the overall benefits that can be gained, such as opening times, range of products and services, etc. Much of this type of advertising is done on a local basis and will often result in full page adverts in the local press.



Direct Response This is one area of advertising where response can be checked and effectiveness assessed. An advertisement, which includes a response mechanism designed to either attract orders or encourage customers to write in and ask for information, gives the advertiser an immediate indication of the degree of success. Research into direct response advertising usually focuses on the media and the advertisement used. Coupons are coded so that advertisers can identify which adverts and media are most effective. Information gained from this assessment can help in preparing plans for another campaign. The information gathered through direct response can be used by organisations to build customer profiles, gain a deeper understanding of customers and therefore allow them to develop more targeted marketing activities. The interactive nature of direct response therefore assists organisations in building a dialogue with customers leading to a closer relationship.



Corporate This form of advertising is not designed to sell products but to enhance the image of the company. The organisation will be trying to communicate with various audiences – customers, workforce, suppliers, shareholders, local authorities, governments, pressure groups, etc. They will be trying to show what the company is up to behind the scenes and how the organisation is working for "the good of all". Quite often this type of advertising will be part of the public relations activity rather than marketing.



Trade and Technical This is the advertising of materials or components to manufacturers or of selling in bulk to retailers. Almost every business has its own trade journal in which this type of

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advertising appears, but advertisers are finding that TV and general interest magazines can be just as effective for this type of business-to-business advertising. 

Classified These are so called because the adverts appear in classified sections (Births, Sales, etc.). While many adverts are placed by individuals, a considerable number are placed by companies such as estate agents, garages, etc.

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Government This may be for recruitment (forces, police, nursing, etc.), information (explaining legislative changes) or persuasive (encouraging loft insulation, etc.). Government advertising tends to use shock and fear more than most other types of advertising (drink, drugs, burglary, etc.).

Using Advertising Agencies Any agency, irrespective of the service it offers, is an intermediary in that it will be a link between two parties. We have already explored many aspects of dealing with external agencies and intermediaries, but advertising agencies deserve attention in their own right because of the very specific work that they do and their importance to marketing activities. Advertising agencies were originally set up to sell media space on a commission basis but now tend to act more for clients than for media owners. They offer a wide range of services covering every aspect of communications and do not simply deal with advertising space. There are two types of agencies: (a)

(b)

Full service agencies may provide: 

marketing/communication planning

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market/marketing research/media research and selection

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creative design/illustrations/photography

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purchase of time and space.

Part service agencies may provide one or more of the particular aspects given by full service agencies. This type of agency has become much more common in today's market-place with specialists setting up in business on their own, or in small groups.

Advertisers may decide to use an "a la carte" basis where they use several part service agencies to cover a campaign – basing the choice of agency on the particular skills available. They may also elect to give the control of a campaign to one agency which may not have the resources to carry out all of the activities necessary. These agencies will subcontract to other agencies and act as managers on behalf of the client. 

How agencies operate Agency objectives are profit based. They will be seeking customers in the same way as any other organisation – irrespective of the particular product/service. They have standard structures (function/regional/task, etc.) according to whatever suits their individual circumstances. Clients of agencies are known as accounts. Each account will have certain agency personnel who are responsible for achieving end results and reporting back to the clients. The agency personnel responsible for dealing with clients can range from an entire team to one account executive – it will depend on the prevailing conditions such as size of account, tasks involved, etc.



The need for an agency

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The need for an agency will depend on the size of the organisation, resources available, size of the problem in hand, time allowed, etc. Some companies will prefer not to engage agents as they want to retain as much control as possible – or they may be unable to because of financial problems. 

Payment of advertising agencies The terms "above the line" and "below the line" are used to distinguish between types of activities which are charged for differently. (i)

Above the line refers to those activities which involve a commission from the media owners (time, space)

(ii)

Below the line refers to those that need to be charged for by some other means (design, research).

Unfortunately although there is no "line" we still have to cope with these expressions, which often cause confusion for students. The line concept comes from the early days of advertising agencies when they existed by earning commission from media owners for selling space, etc. Originally, the media owners only gave commission to approved agencies. However, in the early 1970s this system was deregulated and media owners were forced to give discount to advertisers as well as to agencies. This led to agencies accepting lower profits and offering reduced rates to clients in order to attract business. It has resulted in the client having more power than previously, and the agencies having to work harder to maintain their profits, etc. In some respects this deregulation was also responsible for the growth of specialist agencies who could charge for their particular expertise – thus helping to create the a la carte system mentioned. We now have a mixture of ways in which an agency can be paid (or charge) for services: (i)

Agencies earn their commission from the media owners.

(ii)

Agencies mark up costs and pass charges on to clients.

(iii)

Inclusive fees can be agreed at the outset of any contract.

(iv)

A combination of commission/fee system can be used.

Advertising Media "Media" covers a multitude of methods and means of advertising – "anything that can be used to convey an advertising message" – but it is generally accepted that the term major media covers five areas: 

press



television

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radio

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cinema

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outdoor advertising

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internet.

Note that all major media come into the above the line category (subject to commission). Perhaps the most difficult decision for any advertiser is the choice of medium as, no matter how effective an advertising campaign, it will fail if it is not in the correct medium for the particular target audience. An advertisement is subject to "wastage" – the amount of resources or opportunities lost by missing a sector of the intended audience.

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Media selection will, broadly speaking, be based on three factors: (a)

Cost Involved The size, objectives and resources of the organisation wishing to advertise will influence the type of media, size and frequency of the campaign.

(b)

Characteristics The nature of the medium chosen will depend very much on the objectives of the campaign. Is a serious presentation required? Will a popular daily do? Will it be better to use a trade journal or a national daily? Will the media chosen reach the required audience? Is it a believable channel for the message that is being sent?

(c)

Audience Coverage is crucial. Advertisers will be asking: Does the medium chosen cover the target audience? Will the audience respond in the required way? How does the medium know what the audience will do? In other words, how well does the medium know its own audience?

Whether it is an advertiser or an agency that is involved in the decision on which medium to use, there are several considerations to be taken into account: 

What is the competition doing?



Is there a particular requirement as far as distributors, etc. are required?



What are the lead times involved?

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Will the medium be available for the time(s) required?



Has the creative work been done with a particular medium in mind?



Does legislation impose any restrictions on the medium?

We can now move on to compare the characteristics of different media for the purposes of advertising. (a)

Press Advertising The "press" covers all printed papers, i.e. newspapers, magazines and directories. They may be national, regional, specialist, trade or general publications. Basically they are owned and operated by someone other than the paying advertiser. The advantages and disadvantages are shown in the following table. Advantages High circulation with good "opportunity to see" (OTS) Audience can be easily identified Information can be saved and retrieved Adverts can include response coupons, etc. Relatively low costs involved (both preparation and advert space)

(b)

Disadvantages No sound/movement If too many adverts some will be missed Magazines require long lead times Printing only as good as the staff involved

Television Advertising Television is seen as one of the (if not the) most persuasive means of advertising. It is certainly effective and is, in its own right, a hugely successful industry. From early

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beginnings of limited land lines, today we have cable and satellite transmissions giving choices of multiple channels to viewers round the world. Global advertising is now common practice but would have been unheard of not that long ago. Advantages Can provide movement/colour/ sound/emotion It is an intrusive medium Viewers can identify with situations in adverts Mass, regional or specific coverage available

(c)

Disadvantages Short time of adverts restricts information-passing Can be repetitive which will result in boredom for viewer Costly/time-consuming to produce live adverts Adverts shown when many supply points are closed Adverts not retained for review (consider home videos) Can be difficult for viewer to respond (consider telemarketing)

Radio Advertising In common with television advertising, radio transmission has actually increased and radio advertising (particularly for local services and business products) has gained in popularity. This may to some extent be a direct result of the increase in the number of cars in the world which now have radios fitted. Drivers are a captive audience which listens to relieve the monotony of driving or being stuck in traffic jams. Advantages Airtime is not very expensive Offers sound effects/emotion Versatile in location (radios can be carried around) Is intrusive

(d)

Disadvantages Non-visual Can only transmit non-complex information Need repetitive adverts to ensure coverage High risk of listener intolerance due to repetition

Cinema Advertising For several years the cinema, as a form of entertainment, suffered from poor audiences and falling revenue. However, there has been an upsurge in popularity with many major blockbusters attracting audiences. This has revitalised the advertising activities within cinemas. Coupled with the introduction of multi-screen complexes, the advertising capabilities have been increased dramatically. Different advertisements can be targeted to different audiences in accordance with the film that is being shown.

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Advantages Pleasant/relaxed atmosphere Captive (though small) audience Sound/colour/movement/emotion

(e)

Disadvantages Only one chance to show advert per visit to the cinema Audience cannot note telephone numbers Regular cinema-goers can become bored with the adverts

Outdoor Advertising Outdoor advertising takes many forms: posters; "adshells" (on bus shelters, etc.); transport (buses, taxis, etc.). Outdoor advertising is often used to back up other types of advertising in a campaign. Advantages Continuous display Good memory joggers Good impact capabilities Colour/humour

(f)

Disadvantages Involves long, advance planning Difficult (not impossible) to coordinate campaign start Not easy to pass information as people do not always read fully

Internet The internet itself is a new media/way of communicating with customers. The internet can be used for advertising, supporting sales promotions, providing customer support services such as online ordering. Advantages Ability to personalise information Allows for interaction with the customer Can hold large amounts of information Quantifiable

Disadvantages Relies on other elements of the promotional mix

D. SALES PROMOTION This type of activity has been described as: "Those activities which do not normally make provision for a commission to be payable to an advertising agency." (Hart and Stapleton, Glossary of Marketing Terms) "A short-term tactical marketing tool which gives additional reasons or incentives to encourage purchase." "Any activity which supplements the promotional campaign of an organisation." "The various techniques used to put the product in danger of being sold." "Profitable promotion of sales through means other than display advertising whereby additional reasons or incentives are given to encourage purchase."

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"The main purpose of sales promotion is to give the hovering customer a push in the right direction (i.e. towards the product)." (Alison Corke, Marketing and Public Relations) These examples of definitions show how difficult it is to define sales promotion but also how easy it is to show that sales promotion can be anything and everything. Sales promotion is the sum of all effort other than advertising which a company uses to help promote its products in the marketplace. The accepted idea of sales promotion covers two types of promotional effort: (a)

(b)

Immediate promotions, which can include: 

point of sale displays

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direct mailing

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exhibitions

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incentive offers (multibuy or buy one get one free)

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free samples/magazines

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in-store demonstrations

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reusable packaging (where containers can be used for other purposes when the product is used up, e.g. storage jars)

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personality promotion (sales force dressed up to give away prizes), etc.

Delayed promotions, which can include such activities as: 

lotteries and competitions

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cross-couponing (promoting one product by giving coupons on another)

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free prize draws

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self-liquidating offers

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mail-in premiums (free gift for mailing in proof of purchase)

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money-off coupons

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charity promotions (money for proof of purchase donated to particular charity).

Without doubt, sales promotion is widely used by many companies across the whole spectrum of markets, catering to a wide variety of target audiences in both consumer and industrial sectors.

Advantages and Disadvantages of Sales Promotion Sales promotion can: 

help sales

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increase customer awareness

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help create peak selling periods

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attract impulse or marginal buyers

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attract customers to premises, which may have knock-on benefits for other products in the range

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improve relations with retailers due to increased traffic in stores.

On the other hand, there is a downside to sales promotion:

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It tends to produce only fleeting interest in products and does not show any lasting effect (which is why companies keep changing their sales promotional activities).



If kept on too long the customer will become bored with the campaign.

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It might result in a special offer price having to be reset as a new standard.



It can lead to disloyalty on the part of customers if too many promotions are on offer (they will shop around for the best offer, rather than the product).



Sales promotions are very expensive to run and this increases costs and consequently prices to the customer, which means that the organisation suffers in the end by reduced sales.

Thus we can see that although sales promotion techniques can be valuable, they must be handled with care if the customers are not to become worn out by offers, rather than seeing offers as being incentives. Most of the types of sales promotion offers outlined here will be familiar to you from your experiences as a customer and consumer, but we shall take a closer look at some of the methods which are more frequently used. The close targeting required for effective direct mail has given rise to the term database marketing which, in effect, means companies using "good lists" of customers in order to communicate with them. Lists are on sale from a variety of sources and will be specific to certain target sectors – doctors, students, sports fans, readers of certain publications, owners of particular makes of car and so on. There is an endless range of lists that you can buy from list sellers but there is no guarantee that the list will be accurate. Many companies create their own database of current and potential customers by quite simple and inexpensive means. For example, when a purchase is made and a customer has to send in details to register the guarantee, the customer's details will be added to the database and any subsequent promotional material will be sent in the future. Potential customers can be found by advertising in the press and inviting people to write in for a free sample. Each has to give their name and address of course, so that goes onto the database for future use. Not only does this produce an accurate list, but it also indicates that those on the list have at least an interest in the product which is being offered as a sample. Gathering lists by these means is effective, but the lists must be checked periodically to see if they are still accurate to avoid wastage. Developments such as online purchasing, online promotional activities and loyalty cards mean that organisations are now able to capture data about their customers more easily and quickly than in the past, providing marketers with more detailed and up-to-date data and information. Developments in database technologies and analysis techniques have allowed organisations to make increasingly effective and sophisticated use of the information they hold on customers and potential customers. This expansion of market intelligence is based on such developments as: 

Data warehousing – the storage and maintenance of large amounts of captured data in one database (or a series of related databases), which facilitates analysis and extraction of relevant information.



Data mining – the ability to analyse very large amounts of data from a wide variety of sources in order to identify more detailed and relevant trends and relationships within marketing information, to support improved decision-making.



Data fusion – the combining of many different data items from many different sources into one single database (or series of related databases) in order to develop a more detailed understanding of the market.



Database marketing – the use of the enhanced market information (derived from the previous techniques) to develop marketing strategies based upon detailed

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understanding of the market and the behaviour/interests of customers, and in particular, to build relationships with customers which both exploit and enhance this understanding. The sheer level of competition and increased choice for customers has helped to make direct mail a very attractive means of communication for marketers. Research into customer tastes and lifestyles has meant that accurate targeting can take place with reduced costs for the marketer and a greater possibility of successfully completing a sale. However, as I said earlier, the list must be up to date or costs will be wasted and the company image will suffer. The advantages and disadvantages of direct mail are set out in the following table. Advantages Precise targeting Flexible Inexpensive Measurable Can be "personalised" Reader devotes full attention while reading

Disadvantages Lists can be outdated/inaccurate Frequent mailings lead to dismissal of a product by the target audience Too many advertisers chasing similar market segments can lead to saturation of target audiences with resulting loss of sales

Exhibitions Exhibitions are public events which are held by one (or several or many) organisation(s) which are aimed at demonstrating products and/or services to an audience interested enough to attend. The main reasons for and problems with using exhibitions are set out in the following table. Reasons

Problems

It is a means of gaining new customers It helps maintain relationships with existing customers It is a good way of making contact with people in the same field It is a good way of supporting agents and distributors It is one way of gaining publicity It is a good way to introduce new products It is a good way of seeing what the competition is up to

The expense Poor presentation will affect image There may be poor representation by organisational personnel It can be difficult to measure effectiveness It can be difficult to know if the right audience was reached

Exhibition exposure can be at a recognised trade fair, at a locally arranged exhibition, or at an international exhibition. There are now many annual exhibitions which are well known in their respective fields and regarded as being "essential" if organisations wish to keep their names in the minds of the consumers, e.g. Ideal Home Exhibition, Boat Show, etc.

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There are also permanent exhibition sites which rotate the products or trades that are on display, e.g. National Exhibition Centre (Birmingham, UK), World Trade Centre (New York, USA). In addition there are mobile exhibitions arranged to suit requirements at a particular time; these mobile exhibitions may be staged by individual companies, or local or national governments. They offer the possibility of taking the "show" to the customer rather than using the established venues and hoping that the customer will come to the show. Exhibitions can be large or small but they all have the same basic similarities in that they attract interested parties. Companies spend a great deal of money on exhibitions, giving away free literature, samples and so on. The fact that this type of activity shows little sign of decline indicates how effective a means of promotion it is. However note that many companies regard exhibitions as being part of their public relations activity. They would like to obtain orders, etc. but they are far more interested in the exposure an exhibition brings. In certain cases, particularly with industrial products and high-status products such as cars, it is almost obligatory for a company to be seen at exhibitions or the target sectors (and competitors) will think that the company is in financial trouble. Customers do not like to buy from companies that appear to be in difficulty as they want the security of knowing that the company will continue in business.

Conferences/Seminars Conferences and seminars are smaller events than exhibitions but they are very valuable in terms of their communications capability. They tend to be arranged by individual organisations and are aimed at specifically selected audiences. These audiences are either directly involved with the company, such as customers, dealers, distributors, etc. or targeted at a wider but still relatively small target, e.g. design engineers, industry or knowledge specialists, etc. The main reasons for and problems with using conferences and seminars are set out in the following table. Reasons You can attract the people you want to influence (press, customers, agents) They are good public relations activities for organisations as they can be hospitality based You do not have the interference of competitors, so you can get your message across in the way that is best for you

Problems The expense They can be seen as a way of "bribing" interested parties They may take place in an artificial atmosphere which ignores the problems of the operating environment They are often carried out by more senior personnel in the organisation who may be too remote from what is happening in the marketplace

Sales Literature Leaflets and brochures can be an essential part of the product offering. Customers may be unable or unwilling to reach a purchase decision without the support of literature which details technical specifications, product uses, testimonials from satisfied customers, indications of the stability of the manufacturer, etc. Manufacturers/sellers can reap extensive benefits from well-produced sales literature and it is for this reason that so much care is taken and so much money spent in this area.

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Once a sale has been completed, a customer may need support/guidance on operating, maintaining or servicing a product and manufacturers will provide literature which caters to these needs. Obviously the more expensive or technical the product, the greater will be the requirement for sales and/or support literature. It is for the organisation to assess customer/product requirements and to decide what – if any – percentage of their budgets and efforts should be dedicated to this type of activity. The internet has provided organisations with the opportunity to offer sales support literature online. The benefits of this are that the information can be easily updated by the organisation, made easily available to customers and it is cheaper to deliver. This all leads to improved customer service and increased customer loyalty. Finally, organisations are able to track their customers' use of sales literature. This means they can use other elements of the marketing communications mix to intervene, e.g. direct mail to offer a sales promotion or use the information to inform future marketing activities and/or product development.

Merchandising Because much selling is now done on a self-service basis, where purchase decisions are made at the point of sale, failure to put the right product in the right place at the right time can often mean no sale. Merchandising techniques are used to provide the final impetus and reassurances to the customer. Merchandising, which is sometimes known as the "silent salesman" or "selling through techniques", covers many in-store aspects of trading such as: 

which products should be stocked/displayed



how much stock to hold



the most appropriate store layout/decor



traffic flows through the store



in-store promotions.

Retailers must ensure that products sell, as selling space is at a premium and the need to improve sales per unit area is critical. Therefore retailers expect manufacturers to ensure that their product can/will: 

sell readily at the point of purchase



provide advertising



utilise sales promotion techniques.

In return, manufacturers expect retail outlets to: 

understand store layout techniques



provide first-class sales assistants



have personnel skilled in product display.

Other aspects of merchandising include: 

Point of Sale Material Stores generally receive more display material than they can use, so show space is at a premium. Sales material and its location within a store are normally decided as part of the overall communication strategy but sufficient discretion must be permitted for local variations. The objective of point-of-sale advertising material is to provide a large hook which will attract passing customers.



House Style

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Retail chains have become aware of the benefits to be gained from standardising on house styles and this fact alone has led to many retailers producing their own sales material. House styles show the appropriate image for the store and can be carried over into advertising, thus achieving a collective impact over individual advertisements. House styles can develop in parallel with own-label packaging; a retailer puts his reputation on the line with his own name. 

Packaging Packaging was originally used for the protection of the goods during storage and transit or for the protection of handlers when there was danger from the goods themselves. Security is no longer the sole requirement. As well as protecting the product with regards to temperature or strength, packaging is used to convey information, establish an identity, and educate buyers and users. Packaging is therefore a powerful promotional medium and an important communication channel. It gives the manufacturer an opportunity to convey a message to the customer, which can be aimed at persuasion, information, reminding, etc. Even when packaging is empty it will be promoting (i.e. the item needs replacing). Packaging material should be selected carefully and be capable of easy and quick disposal when it is finished with. Better still, it should be capable of being recycled for further use. The use of colour in packaging is very important. It can be used to convey psychological ideas about products, e.g. cleanliness is usually portrayed by white.



Branding We looked at branding in an earlier chapter, but we include mention of it here because it is very much a sales promotion technique. It is one of the major aspects in attracting customers to purchase one product rather than another. The stronger the brand is, the greater the possibility of a successful sale.

Effective Sales Promotion We can see that sales promotions can be many and varied and that each method will have its own advantages and disadvantages. Because of this it is essential that managers treat such activities with respect and take great care not to be in a situation where there is overkill of promotion. We could say that the main functions of sales promotion are to advise, stimulate and encourage consumers to react favourably towards the products or services which are being promoted. To be fully effective, all sales promotional activity needs to be integrated and coordinated with the remainder of marketing activities. However it is particularly important that sales promotion is coordinated with sales and advertising policies, since their interaction and interdependence are vital. This does not mean that sales promotions have to have the same theme as advertising. Many sales promotions do, though, and extra benefit is gained if this can be done successfully. The alignment of promotional activity as a cost or an investment is the first consideration a company must give to promotional budgeting. However cost-related criteria are often inextricably linked with affordability, not the achievement of objectives. It is therefore desirable to work backwards from the cost of achieving marketing objectives, rather than constraining activities within a predetermined budget. That said, it is often the case that companies have to cut their suit according to the cloth that they have available. The following factors will dictate the type and level of promotional activity:

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Product's position in the life cycle Depending upon the stage a product has reached in its life cycle, there may be a requirement for a disproportionate amount of promotional spend. A product which is in its launch stage requires heavy investment; a product enjoying a mature market position may benefit from the long-term build up of brand investment. Products in decline may also need heavier promotional support.



Product's position in market A large market share will condition promotional activity, since it is not in the company's interest to dilute the price of the product sold to its existing customer base. Alternatively, a product with a small market share may use this type of promotional tactic to help brand switching.



Promotional activities of competitors Promotional activity ideally should counter competitor activity and therefore be as relevant to the market conditions as possible. For example, if all competitive activity is centred on in-store merchandising, it may be wasteful and unnecessary to concentrate on traffic flow advertising (i.e. getting people into the store).



Brand image It may be that certain promotional activity will debase the brand image of a product, especially if the product has an upmarket image.



Consumers' perception of product Products which have an inferior perception in the eyes of the consumer will not benefit from promoting anything other than a price advantage (if one exists).



Market trends and strategy If a market is expanding, there may be room for a company to penetrate using promotional activity designed to brand-switch. Another strategic option (market development) will involve a different type of tactic.

E. PERSONAL SELLING Selling is a two-way communication which provides information in a flexible way that can be adapted to meet the needs of a specific customer. Selling is part of the communications mix, but it is much more focused than mass communications like advertising. Communication here is customised by one individual salesperson or sales team in personal contact with customers. Its objective is to get the buyer to act, to buy. The importance of selling lies in the fact that most buyers buy from salespeople. However selling as a communication tool does not come cheap. As such the role, tasks and organisation of selling need to be clearly defined so that the sales effort is not diluted or misdirected in any way. Personal selling means informing and persuading customers through personal communications directly associated with a particular transaction. In this respect, personal selling and non-personal selling such as advertising are complementary activities and their relative importance will vary dependent upon the nature of the product and the buying behaviour associated with it. A school of thought as depicted in Figure 10.4 is that advertising will be dominant where purchases are small, frequently purchased and of low unit value, whilst personal selling is appropriate to high priced, technically complex products which are bought infrequently. Figure 10.4: Selecting the promotion mix

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Consumer Marketing

Industrial Marketing

Personal Selling

Advertising

Simple, low value Frequently purchased

Complex, high priced Infrequently purchased

Although the diagram is rather over-simplistic, nevertheless most companies, especially those in industrial marketing, spend more on operating a sales force than on any other single aspect of marketing. Many more people are engaged in selling than in any other part of the marketing structure. However, there is no simple description of the salesperson's role. It varies from industry to industry, and even within a particular industry there are substantial variations from company to company.

Sales Force Objectives and Tasks The objectives of the sales force are selling, servicing, prospecting, communicating, information gathering and allocating goods in the marketplace. Arising out of these objectives a number of tasks can be identified as depicted in Figure 10.5. Figure 10.5: Key tasks in selling Prospecting Information collection, and dissemination Communications

SELLING TASKS

Negotiating and selling Servicing Time and resource allocation It is difficult to establish priorities among the list of tasks unless the selling style and organisation structure are understood. Salespeople generally focus on the tasks of prospecting, negotiating and selling, but the back-end tasks of information collection and dissemination, communications and time and resource allocation are no less important and are often essential to the success of selling. Sometimes companies will provide sales support staff in the form of telesales, customer service personnel, etc. to carry out some of these tasks.

The Seven Steps of Selling Selling, as we have already said, involves many tasks. However, the selling process itself is based on seven steps, as illustrated in Figure 10.6.

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Figure 10.6: The seven steps of selling Product Knowledge Prospecting Approach Establishing Needs The Presentation Closing Follow-up (a)

Product Knowledge Selling is about promoting a product or service. To do this effectively, the salesperson must have a good understanding of what is being sold and bought. The first step in the selling process is therefore product knowledge. Many companies spend a lot of effort training their sales forces to develop product knowledge in terms of product features such as assortments, sizes, specifications, backup support services, finance, etc. However, the real purpose of the product is to satisfy a need – products are, in effect, problem-solvers. To this end, the salesperson must not only be very familiar with what a product is, but also what the product features can do for the customer in terms of product benefits. The following table highlights the distinction between product features and benefits.

(b)

Product/Service

Feature

Benefits

Car

Runs on unleaded petrol

Saves company money. Allows customers to be seen as environmentally conscious.

Laptop Computer

Lightweight

Allows machine to be moved easily between offices. Customer need not buy a special desk or work surface.

Photocopier Maintenance

Immediate call-out of Maintenance Engineer guaranteed

Saves customer lost photocopying time. Provides peace of mind.

Prospecting This involves identifying qualified potential customers. In most industries the salesperson must continue to find and sell to new prospects in order both to increase sales and to offset the loss of customer business to the competition. Some of the best means of prospecting are by: 

searching for names and addresses in newspapers and directories



subscribing to specialist sales leads organisations

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(c)




building referral sources such as suppliers, dealers, lost customers and noncompeting salespeople



asking for introductions to see subsidiary companies of existing customers



using the telephone to find out who the DMU is, their name and position in the organisation.

Approach In all selling, first impressions count. This does not simply refer to how the salesperson looks, but also how well prepared they are and how they meet and greet the buyer so as to get the relationship off to a good start.

(d)

Establishing Needs In order to satisfy a customer, a salesperson must have a clear understanding of their needs so that they know which features and benefits of the product to promote. Too often, the salesperson makes the mistake at the start of the sales presentation of talking about their products – instead of first finding out what it is the customer wants. Asking questions to re-establish customer needs provides the clues as to which product benefits to promote.

(e)

Presentation Here the salesperson explains how the features and benefits of the product(s) will satisfy the customer's needs. This step in the selling process calls for good listening and problem-solving skills. What's being proposed will undoubtedly be questioned and objections thrown up. Of course objections should be anticipated when formulating product knowledge and building information up on prospects. In handling objections a salesperson should use a positive approach, by asking the buyer to clarify the objection, by taking the objection as an opportunity to provide new information and thereby turning the objection into a reason for buying.

(f)

Closing For many the hardest part of the selling process is closing the sale, simply because people generally do not like rejection and so avoid asking for an order. Because of this, salespeople often miss opportunities or buying signals, which indicate when they should close, e.g. picking up a sample, asking a colleague for his opinion, sitting forward and nodding approval, or asking about prices, credit terms and delivery.

(g)

Follow-up The last step is very important if the salesperson wants to ensure customer satisfaction and repeat business. On closing a sale, a salesperson should follow through by completing all details of the transaction, and schedule a follow-up call for when the order is received to ensure there is proper installation, instruction and servicing. Follow-up is about continuing customer satisfaction in identifying any problem and reducing the buyer-concern about the sale.

The steps outlined here are naturally more akin to the higher value sales which can be found when a personal visit to a customer is necessary. However, this is not to say that the "spirit" of the steps in selling does not apply equally to lower value sales – it does. Many companies today recognise that they earn a higher return from money spent getting repeat orders from existing customers than they do from resources invested in attracting new customers. There are also benefits to be gained from cross-selling opportunities with existing customers. As such, a professional approach to selling is essential irrespective of the value of the order from the customer. It is customer satisfaction that should be paramount. If customers are satisfied with all aspects of a company's sales techniques and approach they are more likely to investigate other products being sold. This can result in

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cross-selling (other items in a product range) or selling-up (higher value purchases than the original intention) for the selling organisation. Consider your own purchasing. Have you ever bought a pair of shoes and because a sales assistant was helpful you also bought shoe cleaner (cross-selling)? Or in the case of more expensive products – have you ever gone to buy something only to be persuaded by a salesperson that a more advanced (and expensive) model would meet your requirements better (selling-up)? These techniques work in every kind of selling but are only possible if a salesperson is good at their job and can arouse the interest of a buyer.

Coordinating Sales and Sales Promotion Personal selling and sales promotion are so interrelated that close coordination is an essential part of the joint activity. Both sales promotion and personal selling have the same objective. In many companies, the sales promotion activities are partly carried out by the salespeople. In such cases the salespeople must be carefully briefed, so that the promotion results are maximised. 

Sales Promotion Teams Special sales promotion teams are employed permanently in some companies; other companies may hire them as required. When special teams are used from within the company, it is customary for the sales promotion plan to be agreed and cleared with the sales department so that the maximum cooperation can be attained. The teams' programmes will be circulated to the sales staff and they will be able to warn customers in advance of the promotional activity which is due to take place. This is an essential part of the promotional scheme, for it enables the salespeople to prepare customers for a period of what is hoped will be extra sales activity. Usually the sales promotion teams will tour the country, working region by region or town by town. The task of each team may be to deliver samples to homes and they may deliver leaflets announcing some special offer or perhaps redeemable coupons. Sometimes, when the promotion is directed at consumers, the team may be instructed to ask housewives questions and, if the correct answer is given, a prize may be awarded. Sometimes the promotional workers ask if the housewife uses a certain product, and if so, ask to see the container and then a prize may also be given. When the promotion is concerned with the trade, the salesperson may have helped to plan the promotion on their territory by giving advice as to which dealers are likely to be cooperative and also which dealers they would like to recruit as new stockists. There may be some stockists where they would like to see an increase in sales and, in helping to plan the promotion, the salesperson will select these stockists, who may be given special attention by the sales promotional team.



Using Specialist Agencies In-company promotional teams have several advantages since their loyalty is given wholly to the company and as they become experienced in promotional work their services become more valuable. However there is one problem with in-company teams and that is the high expense of maintaining them. To keep permanent teams (or even one team) on the payroll is a large expense and the team must be both fully utilised and profitably employed. Sales promotional work is intensive and requires a continuously high level of enthusiasm. If the team is not fully occupied, the enthusiasm will wane and the team's efficiency will be impaired.

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As an alternative to in-company teams, there are several companies which specialise in sales promotional work. They will provide teams of men or women who will do the work according to an agreed plan with the client. The borderline between promotional work and personal selling is a narrow one, and the specialist teams which can be hired will usually be prepared to do both personal selling and promotional work if it is required. The personal selling service can be an important one for a small company which has only a few sales representatives. If it is desired to launch a new product, it will be difficult to obtain an adequate distribution among dealers or customers if the salespeople's time is limited. A hired promotional or sales force can help to effect distribution during the launch period. However, do not expect the same degree of company loyalty from a temporarily hired sales team.

Organisation of the Sales Force A sales force needs to be organised in a certain way to be effective and efficient. Companies vary in the way in which they do this and there are four methods by which it can be done. 

Geographical Area/Region This is perhaps the most common form of organisation and it is the one most people would be aware of. A company is likely to be split into several functional areas such as sales, production, finance and personnel and it is the sales department that is organised on an area basis. Sales force personnel will normally deal with customers in their particular area. The possible advantages of a single salesperson assigned to cover all company products in a particular area are savings in travel expenses, better local and customer knowledge and avoidance of multiple calling on the same customer. The products offered do need to be fairly homogeneous and within the technical competence of the sales force.



Market/Customer Type When a sales force is organised by market it is, in effect, by customer types. Product specialisation selling may lead to duplication of calling on the same customer but specialised selling has the advantage that qualified sales personnel can be employed to deal with the special product applications and attitudes. Knowledge of the organisation may also be important. Sales forces are thus calling on particular market segments. Computer manufacturers often do this by having distinct sales staff to call separately on retailers, engineering and construction companies, and banking and finance institutions. So there are thus three sales forces and each would be dealing with the specific needs of each customer group. Sales staff involved with retailers are unlikely to be able to apply the computer's attributes to the needs of bankers, engineers and so on. Stirling Health, who marketed Andrews Liver Salts, Milk of Magnesia and Delrosa had a sales force organised in this way but this was subdivided into areas.



Product Sales forces may sell particular products. Thus one sales force may sell patent medicines, another may sell food and drink and a third may sell pharmaceutical products. Sales force structures of this nature have the advantage that highly qualified salespeople can be employed to deal with technical explanations and problems. Sometimes the product range may benefit from this type of organisation. Note that in the example just given, the staff from each may call on the same customer selling a different product range. However this may not always be the case. The structure is favoured by larger companies who have highly diversified specialised product lines each making substantial profit contributions.

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Matrix Planning and new product development are problem-solving activities for which a functional structure is not suitable and some form of compromise is necessary. One solution is the setting up of project teams comprised of representatives from each functional department and this is sometimes referred to as matrix organisation. They are not a common form of structure but are nevertheless used in heavy engineering industries in particular. Each project could, for example, be a different type of aircraft.

Sales Forecasting and the Sales Plan Sales forecasting is a very important part of sales management/marketing as it is usually this which will determine production and procurement policies as well as policies covering promotion, pricing, etc. Forecasts can be based on market share in relation to growth or in the company's own sales activities with a targeted growth. Whichever way is used they will be either short (possibly three months ahead), medium (usually one year), or long (up to five years in most industries but longer in some). The bases for forecasting may be quantitative or qualitative depending on the objectives of the organisation. 

The Sales Plan It is vital that any sales plan is part of an overall marketing plan and, as such, part of a corporate plan. If sales strategies are not linked into other strategies there may be problems for the company. For example: 

A sales drive on one particular line, which is not matched by increased production of that line, will fail.



An intention to improve customer service levels may well fail if the sales plan does not allow for increased involvement of the sales force.



Increasing the number of distribution outlets without reviewing the sales force can lead to wasted resources or overstretched personnel.

The plan itself is not really any different to any other plan involved in the marketing effort. There will be objectives, strategies and programmes, but where the sales plan may differ is in the amount of detail. By their very nature sales plans tend to be operational and as such may well include detailed targets and budgets for individual salespeople. Strategic sales planning (at higher levels) will outline the overview of what is to be done, e.g. increased sales staff, methods to use, etc. but the operational levels will be quite specific and detailed.

F. PUBLIC RELATIONS What is Public Relations? There can be no doubt that public relations activities span the entire organisation, taking in the very highest level of management as well as the operational levels. Despite this the term "public relations" is often misused and misunderstood, with many managers failing to appreciate the importance of the activities involved. It does not help that various authorities give different definitions of public relations, as this can lead to even more uncertainty. Who should we turn to for a sensible definition? Consider the following: " all activities and attitudes intended to judge, adjust to, influence and direct the opinion of any group or groups of persons in the interest of any individual, group or institution" (American Public Relations Association)

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Although I am convinced that this is not the case, the above definition could be taken to imply a degree of coercion in the interests of the person or group undertaking the public relations activities. To some extent, I prefer the comments of a previous president of the American Association who described public relations as: "everything involved in achieving a favourable opinion." However, even this comment could imply a lack of responsibility and a sense of "anything goes" as long as it achieves the end result. "Public relations practice is the art and social science of analysing trends, predicting their consequences, counselling organisation leaders and implementing programmes of action which will serve both the organisation's and the public interest." (World Assembly of Public Relations Associations, 1978). You can see that this definition was actually formed as an aid to guide the actions of public relations specialists specifically. It does not address the meaning of "public relations" itself, but seeks to define what the specialist does. "the planned and sustained effort to establish and maintain goodwill and mutual understanding between an organisation and its publics" (Institute of Public Relations, UK) To me, this definition gives a much clearer view of public relations in that it contains the key words: 

"planned and sustained"



"establish and maintain"



"mutual understanding"

and most important of all: 

"between".

Whichever definition of public relations you prefer (and there are plenty more around) you should find that they all have a common underlying principle. Public relations is about understanding the needs of an organisation and its publics, and working towards satisfying those needs. Thus we can see that public relations is something which needs to be worked at and does not just happen because someone wants it to. No organisation can work for its own objectives and disregard the needs of its publics. Likewise, the attitude that all we have to do is "be nice" to people carries no leverage in today's sophisticated business world. Public relations is a discipline which demands a careful approach if it is to be successful.

What Public Relations is not! 

Public Relations is not Publicity Publicity can be defined as planned or unplanned exposure in the public domain, such as a newsworthy item or some tragic event which involves a company in some way. Publicity may be planned or unplanned, and it can be good or bad. Public relations is "planned" and should always be to the benefit of the organisation involved.



Public Relations is not Advertising We have already seen that advertising is communication through a form of paid media and tends to be of an impersonal nature. Media coverage for public relations is sought, but not bought. Advertising tends to be aimed at the decision-making units in the purchasing process, whereas public relations will tend to be aimed at a much wider target audience. It is true that public relations can lay the groundwork for advertising in that it can imprint an image for the company in the marketplace, but public relations in

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itself is not designed to attract buyers – merely to increase knowledge and understanding of the company and its aims. Public relations is often confused with corporate advertising. This is quite understandable as in many cases the two will have similar objectives, i.e. to increase awareness of the company. However, corporate advertising is carried out by using paid media; this differentiates it from public relations, which does not pay for exposure in the media. 

Public Relations is not Press Relations Both public relations and press relations can be referred to as PR, but they are not the same thing. Press relations incorporates the efforts made to establish and maintain good relations with the press. It is true that press relations will be a major task for the public relations function, but press relations will not have an impact on the policies governing the public relations activities. Note that the word "press" is not really adequate as other media are equally important, which is why we now hear this referred to as "media relations".

Purpose of Public Relations Public relations could be said to be very similar to advertising: they both strive to pass on information and awareness, and both have an impact on the attitude of the target audience. Neither of these activities "sells" directly, but both are major influences on the behaviour of individuals and groups. However, you could argue that the purpose of advertising is to "help the sale", whereas the purpose of public relations is to "create understanding". This may be easier said than done. It has been said that in the corporate world (perhaps the personal world, too) there are three main categories of people to deal with: 

those who know you and like you



those who know you and do not like you



those who neither know you nor care (often the majority).

The first category is easy to deal with as long as you do nothing to upset them and thus maintain good relationships. It is the second two categories that give cause for concern. If we are to "create understanding" we must try to change the attitude of others towards us. We know that different people can have different attitudes to the same thing – whether it be an idea, an organisation or even an individual – and that these attitudes do not change easily. In fact, changing the attitude of someone can be very difficult indeed. For the organisation, this is where public relations becomes so important. When we try to influence attitudes towards or within an organisation we are really seeking to achieve a more favourable position. A model produced by Frank Jefkins, a renowned British writer on public relations, encapsulates this "transfer process" that we are trying to achieve (Figure 10.7). Figure 10.7: Jefkins' Public Relations Transfer Process Current attitude Negative Hostility Prejudice Apathy

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Positive Sympathy Acceptance Interest

322


Ignorance

Knowledge

Every organisation should use some form of public relations in order to establish itself in the marketplace. This may simply be to gain advantage over competitors or for some other reason such as reassuring shareholders and customers that the company is financially sound. It is not only profit-making organisations that are concerned with public relations. Charities, local and national governments, political parties and pressure groups all have valid reasons for presenting themselves favourably to their respective target audiences or "publics" as they are known in public relations. Consider the organisations concerned with public safety and well-being (transport, pharmaceuticals, etc.): it is essential that they acquire a degree of public confidence and credibility if they are to carry out their role effectively. Public relations is the means by which these organisations acquire their public standing. At best, public relations does not only tell an organisation's story to its publics and foster good relationships, but it also helps to shape the organisation and the way it performs. Taking this further we must accept the fact that there are varying levels of public relations activity within any organisation. The strategic or higher management level of the company will be concerned with corporate public relations, which encompasses issues such as company positioning in the market place, the corporate image and how business is carried out. The operational levels will be influenced by whatever the higher levels decree, but they will be responsible for the day-to-day activities that need to be carried out. It is quite common for these aspects of public relations to be dealt with by the marketing department in a separate section known as the "public relations function" (or department, division, etc.). Although corporate public relations tends to be the most visible to the external publics, it is the operational level that does the necessary background work which leads to success. By research, a public relations practitioner can establish the needs and concerns of any identified public, as well as assess opinions on various matters. After analysis of the research, information can be fed back to the relevant managers for consideration which, hopefully, will be taken into account when actions are taken. This does not just involve the drawing up of plans for the future, but also means that current activities can be amended if they are causing any problems. So it follows that if public relations is to be successful, it must be organised in such a way that activities can be undertaken in a logical and sensible fashion.

Public Relations and the Marketing Mix Despite the fact than most marketing writers claim public relations is part of the marketing effort, Frank Jefkins in Public Relations for Marketing Management claims that public relations and marketing are not the same thing. He agrees that they are very close in that they are both dealing with human relations, but he is of the opinion that public relations is really the "sociological" side of marketing which, in its own way, enhances the marketing mix elements. He claims that if the communications, good behaviour, understanding and goodwill aspects of marketing are "nurtured" (by public relations) much will be done to effect the desired shifts in attitude that marketers seek to achieve. I am afraid that I cannot subscribe to his opinion that public relations and marketing are different. In my opinion they are indivisible aspects of the efforts undertaken by an organisation to create and develop relationships with its target audiences. However, I do agree with his proposition that public relations can and does help with the elements of the marketing mix. 

Product

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Information gathered in the public relations function may have a direct impact on product policy within an organisation provided the information is fed back to the relevant section of the production process. This may be at any stage – design, production, packaging, etc. Complaints received from customers can often act as a catalyst which will result in a new version of a product being produced. Criticisms in trade press reviews or even snippets of information overheard at an exhibition can all bring new ideas into a company. The trick is to see that the public relations function is capable of both gathering this type of information and getting it to the right people. We could argue that intelligence gathering such as this is a task of the product manager, but it is equally a responsibility of the public relations function. Anything which helps to create better relationships cannot be overlooked. 

Price You could argue that the added cost of having a public relations function can only serve to increase the prices charged to customers, but this is a short-sighted point of view. Good public relations will enhance the image of the company in the eyes of the buying customers and thus confer a degree of security in the company and its offering. If a company is seen to be lacking in some way (aggressive stance, production policies, ethics, etc.), the buyers may well object to its pricing structure. On the other hand, a company with a good market standing and image is less likely to have problems when setting prices as buyers will accept them more readily. Public relations, working towards achieving this good standing, certainly helps in controlling price levels and fluctuations.

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Place (Distribution) It is likely that the main effect public relations can have on the distribution channel will be with the channel members – distributors, warehouses, retail outlets, etc. Marketing planning will take care to see that the distribution channel chosen is suited to the needs of the actual buying customer or end-user, but public relations will help to keep the distribution channel members satisfied. It is not enough to simply issue product literature to a member of a distribution channel – they may need something more. If a channel member is kept informed it means ultimately that customers too will benefit. Public relations can help in this by providing additional information and support as and when necessary, thereby helping to maintain the marketing effort.

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Promotion (Communications) Public relations is very much concerned with communications in that it adds to and enhances the other promotional efforts. We have already seen that public relations at its highest level will seek to ensure that the company has a good image which is communicated to the public. At its operational level, public relations will see that the promotional tools used are in keeping with the image that the company wishes to project. The relationship between "promotion" and "public relations" is one of the stronger linkages that we can see where the marketing mix is concerned. If these two aspects do not match you will soon have a company that is struggling either with its image or in its advertising campaigns. However, for the company that gets them balanced success is guaranteed. For example, take a high profile organisation such as the Virgin group of companies. The group includes a diverse assortment of companies but, broadly speaking, advertises itself and its products as being go-ahead and keeping up to date with people's requirements in the modern world. All the promotional literature is presented in glowing warm colours, with messages meant to reassure the buyers that they are dealing with a company that cares. Promotion is geared very effectively to all sectors – young and not so young – and in all types of media. In addition to this the group has Richard Branson as its founder and chief executive. He is a highly visible and well-

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publicised personality who is very much presented as a "man of the people", with a caring and modern attitude. There can be no doubt that Richard Branson is an extremely astute businessman and yet he commands tremendous liking and respect from many quarters. Because of this he himself is one of the best public relations tools that Virgin could have. Every time he is seen in public his Virgin group of companies reaps the benefit of publicity. But this is no accident. He and his executives know very well that all the advertising they do, and the product literature they produce, will not be as effective on their own. They fully utilise the public liking for Branson in a very effective way. Consider only one of the products they have – personal equity plans. Can you think of another financial company where you would instantly recognise not only the name of the company, but the chief executive too? A very difficult task for most people! Virgin are to be congratulated on their effective use of promotion and public relations as joint marketing tools. 

Soft Elements People – one of the so-called "soft" elements of the mix – actually refers to one of the most important resources of any organisation, its personnel. Good internal public relations means happy people. Happy people usually means good customer relations so it follows that public relations is a definite help in respect of employees who are working towards satisfying customer needs. This type of internal public relations is relatively easy to arrange and effect, providing the company recognises the need for it. The existence or otherwise of a public relations function within an organisation may, at first glance, appear not to have a great deal of impact on the two remaining elements of the mix – physical evidence (concerned with appearances, ambience etc.) and processes (concerned with systems used to deal with customers and business in general). But consider for a moment the company which has to provide waiting areas for customers. If there is no public relations policy these waiting areas could be poorly designed and uncomfortable and give a completely wrong impression to the customers. Likewise, if a company presents itself as being customer friendly, the processes or systems used should reflect that. Intelligence gathered by those in the public relations function will be added to that gathered by those in the marketing function. This intelligence will then help to ensure that both the physical evidence and processes elements of the mix are amended in accordance with the company's attitude to its customers and in line with the strategic policies which have been decreed, as well as in keeping with the customer needs as identified by the marketing people.

The Public Relations Message We know, from the overall communications process, that there will be a sender – the organisation which has a message to get across – and a receiver – the public that we are trying to influence in one way or another. What we need now is to have a structured and credible message which will be accepted and believed by our public(s) – badly worded or designed messages can actually work against the interests of the organisation. Messages must always be designed and structured from the point of view of the public rather than from the point of view of the organisation. Any message can be informative or persuasive or a mixture of the two. 

Informative messages will contain straightforward information on whatever the problem is. There may also be contact telephone numbers or addresses to write to for information and so on.

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This type of message is often used in public relations for corporate issues when reassuring the various publics on some issue (such as when Perrier had to reassure the general public that they had solved the problem of the traces of benzene which had been found in some of their bottles) or in the event of any major problems (such as product recalls because of a technical failure in one or more components). 

Persuasive messages play on the personality of the recipient or target public. They will concentrate on needs, wants, aspirations and desires and will use emotional aspects to win support. Messages can be designed to play on emotion and manipulate public opinion in particular ways, even though they may really be aimed at achieving a completely different objective. This practice is quite common and is acceptable in the public relations field as long as the message does not mislead and give false information.

The nature of the problem and of the public(s) will largely determine the type of message which needs to be sent and the messages might be adapted somewhat if circumstances change. The type of message which is to be communicated to the public will be dependent upon what needs to be said in the prevailing circumstances. However it is worth mentioning that people are more likely to accept messages which meet with their own beliefs, e.g. political leanings, type of newspaper read, and public image of the communicating organisation. In addition, the message must be capable of being sent out in a suitable format and by an appropriate channel or medium which will reach the target public.

Methods of Public Relations Earlier in this course you will remember that we considered various methods of sales promotion: 

direct mail

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sales literature

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exhibitions

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merchandising

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conferences/seminars.

All of these methods are seen as being below the line in that, although they could be used to supplement the advertising effort, they are not using media controlled by others and do not attract commission from any media owners. Thus, they are not advertising in its truest sense. We have also seen that public relations is not advertising, so it follows that communication methods used must also be below the line. From there, we can see that many of the methods we have already considered in respect of marketing to the target audience are also suitable for us to communicate with our publics. Not all will apply in every case, but some of them certainly will be of use. The difference is that instead of trying to "effect a sale" we are trying to "get the message across" in order to influence attitude and opinion. Some of the more typical channels for public relations are considered next in relation to the audience which it is the objective to reach. (a)

Internal Publics 

Newsletters or In-house Publications These can be an excellent method of keeping everyone informed of current developments and can be used as motivational tools. Simple things like monthly competitions, awards for good performance, etc. can be promoted and, if it is well done, the in-house publication in itself becomes a factor in the satisfaction of

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employees with their employer. If people are kept informed they become involved and are more likely to be loyal and supportive to their company. 

Briefing Meetings If briefing meetings are held as a regular event, or in the case of some important development, they give employees the opportunity to ask questions and to see that the company is not trying to hide anything. Announcements can be made on changes in company policy, new product launches or impending mergers. These meetings are also very useful for quelling any rumours that may have started to circulate and, even more so, to reassure on the future stability of the company and its employees.

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Family Days and Parties Any opportunity which allows employees to bring together their work and personal lives can only be for the good. Events such as these are an excellent opportunity for all levels of the company to mix together – especially if there is some activity involved which acts as a leveller, e.g. races and other sports. Including families in activities not only makes the employees feel better, but it means that the families can begin to understand the nature of the company. Everything that helps to keep employees happy is to be applauded. This type of activity could also be regarded as being part of the public relations effort in the local community. After all, the employees live in the community too! The difficulty here is that events such as these cost money. However, many companies feel that the benefits gained outweigh the costs and are happy to host family events – even if it is only a buffet supper at Christmas for employees and their partners.

(b)

External Publics 

The Media When people refer to "the media" they are often thinking in terms of those which give national coverage, but there is much to be gained from local media. Local newspapers, radio and television are all interested in news items relating to local organisations. Another aspect to consider is that often local reporters have links with national or even international newsgroups and will pass on a story. It is amazing how often a simple little story concerning a company can soon be reproduced in media around the world. I was once very impressed to read an article in a newspaper about an achievement of one company which is based near where I live in the UK. What made it so impressive was that this is a very small company and I was in the Middle East at the time! The article had been reproduced in a local English language paper, for the region I was visiting, only two days after it had first appeared in the company's local paper in the UK. Gaining international exposure in this way must be an advantage to companies. News items may be good or bad, but the relationships between the organisation and the media may well determine how they are presented to the public. For instance, if a company regularly refuses to give interviews to reporters, or refuses to comment on something that has been reported, it will gain the reputation of being secretive or obstructive. The local media (national and international, too) will soon be presenting articles which reflect this attitude, and the company can lose a great deal of goodwill. Conversely if the company works with the media it is more likely to have favourable reports published. Good media relations mean that an organisation

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can have its successes publicised and its failures treated gently. The public relations officer who fails in media relations does not deserve to succeed. 

Press Releases It is common practice for press releases to be issued to the media giving information on a range of topics. These can include current or intended activities, some particular achievement of which a company is very proud, or even to counteract bad press which has arisen for some reason. Such press releases do not necessarily get published. Publication will depend on just how newsworthy the item is and whether or not any particular medium wants to use the release. Many companies use what are known as syndicated press releases. A syndicated press release is one which is drawn up at head office by the chief public relations officer and is then distributed to regional offices for publication in the local press under the name of the local manager. This method gives the advantage of a common or consistent press release, but with the added benefit that local names and contact telephone numbers can be added. Of course, great care must be taken to ensure that there is no overlap of publications. For example, if the same release was then used in the national or international press the company could look very foolish.

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Press Conferences Perhaps the most important question that needs to be asked in the case of press conferences is: "Do we need one?" Press conferences should really only be used when there is a major announcement to make or a major problem to overcome; holding a press conference when it is not needed will often prove to be counterproductive. Press conferences involve inviting media representatives to a suitable location and then "presenting a case". The people who are entrusted with speaking at a press conference must be well briefed on what they have to say and they must prepare in advance. If reporters and commentators are given a free hand with regard to the topics and questions they can put, the end result may be something akin to chaos with a resulting loss of face for the organisation. Quite often the organisation hosting a press release will take the opportunity of courting the press by providing information packs, refreshments, and so on. However, media people may be suspicious if the hospitality is overdone so, once again, great care must be taken.

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Open Days If customers and members of the local community are invited to visit the premises of an organisation it gives the opportunity to publicise future activities, give reassurances on current financial strength, and highlight the trial of testing of new products, etc. More than anything, it gives the organisation a chance to show that they do care about their publics and their opinions. Hospitality need not be expensive, but the goodwill it fosters can be incalculable.

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Sponsorship You only have to watch a sports event on television, or visit a theatre, to see just how important sponsorship has become in the modern world. Vast sums of money are paid out in a variety of ways: sponsoring a sports personality for training; a team of racing cars; a snooker championship; a football competition; a drama festival; an individual theatre and numerous other events.

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The main reason behind this form of support is to gain corporate exposure, particularly when the sponsored event is televised throughout the world. For example, in some countries where tobacco or brewing companies are restricted in their promotional activities, they can sometimes use sponsorship to good effect. However, there are also other reasons for sponsorship. If a company can be seen to be sponsoring something which is regarded as being "worthwhile" or "good for society" it benefits greatly as far as its publics are concerned. The company gains image, prestige and standing in the marketplace, all of which increase the power and influence of the company. An added benefit of this heightened stature is the "spill over" effect of the image. Subconscious impressions will be imposed upon the minds of the latent publics which, if ever the public becomes active, may work to the advantage of the organisation. After BT's Global Challenge (a sponsored round-the-world yacht race), the head of BT's global marketing commented that the investment in the sponsorship had "pound for pound, delivered three and a half times more exposure than advertising". And, as he said, "that is just the beginning." You can see from this comment alone that sponsorship can be a powerful tool to use in marketing and public relations. Sponsorship in many cases is related to advertising. Consider the use of the sponsored personalities in adverts for hotels, sports equipment, soft drinks, car tyres, and so on. But the underlying reason for sponsorship is the increased exposure that companies gain and the add-on benefits of increased stature in the eyes of the public at large. It is worth mentioning the dangers that exist when a company sponsors a personality rather than an event. If the personality falls foul of the law or public opinion in some way, the image of the sponsoring company may be affected rather badly. In such cases companies usually react very quickly and drop that particular personality. Even though a lot of companies spend vast amounts of money on sponsorship, it need not be expensive to have your name publicised. It depends on who you are trying to reach and influence. A lot of companies do not recognise the importance of local sponsorship, although it is fair to say that many companies do. Local sponsorship is an important aspect of community relations and can be very effective in gaining public goodwill. Whether it is support of a local rugby team, a hospice, a scout group or even a local mother and baby group, there is a great deal to be gained by any organisation that involves itself with the community in this way. 

Lobbying In dictionaries you will find lobbying defined as: "to attempt to influence legislators in the formulation of policy" "to apply pressure or influence the passage of a piece of legislature" and a lobbyist as: "a person employed, by a particular interest, to lobby." These definitions suggest that lobbying is very much a political activity which some companies may be involved with infrequently, if ever. But there are many companies which have representatives who are engaged in dealing with politicians on a full-time basis. These representatives may be actual employees

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of the company or they may be agencies who deal in this sort of activity. Their intention is twofold: (i)

intelligence – to keep the company aware of what is happening politically

(ii)

influence – to see that the interests of the company are maintained and protected.

Being aware of what is happening and is likely to happen means that a company can make preparations for any eventuality (e.g. the transport companies and duty-free issues). Having influence on whether a politician will vote for or against some proposal can be very important to the future stability of a company which is why so much lobbying takes place. Governments recognise that lobbying does take place and in many cases facilities are made available for this purpose, e.g. offices set aside where people can meet. In Washington, USA, many companies have set up their own offices so that they can have easy contact with politicians and be ready to mount (and monitor) campaigns aimed at achieving both positive and negative shifts of attitude on a wide range of issues. In itself lobbying can work for the good of society as it means that the interests of some major organisations are being listened to. We must not forget that those huge organisations which do lobby politicians have an impact on the public at large – with jobs and financial security often being affected in some way. Public relations in this respect is quite legitimate and is a useful tool for companies. The danger lies in allowing influence which does not reflect the view of society as a whole. Needless to say, predominantly because of the wealth of some organisations, accusations of corruption and bribery abound. There have been many instances of public hearings against politicians being accused of taking bribes of money, goods or services, in exchange for presenting a company's interests. Public accusations, denials and hearings may or may not mean that corruption is controlled. A cynic might argue that these public hearings only come about because a politician has refused to support (or stopped supporting) a company. For example, in late 1997 one British politician accused of taking money for putting questions to Parliament (on behalf of the owner of a world-famous department store in London) said, at his hearing: "I am here not because I am corrupt, but because I refuse to be corrupt." Others would have you believe that allegations of corruption are a direct result of the jealousy of some other party. Yet more will tell you that these allegations are to "protect society". Who knows? Whether or not we approve of it, and whatever our opinion of the level of honesty involved, lobbying is going on daily in every part of the world; it is a recognised and established part of corporate public relations.

Importance of Integrated Activities The methods of communication that we have outlined can all be very effective in their own right. If an organisation chooses to use only one method, it can achieve its objective; on the other hand, if a company chooses to use a combination of methods it will be even more successful. You can begin a public relations campaign with a news release, follow up with letters and leaflets, then carry on and arrange open days or a special meeting and so on. There are no rules as to how and when you should use a particular public relations technique. The trick is in using a combination of them. They will each support the other and, providing the message sent is consistent, should be much more successful than using any one on its own.

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A survey undertaken in 1997 by CHJS (a business-to-business research agency) and the University of Strathclyde indicates that the benefits of public relations and integrated communications are now widely recognised by professionals and organisations alike. Respondents in the survey voted public relations as giving the best return on investment of any type of communication and, even more telling, 95 per cent of the respondents believed in an integrated approach. Successful integration of communications One particularly good example of a successful integrated campaign is that of Halifax and how their “Staff as Stars” campaign transformed Halifax from a former building society to an aggressive competitor to the big four clearing banks in the space of twelve months. Traditionally, banks divide their advertising between a brand message on TV and a product message in the press. Retailers, however, focus on “substance” in all of their communications (i.e. deals, price comparisons, new products or services). In all its communications Halifax focused on the most motivating “substance” in financial services – that of “value”. Taking its inspiration from retailers rather than normal banking communications, this campaign brought together 35,000 staff and increased sales by 150% with an increase in profit of 43%. The campaign also provided the groundwork for a merger with the Bank of Scotland. Interestingly, Halifax was unable to assess the success of communications campaigns over years with the support of research, but had to achieve instant success against a backdrop of shareholder expectations. This was achieved! The main features of the campaign are outlined on the following two pages.

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Figure 10.8: Halifax Bank – “Staff for Stars” Integrated Communications Activities

Target All adult customers of banks and Halifax colleagues The Communications Idea Halifax designed a campaign that would permeate and inform everything that Halifax did both externally and internally. In order to avoid the normal bank branding they wanted something different to the normal staid and conservative bank style advertising. They wanted to develop an integrated campaign that would be talked about. The creative idea was to use real Halifax staff and they would be singing in their own pop video. A new strap line was also introduced “Always giving you extra”. Launching the communications idea internally The campaign was launched internally by Jonathan Ross appearing on Halifax TV, a weekly internet broadcast to all 35,000 employees, with a request for staff to come forward and star. A total of 1,169 people applied and were auditioned in eight regional castings and 20 appeared in a national final in London. Internal communications - People Halifax believed that focusing on the “human” organisation was a powerful platform as it was motivating to consumers and employees alike. The campaign was very positively received by employees and so powerful and flexible internally that it was adopted in all internal communications. Research carried out internally showed that employees believed that the campaign represented them in a positive way and that it had made Halifax a real competitor to the other high street banks. In fact, in following campaigns, the number of staff applying to star in the campaign increased to 1,851 in 2002. As Halifax role models, the stars are the perfect vehicle for recruitment advertising. The stars featured in internal magazines and were the focus of all internal public relations – branch openings, special appearances, competitions – and are used on all product literature. They are also used as the stars at annual Halifax sales conferences. As a result of the success of the campaign, after the merger, Bank of Scotland launched its own “Staff for Stars” campaign using a member of staff from their Glasgow branch. Advertising The first advertisement featuring “Howard” promoting the current account was flighted in 2000. “Yvonne” promoted the credit card. “Matt” promoted mortgages. There was an aggressive campaign of advertising which compared prices to those of other banks. The advertising message and form of the promotion stood out from other banking institutions and was liked – it communicated clearly. It achieved one of its goals in as much as it changed the target group’s mind about the Halifax brand since Halifax had changed from a building society to a bank. Advertising recall was also impressive and research carried out by Marketing magazine’s Adwatch survey showed that the “Howard” ads achieved a 71% recall with the public.

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Direct Marketing The communications idea was also used in store as well as in direct marketing and online. Internet click-through rates were higher after the introduction of the “Staff for Stars” campaign. Brand building The advertising campaign differentiated Halifax from other clearing banks. The advertising led to immediate changes in the perception of the Halifax brand and had a significant effect on non-customers which was the primary external target audience. The campaign has sent out the message and disseminated the brand proposition internally far better than any branding workshops that could have been used instead. The fact that Halifax and Bank of Scotland have similar campaign ideas has a positive effect on the merger, not to mention economies of scale, and both brands were able to use and benefit equally from the communications idea. Effective in Public Relations “Staff for Stars” created more public relations than any other campaign in UK at that time without the use of a PR agency since Halifax generated its own campaign. Benefits of an integrated campaign A single communications idea has saved significant internal and external resources for Halifax. Unlike other banks, now, Halifax does not require different concepts and different photography for branch window displays, product literature, sales conferences and presentations. The most significant effect of the communications idea was how well it synergised employees in such a short space of time which is very difficult to achieve in such large organisations. This demonstrates the effectiveness of an integrated communications campaign acknowledging the power of internal marketing.

Source : R Warren and D L K Warren from Gold Publications, 2003

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G DIRECT MARKETING We will start this section by summarising the advantages and disadvantages of direct marketing: Advantages

Disadvantages

Precise targeting One-to-one communication Relationship building Encourage high level of interaction with customers Measurable Messages can be "personalised" High conversion rates Ability to gather detailed customer information and understand customer buyer behaviour.

Lists can be out-dated/inaccurate Frequent mailings lead to dismissal of a product by the target audience Unsolicited communications such as spam can alienate customers Can suffer from low credibility due to unsolicited communications

Direct Mail/Email Direct mail/email means exactly what it says: mail (using some kind of postal or email service) sent direct to the target audience. It may be only a reminder or newssheet communication, in which case it could be considered as part of the public relations activities of an organisation. However, direct mail tends to be the first step in a chain of activities which a seller hopes will lead to an eventual sale. In the majority of cases, direct mail is used to arouse interest in a possible or targeted customer, leading to a request for further information, or a visit from a representative, or for a sample of a product. Once this stage has been reached the advertiser can give more precise information or actually use more intensively persuasive material and/or follow-up activities. Mail order is often linked with direct mail – but they are not the same thing! Mail order is simply "ordering by mail" – usually from a catalogue of products. The actual product may not be delivered by mail, depending on the requirements of the product, buyer and/or seller. Changes in advertising techniques and in technology have helped to introduce other forms of "mail order". These activities, which can be described as direct response marketing, can include such activities as selling off the page (where an advert in the media will include a response coupon) or selling from a TV advert (where viewers are invited to ring up with their order). Direct response marketing tends to be aimed at mass markets, whereas direct mail, which may result in a form of mail order, is targeted at a very specific market segment. Telemarketing Telemarketing means the use of the telephone to target customers directly. The telephone allows organisations to create an immediate dialogue with customers and gain immediate responses. It also allows the marketing activity to be flexible to the needs of the customer, for example by answering questions and providing them with specific information. Telemarketing has suffered from a lack of credibility in recent years and organisations must be careful not to alienate customers. The cost of telemarketing can also be high, although

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with developments in communications technology many organisations are switching their telemarketing activities to less developed countries to reduce costs. Telemarketing is particularly relevant in business-to-business marketing and often used during the prospecting stage to support personal selling. Internet/e-commerce E-commerce means buying and selling or other business transactions by means of electronic media such as the internet. Types of e-commerce activity could include: 

use of online catalogues for customers to seek information and evaluate products

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electronic ordering by online order forms such as buying cinema tickets

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sending order confirmations by email or SMS texts

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electronic payment through the internet – EDI systems which allow for the transfer of monies between banks.

These direct and one-to-one communications assist organisations in building strong customer relationships.

Relationship Marketing It is worth closing this section with a paragraph on relationship marketing. All marketing communications activities are aimed at communicating with customers; the more interactive the communication, the stronger the relationship with those customers will be. Good customer relationships lead to good customer service and strong customer loyalty. The use of database marketing and direct marketing techniques (particularly via the internet) has greatly improved the ability of organisations to build profiles of their customers. Databases allow organisations to store and retrieve data (data warehousing) and analyse the data (data mining) in order to gain a deeper insight into customer preferences. For example, website analytics can provide information on the types of purchases a consumer is making thereby alerting the organisation to other products that the customer may be interested in. This type of analysis means the organisation can be more successful in targeting customers. This detailed targeting can lead to one-to-one marketing activities (such as making recommendations/offers to individual customers) and thereby build customer relationships. The internet itself provides a mechanism for conducting and building one-to-one relationships by allowing organisations to target customers in a more flexible and effective manner. Databases generated from internet use are self-generating and all the contacts and information are from customers who have already shown an interest in the product and/or service, so communications are much more targeted. The internet has the capability of interacting and building a dialogue with customers; customers can select the information they want, provide feedback to the organisation and organisations can follow through customer enquiries individually and speedily with email responses. Products can also be tailormade/ordered via the internet allowing customers to choose their own colour, design etc. One of the advantages of building close relationships with customers is the ability to generate more sales revenue from each customer. This can be done by encouraging repeat purchases and cross-selling with other products from the product portfolio. An example of this can be seen in the banking industry where banks will try to sell other products such as life assurance, savings plans etc. to a customer who uses the online banking service.

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H. INTERNATIONAL MARKETING COMMUNICATIONS Introduction Geographical and cultural separation of the organisation from the marketplace will cause problems in communicating effectively. Information researched should be understood accurately, and international marketing communications can be challenging due to several factors such as the complexity of market conditions, differences in media available, languages, culture, advertising regulations and resources. With the advent of technological developments in communication, there is a definite need to communicate in international markets with a more diverse range of stakeholders and build relationships through interactive marketing. With the increase in the range and volume of communications that consumers are exposed to, it has become increasingly more difficult to communicate a distinctive product or service offering. There are a wide range of promotional tools that might be used to persuade customers to purchase products and services and the new technologies are increasing the choice. The challenge for the organisation is to use the right tools as effectively as possible to reach their consumers wherever they are in the world. Forces towards internationalisation include: 

growing similarities between countries

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improved communications

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advances in technology

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capacity to produce similar/identical products

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gradual removal of tariff barriers – emergence of the large trading alliances

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government action to incentivise foreign trade.

Challenges for International Marketing Communications The aim for international marketing messages is to convey accurately the information organisations wish to convey to their markets. Unfortunately there can be mistakes in the use of language, particularly messages that do not translate successfully. Lack of knowledge and sensitivity to the differing cultural norms amongst communities can also be an issue. An example of the unforeseen problems that become apparent when messages are not monitored correctly across borders is the case of Nike using the "flame" design on its shoes; this design bore a resemblance to the Arabic for "Allah". This caused the scrapping of around 40,000 pairs of sports shoes. Again there was an issue with the CocaCola brand name not travelling well since when read as a mirror image (laterally inverted) it reads "No Mohammad, No Mekkah." There are several reasons for the failure of promotional messaging: 

inconsistency in the messages conveyed by customers to staff at different levels from different countries and cultures



differing styles of corporate identity and brand image in different countries which are confusing for consumers



a lack of coordination of messages such as advertising campaigns and changes in the marketing mix elements such as pricing and the product itself

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insensitivity to the different ways people interpret messages (there is a tendency for marketers to use their own self-reference criteria rather than establish how international consumers might interpret the message). It is therefore apparent that marketers need to understand their markets in other countries if they are planning to expand internationally, which means conducting

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marketing research to understand the culture and consumer behaviour in the chosen countries.

The Components of Culture Social and cultural factors influence consumer and buyer behaviour. The differences between these factors in different parts of the world are a central consideration in developing and implementing international marketing strategies. Culture provides individuals with identity and direction as to what is acceptable behaviour and is acquired through learning. Culture is passed from generation to generation through family, religion, education and media. These areas provide consistency, stability and direction to society. Culture is made up of three essential components: 

beliefs – mental and verbal processes which constitute knowledge and assessment of products and services



values – indicators that consumers use for appropriate behaviour which are enduring and stable over time



customs – accepted ways of behaviour in specific situations, e.g. Christmas, Ramadan.

There are eight components of culture identified by Terpstra and Sarathy (1997) which form a framework for examining a culture from a marketing point of view (Figure 10.9). Figure 10:9: The eight components of culture

Language

Religion

Values and Attitudes

Aesthetics

CULTURE

Education

Law and Politics

Technology and material culture

Social organisations

Language Language has various components – spoken and silent body language, silence and social distance. Language links all the components of culture. Many countries have dialects and some countries have other "first" languages (such as French and English in Canada). Silent language has a powerful place for communication and can encompass such factors as time keeping, conversational distance between people and friendship. Religion

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Religion can be a major cultural factor and an awareness of it is critical for an understanding of an international market – it can have a significant effect on behaviour such as the food eaten and clothing worn. In some countries it is the most dominant cultural force and therefore rules affecting religious laws require empathy on the part of international companies. Values and Attitudes The values consumers place on factors such as achievement, work and wealth will affect not only the products offered but also the packaging and communication activities. The ways in which an organisation might motivate its staff will also be influenced by the local culture. For example, achievement and success acts as a justification for the purchase of goods. Individualism, being oneself, stimulates acceptance of customised or unique products that enable an individual to express their own personality. Aesthetics Aesthetics covers the local perception of music, art, architecture and so the organisation should ensure that any communication strategies are acceptable to the local culture from this point of view. For instance, colour can mean different things to different individuals and brand names do not always travel across borders well (CocaCola). Those involved in personal selling should be aware of the impact of formal or informal dress codes as well as gestures in greetings. Education The level of literacy within a country will have an impact on the sophistication of the community and therefore the level of education will affect, for instance, the labelling on packaging of products. In developing countries it would be necessary to consider the method of communication and perhaps consider the validity of verbally based communication activities. The balance between visual and non-visual components in messages should also be considered. Law and politics Quite often the legal and political environment of a country will be influenced by the cultural traditions of the community, since they reflect the norms of behaviour. Technology and material culture Technology and material culture will relate to the extent of a country's technological expertise and advancement and the attitude of individuals towards it. For example, some cultures may not consider servicing a car important if it is still working, so it may be necessary to educate consumers through communication activities. Social organisation Social organisation relates to the way the people within a country approach status and social institutions. An example of this would be the role of women – marketing to women would be very difficult in cultures where women have little social status. There are many other examples: in some countries such as Switzerland home ownership is not important and people tend to rent rather than purchase a home; in South Africa it is expected that a house will have a cooker provided in the kitchen.

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Communication – Standardisation or Adaptation? In international marketing communications it is widely accepted that there are two core strategies – standardisation and adaptation. In the table following the concept of standardisation in a global setting reflects the strategy adopted by organisations such as McDonalds and Disney. Global Strategy

Benefits of Standardisation

Keep the same brand and imagery, adapt the product

Achieve economies of scale

Focus on the corporate brand

Easier coordination

Single campaign development: – cohesion in underlying message, but room for tailored propositions to local market – create a core blueprint then flex to local requirements.

Avoid duplication of effort

However, with the need to demonstrate cultural sensitivity and empathy with a wide range of international customers and avoid the type of mistakes discussed earlier, it is necessary to adapt the international communications to local needs. Let us examine these two strategies more closely. 

Standardisation The drivers for standardisation come from the organisation's wish to improve efficiency and to achieve economies of scale in areas such as media buying and advertising. They also come from experience, with the aim of repeating past successes. Standardisation provides customers with perceived added value through consistently recognised branding. Consistency in the brand and corporate identity will encourage feelings of trust, confidence and loyalty, e.g. it will be reassuring for a visitor to another country to see a familiar logo for a bank or hotel chain. As a result of increased travel, television communications and the written media, consumers often prefer the brands they have become accustomed to. The internet allows customers to access products from organisations in far locations and it also allows smaller companies to compete on equal terms with their larger competitors. Advertising standardisation is best used in visual messaging for the main part of the advertisement and when well-known celebrities are used to feature products. Music is an important aspect of the communication as well as the use of well known trademarks and symbols, such as the use of significant landmarks (e.g. the Eiffel Tower in Paris). Advertising does not travel well to other countries when the use of the spoken or the written word predominates or if humour is used, since humour is generally unique to a culture.



Adaptation The main drivers for communication adaptation are the cultural differences that need to be managed when communicating with customers in different countries. Hofstede (1990) has highlighted the differences between countries in his expansive research. For example, the US and UK are "individualistic" which emphasises individual goals

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and the need to empower and progress. Hofstede also identifies "collectivism" where there is group membership and family support, as seen in Latin countries. It is believed that advertising is most effective when it is relevant to the target audience. In this respect it should be noted that in some countries there is a significant difference in the portrayal of women. However, the perception of the role of women in many countries is changing as many more women enter the workforce. According to Doole and Lowe (1999), research carried out in China found that women were depicted as product users, but men as having the product authority (purchasers). Research carried out in Singapore showed that women were used as spokespeople for the product as well as having the product authority, and they were also the providers of help and advice regarding the product in advertisements. There are other reasons why communications need to be adapted such as political considerations and legal regulations. Many organisations need to change their names or brand names because of the different meanings they have when moved to other countries, e.g. "Price Waterhouse" was allegedly translated in some countries as "Expensive Water Closet". The New Zealand Dairy Board, which exports dairy products such as its brand name Anchor, had to change the name to "Fern" when marketing in Malaysia. The Anchor brand in that country was a well-known beer and there would be a negative reaction to this brand name in the context of housewives buying (Anchor) dairy products for their children.

Planning and Coordinating the International Communications Strategy To achieve its objectives the organisation will need to look at a variety of promotional tools. The key to success in any campaign is the integration of the various elements that add value in a cost effective way by choosing communications methods that will have the most impact on consumers. Criteria which will influence the choice include: 

the market area and industry sector



the customer segment to be targeted



the target group requirements and the best way to reach them



the country or region, the culture and the communications media



the resources made available by the organisation.

It will be necessary for the marketer to decide which elements of the promotional mix will be best suited to the particular market.

I.

EVALUATING PERFORMANCE

Evaluation is a key part of marketing communications. The findings and results of the evaluation process feedback into the next campaign and provide indicators and benchmarks for further management decisions. Marketing communications as a management activity requires the use of research and testing procedures in addition to continuous evaluation. Continuous evaluation of the impact of the communications is vital to improve the effectiveness of the methods, but also to assess the extent to which the different aspects of the communication can be standardised across international markets. The success of a promotional strategy and the associated plan is measured by the degree to which the objectives set are achieved and the strategy has been effective. It is also necessary to ensure that the strategy has been executed efficiently and that the full potential of the promotional tools has been extracted and resources have been used economically. These should be assessed regularly through the application of marketing research methods. For instance, holding focus groups with customers and consumers to monitor the development of the communications strategy will give the organisation key information as to the success of its communications.

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A survey may be designed and distributed in order to establish the internal and external attitudes towards the communications campaign before rolling out any future communication messages. It is important that marketing research techniques be used before commitment to a particular communications campaign to test how well it will be received. Performance measures must examine the personnel and human resource aspects as well as the impact of any written or visual communications directed towards target groups.

Pretesting Advertising and communication methods can be researched prior to their release. The most common methods used to pretest advertisements are concept testing, focus groups, consumer panels and physiological tests (these measure the involuntary responses to stimuli and avoid any bias in other tests and include eye tracking and pupil dilation tests). These methods can determine, rank and prioritise proposed messages. Once the communications messages and advertisements have been developed then management require reassurance and guidance regarding which of the alternatives should be developed further. It will be more effective for a marketer to terminate an advertisement before costs become high and commitment too final.

Post-testing Testing communications campaigns that have been released is time consuming, but the advantages are that the messages are evaluated in their preferred environment. Methods used to evaluate the effectiveness of these advertisement messages utilise the following criteria: 

Enquiry tests – measurement of the number of enquiries or direct responses stimulated by the messaging. This could be, for instance, returned coupons, responses for further literature and actual orders. Enquiry tests can be used to test single advertisements or a campaign.

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Recall tests – these are designed to assess the impression a particular advertisement or campaign had on the memory of the target group. This type of testing requires interviews to take place, e.g. "Do you remember an advertisement for air travel?" If the respondent says "Yes, Virgin", then the respondent would be asked what they recalled about the advertisement and what did it say about Virgin Airways. The reliability of recall scores can be high but validity can be low, although this method is widely used.

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Sales tests – this type of test is without doubt very useful, but only direct response has validity because market-based tests tend to be historic. Sales occur mainly because of past actions and past communication strategies and so the results of this method are difficult to evaluate.

Financial Analysis The amounts of resources that are directed at communications require that the organisation reviews both these amounts and manner in which they have been utilised. Variance analysis provides an ongoing picture of spending and can give an early warning should unexpected levels of spending be incurred. Rapidly rising media costs have contributed to marketers using centralised media buying to achieve cost savings. Thus advertising economies of scale can be achieved by organisations spending large amounts of their resources on media.

Likeability According to Gordon (1992) the term "likeability" reflects the following issues: 

personally meaningful, relevant, informative, true to life, believable, convincing

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relevant, credible, clear product advantages, product usefulness, importance to "me"

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stimulation of interest or curiosity about the brand; creates warm feelings through enjoyment of the advertisement.

This means that post-testing should include a strong measure of how well a message was liked at its deepest level of meaning. There is a linkage here regarding the concept of "value", i.e. the degree to which the advertisement works is a measure of the impact the message makes on a customer. For advertising to be successful it must be effective and therefore of personal value to the members of the target audience. The evaluation of a marketing communications plan, once implemented, is an essential part of the total system and provides a rich source of material for the next campaign and the ongoing communications that all organisations design and deliver to their target markets.

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Chapter 11 Services Marketing Contents

Page

A.

The Importance of Services Marketing

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B.

Characteristics of Services Intangibility Inseparability Variability/Heterogeneity Perishability Lack of Ownership

344 345 345 346 346 346

C.

The Services Marketing Mix People Process Physical Evidence

347 347 347 347

D.

Creating Value Service Encounters Customer Relationships Internal Marketing Quality and Relationship Marketing

348 348 348 349 349

E.

Service Quality and Performance The SERVQUAL Model Service Failure – Blueprinting

350 350 352

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A. THE IMPORTANCE OF SERVICES MARKETING As consumers we use services all the time: turning on a light switch, talking on the telephone, going on a flight or having a haircut. Typically the organisation that delivers the service is complex. Generally product-providing organisations may also be dependent on services or services may be a supplement to the product offering. Unfortunately customers are not always happy with the quality and value of the services they receive for a number of reasons, e.g. late deliveries, unhelpful service providers, long queues. In countries across the world there has been an increase in automation within industries and agriculture combined with a growing demand for new and traditional services. This has resulted in an increase in the number of people employed in the services sector. There is an "internal service" within the organisation which includes functions such as human resource management and recruitment, accounting services, payroll administration, office cleaning, landscape gardening, supply chain management and advertising to name a few. Some of these services are often outsourced to more efficient and specialist contractors. The forces that shape service markets are government policies, social changes, business trends and advances in information technology as well as internationalisation. The organisation must continuously be aware of trends in the size and structure of each market in which its services compete. The organisation should monitor its competitors' activities and have a clear strategy for maintaining competitive advantage.

B. CHARACTERISTICS OF SERVICES According to Lovelock and Wirtz (2004) there are basic differences between goods and services: 

Customers do not obtain ownership of services – they usually derive value without ownership. An example is car rental – the period of the rental determines the price.

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Service products are ephemeral and cannot be inventoried – services are transitory and perishable and are not stored.



Intangible elements dominate value creation – Shostack suggests distinguishing between goods and services by means of a scale as to whether it is tangible or intangible dominant. If more than half is intangible, then it should be considered to be a service. In the case of a restaurant, most of the added value comes from food preparation and cooking, table service, environment, parking, toilets etc.



Customers may be involved in the production process – customer involvement can take the form of self-service as in using an ATM, or cooperating as with a hairdresser; this means customers could be thought of as partial employees. Service organisations have much to gain through making the experience more enjoyable.



Other people may form part of the product – the type of customers who use a particular service can shape the nature of the service experience for others. If you attend a sporting event, then the behaviour of other fans can add to or detract from the excitement.



There is a greater variability in operational inputs and outputs – the presence of employees and other customers makes it difficult to standardise and control the quality in service inputs and outputs. For services consumed as they are produced the operation takes on real-time conditions which may vary from customer to customer or from one time of day to another.



Many services are difficult for customers to evaluate – the experience is only evaluated after or during consumption and becomes particularly difficult to do when the

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customer lacks expertise in that particular area of the service delivery. Service providers are able to allay fears of customers by helping them and educating them as to what to expect both during and after service delivery, e.g. for a package holiday. 

The time factor assumes great importance – many services are delivered in real time with customers present. Busy people expect the service to be available to them at times that suit them rather than when it suits the organisation. In response, more and more organisations are offering extended opening hours.



Distribution channels take different forms – organisations are able to offer customers a choice of distribution channels. For example, in banking this ranges from visiting the bank in person to home banking on the internet. Electronic delivery of services is expanding and any information-based component of a service can be delivered instantly to anywhere in the world.

Services are said to have five key characteristics which impact on marketing programmes: 

intangibility



inseparability



variability/heterogeneity



perishability



lack of ownership.

We will consider each of these in turn.

Intangibility Services are intangible: they cannot be seen, heard, touched, tasted or smelled and this can cause a lack of confidence for consumers in the decision-making process. Consumers therefore make decisions based on a range of quality-based cues or stimuli (advertising messages). This may involve making an assessment about the people delivering the service, the location, equipment, messages used, branding or price. Thus the organisation offering the service should determine and design a service process blueprint that leads to customer satisfaction. For example a bank will determine what would be the ideal experience for its customers and provide what is necessary to deliver that service experience. This would include communication tangibles such as brochures, leaflets and a website that positions the bank as a desirable bank to be with. Staff should be trained to achieve a seamless and consistently high standard of service delivery.

Inseparability Services are produced and consumed at the same time, unlike goods that may be manufactured and stored for later distribution. The service provider becomes an integral part of the service. For instance, the teller at the bank is an inseparable part of the service offering and can affect the outcome. So services are consumed at the point they are produced and thus the interaction of production and consumption is of particular importance for the quality of service and also the experience enjoyed by the customer. There can be mass service experiences such as a rock concert, or solo experiences such as a visit to the doctor. The differences will impact on the nature of the service experience and the process provided to enhance the experience. In a mass service experience other customers will influence the perceived quality of the service. So the audience at a rock concert will create the atmosphere which will be positive for some or negative for others. In a solo experience such as interaction with a doctor, there is greater control to the service provider who needs to manage the immediate encounter. If there is a broad mix of customers for a service delivery this will impact on the needs of different groups that are to

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be considered by the provider. It may in fact reduce the impact of the service being delivered, e.g. catering for different target groups visiting a bank.

Variability/Heterogeneity As I have said, a service is produced and consumed at the same time. Because people make up the service offering the service will be unique, and it is a problem for the organisation to try and achieve consistency in service delivery. Training and monitoring customer satisfaction can help to maintain the standards of delivery, but it is very difficult to standardise the delivery around the process blueprint. After all, the brand service promise given in the communication messages serve to form and frame customer expectations. If, for instance, demand increases unexpectedly – e.g. a sudden influx of customers to a restaurant coinciding with a special event locally – there may be insufficient capacity to deal with the excess number of customers and service efficiency may breakdown. It is therefore for managers to consider and anticipate situations when service may be stretched, and calculate staffing needs at varying times when service breakdown might occur.

Perishability Services are perishable because they cannot be stored – an empty seat on a plane is a lost opportunity. Once the plane takes off the seat cannot be sold. Dentists charge for missed appointments because a missed appointment could have been filled by another patient. So during times of demand fluctuation, perishability also means that service organisations can have severe problems. In the case of aircraft seats, a task for marketers is to ensure that the number of empty seats is minimised and vary the service provision accordingly, e.g. smaller planes or reduced flying times. Demand can vary unpredictably which challenges the provision capability. One way in which organisations may address this problem is through pricing strategy. Lowering prices in times of low demand, e.g. visits to museums during winter months, and raising prices during high demand periods such as summer months. This will help to level the demand and increase revenue over the year. Another area for marketers to consider is developing additional services, such as long weekend breaks offered by coastal hotels to attract retired people outside the holiday season. Leisure attractions such as Leeds Castle in Kent offer family discounts and one year tickets to stimulate demand and encourage customers to return to enjoy the facilities throughout the year.

Lack of Ownership Services cannot be owned. As we have seen, there is no tangible element involved in a service and so the service terminates once the experience comes to an end. At the end of a plane journey the passenger alights from the aircraft and the experience, positive or negative, becomes a memory. The seat on the plane has been "rented" for a period of time for the price of the ticket. The seat remains the property of the airline and is available to be rented by other customers at other times. However service providers encourage the further use of the service through frequent flyer programmes to increase customer involvement in the service. As a result customers will also develop a perception of the brand through familiarisation with the service and the level of the experience enjoyed. It is for the marketer to ensure that this experience is positive in order to achieve good customer relationships and retention and manage these relationships effectively.

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C. THE SERVICES MARKETING MIX When developing strategies to market manufactured goods marketers usually consider the four basic elements known at the four Ps (product, price, place, and promotion). As you already know, to address the distinctive nature of service performance the marketing mix is extended by adding three elements associated with service delivery – process, people and physical evidence. Collectively the seven Ps of marketing, or the (extended) marketing mix, represent a set of interrelated variables facing managers of service organisations. We will look at these extended elements in more detail.

People Many services depend on direct interaction between customers and an organisation's employees. The nature of these interactions strongly influences the customer's perception of service quality. This is often based on the interaction of the customer with front-line staff in situations such as hairdressing, dining in a restaurant or talking to call centre staff on the telephone. Successful service organisations devote time and resources to recruit, train and motivate their employees. Customers often interact with employees over an extended period of time and they are quite likely to be in contact with other customers with whom they also interact, e.g. in a college class, train or bus. When other people become part of the service then their behaviour and appearance will either enhance or detract from it. Customers will evaluate the employees' appearance and social skills as well as their technical skills. Thus, many organisations provide staff with uniforms to standardise dress. Manuals are developed which will help staff to understand how to deal with customers under certain circumstances in an effort to standardise communication.

Process The ability to deliver a product to customers requires the efficient and effective design of processes from input to output or delivery. A process is a method and sequence of actions in delivering the service performance. Service processes that are not well designed can lead to slow, ineffective service delivery and dissatisfied customers. Organisations should devote time and resources to perfecting the service delivery process; this will encourage customers to repeat the experience and become loyal customers. If the service process is inadequate, then this makes it difficult for front-line staff to do their jobs well and results in low productivity and the likelihood of failure in service delivery. For example, it is necessary for a restaurant to monitor its approach to customers from the time they enter the restaurant through to the time they leave.

Physical Evidence Service organisations should manage the physical evidence elements carefully because they will have an effect on customer impressions before, during and after the experience. The physical appearance of buildings, shops, gardens, vehicles, interior decor, and equipment, as well as signage, stationery and other visible aspects all provide a tangible perception of the organisation's quality of service and can be an enticement or a discouragement for the customer. The organisation's premises should be decorated and furnished to a standard that reflects the desired positioning of the organisation. For example, the type of decor that reflects a fine-dining restaurant would not be appropriate for a coffee shop.

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D. CREATING VALUE Managers should be concerned with how they give good value to customers, treating them fairly in all elements of the extended marketing mix. Customers regularly make decisions about whether to invest time, money and effort to obtain a service that will satisfy needs. This could be a decision about where to have a meal or an investment in a longer-term benefit such as education. If a customer feels that they have had to pay more than expected, received fewer benefits than expected, or felt badly treated, then the perceived value will be diminished. Customers can easily perceive the behaviour of unhappy employees during the service encounter whether it be verbal or body language. It is in the management's best interests to develop strategies and procedures that seek long-term relationships with both their customers and employees. In doing this they will need to consider the different nature of service encounters.

Service Encounters Shostack (1985) describes a service encounter as the time during which the customer interacts with the service itself. Such times will vary according to the service in question, and there may be differing levels of encounter such as high, medium and low contact (Glyn and Lehtinen, 1995). 

High Contact Customers visit the service provider for personal involvement throughout the delivery process (e.g. banking).



Medium contact Customers visit the service provider but do not remain for the service delivery (e.g. dry cleaning, accounting services).



Low contact There is little or no contact between the customer and service provider due to remoteness of delivery (e.g. radio and television programmes).

Customer Relationships Organisations need to focus not only on their relationships with customers. They also need to focus on relationships with the industry in which they operate and with society, because such relationships can impact on the organisation's long-term success. Quality service is the key to customer retention through customer satisfaction. Channel Members Channel members are a particular group that should be considered for building good relationships with, as they represent both the supply and distribution side of the business. For example, package tour operators must have good relationships with their suppliers (hotels, airlines) and with their distributors (travel agents). The objective of relationship building with these groups is to develop cooperation between all parties who can impact on the overall satisfaction of the consumer. Quality of service is paramount and suppliers and channel members play an important role in service quality. Customers Relationship marketing is also about building relationships with customers rather than just creating exchange processes. Customer contact should be maintained after the sale has been completed, and the focus should be on retaining customers rather than just trying to attract new ones.

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Referrals Another important influence on an organisation's performance is the amount of business achieved through customer referrals. This is particularly important in services marketing where word of mouth recommendation is a key factor in the customer decision-making process. Referrals which influence decisions are frequently informal and come from experiences of friends and family of consumers. Most organisations receive a proportion of their business through referrals. As an example, pharmaceutical companies spend a large amount on promoting their products to doctors who might recommend the product to their patients. Consumers can be reluctant to try a service without first acquiring opinions from peers and family members; a good experience at a restaurant recommended by friends can be very effective.

Internal Marketing The concept of internal marketing has been developed within the service sector, although it is relevant to all organisations. The organisation needs to have equal regard for its internal customers – the employees – as for its external customers and markets. Specially formulated internal marketing programmes designed to communicate, train and motivate internal market members are very important if the relationship is to be a positive one. Relationship marketing emphasises building and maintaining a good group of employees. Service quality depends on people and so developing long-term relationships with internal customers is just as important as building relationships with external customers. The values portrayed to consumers through marketing communications should be expressed and reinforced by employees who interact with the customers. It is necessary to highlight the fact that employees offer the functional delivery of the service as well as the emotional elements whilst interacting with customers. It is therefore important that employees "buy in" to the organisational values and strategies and take ownership of their own contribution and become committed to the achievement of management goals. A good example of this is the way the John Lewis Group has embraced its employees as partners within the business, which has engendered the required commitment and belief in their performance within the service encounter. Therefore employees should be trained to communicate with customers so as to provide a positive experience.

Quality and Relationship Marketing At the centre of relationship marketing is its focus on quality and thus quality becomes integral to the organisation's activities. Developing relationships with the various stakeholders helps build quality into the service. Relationship marketing goes beyond just internal marketing – it also builds on aspects such as Total Quality Management. Relationship marketing should allow for more customer contact on a regular basis between the customer and the organisation on different levels, and that means not just contact with the front-line staff. Increased communications with customer groups will enhance customer service. Regular updates and newsletters can be effective forms of communication. Loyal customers who continue to purchase are very valuable to the organisation. One tool that will assist marketers is a database containing records of customer buying behaviour and related information, which can be used to target new products or promotions accurately.

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Services Marketing

E. SERVICE QUALITY AND PERFORMANCE It will now be apparent that service quality is of crucial importance to both customer and service providers. Employees represent the interface between an organisation's internal and external environments. The Japanese philosophy of Total Quality Management (TQM) has become a byword for businesses as consumers have become more aware of service quality and consumer watchdog associations have monitored quality in many areas of business. TQM is based on the idea that every employee must be committed to maintaining high standards of work in all aspects of the organisations' operations. In many ways service quality is not easy to measure and, as we have noted, the nature and characteristics of different services have an impact on quality issues.

The SERVQUAL Model A very popular model in measuring the quality of the service encounter is the SERVQUAL Model developed by Parasuraman, Zeithaml and Berry (1988). It is based on the differences between the expected services and the actual and perceived service (see Figure 11.1). This model identifies five gaps between the elements which are discussed next.

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Figure 11.1: SERVQUAL model CUSTOMER Word of mouth communications

Personal needs

Past experience

Expected service GAP 5 Perceived service

Service delivery GAP 1

GAP 4

GAP 3

External communications to customers

Service quality specifications GAP 2 Management perceptions of consumer perceptions PROVIDER

GAP 1: The gap between the customer's expectations and management perception Management needs to understand customers' needs correctly otherwise resources could be directed into the wrong areas of service. For example, a restaurant would have to know its customers perception of the expected experience – quick service at lunchtime, or long and leisurely dinners to enjoy the relaxed ambience. GAP 2: The gap between management perception and service-quality specification Management have gauged customer needs and wants correctly but have not managed to achieve corresponding performance standards to meet these needs, or have set standards that are not achievable by the providers. The restaurant understands the need for quick

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delivery during the lunch hour, but has not provided enough staff to handle the rush which has lengthened waiting times at table. GAP 3: The gap between service-quality specifications and service delivery The service delivery does not match the specification which may be due to lack of training or lack of provision from other sources. For example, the restaurant waiters are not sufficiently trained in the process of delivery or supplies have not arrived on time in the kitchens. GAP 4: The gap between service delivery and external communications The service that has been promised through promotional communications and campaigns will influence customer expectations and therefore customers will be disappointed if these expectations are not met. Very often an advertisement picture and message will be misleading in terms of the actual environment and service provided in order to encourage customers to use of the service. This will lead to a distorted view of what can be expected. GAP 5: The gap between perceived service and expected service Customers misunderstand the quality of the service in relation to what is expected. This type of gap can come from lack of communication on the part of the service provider who fails to give detailed information that will reassure the customer in the case of a difference in this area. For example, a station announcing cancellation of trains without explaining why there will be a delay. The following five dimensions of service quality have been identified: 

reliability – accuracy and dependability of the service



responsiveness – receiving prompt and friendly service

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assurance – confidence and competence of employees



empathy – care shown towards customers



tangibles – physical evidence provided to support the service.

Service Failure – Blueprinting Gaps 1 and 5 represent external gaps and gaps 2, 3 and 4 are internal gaps occurring between different functions within the organisation. A well-designed process blueprint will be a powerful tool for identifying failure points. The gaps model goes further in assisting to meet customer requirements, and it can be used as a measurement tool. It is necessary for the organisation to understand how failures occur: such as a receptionist incorrectly entering a date into a diary for a hairdressing appointment which may have a ripple effect on staff and other customers throughout that day. It is necessary for managers to identify why problems arise and develop contingency plans and service recovery guidelines for staff. Knowing what can go wrong is a first step in ensuring the service encounter is consistently of good standard.

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Chapter 12 Marketing and New Technologies Contents

Page

Introduction

354

A.

The Changing Marketing Landscape Information Technology Changing Social Roles A New Marketing Landscape? Coping with Change

355 355 356 357 358

B.

The Impact of Technology on Marketing Information for Marketing Research Purposes Consumer Behaviour Customer Service

358 359 360 360

C.

The Effects on Marketing Strategy New Technologies and New Approaches Direct Marketing Social Networking Channel Management Pricing

362 362 363 364 364 365

D.

Ethical Issues and the Downside of Internet Marketing

366

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INTRODUCTION If there is anything that we can be certain of in life, it is that there will be change. What the change will be is often a matter of conjecture. Consider the following examples of aspects of life which we now accept as commonplace, but which could not have been realistically envisaged in the past. 

There are people still living today who were born when the car was not the main form of transport it has become for many. There was a time when only relatively rich people could travel widely, whereas now people think little of taking a plane to some exotic location for a holiday or for business.



It is not so long ago that telephones in the home were the exception rather than the norm. Now we carry our mobile phones and can speak to anyone anywhere in the world whenever we want to.



We have advanced in terms of entertainment from listening to crackling valve radios in our homes, to watching colour films and programmes on wide-screen televisions with wrap-around sound.



We can eat seasonal foods at any time thanks to new storage and growth techniques and air transport.

But it is perhaps in the business world where we can most readily see the dramatic effects of change. In respect of marketing, and taking the elements of the marketing mix in turn, some of the changes we now accept as being standard are as follows: Product 

There is an ever-increasing choice available for purchase.



Manufacturing is safe and hygienic with high levels of quality control.

Price 

Intense competition has led to many prices being stabilised or reduced.



Price transparency is aided by availability of information on the internet.



Credit and finance facilities make it easy for customers to buy.

Place 

There are numerous outlets for products with fast deliveries.



Products are available for sale over telephone and computer links.



Growth in e-commerce and therefore the disintermediation of organisations, i.e. organisations selling directly to consumers.

Promotion 

There is a wider variety of media than in the past.



Communications between companies and customers are now more open.



One-to-one communication through the internet and email, and the use of data and databases is common.

People 

Companies train their personnel on service aspects.

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Customer care is now the norm.

Physical evidence 

Retail outlets are more attractive and bright.

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Product and company information material is more honest and easier to understand.

Processes 

Shopping from home is now possible.

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Ordering and follow-up systems have been improved.

A. THE CHANGING MARKETING LANDSCAPE All the changes we have identified here have resulted in the current situation where buyers now expect an almost instantaneous response. Customers do not appreciate having to wait for products or for answers to problems. Those companies who do not keep up with the speed of change often find that they are losing customers to their competitors. We will examine two elements of the marketing environment – information technology and changing social roles – to illustrate just how fundamental change may be.

Information Technology Advances in technology are allowing companies to manage huge volumes of information in databases. For marketing the main impact of this has been to enable closer targeting of potential customers and more specific promotional activities aimed at them. The greatest growth has been in the world of e-commerce, made possible by the development and almost universal availability of the internet. As everyone knows, the internet is an open system that enables anyone with a personal computer and internet access to connect to the worldwide computer network World Wide Web (WWW). No one person, organisation or government controls or owns the internet. It was initially developed as a military system in the USA, but was soon used as a means of transferring large volumes of information between academic and government research centres. As the personal computer developed and more universities and commercial companies became involved, so did the software to facilitate searching for information and relaying messages and information quickly between users. Initially the system was used by technical experts to send data, and then messages. Commercial companies began to post web pages on the internet so those interested could browse through the information. Soon websites were developed which provided more information and eventually led to two-way interaction with those accessing the web pages. With the development of protocols for encoding financial and other sensitive information, the internet can now be used to purchase services and products using a credit card. Developments mean that screen access can be integrated with a telephone call, so that the web page can be viewed at the same time as using the phone to talk to the telesales operator. The system is now proving popular with business-to-business users and individual consumers. It is unaffected by national boundaries and cheap to use, access costing no more than the price of a local phone call. Such a deregulated system operating across international boundaries poses new challenges as it develops from an information service to a promotional tool and a sales and distribution channel. Concerns have been expressed in four areas: 

confidentiality of individual information

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consumer protection for those purchasing goods

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the legal system under which transactions take place

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concern over the difficulty of governments collecting sales taxes.

The rapidly changing business environment of e-commerce is making it very hard to predict what will happen in the near future. Pure service industries such as banking, insurance and

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travel agents are likely to experience a major restructuring of their industries. Simple items such as books, CDs and videos can be sold easily through the internet. Without the high costs of the high-street store, price discounts can be offered. However if shopping is seen as a leisure activity and impulse purchases are a way of life then the best high-street stores are likely to survive. While the number of transactions over the internet continues to grow, the bulk of activity is still concerned with the search for information. The most likely scenario for consumer purchases is that the internet will become an additional channel to market for many companies, providing the customer with an alternative means of purchase. Some new companies will be created and operate as niche providers in the electronic marketplace. Some of the most pronounced changes will be in business-to-business sales and service, where contacts are ongoing and where exchange of information and data is intense. Here the internet is likely to continue to develop at a fast pace. Over the longer term, a major difficulty arises in forecasting technological developments. This is a key issue for the health of a nation's economy. Those nations and companies who are first to develop a technological lead tend to grow as the technology is embedded in new industries and products.

Changing Social Roles The one-time typical family unit of husband, wife and two or three children is becoming much less common as a higher divorce rate, later marriage and smaller families reshape the household unit. Yet this family model still appears to be the format to strive for and is depicted in many advertisements for household goods and services. There is evidence of change in the way that families operate as a unit. Many household products have been traditionally considered to be dominated by either the male or female partner, but these distinctions are becoming increasingly blurred as gender roles change. In the United Kingdom, a report entitled Social Focus on Women published in 1998 by the Office for National Statistics highlighted some of the changes in family roles that have occurred. For example: 

Although men may say they believe household tasks should be shared, only one per cent say they always do the washing and ironing. Household cleaning is carried out mainly by women in nearly two-thirds of households, though this proportion has been falling gradually.



Just over a quarter of all men and a fifth of women agreed with the view that "a husband's job is to earn money; a wife's job is to look after the family and home." This is about half the level of agreement noted in 1987.



The number of women stating that the home and children are more important than a job fell from 15 per cent in 1987 to 7 per cent in 1997.



The main evening meal is made mainly by women in just over a third of households, this proportion having halved in two decades.

There has been much debate about the fragmentation of families into cellular households in which family members essentially do their own activities independently of other members. This is reflected in individually consumed meals rather than family meals, and leisure interests that are increasingly with a family member's peer groups rather than other family members. Marketers have responded to the needs of the cellular household with products such as microwave cookers and portable televisions which allow family units to function in this way. However it can also be argued that new product developments are actually responsible for the fragmentation of family activities. The microwave cooker and portable television may

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have lessened the need for families to operate as a collective unit, although these possible consequences were not immediately obvious when they were launched. The family unit can expect to come under further pressures as new products, such as online entertainment and information services, allow individual members to consume in accordance with their own preferences rather than the collective preferences of the family.

A New Marketing Landscape? Many academics and practitioners have been talking about "paradigm changes" in marketing, or the emergence of a completely new marketing landscape. Supporters of this view point to the increasing level of competition which has developed in many markets. Moreover, buyers have become increasingly discerning and what they may have happily accepted a few years ago, they will now reject. If a company does not meet their needs, then there is probably somebody else who will. Consumers' tastes have changed more rapidly than ever before and it is becoming increasingly difficult to categorise individuals into neat market segments. An individual may flit between segments depending upon a whole range of circumstances – some rational, others apparently quite irrational. Amidst this new marketing landscape, a number of issues have arisen which may well define the new approach to marketing. For example: 

Sell the Relationship, Not the Product We saw in an earlier chapter that many firms have attempted to create close relationships with their customers. At first this happened mainly in the business-tobusiness sector, but has since become very common among firms selling to private consumers. Firms have put a lot of effort into understanding their customers so well that they know what they will want to buy next. You can refer back to our earlier discussions of relationship marketing and assess whether its aims have really been met. Do customers really want a relationship with suppliers? What benefits do they really receive?



Information is at a Premium Knowing about customers has become crucial to business success, so many companies have put a lot of effort into collecting, analysing and disseminating marketing information to their managers. Some people call this "knowledge management" and doing this well can give a firm a great competitive advantage. Think about companies that you most admire for their knowledge management. Are these companies that you would go back to repeatedly? Is this likely to make them profitable? Also think about the consequences for companies who do the opposite – collect inadequate information and never have the right knowledge available to the right people in the right place at the right time.



Is Marketing an Art or a Science? To many people, marketing has no credibility if it does not take a rigorous, scientific method of enquiry. This implies that research should be carried out in a systematic manner and results should be replicable. So a model of buyer behaviour should be able repeatedly to predict consumers' actions correctly, based on a sound collection of data and analysis. In the scientific approach, data is assessed using tests of statistical significance and models accepted or rejected accordingly. There is an alternative view which sees this scientific process as essentially backwardlooking. The scientific approach is good at making sense of historic trends, but less so at predicting what will happen following periods of turbulent change. For example during the early 1990s models based on the scientific approach failed to predict accurately the change in consumer spending following changes in such variables as

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household income, taxation levels and interest rates. These variables had traditionally been associated with changes in consumer spending. A more in-depth analysis of consumers' attitudes suggested that feelings of greater insecurity (brought about by the casualisation of many jobs), and the memory of the fall in house prices, had served as a warning to consumers which rendered many previously developed models of consumer spending obsolete. It is a challenge to combine scientific analysis with creativity, and the attempt can sometimes be quite idiosyncratic. The scientific approach to marketing planning has a tendency to minimise risks, yet many major business successes have been based on entrepreneurs using their own judgment in preference to that of their professional advisers – examples include Virgin airlines and the Sony Walkman. On the other hand, the reformulation of the taste of Coca Cola in the late 1980s had followed the scientific process of conducting large-scale research into consumers' preferences and product testing, but when it was relaunched it was a major failure, forcing the company to reinstate its original formulation as Classic Coke. It is a challenge for marketers to use both scientific and more creative processes to understand and respond to their environments.

Coping with Change As I said earlier, the one thing we can be certain of is that there will be change. Marketing managers need to be aware of this and, wherever possible, should prepare for changes which may take place. This is no easy task, as we can never know what lies around the corner. However, it is fair to say that we can expect some if not all of the following: 

shortened product life cycles



increased demand for specialist products



ever-improving technology in transport and electronics



pressure on companies from customers and governments



changing tastes of buyers.

To cope with these, and any other likely changes, marketing managers must: 

be aware of the growth in awareness of rights on the part of customers



deal fairly and honestly with customers, suppliers and competitors



be ready to adapt to social changes such as changing tastes or priorities



make the best use of research information gathered to keep abreast of change



develop an awareness of the longer-term implications of short-term changes



constantly monitor both internal and external environments.

In other words, marketing managers of the future will have to behave in much the same manner as the marketing managers of today. They need to identify and anticipate in order to satisfy customer requirements profitably. They must continue to practise marketing!

B. THE IMPACT OF TECHNOLOGY ON MARKETING We are now in an age where organisations, large and small, are embracing online marketing into their marketing strategies and marketing mixes. They are doing this because online marketing is proving to be such a powerful medium for building customer relationships by virtue of its personal, one-to-one nature.

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The implications of electronic resources for marketing lie in how they can be used to improve management and implementation of marketing activities in an effective and efficient way. Page-Thomas (2005) outlines five activities that are influenced by technology: 

information provision – how information is provided to customers



data and information acquisition – how information about customers is accessed



communication and relationship management – how organisations communicate with customers

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transaction management – management of payment for purchases



distribution and logistics management – how products are delivered to customers.

There are many new technologies which make it easier to conduct marketing activities in a creative and quicker way.

Information for Marketing Research Purposes Technology is increasing the marketer's ability to access data and thus the implementation of primary research can be far more efficient and cost effective than in the past. Secondary data is now available through websites or CD-ROMs. It can be distributed through downloads or email in different formats such as PDF, Word or Excel. Primary research It is now possible for marketers to collect data through the use of chat software, either through the internet or video and web conferencing software (which allows participants to interact with each other). The distribution of surveys has also been enhanced through the ability to distribute using internet technologies such as email and website downloads. Nevertheless there remain problems associated with these methods, since there can be a sampling bias due to the fact that there are still large numbers of people who still do not have access to the internet. It is necessary for researchers to ensure that the sample chosen for online response is suitable. Quantitative Research In the US organisations are experimenting with completely automated telephone interviewing (CATS) which is a further development from the CATI systems (computer assisted telephone interviewing) that have been used in the past. This system has enabled interviewers to automatically dial potential respondents in order to minimise time used in connecting. CATS uses an interactive electronic voice so that questions are asked by a recorded voice and answered with the aid of the touch-tone phone. There are two main online survey methods: email and web based. Surveys can be delivered through desk-based computers, digital TV and WAP (web-enabled mobile phones). Email surveys are similar to postal surveys although they are administered electronically. Web surveys can be administered as a standard questionnaire or interactive questionnaire. The interactive format is similar to CATI with the questions shown on the computer screen one at a time as the respondent answers. A problem associated with purely electronic responses is the fact that as respondents are all internet users they will not be typical of consumers in general. This means the sample frame will be biased unless the research is confined to internet users. Qualitative Research The internet has enabled agencies to look at new ways of viewing group discussions such as using in-house broadcasting networks or through video streaming on the internet. This means that more people can be involved in observing the research, and this could be particularly useful if different regions or countries are involved. This footage can also be put

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into emails or PowerPoint presentations. Teleconferencing is another medium that can be used to run focus groups. This is an expensive method but may be useful when interviewing business people who are unable to take time to attend a group meeting. Another method is online focus groups or private chat rooms, where a group is willing to discuss a topic online using text. This method removes the ability to judge non-verbal aspects such as facial expressions, unless executed with the use of webcams. Observation techniques have been able to provide powerful information on consumer behaviour through electronic devices that record behaviour such as traffic counters, optical mark scanners, geographical information systems, tracking devices such as RFID and cookies (Baines, Fill, Page, 2008). A cookie is a text file (which can be read by website software) on the hard drive of the user's computer which records web activity patterns. This gives marketers a better understanding of the browsing and purchasing behaviour of their online consumers. As a result it is possible to tailor offerings and advertising to the site visitor, e.g. "people who purchased what you have ordered were also interested in XXX". From a marketing viewpoint the use of cookies gives further insight into the browsers and help target advertising on the web with more control over what promotional offers are developed. Presenting the Data The report of the findings of the research can be placed on the internet or on an intranet so that management can access the information wherever they are in the world. It can be conducted in exactly the same way as it would in the boardroom and either PDF or interactive documents can be used as a click-through process. It is possible to also use sound or video clips from focus groups (Wilson, 2008).

Consumer Behaviour Research conducted by Professor Sunil Gupta of the Harvard Business School discusses the effects of viral campaigns (promoting information or products that other customers are "compelled" to give to other friends, colleagues and family). He believes that marketers have choices: either buy advertising or start viral campaigns in this high technology environment (Gilbert, 2009). It is believed that consumer behaviour will be better understood by marketers through studying social network users themselves. Research carried out on data from Cyworld (a social networking site in South Korea with close to 21 million members) found that some users are influenced by the purchases of friends and social pressure. The breakdown of the users shows that 48 per cent are not well connected to others and are unaffected by the purchases of others, however 40 per cent have a strong connection and are influenced by purchases of their peers. The remaining 12 per cent, whilst being very active in networking, prefer to remain more individual but indulge in non-purchase activities. This research has shown that the 40 per cent that are influenced increase revenue by 5 per cent for marketers. This research also showed that the clickthrough rate of advertising on social networking sites is quite low because consumers don't necessarily visit the sites for product information. The research showed that an effective means of gaining browser interest is through a viral campaign. For example, Honda offered 750,000 Facebook members a heart-shaped virtual gift with the Honda logo that could be sent to other members on Valentines Day. This type of campaign could be a high source of revenue and sales.

Customer Service The new technologies are having a strong influence on one-to-one encounters through personal selling and exchanges between customers – this of course is the increasing popularity of social networking sites. It is now clear that technology is being used to manage all customer communications and manage customer service. With the development of

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customer interaction centres (call centres), the use of computer-telephone integration has aided help desk operations and helped in the consistency of service delivery. Differing tools are being used in this regard and are shown in the table following. Many companies are now using SMS technology as a marketing communications tool. It is also being used as a "reassuring" service for AA customers waiting for roadside help after breakdown assistance has been registered at headquarters. Classification of customer service technologies Application Customer-facing

Customer-touching

Customer-centric intelligence

Online networking

Description

Example 

Customer interaction centres (CIC) using computer-telephone integration



Automated email responses



Sales force automation (SFA)



Field service automation



Self-service technologies



Personalised/customised web pages



E-commerce applications



Automated/interactive voice response (AVR/IVR) systems



Interactive kiosks (ATMs)

Technologies are used to analyse the results of operational processing; the results are used to improve management of customer service delivery and management.



Data reporting and warehousing



Data analysis and data mining

Methods provide the opportunity to build personal relationships between stakeholders (e.g. employees, customers).



Forums



Chat



Newsgroups



Blogs



Email

Customers interact with the company representatives; however, technologies support employees in information flow, service delivery and customer interaction.

Customers interact directly with technologies.

(Source: Baines, Fill and Page, 2008)

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C. THE EFFECTS ON MARKETING STRATEGY New Technologies and New Approaches Developments in electronic tools and technologies are increasing the speed at which information is transferred, increasing the amount of information that can be stored and processed as well as supporting new ways of organising information gathering. With an increased number of media channels now available, target groups are becoming smaller. Media channels are coming together which makes it necessary for organisations to adopt an integrated approach to message delivery and gain a better understanding of the needs and technology behaviour of the target audience (Peltier, Schibrowsky and Schultz, 2003). Click-to-call Technologies Click-to-call technologies are increasingly being adopted as a means to communicate with consumers and click-to-call buttons are appearing on corporate websites, emails and interactive advertisements as well as search engine directory advertisements. Internet organisations such as Google and Yahoo! are investigating ways to enable web-to-phone connections between customers and providers through their local search advertisements. Click-to-call services enable customers to click a button and immediately speak with a customer service representative who is able to either place a call over the computer using VoIP technology or request a call back from the provider by giving a phone number. As progressive as this all sounds, research has shown that customers still prefer to have a simple telephone call when dealing with issues such as payment, delivery, product support and general order enquiries. Self-service Technologies Self-service technologies enable customers to facilitate the service themselves. They are to be found in telephone banking, automated hotel check out and flight check-in, pay-at-thepump terminals and automatic teller machines (ATMs). The use of self-service technologies occurs as a result of organisations being able to reduce costs in service delivery and standardise the service delivered. Core benefits for the consumer are the convenience and speed of service delivery. Click-only Companies Organisations such as Amazon and Expedia do business online and distribute by post. Other organisations such as Tiscali and BT provide internet and email connections for a fee. Transaction sites such as eBay take commission for transactions conducted on their sites. Click-and-brick Companies Click-and-brick companies are organisations who manage to combine online marketing with established tangible "brick" outlets, and so are able to offer customers more options. Under these circumstances the problem for marketers is the need to conduct online sales without jeopardising sales in their stores or other retail outlets. It is a question of needing coverage in both areas to keep pace with competition, particularly when market conditions are depressed. If an organisation does not seek online sales, then its competitors will. John Lewis is a good example of an organisation that is able to capitalise on the choice of communication and sales medium. Since their brand is strong, they have a large customer base with good industry experience as well as excellent relationships with key stakeholders. The advantage to consumers is the fact that 24-hour shopping is available which enables internet browsing at leisure without having to visit stores at certain times. It is possible to purchase online and return goods to the shop if required.

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Direct Marketing Websites A website can attract customers from the local area or from other countries around the world. If the site has good rankings in the internet search engines (e.g. Google) under appropriate categories or links from key words that consumers might use to search, it is possible to gain many enquiries that the organisation might otherwise not have received. Web technology is an affordable way to reach prospective customers easily. Email Before the advent of email and the internet newsletters were printed on paper and sent by post. The use of the internet has had a significant role in marketing campaigns. Instead of only being able to afford a few hundred newsletters, marketers can now send tens of thousands for little cost. The large number of people around the world using the internet is driving the use of email marketing. As a result marketers will reach a large audience of potential customers. It is also cost effective and cheaper than some other more traditional methods of communication, and can use interactive media such as videos, audio files and graphics. The use of email means that marketers are able to tailor and personalise their messages and send them at any time of day. It is also easy to analyse any data obtained through the internet through email software that measures how much has been gained through a campaign, and this can inform further strategy. The use of email enables marketers to reach certain target groups that require a particular service or product rather than the consumer having to reach the organisation through more difficult and resourceconsuming methods. Email can be an efficient solution for following up with potential customers who already have knowledge of the organisation or its products. SMS and podcasting "I can see the day when the grocery store is full of promotional offers you can access using your cellphone." (Jeff Mason, Cadbury Schweppes, 2010) Mobile phone marketing is increasing as an effective tool for communication between an organisation and consumers. This allows for a direct marketing communications strategy for the organisation and marketing spend is increasing in this channel; it reached €208 million in 2004 (Smith, 2005). It is a quick and effective medium with the benefit that the organisation can reach the consumer at any time of the day or night (as opposed to the computer where access for more than say 12 hours a day is unlikely). Podcasts, which are audio feeds downloaded at consumer request to portable media players such as the iPod, are another potentially successful means of reaching customers who are able to access information such as news, travel guides and entertainment. Advertising messages can now be delivered across varying electronic channels. There is also the fact that there is a vast number of consumers who are not comfortable with typing messages on phones or receiving messages from stores that know a consumer's location (such as Gap sending a message as a consumer walks past the store). Mobile marketing relies upon text messaging, downloading images or game playing but it is not in widespread use as yet. Fast approaching is the time when consumers will be able to watch films, see commercials and interact in real time with the visuals, in a similar way to what can now be done by computer. This opens up a tremendous opportunity for creative applications. Given the frequency with which personal mobile phone numbers change, it will be necessary for marketers to ensure that the information content on databases is relevant and up to date. Mobile phone marketing is likely to be most associated with organisations and brands (e.g. drinks markets) that engender a high volume of use with a younger target market at ease with the technology. As a relatively new medium it is likely to have much appeal and could be the ultimate in personal communication marketing.

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Social Networking Participating in online discussions and message boards allows individuals to network with a large group of people in the target market without leaving home or office. The use of live chats or "webinars" allows individuals to become public speakers without having to travel and speak to a national or global audience. The internet attracts many business people to promote their businesses online. Social network marketing is growing; some of the most easily recognised social networks are Facebook, Myspace, and LinkedIn (business information for older users) and Twitter. These channels provide an excellent avenue for promoting a brand online. Social networking channels need to be managed and monitored effectively since communication is 24/7 and the brand can become damaged easily. For example, the recall of cars by Toyota in 2010 is a prime case of an organisation's slow response to consumer communications on the internet. Social networking needs to be treated with respect as a medium since it is a source of information and gossip – employees could become ambassadors of the organisation rather than condemning. Consumers demand openness and honesty and seek to become a voice on various issues. It is therefore imperative that, in a crisis, organisations meet the demands of direct and informative communication swiftly, to show that they care. This can be seen with regard to the Madeleine McCann tragedy. The social media was used very effectively and information about the case was publicly known within twenty-four hours due to Facebook pages being posted, as forum debates took place and multiplied. Examples of effective Facebook pages are Coca-Cola and Gap. Facebook now has 500 million users. Blogs Blogs are additions to the communication toolbox and have become very popular. They enable individuals to express their opinions to a wide online audience which encourages online feedback. The range of opportunities is vast and the written word of a blogger is accessible to a large audience. Individuals are able to use blogs as diaries, e.g. celebrities who also "tweet" on Twitter to keep followers informed of their activities. Blogs are also used by organisations internally to communicate between project teams to give updated information; often such blogs are publically available, e.g. Microsoft. It is estimated that ten per cent of consumers use blogs once every week (Li, Bernoff and McHarg, 2004).

Channel Management The new technologies are having an impact on the logistical function and order processing as well. Electronic technologies have increased the efficiency and effectiveness in this area and the key technologies can be classified as: 

high-cost and revolutionary technology – robotics, automated material handling equipment, automated storage and retrieval equipment



medium-cost and revolutionary technology – handling hardware, barcodes, optical scanners, local area networks, hand-held data entry devices and software, electronic data interchange (EDI), direct product profitability



low-cost incremental technology – software applied to inventory control, order selection, short interval scheduling, as well as other functions such as sales forecasting, financial support.

(Adapted from Sum, Teo and Ng, 2001) Organisations have managed to reduce their inventory levels through just-in-time delivery (JIT) systems, EDI and extranet technologies enabling the retailer and supplier to be in constant touch. Electronic warehousing systems or database systems are used for the storage of information. An example is Apple: thousands of music and video titles are accessible from advanced database systems.

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Many online retailers use delivery channels which permit retail customers to track the status of anticipated deliveries through the internet. For instance DHL customers can track their parcel whereabouts in this way and DHL alerts customers by email as to expected departure from the warehouse and estimated delivery time. It is much more cost-effective for organisations to exchange information by electronic means such as the extranet (an intranet partially accessible by authorised external users). The Federal Express COSMOS customer service system tracks every movement of every package in the network through hand-held computers carried by all employees who handle packages. This is the basis for the organisation's ability to differentiate its service. The organisation provides customers with terminals so that they can also link into the system directly and this allows Federal Express to manage its own shipping department. This process has the effect of diminishing the possibility of their customers switching to other service providers (Glazer and Rashi, Journal of Marketing, 1991). Similarly, McKesson (a pharmaceutical wholesaler) has a system called ECONOMOST which means that computer terminals are given to outlets that link with the central system; it has added a service for customers whereby McKesson sells back summaries of information collected daily. As goods and services move along Porter's value chain (1985) a significant contributor is the exchange of information; from this viewpoint the model could be seen as a communications channel. In recent times the effect of the expanding capacity for the channel-to-retail-outlet process is the increase in speed with which information is transmitted and the increase in the amount of information that can be stored and processed at any given time: innovation in information processing is a result.

Pricing One of the key factors in the changes with regard to pricing strategy has been the influence of the internet technologies and information brokers offering pricing comparisons for consumers. Price comparison websites are common. The website moneysupermarket.com provides this type of information and has developed a large following. This site offers comparisons on services such as utilities (gas and electricity) insurance, cars, travel etc. This makes the wider environment a more transparent place in which to operate, and one in which organisations can see that their product or service may be more highly priced than that of competitors. The way consumers are able to choose how they conduct transactions and pay for goods is changing. For example, in supermarkets it is possible either to check out through the EPOS system with the help of a checkout assistant or go through the procedure in a self-service capacity. Alternatively, payment online for orders is possible over the website. The choices for banking have also changed. Customers can visit a "brick" site or obtain cash and balances on accounts through ATMs; they can use online and telephone banking facilities to move money from one account to another and make payments. Electronic technologies are greatly assisting consumers in transaction activities. Online auctions are becoming increasingly popular with websites such as eBay whereby consumers are able to post items for sale for a set fee. The seller decides the price they wish to have and then the item is sold with no extra charge from eBay (Baines, Fill and Page, 2008). Consumers are able to bid and compete to purchase items for prices above those posted with the highest price completing the sale. According to research carried out by Forrester Research, online auctions in Europe will reach €623 bn by 2011.

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E. ETHICAL ISSUES AND THE DOWNSIDE OF INTERNET MARKETING There are a number of ethical, security, legal and practical issues facing internet marketing: 

Developing and maintaining a good website with high search engine rankings can be an expensive and time-consuming process. Technology makes it easy for people to hide and this tends to make organisations feel they do not have to be contacted in person. However a website or an impersonal email is not equal to one-to-one contact.



A consideration for marketers is the volume of enquiries likely to be received from the organisation's website. Many of these might be from people unknown to the organisation but all will require time to deal with. As in more conventional marketing and word-of-mouth referrals, individuals who are referred to the organisation are more likely to buy the product or service than those who find it by accident. From this point of view, it may be better to put more time and money into building referrals than into building a bigger web presence.



Online privacy is an ongoing concern as many consumers using websites provide vast amounts of personal information. This leaves them open to abuse should organisations use this information in an unauthorised way, e.g. delivering database information with other companies without permission.



Online security is also of concern as hackers attempt to access online transactions to intercept credit card numbers and make unauthorised purchases. By the same token, organisations fear that by using online technology other organisations may invade their computer systems for sensitive company information. Governments have attempted to develop legislation but this is a complex area with many global ramifications.



Other concerns are the safety of children and teenagers who regularly use social networking sites such as Facebook and Myspace. These young people are exposed to marketing activities directed at an older target group, and are thus open to abuse from adults and their peers. An effort to control these problems is being led by INSAFE, an organisation endorsed by the EU. This is necessary in order to control the activities of those who seek to evade legal controls, e.g. for the purchase of alcohol online by underage people. TRUSTe is a non-profit self-regulatory organisation which is working with large corporations such as Microsoft; it looks into the privacy of organisations and helps consumers use the internet safely.



Consumers are also subject to internet fraud such as theft of identity, with fraudulent websites being set up to deceive consumers into giving their personal details. This fraud is known as phishing (Kotler, Harker and Brennan, 2009) and can of course be quite damaging for brands. ENISA (the European Network Information Security Agency) is an EU-wide body that is operating to eradicate this type of practice.

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