Case Studies

case study one THE LANDER COMPANY

This case is a good one for introducing the market orientation concept and its application in an actual business situation. The Lander Company is a good example of a vertically integrated manufacturer with a diversified line of products. The firm apparently had been highly productionoriented. People with a production orientation apparently started the firm, were responsible for its success to date, and still permeate the management structure. The following questions can be raised during the case discussion: 1.

Do you think that the Lander Company has a problem?

2.

How do you evaluate the new organisation proposed by Mr Lander?

3.

How would you proceed to introduce a market orientation philosophy within the firm?

Do you think that the Lander Company has a problem? In the short term, probably no. The firm seems to have successfully implemented a strategy of vertical integration in the textile supply chain (see Figure TN1.1) and created a mass production capacity. In the average or longer term, however, the firm will rapidly be confronted with the problem of organising its distribution network and of controlling the access to the end-market. A quick ‘strengths and weaknesses’ analysis of the Company suggests the following weak points: The contacts with the market are limited to ‘first buyers’, that is, the 46 distributors and the 72 garment manufacturers (see Figure TN1.2).

The firm has no direct contacts with consumers. Several intermediaries (transformers, wholesalers, retailers, and so on) form successive screens between the Lander Company and consumers. As a result, information on fashion, colours, preferences arrives late and the firm obviously has a reactive, and not a proactive, behaviour. The Company has no brand or labels and its products are commodities, which lose their identity in the downstream transformation process made in the supply chain. To illustrate this point, take the examples of Uco-Tergal and Gore-Tex which have successfully created a quality label in the chain. Lander probably does not know the retailers handling its products. Only five sales representatives are in the sales organisation and they limit their sales contacts to the direct customers of Lander. Lander’s distributors hold the goods on consignment, w hich is indicative of a weak commercial position and bargaining power.

Advertising is non-existent and could not be used since there is no brand and no distinctive quality to promote. The product line is made up by designers and colour experts who have very little contact with consumers who ultimately purchase the fabrics produced by Lander. To sum up, the Lander Company has all the characteristics of a firm in the phase of passive marketing and the Lander executives probably feel that they have developed superior products which will sell on their own merits. This type of attitude is common in markets where demand exceeds supply but is no longer suitable in more competitive environments. The Lander Company sooner or later will have to operate in more mature markets where innovations, market segmentation and positioning decisions are key issues. The Company is not prepared to confront these changes and Mr Lander is right in proposing to reinforce its marketing organisation. The task of engendering a market orientation philosophy into a firm such as Lander’s will take time and patience on the part of all concerned. General Electric executives said it took five years to

This teaching note has been prepared by J.-J. Lambin on the base of a note written by W. J. Stanton. All rights reserved. © Jean-Jacques Lambin, 2000. Market-driven Management Management , published by Macmillan Press

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Strategic Marketing Management – Instructor’s Manual realign and reorient people once the decision was made to adopt and implement the market orientation concept. Another executive for a large manufacturer of paper products said it took four months to reorganise for the marketing concept, but four years to get people’s attitudes and philosophies reoriente d.

How do you evaluate the new organisation proposed proposed by Lander? Mr Lander wants to set up a sales agency as a wholly owned subsidiary. If it is true that sales agents are widely used as key middlemen in the textile industry, these agents are generally independent firms representing several manufacturers. The organisation proposed by Lander has several nonnegligible drawbacks: The marketing function is separated from the other functions, while the market orientation philosophy should involve the entire organisation. The geographical location in a nearby city will not facilitate informal contacts between the different functions and will make interfunctional co-ordination more difficult. The adoption of an intra-company transfer price (cost plus 10%) will demotivate the manufacturing function, which is protected from competitive pressures from the outside world. As a profit centre, the sales agency could very well purchase goods from other suppliers if the manufacturing unit is losing its competitiveness. The sales agency will be responsible for operational marketing but who will be in charge of strategic marketing?

We can ask why Mr Lander wants to set up a subsidiary firm to handle the marketing of his products. One reason may be that Mr Lander seems to be anxious about the resistance within the company to this type of organisational change. It should be clear, however, that the key to successful reorientation lies with Mr Lander himself. To introduce a market orientation, he must believe in the value of it and support it 100 per cent. Paying lip-service to the concept and reorganising the management structure by creating a new department and new executive titles are totally insufficient. In answer to the specific question at the end of the case, Mr Lander probably should not set up a sales agency as the wholly owned subsidiary proposed in the case. It would seem much more reasonable to establish a marketing organisation as a regular department in the company. Lander is large enough and diversified enough to warrant having its own marketing organisation. However, regardless of the title or organisational location of the marketing unit, the key to its success is how well it is co-ordinated with, and accepted by, the rest of the company. This coordination and acceptance, in turn, will depend upon how well Mr Lander, the president, supports the marketing idea. Simply taking the present salesmen, designers, and so on and retitling them or their department is not going to change attitudes, philosophies or practices. In this case, it would seem more reasonable to establish a marketing organisation as a regular function within the Company.

How would you proceed to introduce the market orientation philosophy philosophy within the firm? Following are some specific suggestions for developing a market orientation in the Lander Company: 1.

Hire an outside consultant to communicate the message within the company. Being an outsider, his message may have more weight and credibility.

2.

Organise an in-company seminar with outside speakers with the objective to explain what it means to become market-oriented.

3.

Assure Lander’s executives that being market -oriented does not mean that the marketing executives will run the company.

4.

Recruit a fully fledged marketing manager to create the new marketing organisation.

The Lander Company

5.

Promote a high potential junior manager – for for instance one of the five salesmen – to to create the new function.

© Jean-Jacques Lambin, 2000. Market-driven Management Management , published by Macmillan Press

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6.

Create an interfunctional task force chaired by Mr Lander to promote the market orientation philosophy.

My recommendation would be to combine proposals 6, 3, 2 and 5. The interfunctional team chaired by Mr Lander should be in charge of strategic marketing decisions and the high potential junior executive (after more extensive training) should be responsible for reinforcing the commercial organisation of the company. See also the WILO case for a discussion on the relative merits of different organisational structures.

Raw material market

Textile mills

Weaving and knitting

Dyeing and finishing of cloth

Clothing industries

Wholesalers

Retailers

End-consumer

Figure TN1.1

General scheme of the textile industry


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Strategic Marketing Management – Instructor’s Manual Lander

5 Sales representatives

46 Distributors

72 Manufacturers

Manufacturers

Wholesalers

Wholesalers

Retailer

Retailer

Retailer

Supermarket

Consumer

Consumer

Consumer

Consumer

Figure TN1.2 Lander market structure

case study two THE WILO COMPANY

The objective of this case is to discuss the relative merits of two organisational structures, functional and interfunctional. The question is to know how to organise the firm to facilitate the development of a market orientation culture as a corporate business philosophy. The reference reading for this case is Chapter 2 (see pp. 60 – 8). 8). The case discussion can be organised along the following questions: What are the pros and cons of a functional organisation? Why are interdepartmental relations often difficult within a functional organisation? What are the merits and the challenges of team-based cross-functional organisations? evaluate the new organisation adopted by the WILO Company?

How do you

During the discussion, the difficulties and challenges of cross-functional teams should also be reviewed.

What are the advantages and disadvantages of a functional organisation?


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The functional form of organisation, as diagrammed in Figure TN2.1, is the simplest and most formalised design. At the corporate level, managers of each functional department (such as Production or Marketing) report to the Managing Director and each relatively independent function has its own set of performance measures. Broadly, Production focuses on supply regulation, Marketing tracks market share and focuses on demand stimulation, Finance monitors cost and profit, and so on. Within the marketing department, heads of specific marketing activity areas, such as sales, advertising and promotion, market research, and so on, report to the Marketing Manager. At the upper level, the Managing Director co-ordinates the activities of all the functional areas reporting to him or her, often with heavy reliance on standard rules and operating procedures. This is the most centralised and formalised mechanism for resolving conflicts across functional areas. These characteristics make the functional form both simple and efficient. It is particularly appropriate for businesses whose products and markets are few and similar in nature, or those operatin g in relatively stable and predictable environments. In principle, the different departments should interact harmoniously to pursue the overall objectives of the firm since each department or function has an effect on customer satisfaction through its activities and decisions (reference to the value chain concept). In practice interdepartmental relations are often characterised by differences of opinions as to what is in the company’s best interest. Having marketing as a separate function has a negative consequence to confine de facto the market orientation to the sole marketing department. The other functional managers are inclined to say that ‘ they do the marketing and they worry about the customer ’, customer ’, whereas everyone within the organisation should be market-oriented. According to the stakeholder theory (Webster, 1994, pp. 26 –7), each of the company’s functional s pecialists has its own constituency that must be served and satisfied: Financial managers are accountable to the firm’s shareholders and others who provide funds.

Purchasing managers must manage relationships with suppliers of raw materials, components, services and other inputs to the operations of the business. Engineers and scientists represent the scientific community and are caretakers for a body of professional knowledge. Human resources managers and line managers share responsibilities for the employees who contract with the firm. Manufacturing management is accountable to multiple constituencies including the employees, the owners of the productive assets, vendors and customers.

This teaching note has been prepared by J.-J. Lambin. All rights reserved.

It is the job of top management to co-ordinate and manage the trade-offs between these potentially conflicting interests. But the market orientation concept asserts that customers should be the first constituency (among equals) that must take priority because customers have veto power over all the other decisions made within the organisation.


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Strategic Marketing Management – Instructor’s Manual Managing Director

Marketing

R&D

Human resources

Production

Finance & Control

Marketing Manager

Marketing research

Sales

Advertising

Sales promotion

Product manager A

Product manager B

Sales supervisors

Product manager C

Sales reps

Figure TN2.1

Sales administration

Typical functional organisation

Why are interdepartmental relations often difficult within a functional organisation? Many of the problems in the relationship between marketing and the other functions, and in particular R&D, can be traced to the different backgrounds and nature of marketers and developers, which foster a lack of interest in each other’s work and thinking in stereotypes. Table TN2.1 shows how marketing people and technical people perceive each other. The results of such prejudiced attitudes and opinions can be disastrous. In the course of the case discussion, I found it useful to ask the students to complete themselves Tables TN2.1 and TN2.2, using the two grids presented in Appendix TN2.A, one group of students representing the marketing department, another group the other non-marketing functions. In addition to these weaknesses inherent in any functional organisation, several market analysts have formulated criticisms about the marketing department’s performance. The main criticisms are the following: To have confined market orientation to the marketing department, thereby preventing the development of a market culture within the organisation. To be a big spender and to have failed to develop objective and quantified measures to judge its own overall performance.

© Jean-Jacques Lambin, 2000. Market-driven Management , published by Macmillan Press

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The WILO Company To have privileged tactical marketing instruments over strategic ones, by giving precedence to advertising and promotions over product innovations. To be risk-adverse by placing more emphasis on minor market-pull innovations over more revolutionary (but more risky) technology-push innovations. To have responded to environmentalism by green advertising unsupported by prior product redesign, thereby undermining the credibility of green marketing. To have neglected the ‘fewer frills, low price’ segments, thereby opening the door to private labels development.

To have created confrontational rather than collaborative relationships with large retailers and to lose the battle of the brand in several product categories. To lose contact with the new consumer and to have failed to develop long-term relationships with the customer base.

Table TN2.1

Marketing and R&D’s perceptions of each other

Marketing people about technical people

Technical people about marketing people

Have no sense of time Don’t care about costs

Want everything now

Have no idea of the real world

Are aggressive and too demanding

Hide in the laboratory

Are unrealistic

Can’t communicate clearly

Are quick to make promises they cannot keep

Should be kept away from customers

Are involved only in advertising, promotion and public relations

Require customers to adapt themselves Lack of feeling for service and customer-orientated attitude

Are focusing on customers that don't know

Do not pay attention to competitors and competitive advantage

Can’t make up their minds

Are always looking for standardisation

Are too impatient

Are very conservative

Are more interested in playing golf

Have a very narrow view of the world

Are always in a hurry

Always underestimate costs

Don’t trust technical people

Have no sense of humour

Set unrealistic goals for profit margins

Are off in another world

Can’t possibly understand technology

Are passive

Aren’t interested in the scientists’ or engineers’

Don’t understand customers

problems

Can’t stick to schedules

Are too quick in introducing a new product

Are interested only in technology

Want to ship products before they are ready

what they want Make bad predictions


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Change the design specifications frequently

Strategic Marketing Management – Instructor’s Manual Are slow Never finish developing a product

Source: M. Bruce and W.G. Biemans (1995, p.145).

For these reasons and given the increased complexity of the macro-marketing environment, many companies, like the WILO Company, are moving from control-oriented, functional hierarchies to faster and flatter team-based organisations.

What are the merits and challenges of a team-based cross-functional organisation? It is a common belief in management practice today that one of the most effective ways to shorten development cycles is through the collaborative work of cross-functional development teams. We define a team as a small group of people with focus, motivation and skill to achieve shared goals. The practice of using cross-functional teams was pioneered by the Toyota Motor Company and is now standard practice in an increasing number of firms. The benefits of using cross-functional teams are (Parker, 1994): Decreased product development times Improved organisational ability to solve complex problems Increased customer focus Increased creative potential Increased learning by team members Single point of contact. Chrysler used the team approach to reduce by 40% the time it takes to develop a new car or truck. Honeywell’s Building Controls Division used cross-functional teams to cut product development time by 50%, reduce product costs by 5 – 10% and make products 97.6% defect-free (Parker, 1994).

Management by cross-functional teams is not always easy to achieve in practice. Collaboration among people from different functions is difficult, uncertain, and suffers from too little mutual understanding. New product development teams are typically composed of people who do not have the experience or qualifications to criticise each other’s judgements o r performance – certainly not while the project is evolving. They do not, and cannot, know all that their colleagues from other functions know. And uncertainty comes in many forms: What features do customers want? How do features translate into sales? Is the technology available to develop the features? Will the product be manufacturable at the desired market price? Much of the challenge of new product development is centred on people from different functions finding answers to, and getting agreement on, just such questions. Obviously, the more team members understand the work of other functions and the interrelationships among all functions, the more likely they are to make intelligent decisions that will enhance the success of the product. But what constitutes understanding? Table TN2.2 summarises the main differences in orientation between marketing and the other functions.

Table TN2.2 Summary of organisational conflicts between marketing and other deparments Department

Their emphasis

Marketing’s emphasis

R&D

Basic research

Applied research

Intrinsic quality

Perceived quality

Functional features

Sales features

Long design lead time

Short design lead time

Few models

Many models

Engineering


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The WILO Company

Purchasing

Manufacturing

Finance

Accounting Credit

Standard components

Custom components

Narrow product line

Broad product line

Standard parts

Non-standard parts

Price of material

Quality of material

Economical lot sizes

Large lot sizes to avoid stockouts

Purchasing at infrequent intervals

Immediate purchasing for customer needs

Long production lead time

Short production lead time

Long runs with few models

Short runs with many models

No model changes

Frequent model changes

Standard orders

Custom orders

Ease of fabrication

Aesthetic appearance

Average quality control

Tight quality control

Strict rationales for spending

Intuitive arguments for spending

Hard and fast budgets

Flexible budgets to meet changing needs

Pricing to cover costs

Pricing to further market development

Standard transactions

Special terms and discounts

Few reports

Many reports

Full financial disclosures by customers

Minimum credit examination of customers

Long credit risks

Medium credit risks

Tough credit terms

Easy credit terms

Tough collection p rocedures

Easy collection procedures

Source: P. Kotler (1997, p. 700).

One of the real challenges for teams is to develop measures that will help individuals assess how well they are doing what they agree must be done. The Return Map designed by House and Price (1991) gives an example of such measure. For a presentation of this method, see in the text Chapter 11 (pp. 499 – 501). Most measures track what goes within a function (market share, cost, inventory, and so on), not what happens across functions. A team typically is responsible for a complete value-delivery system. Teams must create measures that monitor the tasks and activities throughout the organisation that produce a given result.

How do you evaluate the new organisation adopted by the WILO Company? The new WILO organisation (see Figure CS2.3) is a good illustration of a team-based cross-functional structure. Central in this scheme are the CIF teams assigned to each Strategic Business Unit. Given the absence of more detailed information, the following comments or questions could be raised: The leader of each CIF team plays the function of integrator (or process manager) described in the text (see Chapter 2, pp. 75 – 6). No information is provided in the case concerning the profile of the leader. In the WILO case, the leader of each CIF team is an expert coming from Marketing/Sales or Customer Service. Why not from another functional area? Is there not a risk of ‘perceived marketing imperialism’ by the other functions? A key success factor for a team is to ensure a good balance between the different functional viewpoints. The role of the Round Table is not clear inasmuch as the CIF team leaders apparently do not participate. Its role is to be a link between the CIF teams and Production. Is it not an unnecessary additional level in the organisation since a Production representative already participates in each CIF team? How are the CIF teams going to assess their own performance? Where are the marketing specialists in charge of pricing, market research, advertising, and so on located? The case does not provide answers to these questions.


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Strategic Marketing Management – Instructor’s Manual

References Bruce M. and Biemans W.G. (ed.) (1995) Product Development , Chichester, John Wiley & Sons. House C.H. and Price R.L. (1991) The Return Map: Tracking Product Teams, Harvard Business Review , Vol. 69, January –February, pp. 92 –100. Kotler P. (1997) Marketing Management , New Jersey, Prentice Hall International. Parker G.M. (1994) Cross-Functional Teams , San Francisco, CA., Jossey-Bass. Webster F.E. (1994) Market-Driven Management , New York, John Wiley & Sons.

Appendix TN2.A

Marketing and R&D’s perceptions of each other

Marketing people about technical people

Technical people about marketing people


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The WILO Company

Table TN2.2 Summary of organisational conflicts between marketing and other departments

Department

Their emphasis

Marketing’s emphasis

R&D

Engineering

Purchasing

Manufacturing

Finance

Accounting

11

Credit


case study three TV: COLD BATH FOR FRENCH CINEMA

This case lends itself to a discussion of the question whether marketing can help better understand the nature of artistic production and, more precisely, of the French cinema industry and its request for protectionism and government subsidies. The discussion can be organised around the following questions: 1.

How would you describe the overall situation of the cinema industry in the world and in Europe?

2.

To what extent are the market orientation concept and the marketing discipline in general relevant for arts organisations?

3.

Should the European cinema industry be exempted from the GATT trade discussions aiming at removing protectionist barriers?

4.

What recommendations would you give to promote the French film industry?

Situation of the cinema industry in the world and in Europe The cinema industry is facing increasing competition, particularly from television, multimedia and video. TV sets have invaded every house, if not every single room. The number of channels offered to viewers keeps on increasing. Moreover, television offers the obvious advantages of being cheaper than the cinema and of providing zapping possibilities. Some pay-TV channels (like Canal Plus) specialise in showing the most recent films to attract consumers. In this activity they compete directly with the cinema. Multimedia technology, associated with home computers and the fast developing Internet, has brought consumers new ways of satisfying some of their needs previously met by the cinema industry. Videotapes often come on to the market just a few weeks after the film has been launched in the cinema. These changes in the entertainment industry show that demand for cinema has reached the maturity phase of its product life cycle (PLC). To survive, the cinema industry has to compete hard to keep people going to the cinema. PLC theory suggests that in mature and highly fragmented markets, the priority strategic objectives are to propose improved products, to differentiate offers from those of the competition and to actively search for new market niches.

Table TN3.1

Key data on the cinema industry in the EU (1992)

Number of screens: 16 621 Number of seats: 4 509 465 Number of tickets sold: 560 780 000 Average yearly frequency: 1.61 Average ticket price: 170 BF Total ticket sales revenue: 94.6 billion BF Average per cent of national films: 17% Average per cent of American films: 74%

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TV: Cold Bath for French Cinema

The cinema industry also has all the characteristics of a global market , a fact perfectly well understood by Hollywood. American film companies design their products and their launching strategies upfront for the world market, while very few European films are distributed beyond their national borders. Even fewer have a European or worldwide distribution. US audio-visual firms

This teaching note has been prepared by J.-J. Lambin and J.P. de Moreau. All rights reserved. © Jean-Jacques Lambin, 2000. Market-driven Management , published by Macmillan Press

need the international market since, in 1991, 46.8 per cent of their total profit came from foreign markets (mainly Europe and Asia) against 41.6 per cent in 1988. Since 1980, the number of viewers of American films has remained practically unchanged at 420 to 425 million, while viewers of European films have fallen from 475 to 120 million ( Le Soir , July 1, 1994, Dossier Eco-Soir). A major weakness for European films is the absence of any Euro-marketing strategy in the cinema industry.

Table TN3.2 Number of feature films made annually in countries throughout Western Europe 1991

1992

1993

1994

1995

Britain

46

42

60

70

81

France

156

155

152

115

129

72

63

67

57

84

1

4

17

17

20

129

127

106

95

75

Germany Ireland Italy

Source: Screen Digest , London; National Film Institutes.

In this context of international competition, the French cinema industry is experiencing difficult times as shown in Table TN3.2. One observes a decline in the production of feature films between 1991 and 1995, while in countries such as Britain and Germany production is increasing. France is also the country where there is the smallest proportion (58 per cent) of American films compared to the European average of 74 per cent. (See Appendix TN3.A.) As mentioned in the case, cinema attendance in France has fallen from 200 million to 130 million per year since 1980. For the past two years, the market in Europe has been changing since, after decades of decline, production in Europe is reviving under the banner of the American studios (see Box TN3.1). In 1993, the trade deficit of the European audio-visual sector vis-à-vis the USA was larger than 4 billion dollars.

Box TN3.1

Movies are again becoming big business in Europe

The number of films produced in most European countries is now climbing: in Britain, 81 feature films were produced in 1995, up from 70 in 1994; in Germany, 84 films were made last year, compared to only 57 in 1994 (see Table TN3.2). And on a continent struggling with unemployment rates double those in the United States. The production of films and audiovisual products last year employed more than 850 000 people compared with 630 000 a decade earlier. Yet the Europeans call the blessing a mixed one. For what is sparking the growth is investment by the big American film studios like Walt Disney and Warner Bros., a unit of Time Warner. This year, Warner Bros. will open a new film animation studio in London; in Germany, Warner will open its $270 million Warner Bros. Movie World film studio theme park. Warner recently announced plans for another in Britain, to cost $344 million. At Babelsberg, a new $4.5 million sound studio, financed in part with German government funds, is attracting international clients like Turner Entertainment, a unit of the Turner Broadcasting System. Now Europeans increasingly fear the American presence could crush domestic productions. ...Most industry experts say part of Europe's film revival is also a result of the overhaul of European cinemas, led in part by US companies like Warner Bros. Theatres and American Multi-Cinema, which is fast replacing singlescreen movie houses with multiplex theatres. American Multi-Cinema is owned by AMC Entertainment Inc. © Jean-Jacques Lambin, 2000. Market-driven Management , published by Macmillan Press

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Source: Tagliabue J., European Films: The Sequel, International Herald Tribune, February 27, 1996.

Is the marketing discipline relevant for arts organisations? It is a persistent discussion theme among arts administrators: the need for more money in order to maintain and improve art offerings. In some cases it is needed to reduce deficits; in other instances

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TV: Cold Bath for French Cinema Strategic Marketing Management – Instructor’s Manual

it is for sheer survival; for some it is to improve the quality or increase the quantity and in yet other cases, as in the French cinema industry, it is to get protection from foreign cinema industries. Yet there are a series of paradoxes underlying this theme. Simultaneously, arts administrators want increased subsidies and financial independence; they will not charge appropriate admissions but desire increased revenues; they are unwilling to allocate sufficient resources, although they know more effective promotion is necessary; they seek more government programmes and more administrative autonomy; they call for independence from public opinion and intervention but for more public support. One other paradox might be cited: the missionary effort to develop art audiences from those marginally interested and the near exclusion of effort to develop the fullest possible response from that segment of society most likely to support the arts (Dawson W.M., in Mokwa, 1980, p. 7).

Too often art administrators tend first to look elsewhere for help, rather than looking at current audiences and their expansion as the most available resource. To what extent is marketing the appropriate answer? Arts administrators continuously face four major marketing challenges: Attendance stimulation . One measure of arts organisation success is how many people are annually drawn to its performances and exhibits. This signals how much value people place on its offerings. Audience development . The real challenge to an arts organisation is not only attracting the occasional attendee but also the rare attendee or the non-attendee and to build a loyal audience. This requires the organisation to carefully define its target market, to study cultural needs and preferences and develop artistic offerings that satisfy them. Membership development . Most arts organisations offer people the opportunity to become supporting members. Membership development is not a simple activity but one calling for solid marketing skills. Fund raising . Arts organisations are finding that attendance and membership revenue are accounting for a declining percentage of their total revenue needs and the gap must be filled by creative fund raising which calls for a basic long-run strategy.

Clearly both strategic and operational marketing can play a central role in helping the arts organisation in these four challenges. One marketing principle seems, however, inappropriate for the arts world. It is the prevailing belief in the commercial world that consumer preference dictates product development and design. In the art world, the artist should design the core art product, not the consumer or the audience. The artist speaks to all through his or her special insight into the human condition. The message comes whether or not we want it, whether or not we are receptive to it and whether or not we even understand it. The individual art consumer would undoubtedly select those artistic expressions that reflect his or her own taste, aspirations and view of the world. If the audiences were to decide, our arts world would become narrower and narrower and increasingly sterile. All of us need to be pulled, pushed and even thrown into new artistic experience. ...The belief that the consumer is ‘king’ may be co rrect for the commercial world. It is

not appropriate and, indeed, would be harmful if applied to the arts world. The artist, not the consumer, should have the final and deciding vote on what the arts product is (Searles D., in Mokwa, 1980, p. 69).

This is a major difference between the commercial and the arts world. The role of the artist is that of leading the audience, rather than reacting to its preconceptions. This does not mean that the artist can neglect the audience, particularly if he wishes its patronage. A distinction should be made between the artist and the arts administrator. If the artist should remain free from market pressures, the situation is different for the arts administrator whose function is to promote a specific artist a nd to develop an art audience. His or her challenge is to find the proper balance between satisfying needs and leading arts tastes. In this perspective, it is of course crucial for him to know and understand the audience.


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The purpose is not merely to give consumers what they want but to so understand their personalities, situations, attitudes, and aspirations that the arts administrator might better see how to forge the bond between them and the aesthetic offering (Levy S.J., in Mokwa, p. 30). A question often raised (Laczniak, in Mokwa, 1980, p. 131) is the following. Does marketing of the arts in its search for new audience, contribute to a dilution of quality? Is there not a risk of placing arts product development on a level with TV soap operas, because it tries to peg the arts to the lowest common denominator of taste in society? Members of the arts community feel that ultimately such activity will compromise artistic excellence. Alternatively, lack of systematic effort to expand interest in the arts could doom the arts to projected financial crisis.

In reality, a market orientation philosophy in the field of the arts does not imply eradication of art excellence or intellectual production. It implies meeting viewer expectations, which are multiple and highly diversified, by offering adapted products to different target groups of customers. Art excellence and marketing of the arts can coexist. One of the roles of arts administrators is to use strategic marketing to establish better matching (through target marketing) between demand and supply, since the demand for art and cultural products is strongly differentiated from one public to another.

Should the European cinema industry be exempted from the GATT trade discussions aiming at removing protectionist barriers? Should film-making be protected against foreign competition because of its cultural and artistic content? A preliminary question must be raised. Is the film industry art or entertainment? The answer is n ot obvious. Clearly, a large part of production is entertainment, which is not incompatible with an artistic preoccupation. A distinction should be made between the high end (intellectual elite) and the low end (popular segments, families) of the market. Films targeted at the elite by their very essence have a smaller market potential. Performing arts are subsidised by public or private donations because of their value to society and because they are typically part of the not-for-profit sector. Are French film directors, or socalled author-films, trying to meet the expectations of viewers or are they simply designing films targeted at very small and specific audiences without any concern for bringing emotion or entertainment to the public under the pretext that their work is art? French authors and their intellectual snobbery is typical of an industry being product-oriented and not marketoriented. The traditional ignorance or neglect of marketing in the arts can b e attributed to the principal focus on the part of those in the field on the art itself rather than on the audience or market for it. Apathy grows from what may be called the ‘zealot syndrome’. By this is meant the view held by so many in the arts that their activities are so

worthwhile that the public of its own volition will patronise the arts w ith little if any marketing effort (Greyser, in Mokwa, 1980, p. 156).

This attitude tends to change however when arts administrators become painfully aware of the financial implications of partially empty houses and of the expressed preference of the public for American films. French authors seek to get the best of both worlds: public financial support and independence from public opinion. This situation has led to a confrontation between those asking for complete liberalisation of the cinema market and those asking for protectionist measures in favour of national production. The first group is led by distributors and by TV channels; the second by French film producers. At the European parliament in Strasbourg, France led an attempt to counter US dominance by imposing quotas on US television programming. Yet industry experts and government leaders including Britain, Germany and Italy are increasingly questioning the French zeal. They are coming to the conclusion that to compete culturally, Eu rope must compete commercially . TV channels play a very important role in feature film production. As seen above, the importance of television has grown and it is now the main market for French films. As competition is developing between channels for prime-time audiences to attract advertisers, they are asking more and more for films meeting broad public expectations. They press producers into making more commercial and popular films and they produce or co produce themselves more films and TV series. Their bargaining power is very strong given their purchasing power. As a result of this pressure, resistance grew from many French film directors. They are not ready to adapt their production to what is asked for by the market. They argue that their production is art and that money matters cannot direct art. In 1994, France won exclusion of the audio-visual industry from new international free-trade rules under the cultural exception principle. So, today

Strategic Marketing Management – Instructor’s Manual © Jean-Jacques Lambin, 2000. Market-driven Management , published by Macmillan Press

16

TV: Cold Bath for French Cinema French TV channels are required by law to invest in French films and to broadcast a quota of French films each year. The French cinema industry is far away from a market orientation philosophy, but this protectionist posture is fragile and difficult to sustain in the long term. The trend in the world and in the EU is towards deregulation.

What recommendations would you make to promote the French film industry? The cinema market is a global market. If the French film industry wants to become an active player in this market, it should adapt its offerings to the world market. Too often, French films are parochial and cannot appeal to the non-French viewer. Similarly, French film distribution and promotion are generally organised on a local market base, while American film promotion and distribution are designed upfront for the world market. The fundamental question to be examined by the French cinema industry is to know how to position itself in the international movie market given the expectations of the market and given the position already occupied by competition. This also implies the development of a promotion and distribution plan targeted at the world market and not only at the domestic market. To the viewer, a film can be viewed as a ‘solution -to-a- problem’ (see main text, p. 242) and the type of solution sought by the viewer may be very different: entertainment, dream, adventure, intellectual experience, culture, thriller, fantastic, history, etc. Hollywood probably excels in entertainment, adventures, technical effects, but not necessarily in meeting other expectations, such as culture or history. A single arts organisation cannot offer all things to all people. Thus, there is room left to produce films meeting more intellectual or cultural expectations. The implication is that the French film industry has to develop a selective product/market strategy and then communicate its positioning to the general public.

References Eco Soir, Dossier Cinéma: La distribution, c’est la question, Le Soir , vendredi 1 juillet, 1994.

Tagliabue J. European Films: The Sequel: Movies Are Again Becoming Big Business, International Herald Tribune , February 27, 1996. Mokwa M.P. et al . (eds) 1980 Marketing the Arts , New York, Praeger.

Appendix TN3.A Per cent of films distributed in the EU according to their country of origin (1992)

Countries

USA

Nationals

Belgium

73

4

19

4

Denmark

78

15

3

4

France

58

35

4

3

Germany

83

10

6

1

Greece

93

2

3

2

Ireland

88

8

4

0

Italy

69

19

11

1

Luxembourg

NS

NS

NS

NS

Netherlands

79

13

3

5

Portugal

85

1

9

5

Spain

77

9

13

1

UK

86

12

1

1

European average

74

17

7

2

Source: Média Salles. Published in: Le Soir (01/07/94).


17

European nonnationals

Others

TV: Cold Bath for French Cinema

Appendix TN3.B Films distribution within EU (1992) Countries

Total sales revenue

Per cent of sales revenue per country and per media

Per capita sales revenue in ECUs per country and per media

(Million)

Movie

Movie

ECUs

theatres

Videos

Pay TV

Videos

Pay TV

theatres

Belgium

198.81

36.5

44.8

19.7

7.01

8.84

3.90

Denmark

167.97

24.9

51.1

24.0

8.11

16.60

7.80

France

2547.91

23.2

30.0

46.7

10.35

13.37

20.81

Germany

1772.96

25.8

63.9

10.3

5.69

14.12

2.28

Greece

50.51

55.0

45.0

0.0

2.70

2.21

0.00

Ireland

150.31

17.6

60.4

22.0

7.48

25.63

9.35

1032.58

36.0

53.9

10.1

6.44

9.56

1.86

10.35

26.1

41.6

32.3

6.92

11.03

8.58

Holland

293.86

25.7

61.8

12.6

4.98

12.00

2.44

Portugal

104.22

29.8

70.2

0.0

3.15

7.43

0.00

Spain

959.88

27.4

41.8

30.9

6.72

10.27

7.58

2643.39

15.3

64.2

20.5

7.01

29.34

9.35

9932.76

23.8

51.3

24.9

6.82

14.7

7.13

Italy Luxembourg

UK European average

Source: Média Salles. Published in: Le Soir , (01/07/94).


18

case study four ECOVER This short case is convenient for reviewing key issues related to the implementation of a truly green marketing strategy. Ecover is the leader in the market for green detergents and has designed a market coverage strategy targeted at the environmentally conscious consumer. Is this strategy credible and sustainable in the long run? The discussion can be organised around the three questions proposed at the end of the case.

Is Ecover really better for the environment? How will a consumer know a product like Ecover is really better for the environment and be ready to shop at less convenient places (health stores), to pay a higher price and to purchase a product with a lower performance to price ratio? Ecover has mainly placed the emphasis on the development of production processes and facilities generating minimal environmental harm. But to what extent do these green facilities and processes really matter? To answer this question, one should look at detergent consumption from cradle to grave through a ‘life cycle inventory’ analysis, which apparently was not done by Ecover. P&G have done such studies in the US by independent consultants. One such study concluded that 64 percent of energy use in clothes washing life cycles arises just from heating the wash water. Nineteen percent arises from running the washing machine. Relatively little energy is consumed in detergent production, transportation, etc. Eighty one percent of the atmospheric emissions are caused in electricity generation for heating water and running the washer. And similarly, 57 percent of the solid waste is created as fuel ashes in electricity generation for heating the water and running the washing machine. Seventeen percent comes from sewage sludge in wastewater treatment plants, packaging accounts for only 4 percent (Niraj D. and Landis G.H., 1995, p. 2).

These studies suggest that Ecover is claiming superiority in areas that matter relatively little like raw materials, chemicals and packaging. This shows that there is no universally accepted measure of greenness. Thus green is relative and Ecover should try to demonstrate in scientific terms its relative superiority (if any) vis-à-vis competing brands. The present ambiguity makes c onsumers sceptical and could undermine the competitive po sition of Ecover in the long run.

How could Ecover communicate its relative superiority? In response to consumer demand, companies have hurried to create ostensibly green products, but in so doing they have generated a good deal of confusion and, in some cases, an actual backlash towards the very products they are developing. According to a study by UK-based Marketing Intelligence Service Ltd, green products have multiplied by 20 times faster than all new packaged goods since 1 986. As a result, product claims such as ‘degradable’, ‘biodegradable’, recyclable, ‘CFC -free’, ‘ozone friendly’ and ‘environmentally friendly’ are appearing widely in ads and packages. Consumer activists argue, however, that the lack of objectivity of green labels has left the environmentally conscious buyer uncertain and sceptical about green marketing in general ( Business International , Jan. 28, 1991). There are four key ‘V’ variables in environmental marketing communications:

the virtue of the product offering in its eco-performance; the visibility of the environmental performance and the information relating to it; the volume of noise which the company makes about its environmental performance; the verification, that is, the use of independent third parties to substantiate environmental claims (Peattie, 1995, p. 217).


19


Ecover

As a result of the backlash from environmental groups against early green campaigns high in volume but low in environmental virtue, companies are inclined today to turn down the volume of advertising noise and but to improve the communication in terms of virtue, visibility and verification. What are the options for Ecover? Three options can be discussed: advertising, public environmental disclosure and eco-labelling: Advertising seems to be the simplest solution although Ecover has publicly criticised consumer advertising. Also the firm probably does not have the required budget for effective communication through mass media advertising.

An alternative to advertising is environmental disclosure consisting in communicating information about corporate environmental and social performance to the general public. Different methods of environmental disclosures exist; for a discussion of these methods, see Peattie (1995, p. 218). The most popular green labels are the German ‘Blue Angel’ and the EU ‘Ecolabel’. Products can carry the label if they show that they meet the specific environmental criteria laid down for the product category. Labelling schemes can either work on a simple pass/fail basis o r can involve some form of gradation of performance. The problem with eco-labels is that other brands of washing products could very well qualify, thus killing the competitive advantage Ecover claims. What Ecover wants is an exclusive label.

How do you get the consumers to pay for the product’s green superiority? The Ecover green factory generates a premium cost of 30 per cent over conventional plant. How can the firm recoup this additional cost? Recent survey research results show that consumers ‘state’ that they are willing to pay up to 5 per cent more for truly green products (see Table TN4.1). To what extent this attitude translates into actual purchase behaviour is not at all clear. The answer to this question is influenced by a variety of factors (Peattie, 1995, p. 282):

Table TN4.1

Average price increase consumers are willing to pay for green products

Automobiles

4.7 % 0.5 %

Detergents

4.8 % 0.6 % 4.6 %

Plastic packaging 0.4 %

Paper products made out of recycled paper

4.4 % 0.2 % 5.0 %

Gasoline 0.8 %

4.4 %

Aerosols 0.2 %

Plastic packaging or containers made of recycled materials Plastic packages or containers made with less plastic

Nominal 4.2 %

0% 4.3 % 0.1 %

(*) Adjusted for inflation. The inflation rates in 1991 were 4.2% for the U.S. (source: Bureau of Labour and Statistics) © Jean-Jacques Lambin, 2000. Market-driven Management , published by Macmillan Press

20

(*) Real

Source: Environmental Behaviour , North America: Canada, Mexico, United States, The Roper

Organisation, commissioned by S.C. Johnson & Son, Inc., 1992.


21


The nature of the product and the level of differentiation in the market. The credibility of the company as a green producer. The profile of the green issues to which the product is linked (dolphin-friendly tuna fish). The perceived value of green products. The nature of the customer group. The examination of these criteria suggests that the capacity for Ecover to charge a price higher than direct competition (for example P&G) is probably very limited. Green products are usually presented to the market at premium prices. However, the idea that green products are unusually expensive is often an illusion. The reality is that grey products are unrealistically inexpensive, because their environmental costs are largely not reflected in their prices.

Reference Niraj D. and Landis G.H. (1995) Ecover Teaching Note , INSEAD.

Suggested reading Peattie K. (1995) Environmental Marketing Management , London, Pitman Publishing.


22

case study five VOLVO TRUCKS BELGIUM

The case presented here is somewhat different from the example summarised in Table 6 (p. 249) in the text. In the truck market, it is current practice to segment the market according the Gross Vehicle Weight (GVW), which is supply characteristic and not a market segmentation criterion. In a macro segmentation exercise, the relevant market segmentation variables are the following: Functions: regional, national and international transport of goods. Technologies: air, rail, water and road. Customers: types of activity: own account, professional transporters and renting companies; size of fleet: small (1 – 4 trucks), medium (4 – 10 trucks) and large (>10 trucks). Needs satisfied by a truck relate to transportation. This need can be subdivided with th ree broad categories: local, national and international transport (and others). Local transport can be further subdivided into distribution and construction (off the road) transport.

The means or technologies available for performing the transportation function are road, rail, water, air. Concentrating on road haulage, a distinction can be made between trucks below 16 tons (mainly distribution) and above 16 tons (mainly international transporters). Customer groups can be described in terms of several characteristics. The Belgium truck-buying behaviour study has shown the relevance of the following criteria: nature of the activity (ownaccount or professional transporter and renting), size of the fleet owned (small, medium, large) and (to a lesser extent) types of goods shipped.

In the case, the information communicated can be presented in the following table:

Customer types

Size of fleet

Total Small (<3) Medium (4 –10)

Own-account transporters

Large (>10) 11.5%

Professional transporters

14.7%

Total

57.3% 18.3%

65.6% 34.4%

24.4%

100.0%

From this table, one can easily calculate the missing values to obtain the following segmentation grid. Customer types

Own-account transporters Professional transporters Total

Size of fleet

Total

Small (<3)

Medium (4 –10)

Large (>10)

42.6%

11.5%

11.5%

(1)

(2)

(3)

14.7%

6.8%

12.9%

(4)

(5)

(6)

57.3%

18.3%

24.4%

65.6% 34.4% 100.0%

Using these data, the six identified segments can be regrouped into four strategic segments: Segment S1: Own-account hauliers, having small or medium size fleet (segments 1 and 2), and operating at a regional (distribution and construction) or national level. This first strategic segment represents 54.1 per cent of the truck population.



23


Segment S2: The same group of own-account hauliers (segment 3) but with large fleet of 10 or more trucks. This segment represents about 11.5 per cent of the total truck population.

For truck-buyers in these two strategic segments, a truck is a cost, a necessary evil ; haulage is not their business. What buyers are seeking is a solution to their transportation problem and the supplier is expected to provide assistance and services. The cost of the truck is a small part of the total operating costs of the own-account hauliers. These buyers are not specialists and therefore are likely to be less price sensitive. They require attention, continuity of services and problemfree products. Segment S3: Professional hauliers operating on regional and national markets and having a small or medium fleet (segments 4 and 5). They represent 21.5 per cent of the total truck population. They tend to be specialized transporters. Segment S4: Professional transporters with large fleets and operating at both the national and international levels (segment 6). They represent 12.9 per cent of the total. The trucks’ service life in this segment is shorter as the average mileage is much higher. Fleets are composed mainly of heavy trucks above 16 tons.

Segments 3 and 4 are a different breed of truck-buyers – the professionals. To them a truck is a bread-winner . Thus the key decision criteria are economic arguments: big payload, low maintenance costs, purchase price, and so on. These buyers are highly price and cost sensitive, they make price comparisons and inquiries, they take on the service of their trucks themselves. Segment 4 is clearly a supranational segment. Buyers in this segment will be among the first to take advantage of the new EU regulations, to require consistent systems of service and sales support across Europe, and to engage in Europe-wide price negotiations. To verify the usefulness of the grid, the company’s customers and direct competitors should be located in the different segments. The objective is to evaluate the potential of each segment in terms of size and growth, and to measure the market share held by the firm within each segment. The questions to examine are the following:

Which segment(s) displays the highest growth rate? What is our present market coverage of the market? Where are our key customers located? Where are our direct competitors located? What are the requirements of each segment in terms of service, product quality, and so on? The following questions can also help decide whether or not two products belong to the same strategic segment. Are the main competitors the same? Are their customers or groups of customers the same? Are the key success factors the same? Does divesting in one affect the other? Positive answers to these four questions would tend to show that both products belong to the same product-market. The answers to these questions will also help the firm to define its market coverage strategy and to regroup segments having the same requirements and/or the same competitors.


24

case study six THE PETRO-EQUIPMENT COMPANY

The objective of this short case is to give the students the opportunity to apply the macrosegmentation concepts discussed in Chapter 6 and to construct a segmentation grid for the PetroEquipment’ s reference market. The case discussion can be organised in three steps: to delineate the market by reference to the three macro-segmentation criteria: functions, technologies and groups of buyers and to construct an operational segmentation grid; to enumerate the information that should be collected to assess the attractiveness of each segment and the competitiveness of the Petro-Equipment Company; to identify the segments that the Company should target by priority.

Macro-segmentation of the market In the case, the macro-segmentation criteria are respectively: Functions: Deep and shallow drilling; Technologies: Electro-mechanical and electronic products; Several criteria should be used to describe the buyers:

Buyers:

Geographical zones: Developed and developing countries; Buyer type: Major oil companies, large and small independents; Buyer sophistication: Sophisticated and unsophisticated; Ownership status: Private and state-owned.

If we take all possible combinations (that is, 2 × 2 × 2 × 3 × 2 × 2) we would have a total of 96 potential segments, which is of course completely unrealistic. The next step is to simplify the grid by eliminating the null cells representing unfeasible combinations, particularly within the groups of buyers’ criteria. For exa mple: If we compare ‘ geographical location’ with ‘buyer type’, two combinations can be eliminated because there are no independents (small or large) in developing countries. Similarly, confronting ‘buyer type’ with ’ownership status’, it is obvious that independents cannot be ‘ stateowned ’. Finally, there are no ‘ sophisticated buyers’ in developing countries.

We can now regroup all the buyer segmentation criteria in a two-dimensional matrix (see Table TN6.1), where are combined the ‘buyer type’ and ‘ownership status’ criteria, on the one hand, and the ‘buyer sophistication and location’ criteria, on the other .

Table TN6.1

Combined segmentation matrix for an oilfield equipment industry

Buyer Type and Ownership Private major oil

Large

Sophisticated/ developed countries

Small State-owned companies independents independents majors null

Buyer null

null

null

null

25

null

Strategic Marketing Management – Instructor’s Manual Unsophisticated/ Sophistication developed and Location countries Unsophisticated/ developing countries

This teaching note has been prepared by J.-J. Lambin on the base of an example published by M. Porter (1985, pp. 248 – 55). All rights reserved. © Jean-Jacques Lambin, 2000. Market-driven Management , published by Macmillan Press

Inspection of this table suggests further elimination of unfeasible combinations or non-existing segments: There are no ‘private major oil companies’ which are ‘unsophisticated’ and based in ‘developing countries’. There are no ‘large independents’, ‘unsophisticated’ and based in ‘developing countries’. There are no ‘sophisticated small independents’ operating in ‘developed countries’. ‘state-owned majors’ which are ‘unsophisticated’ users.

There are no

Thus, six additional segments are eliminated. The six remaining segments can then be combined with the other macro-segmentation criteria, functions (deep and shallow drilling) and technologies (standard versus premium products). Finally, we obtain the segmentation grid (see Table TN6.2), where 18 (instead of 96) segments are presented.

Table TN6.2

Illustrative segmentation matrix for an oilfield equipment industry

Buyers

Private majors

State-owned majors in developed countries

Large independents

Large independents

Premium deep drilling

Standard/ deep drilling

Standard/ shallow drilling

Sophisticated

Product variety


26

Unsophisticated

State-owned majors in developing Small countries independents

Evaluation of the attractiveness of each segment The case does not provide enough information to conduct an analysis of the attractiveness of each segment. This is nevertheless the next logical step and the students could be asked to identify the type of information they should collect to be able to address the next question, i.e. which market coverage strategy to recommend? The instructor could recommend the reading of Chapter 10. Also, examples of attractiveness indicators are provided in Table 10.1 of the text. Examples of questions that could be raised by the students are: What is the size (volume and value) of each segment? What is their respective rate of growth in volume? Is the profit potential different from one segment to the other? Are there strong entry barriers in some segments? Who is the leading competitor(s) in each segment? How are the distribution and the logistics within each segment organised? How are buying decisions made for this type of goods? And so on.

The Petro-Equipment Company

Evaluation of the competitiveness of the Company Here also, the information available in the Petro-Equipment Company is extremely limited. We know that the firm has an excellent reputation for the quality of the equipment provided and for the assistance in use given to customers. Other elements of information are required: Extent of the present market coverage Market share by segment Technology know-how of the firm Strength of the operational marketing organisation Levels of prices compared to direct competitors Size of the Company compared to the leaders in the industry And so on. See also Table 10.1 for examples of competitiveness indicators.

Which market coverage strategy to recommend? It is difficult to make precise recommendations given the lack of key information. Nevertheless a strategy path to explore could be to focus on the group of small independents in the two geographical zones, who need technical support and assistance in use, a service that Petro-Equipment can provide. Generally, big companies do not expect that kind of service because they have their own specialists and research teams.

Reference Porter M.E. (1985) Competitive Advantage , New York, The Free Press, pp. 248 –55.


27

case study seven SIERRA PLASTICS COMPANY

Price cutting in industry with excess capacity Sierra Plastics Company was faced with competitive price cutting of a difficult-to-differentiate product in an industry with excess capacity. There were four alternative courses of action which management might consider as possible solutions for this very unattractive market situation. First, the company can simply reduce its prices to, or below, competitive levels. Price reductions, of course, are the easiest price changes to effect. However, benefits of price reductions are realised only when unit sales volume is increased enough to offset the drop in prices. Immediate retaliation by rival firms will reduce the probability that Sierra can gain significant volume from competitors. Moreover, Sierra is too small a factor in the industry for its (Sierra’s) price cuts to influence industry price levels. Finally, once prices are lowered, it is most unlikely that they can easily, if at all, be restored to previous levels. A second alternative is to manipulate the quality of the plastic pipe, and to change the price accordingly. Thus, by reducing prod uct quality, production costs could be cut and consequently prices could be reduced. For perhaps obvious reasons this is a highly questionable path to follow. An alternative quality course to follow was to market a new, higher quality product. Thus, Sierra would try to differentiate its product on a quality basis. (This was Mr Pope’s recommendation.) One fact – not stated in the case – was that higher quality pipe sold for proportionally higher prices than did lower quality pipe. Increasing the quality of the pipe could help Sierra Plastics in that the firm could offer the new, higher quality pipe not as a ‘price’ pipe, as other second grade and virgin pipes had become, but rather as a high -priced, quality line, made from superior resins. This strategy might work if distributors became convinced that the pipes were better and could be sold to the ultimate user at a higher price. In order to convince distributors, as well as users, of the better quality of their new pipe, Sierra Plastics Company could resort to a distinctive warranty programme. That is, the company might offer to pay for labour charges incurred in replacing or repairing defective pipe – provided the pipe failure was caused by defective material o r workmanship. This would demonstrate confidence in the pipe. A third possible course of action is to diversify into product lines other than flexible pipe. Present production machines and facilities could be used for manufacturing other plastic products. This alternative is a typical one for industries with excess capacity. As one example, Sierra might produce rigid pipe for use in natural gas distribution, oilfields, or sewage disposal. Of course, this alternative moves Sierra into less familiar fields and calls for new marketing programmes. The fourth alternative is to stress non-price competition, such as advertising or better service by company salesmen, to present to any potential customers. One question, which then arises, is – how much promotion can a small company like Sierra actually do? That is, with no brand identity to speak of, probably limited financial resources, and possibly a non-differentiated product, how much effect would Sierra’s advertising have on its market?


28

This teaching note has been prepared by W.J. Stanton. All rights reserved.

case study eight TISSEX

This case provides a good support for illustrating the development of product portfolio analysis using successively the two most widely used grids: the growth-share matrix and the multi-factor matrix. The comparison of the results obtained from the two method s is instructive and shows how strategic recommendatio ns are sensitive to the type of measurement instruments used. The two approaches yield different insights, but as the main purpose of product portfolio analysis is to help guide, and not be a substitute for, strategic thinking, the process of reconciliation is useful. The questions to propose to the students are the following: 1.

How would you describe the product portfolio of the Tissex Company?

2.

Using the growth-share matrix, check whether the Tissex Company has a balanced product portfolio. What recommendations would make on the basis of this first analysis?

3.

Using the multi-factor approach, identify six to seven indicators of attractiveness and of competitiveness, which are relevant for the Tissex Company and verify, through a multi-factor grid, whether the Tissex Company is in good shape.

4.

Compare the results of the two analyses and propose a marketing strategy for each major business unit.

Structure of the Tissex Company’s product portfolio One way to proceed is to use the three-dimensional macro-segmentation methods, to identify the six major business units (MBUs) in which Tissex operates. The segmentation chart is presented in Figure TN8.1 and the main economic data for each business unit in Table TN8.1.

Functions

Printing ribbons

Printing Technical fabrics

Protection Finishing Leisure Clothing

Linings

Sportswear fabrics

Polyester fabrics

Groups of buyers Spinning Weaving Printing Dyeing

Garment industry – Menswear – Womenswear – …

Dangerous obs – Army – Chemical – Police – …

Office equipment – Typewriters – Computers – Printers – …

Technologies

Figure TN8.1 Macro-segmentation analysis of the Tissex reference market


This teaching note has been prepared by J.-J. Lambin on the base of a note written by G. Marion (ESC, Lyon). All rights reserved. © Jean-Jacques Lambin, 2000. Market-driven Management , published by Macmillan Press

27 Figures TN8.2 and TN8.3 give graphic illustrations of the sales revenue and the gross profit margin, to be used to compare the relative importance of each business unit. In Table TN8.2, the key success factors are identified for each MBU and the strengths and weaknesses of the Tissex Company.

The growth-share matrix The growth-share matrix is graphically presented in Figure TN8.4. Similar charts can be developed using alternatively sales revenue or gross profit margins. Analysis of the matrix leads to the following observations: A very large MBU (polyester) is located in the lame ducks quadrant (34.7%); The MBU linings is a cash cow and represents 29.9% of the total sales revenue; Sportswear fabrics (12.5%) and ribbons (16.8%) are proble m children; Technical fabrics are a star but represent a relatively small proportion (12.5%) of total sales. The recommendation suggested by this analysis would be to adopt a low profile (or to divest) on polyester, to invest heavily on sportswear fabrics, ribbons and technical fabrics, using the cash generated by linings. One observes however that linings generated only 17.6 per cent of the total gross profit margin, while polyester represents 14.3 per cent, a non-negligible amount. The students should be reminded that the growth-share matrix will yield valid conclusions only if the two underlying hypotheses, life cycle and experience effects, are verified in this particular industry (see main text, Chapter 9, pp. 381 – 3).

The multi-factor matrix The students should be asked to identify six to seven attractiveness and competitiveness indicators, which are relevant for this market. Examples of indicators are presented in Tables TN8.3 and TN8.6. Students sometimes have difficulty in understanding the differences between market attractiveness indicators and company competitiveness indicators. Attractiveness indicators should be factors beyond the control of the firm (opportunities and threats), while competitiveness indicators are measures of the company distinctive qualities (strengths and weaknesses). A list of possible indicators is provided in Chapter 11 (see main text, Chapter 9, p. 389 and p. 487). The students should also define the scale by proposing semantic supports for each position on the 5-point scales. The students could then be subdivided in groups to evaluate the five MBUs using the empty grids presented in Tables TN8.4 and TN8.7. For the competitive indicators, the scores should be given by reference to the priority competitor within each MBU. Examples of evaluation scores are presented in Tables TN8.5 and TN8.8. The resulting multi-factor matrix is presented in Figure TN8.5. Significant differences can be observed between the multi-factor matrix and the growth-share matrix. The analysis of the scores of Tables TN8.5 and TN8.8 is useful to reconciliate the results. For example, in the growth-share matrix analysis, polyester and linings were rated as unattractive in terms of growth rate. But in the multi-factor matrix these two MBUs are rated as very attractive in terms of market accessibility and duration of the PLC. Similarly, ribbons and sportswear are rated as very unattractive by reference to strength of competition. Thus, the overall picture is very different. The same type of comparison can be made with competitiveness indicators. In terms of relative market share, the competitiveness of the linings MBU was very high; but this activity scored very poorly on four other indicators of competitiveness: unit cost, distinctive qualities, sales organisation and image.

Propose a marketing strategy for each MBU © Jean-Jacques Lambin, 2000. Market-driven Management , published by Macmillan Press

30

In Table TN8.9 strategic options are suggested for each MBU. The student should refer to Chapter 9 in the main text (see in particular Exhibit 9.11, p. 412) to identify feasible strategies.

Strategic Marketing Management – Instructor’s Manual Table TN8.1

Key economic and competitive data Technical

Printing

Fabrics

Ribbons

Sportswear

Polyester

Linings

Sales turnover

33 MF (6%)

90 MF (17%)

67 MF (12%)

186 MF(35%)

160 MF(30%)

Gross margin: rate

34%

30%

36%

7%

10%

Gross margin: value

11 MF (12%)

27 MF (30%)

24 MF (26%)

13 MF (14%)

16 MF (18%)

Reference market

France

Europe/USA

France

Europe

Europe

Market growth

9%

6%

8%

0%

–2.5%

Market share

30%

5%

15%

1%

12%

turnover

5%

60%

5%

40%

55%

Number of customers

100

90

30

1400

2000

TISSEX rank

1st

3rd

2nd

very low

1st

Direct competitor

GUILLIEZ

[Japan/Germany] SPORTING

[Japan]

DECKERMAN

18%

7/8%

5%

7%

Export share in the sales

Share of the direct competitor

20%

Ribbons 16.8% 90

Polyester 14.3% 13 Linings 17.6% 16

Sportswear fabrics 12.5% 67

Linings 29.9% 160

Technical fabrics 12.1% 11

Technical fabrics 6.2% 33 Sportswear fabrics 26.4% 24 Ribbons 29.7% 27

Polyester 34.7% 186

Table TN8.2

Key success factors TISSEX strengths

Main diagnosis factors per business unit Technical

Printing

Fabrics

Ribbons

Service

Sportwear

Quality

Quality

Price

Delivery

Technical

Good

Good

know-how

production

commercial

equipment

network

Good customisation

Polyester

Linings

Price

Price

Production

Unit cost

equipment

Customers

Supply diversity

TISSEX weaknesses

No brand

selection

Figure TN8.2

Sales revenue

Gross profit margin

(million FF)

(million FF)

Sales revenue and gross profit margin Sales Revenue (SR)(SR)

32

Gross Profit Margin (GM) (GM)

Million FF 200 186

160

Tissex

150

100

90 67

50

33

27

24

16

13

11 0 Technical fabrics

Sportswear

Ribbons

Polyester

Lining

fabrics

Strategic Business Units

Figure TN8.3

Sales revenue and gross profit margin

Market growth rate + 15%

Technical fabrics ( SR: 33 – GM : 11)

Sportswear fabrics ( SR: 67 – GM : 24)

Ribbons ( SR: 90 – GM : 27) + 5%

Linings ( SR: 160 – GM : 16)

Polyester ( SR: 186 – GM : 13)

– 5%

8.0

4.0

2.0

0.5

1.0

0.25

0.125

Relative market share SR = Sales revenue; GM = Gross profit margin

Figure TN8.4

Strategic marketing diagnosis: BCG matrix


Table TN8.3 Attractiveness – evaluation indicators Evaluation scale Indicators

Weak

Weight (100)

Market accessibility

1

Moderate 2

Outside Europe

–


33

3 Europe & USA

Strong 4

5 Europe

Strategic Marketing Management – Instructor’s Manual –

& USA

Market growth rate

–

< 5%

5% – 10%

> 10%

Length of the life cycle

–

< 2 years

2 – 5 years

> 5 years

Gross profit potential

–

< 15%

15% – 25%

> 25%

Strength of competition

–

Structured

Unstructured

Atomised

–

oligopoly

competition

competition

–

Commoditised

Weak

Strong

–

product

differentiation

differentiation

–

> 2000

2000 – 200

< 200

Potential for differentiation Concentration of customers

Table TN8.4 Attracti

veness – acti vities evaluation

Indicators Weight

Major business units (MBUs) Technical

Printing

Sportswear

Polyester

Linings

abrics

ribbons

Market accessibility –

–

–

–

–

–

Market growth rate –

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–


–

Gross profit potential – Strength of competition

–

–

–

–

–

–

Potential for differentiation

–

–

–

–

–

–

Concentration of customers

–

–

–

–

–

–

–

–

–

–

–

Weighted mean

100

Table TN8.5 Attractiveness – Indicators W

activities e valuation

eight

Major business units (MBUs) Technical abrics

Printing

Sportswear

Polyester

Linings

ribbons

Market accessibility

15

5

3

5

4

4

Market growth rate

15

4

3

3

1

1


15

5

3

4

4

3

Gross profit potential

15

5

5

5

1

1

Strength of competition

15

3

1

1

1

1

Potential for differentiation

15

5

3

4

1

1

Concentration of customers

10

5

5

5

2

1

100

4.55

3.20

3.80

2.00

1.75

Weighted mean

34


Table TN8.6 Competitiveness – evaluation indicators Evaluation scale Indicators

Weak

Weight (100)

Moderate

1

2

Strong

3

4

5

Relative market share

–

< 1/3 leader

> 1/3 leader

Leader

Unit cost

–

> direct

= direct

< direct

competitors

competitors

competitors

‘Me too’

Moderately

‘Unique selling

product

differentiated

proposition’

Weak control

Moderate

Strong

control

control Direct sales

Distinctive qualities Technological know-how Sales organisation Image

Table TN8.7 Compe Indicators

– – –

Independent

Selective

–

distributors

distribution

–

Very weak

Fuzzy

Strong

titiveness – a ctivities evaluation Weight

Major business units (MBUs) Technical

Printing

abrics

ribbons

Sportswear

Polyester

Linings


–

–

–

–

–

–

Unit cost

–

–

–

–

–

–

Distinctive qualities

–

–

–

–

–

–

Technological know-how

–

–

–

–

–

–

Sales organisation

–

–

–

–

–

–

Image

–

–

–

–

–

–

100

–

–

–

–

–

Weighted mean

Table TN8.8 Comp

etitiveness – activitie s evaluation

Indicators

Weight

Major business units (MBUs) Technical abrics

Printing

Sportswear

Polyester

Linings

ribbons


20

5

3

4

1

5

Unit cost

20

3

3

4

1

1

Distinctive qualities

15

5

2

4

1

1

Technological know-how

15

5

5

5

5

5

Sales organisation

15

5

5

4

4

1

Image

15

5

4

3

1

1

100

4.60

3.60

4.00

2.05

2.40

Weighted mean


35

Attractiveness rate

Technical fabrics ( SR: 33 – GM : 11)

5

Sportswear fabrics ( SR: 67 – GM : 24) 4

Polyester ( SR: 186 – GM : 13)

Ribbons ( SR: 90 – GM : 27)

3

2

Linings ( SR: 160 – GM : 16) 1

1

2

3

4

5

Competitiveness rate SR = Sales revenue; GM = Gross profit margin

Figure TN8.5 Strategic marketing diagnosis: attractiveness – competitiveness matrix

Table TN8.9

Strategic choices

Activities

Possible strategic choice

Recommendations

Technical fabrics

Market share conquest Market

Conquest

share defence Hold Printing ribbons

Sportswear

Market share conquest Hold then divest

Leave

Market share conquest

Conquest

Hold Polyester

Market share defence Hold the activity Cash maximisation

Maximisation

Divest Linings

Market share defence Hold the activity

Hold

Cash maximisation


36

Tissex

case study nine NEWFOOD Case summary The Newfood Company is preparing the launching of a new product which can be used as a snack and whose product life cycle is short. The problem is to estimate the level of sales of this new product and to assess its expected profitability over a three-year period. The marketing manager has some probability estimates of firstyear sales based on previous cases. He has also designed a base marketing programme and identified a certain number of alternative scenarios. This case is good illustration of the type of problems met in new product launching decisions where generally the information available is quite limited.

Learning objectives This case gives the student the opportunity to gain some familiarity with the analyses required prior to the launching of a new product. The objective is to place the emphasis on risk analysis through the use of subjective probabilities and of the uncertainty cost. The case also lends itself to th e simulation of alternative marketing plans, using price or advertising as main marketing instruments. The three-year planning horizon gives a dynamic perspective to the case and permits reference to the product life cycle concept. A last objective is also to familiarise the students with the preparation of a projected profit and loss statement over a period of three years, a good occasion for using Lotus or Excel. The case discussion can be organised in four steps: To establish the profit and loss statement of the base marketing plan; To proceed to a face value analysis of the risk associated with the project; To proceed to a formal risk analysis based on the subjective probabilities provided in the case; alternative marketing strategies and to analyse their profit and risk implications.

To propose

Determine the profit and loss statement of the base marketing plan over three years proposed by Mr Davies

Table TN9.1

–

Summary of basic economic data

Retail price Mark-up

$0.24 /unit (24 units per case) = $5.76 case 30% on retail price 30% x $5.76 = $1.73 /case

Manufacturer price

$5.76 – $1.73 = $4.03 /case Or: $5.76 x 70% = $4.03 /case

–

Unit direct cost

$1/case

Gross profit margin

$4.03 – $1 = $3.03/case

Fixed costs

$1 million/year

Advertising

$3 million/year

Profit constraint

$0.5 million /year

Let us adopt the following definitions:


37

The level of sales corresponding to zero profit defines the break-even point (BEP). BEP = ( Total of fixed costs)/(Unit gross profit margin )

This teaching note has been prepared by J.-J. Lambin and Ch. de Moerloose. All rights reserved.


38

Newfood

The level of sales where the target profit is reached defines the general equilibrium point (GEP). GEP = ( Total fixed costs + target profit )/(Unit gross profit margin). When Company first-year sales decay from one year to the next [the decay rate, designated by the symbol γ and estimated to be equal to 0.20 (see Table TN9.2)], sales over three years are inferior to three times first-year sales. The blow-up factor (also called the sales multiplicator), designated by beta, will be equal to ß = 1 + (1 – γ ) + (1 – γ )2 = 2.44 (if γ is equal to 0.20)

Table TN9.2

Estimation of the decay rate (γ )

The expected value of the yearly decay rate can be estimated on the base of past observations: it is simply the mean of the observed values for this parameter weighted by the frequency of occurrence. Taking the mid-point of each class interval as observed values, one gets

γ = 0.20 as follows: (0.25) x 0 + (0.50) x 0.20 + (0.25) x 0.35 = 0.1875 or 0.20

In the worst case, the decay rate could be as high as 0.30. In contrast, in the best case it could be as low as 0.15. When first-year sales decay year by year, sales over a three-year period are of course less than three times first-year sales. Beta, the sales multiplicator (or blow-up factor) over three years will be equal to 2

ß = 1 + (1 –γ ) + (1 –γ ) = 1 + 0.80 + 0.64 = 2.44 In the worst case, beta will be equal to: 1 + 0.70 + 0.49 = 1.19 In the best case, beta will be equal to: 1 + 0.85 + 0.72 = 2.57

The break-even point over three years will then be: (Total fixed costs over 3 years / Unit gross profit margin

×

ß)

The general equilibrium point over three years will be: (Total fixed costs + Target profit over 3 years / Unit gross profit margin

×

ß)

In the base marketing programme, we have the following values for these parameters: $1 million + $3 million BEP (1 year) =

--------------------------------- = 1 320 132 cases $3.03 /case

BEP (3 years) =

($1 million + $3 million) × 3 ---------------------------------------- = 1 623 113 cases ($3.03 /case) × 2.44 ($1 million + $3 million + $0.5 million)


39

Strategic Marketing Management – Instructor’s Manual GEP (1 year) =

---------------------------------------------------------- = 1 485 148 cases $3.03 /case ($1 million + $3 million + $0.5 million) × 3 ------------------------------------------------------------- = 1 826 002 cases

GEP (3 years) =

($3.03/case) × 2.44 It is this last result which matters, when the decision is analysed over a three-year planning horizon and a minimum target profitability of 3 × 0.5 = $1.5 million over three years. If the profit constraint was $0.5 million each year, the problem should be considered in a different perspective. Common sense suggests accepting the profit constraint over three years, and not year by year. This level of 1.8 million cases to be sold during the first year is to be compared with the expected value of first-year sales. The expected value of first-year sales is given by the sum of conditional sales weighted by their respective probability, or

E(Q) = Σ pi × Qi

Taking the mid-values of the sales intervals given by Mr Davies, we obtain an expected value for first-year sales equal to 1 925 000 cases: 10% × 750 000 + 20% × 1 250 000 + 25% × 1 750 000 + 25% × 2 250 00 + 10% × 2 750 000 = 1 925 000 cases This expected value (1 925 million cases) being superior to the equilibrium level calculated above, the base marketing plan is well in line with the stated objectives and is therefore acceptable as such. The profit and loss statement presented in Table TN9.3 confirms this conclusion and shows the flows of expenses and revenues over the three years.

Table TN9.3

Profit and loss statement under the base marketing programme Year 1

Year 2

Year 3

1. Expected sales in cases

1 925 000

1 540 000

1 232 000

4 697 000

2. Sales multiplicator of year 1 sales

1.00

0.80

0.64

2.44

3. Company sales price per case

$4.03

$4.03

$4.03

$4.03

4. Unit direct cost per case

$1.00

$1.00

$1.00

$1.00

5. Unit gross profit margin

$3.03

$3.03

$3.03

$3.03

6. Total sales revenue

$7 757 750

$6 206 200

$4 964 960

$18 928 910

7. Total gross profit margin

$5 832 750

$4 666 200

$3 732 960

$14 231 910

8. Advertising expenditures

$3 000 000

$3 000 000

$3 000 000

$9 000 000

9. Fixed costs

$1 000 000

$1 000 000

$1 000 000

$3 000 000

$1 832 750

$666 200

$(267 040)

$2 231 910

10. Gross profit contribution

Cumulative

Using the subjective probability distribution provided by Mr Davies concerning first-year sales, compute the profit expected within the framework of the base marketing plan The expected value of profit can be calculated in the same manner using the profit function. Conditional profits are used instead of conditional sales. Expected value of profit (see Table TN9.3): E (π) = 1 925 000 × ($4.03 – $1) × 2.44 – ($3 million + $1 million)


40

×

3

= $2 231 910


41

Table TN9.4 The cost of uncertainty in the base marketing programme Conditional sales

Probabilities

Expected sales

(intervals)(mid-points)

pi

E (Q) = pixQi

[million cases]

[ – ]

0.5 –1.0

π

Conditional profits ( i)

Expected profit

Choice

π

E (πIP )

E (π) = pix i

[cases]

[ ]

[ ]

Profit perfect info

[ – ]

[ ]

E (R)

[ ]

0.75

0.10

75 000

(6 455 100)

(645 510)

1.0 –1.5

1.25

0.20

250 000

(2 758 500)

(551 700)

no

1.5 –2.0

1.75

0.25

437 500

938 100

234 525

yes

234 525

2.0 –2.5

2.25

0.25

562 500

4 634 700

1 158 675

yes

1 158 675

0

2.5 –3.0

2.75

0.10

275 000

8 331 300

833 130

yes

833 130

0

3.0 –3.5

3.25

0.10

325 000

12 027 900

1 202 790

yes

100%

1 925 000


2 231 910

no

Regret

0

645 510

0

551 700

1 202 790 3 429 120

0

0 1 197 210

Expected value of conditional profits: E (π) = 10% × ( – $6 455 100)

+20% × ( – $2 758 500) +25% × (+ $938 100) +25% × (+ $4 634 700) +10% × (+ $8 331 300) +10% × (+ $12 027 900) = $2 231 910

Given the above results, are you in favour of a ‘go’ decision now or would you prefer to postpone the

decision to collect additional information? If we base the decision on the expected value of sales and/or profit, the implicit assumption is made that the Company has in its portfolio a large number of projects whose financial results could, statistically speaking , offset each other. In reality each project is unique and expected values are simply statistical indicators of the attractiveness of each project. If the firm only has few projects in its portfolio, it will be much more sensitive to the risk implied by each of them. In this particular case, if expected sales are indeed 1 925 million cases and the corresponding expected profit $2 231 910 over three years, there is still a 0.55 probability of achieving much less satisfactory results and a 0.45 probability of achieving better results. Thus, the risk remains high and it could be a wise attitu de to try to reduce the remaining uncertainty by collecting additional information before making the final decision.

Compute the cost of uncertainty and determine whether the market research department’s proposal should be considered or not. If yes, under which conditions? The cost of uncertainty represents the loss to be supported due to the lack of perfect information. Should the information concerning first-year sales be perfectly certain, the decision-maker would decide ‘not to launch’ the product when sales are inferior to the BEP level, that is, in this case, for the first two events (or states of nature) having respectively a probability of 0.10 and 0.20 (in total 0.30). By making that negative decision, Mr Davies would avoid a loss of $1 197 210. This sum is also the maxi mum price Mr Davies would be ready to pay to get this ‘perfect’ information. Loss in the first event (P = 0.10)

= 750 000 cases × ($4.03 – $1)/case × 2.44 – ($3 million + $1 million) 455 100 Loss in the second event (P = 0.20)

×

3 = – $6

= 1 250 000 cases × ($4.03 – $1)/case × 2.44 – ($3 million + $1 million) 500

×

3 = – $2 758

The expected value of the ‘regret’ is E ( R) = (0.10) × 6 455 100 + (0.20) × $2 758 500

= $645 510 + $551 700 = $1 197 210 Thus, we see that the uncertainty cost is indeed equal to the difference between the profit under perfect information and the profit expected under imperfect information as calculated above in the profit function (see Table TN9.4). $3 429 120 – $2 231 910 = $1 197 210 . The cost of the proposed market research study ($75 000) is covered by the uncertainty cost and could be accepted by Mr Davies at least if the sales estimates are known within an interval of 250 000 cases. If the reliability of the market research is high, the proposal may be attractive.

43

Strategic Marketing Management – Instructor’s Manual One should consider however the time factor: a six-month delay is long for a product whose life cycle is three years and which could easily be imitated by competition.

Newfood

Which alternative marketing programmes could be contemplated in order to reduce the risk of this launching decision? Mr Davies is considering four alternative plans based on different levels of advertising expenditures and different prices. These alternatives programmes all imply a change in the decay rate of firstyear sales. S1. Base marketing strategy. Advertising budget: ($3; $3; $3 million) Price: $0.24/case S2.

Depreciation rate: 0.20 Maximum penetration market strategy Advertising budget: ($6; $6; $6 million) Price: $0.24/case

S3.

Depreciation rate: 0.15 Intermediate marketing strategy. Advertising budget: ($4.5; $4.5; $4.5 million) Price: $0.29/case

S4.

Depreciation rate: 0.20 Skimming marketing strategy. Advertising ($6; $4; $4 million) Price: $0.34/case Depreciation rate: 0.30

See Figure TN9.1 for the analysis of each strategy.

Break-even point first year

Gross profit 3 years

s = [$3M - $3M - $3M]

p d = $ 0.24

= [$6M - $6M - $6M

M1

l – γ = 0.80 β = 2.44 1 826 000 cases

$2 231 910

M2

s l – γ = 0.85 β = 2.57 2 889 394 cases

–$6 009 832

]

p d = $ 0.29 M3 390

1 - γ = 0.80 β = 2.44

s = [$4.5M - $4.5M - $4.5M] 1 906 214 cases $1 677

1 - γ = 0.70 β = 2.19

s = [$6M - $4M - $4M] 1 793 522 cases $2 856

p d = $ 0.34

M4 183


44

Figure TN9.1 Analysis of the alternative marketing strategies S1: Base marketing strategy Over a three-year planning horizon, the first-year general equilibrium level (GEP) is at 1 826 002 cases and the gross profit over three years is equal to $2 231 910. Given the first-year expected sales (1 925 000 cases) the GEP is acceptable and the profitability satisfactory. However, there is still a 0.30 probability of having a loss larger than $2.7 million and a 0.20 probability of achieving a profit larger than $8.3 million. The decision-maker will make his (or her) final choice on the base of his (or her) risk aversion rate, which will eventually depend on the general financial situation of © Jean-Jacques Lambin, 2000. Market-driven Management , published by Macmillan Press

the Company or on the availability of more attractive projects. The personal situation of the decision-maker will also influence the final choice. The success of this ‘moderate price/moderate advertising budget’ strategy implies the existence of a strong market price sensitivity and of a low market advertising sensitivity. Thus the channel and the communication decisions must be compatible with this low price strategy. For instance, stores specialising in dietetic products generally have high distribution margins and high retail prices. Similarly, an advertising campaign emphasising the high nutritional value of the product might be undermined by the low price, which often perceived as signal of lower quality.

S2: Maximum penetration marketing strategy The general equilibrium point (GEP) is equal to 2 889 394 cases, a level which is largely above the first-year expected sales (1 925 000 cases). As a result, the expected loss over three years is high and equal to $6 009 833. This ‘high advertising budget/moderate price’ strategy suggests that the firstyear sales forecast may be too pessimistic. To be successful, this strategy implies high price and advertising sensitivities.

S3: Intermediate marketing strategy The general equilibrium level is at 1 906 214 cases, a level close to the expected sales. The expected profit is moderate and equal to $1 677 390. The risk of this strategy is higher than the base strategy since there is a 0.30 probability of having a loss higher than $4.7 million. The initial sales forecast of the base scenario will remain valid if the highest advertising effort made can offset the price increase from $0.24 to $0.29. Under this condition, this strategy is acceptable. Here again the risk aversion rate of the decision-maker will be determinant.

S4: Skimming marketing strategy A high price/high advertising budget strategy is typical of a skimming strategy. The general equilibrium point is at 1 793 522 cases and the profit over three years is equal to $2 856 183. This programme is appropriate when you have to overcome the inertia of potential buyers who are not very price sensitive but very advertising sensitive. To be successful, the price should be perceived as a signal of a high quality product offering superior value to the buyer. Thus the product must have distinctive qualities perceived as unique by the potential buyers. The role of advertising is then to convince the market of the reality of this distinctive value in a creative way. The profitability of this strategy is satisfactory. A critical point is the estimate of the decay effect over time.

case study ten SAS: MEETING CUSTOMER EXPECTATIONS

The case raises the problem of the sustainability of a quality control programme (moments of truth) in a service firm. Before entering into the SAS Company case, two preliminary questions could be discussed: 1.

What are the main characteristics of the demand for services? (see in the main text, pp. 299 – 303);

2.

What are the components of service quality? (see in the text, pp. 504 – 6).

The diagram presented in Figure 11.12 (p. 505) can be used to describe the expectations of business versus leisure travellers in the airline market. The most important gap is between customers’ expectations of service and their

45

Strategic Marketing Management – Instructor’s Manual perception of the services actually delivered. An interesting exercise to organise in a classroom discussion is to identify all the ‘moments of truth’, that is, all the contacts an individual customer can have with SAS employees in a regular travel experience. Although the gap model proposed by Berry et al . (1994) provides a key diagnostic tool for service quality, to be effective this model needs to be embedded in a service quality process that encompasses the whole firm. The authors provide a pragmatic list of actions that service organisations can take to improve the quality of the service that they deliver. These lessons also capture the key components that need to be built into any service quality system. Lesson One: Listening . Quality is defined by the customer. Conformance to company specifications is not quality; conformance to customers’ specifications is. Spending wise ly to improve service comes from continuous learning about expectations and perceptions of customers and manufacturers. Lesson Two: Reliability. Reliability is the core of service quality. Little else matters to a customer when the service is unreliable. Lesson Three: Basic Service. Most service customers want the basics: they expect fundamentals, not fancies; performance instead of empty promises. Lesson Four: Service Design . Reliably delivering the basic service that customers expect depends in part on how well various elements function together in a service system. Design flaws in any part of a service system can reduce quality. Lesson Five: Recovery. Research shows that companies consistently receive the most unfavourable service quality scores from customers whose problems were not resolved satisfactorily. In effect, companies that do not respond effectively to customer complaints compound the service failure and thus fail the service twice. Lesson Six: Surprising Customers. Exceeding customers’ exp ectations requires the element of surprise. If service organisations cannot only be reliable in output but can also surprise the customer in the way the service is delivered, then they are truly excellent. Lesson Seven: Fair Play. Customers expect service companies to treat them fairly and become resentful and mistrustful when they perceive they are being treated otherwise. Lesson Eight: Teamwork . The presence of service ‘teammates’ is an important dynamic in sustaining servers’ motivation to serve. Service team building should not be left to chance. Lesson Nine: Employee Research. Employee research is as important to service improvement as customer research. Lesson Ten: Servant Leadership . Delivering excellent service requires a special form of leadership. Leadership must serve the servers, inspiring and enabling them to achieve.

The instructor should submit this list to the students and, building on the students experience as air travellers, generate proposals for improving service quality.

This teaching note has been prepared by J.-J. Lambin and Ch. de Moerloose. All rights reserved. © Jean-Jacques Lambin, 2000. Market-driven Management , published by Macmillan Press

The measurement of service quality is central in any quality control programme. The SERVQUAL instrument developed by Zeithaml et al . (1990) is composed of five service quality dimensions. For each of these five dimensions, expectations questions can be formulated and confronted with customer perceptions.

Tangible expectations 1. Excellent companies will have modern-looking equipment. 2. The physical facilities at excellent companies will be visually appealing. 3. Employees of excellent companies will be neat in appearance. 4. Materials associated with the service (for example, pamphlets or statements) will be visuallyappealing in an excellent company.


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Reliability expectations 1. When excellent companies promise to do something by a certain time, they will do so. 2. When customers have a problem, excellent companies will show a sincere interest in solving it. 3. Excellent companies will perform the service right the first time. 4. Excellent companies will provide their services at the time they promise to do so. 5. Excellent companies will insist on error-free records.

Responsiveness expectations 1. Employees of excellent companies will tell customers exactly when services will be performed. 2. Employees of excellent companies will give prompt service to customers. 3. Employees of excellent companies will always be willing to help customers. 4. Employees of excellent companies will never be too busy to respond to customer requests.

Assurance expectations 1. The behaviour of employees of excellent companies will instill confidence in customers. 2. Customers of excellent companies will feel safe in their transactions. 3. Employees of excellent companies will be consistently courteous with customers. 4. Employees of excellent companies will have the knowledge to answer customer questions.

Empathy expectations 1. Excellent companies will give customers individual attention. 2. Excellent companies will have operating hours convenient to all their customers. 3. Excellent companies will have employees who give customers personal attention. 4. Excellent companies will have the customer’s best interest at heart. 5. The employees of excellent customers will understand the specific needs of their customers. This set of questions can be used in the SAS case to monitor service quality.

References Berry L.A., Parasuraman A. and Zeithmal V.A. (1994) Diagnosing Service Quality in America, Academy of Management Executives, 8, N°2, pp.32 –52. Bateson J.E.G. and Hoffman K.D. (1999) Managing Services Marketing, 4th edn, Fort Worth, The Dryden Press. Zeithaml V., Parasuraman A., and Berry L. (1990) Delivering Quality Service, New York, The Free Press.

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section two SOLUTIONS TO PROBLEMS Question 5.3 Market share

= Penetration × Exclusivity × Intensity

Market share

= 0.30 × 0.60 × 1.00 = 0.18

Market share (*) = 0.30 × 0.50 × 1.00 = 0.15

Question 5.4 Equilibrium market share = attraction / (1 – loyalty + attraction) 1. Market share of brand A = 0.30 / (1 – 0.80 + 0.30) = 0.60 Market share of brand B = (1 – 0.80 / (1 – (1-0.30) + (1 – 0.80) Market share of brand B = 0.20 / (1 – 0.70 + 0.20) = 0.40 or Market share of brand B = 1 – 0.60 = 0.40 Note: Demonstration MS t + 1 = α MS t + β (1 – MS t ) As ‘equilibrium’ means : MS t + 1 = MS t = MS

Hence

MS = α MS + β (1 – MS ) MS = β / (1 + β – α )

To reach an equilibrium MS = 0.60, the manager of brand B should – either increase the attraction rate β to

= MS (1 – α ) / (1 – MS ) = 60% (1 – 0.70) / (1 – 0.60) = 0.45 instead of 0.20

– or increase the loyalty rate α to

= 1 + β – β/ MS = 1 + 0.20 – 0.20/0.60 = 0.866 instead

of 0.70 – or combine part of both increases. He would prefer pressure on loyalty, since required pressure seems to be higher on attraction (× 2.25) than on loyalty (× 1.23). But he must remain careful about potential saturation effect on loyalty (near 100 per cent).

Question 5.5 Utility is calculated following the composition approach, as shown in the table below:

Attributes Scores of Brand

Brand A

Attribute 1

10

Attribute 2

importance

determinance

6

4

8.00

7.62

8

3

7.80

7.54

5

7.30

7.27

8

4.70

4.88

8

9

Brand C

6

8

Brand D

4

3

0.4

Attribute 4

8

Brand B

Importance

Attribute 3

0.3

10 7 0.2


48

0.1

Differentiation

2.58

2.71

1.71

2.16

Determinance

0.32

0.33

0.19

0.16

1.00

Differentiation of an attribute is measured by the standard deviation of the distribution of this attribute’s evaluations. Determinance is the normed result of the multiplication of the importance by the differentiation.

The importance score is calculated as a weighted sum of perceived presence of the attributes by their importance. It is the same principle for the determinance score . Both approaches give brand A as being the preferred one.

Question 5.6 Attribute A

Attribute B

Attribute C

Attribute D

Weight

0.40

0.30

0.20

0.10

Brand A

8

4

4

1

Brand B

8

3

5

3

Brand C

6

6

5

3

Brand D

5

9

6

5

1.

Compensatory model: we maximize the weighted average Brand A = 5.3 Brand B = 5.666 Brand C = 5.5 Brand D = 6.4 is chosen

2.

Disjunctive model: we consider only the best brands on one or some attributes. (Let us say attribute A). Then brand A and B are considered.

3.

Conjunctive models: we will eliminate brand with score lower than 5. Only brand D remains.

4.

Lexicographic model: we select first on the most important attribute, then on the next one if any ex aequo.

On attribute A (most important), brand A and B are the best, then on attribute B (second importance), brand A is best, so it is chosen.

Question 8.5 Maximum selling price = $5 000 Initial production costs = $8 000 Slope of experience = 0.85 If λ = 0.85 then the cost elasticity ε = – log λ /log 2 = 0.234 Production costs are calculated following the mathematical expression of the experience curve. ε

C = C0 (Q/Q0) –

The costs sharply decrease as shown in the table below. ε

C3 = C1 (Q3/Q1) – = 8000 (3/1) – 0.234 =(8000)(0.773) = 6186

Cumulated production (Q)

Unit production cost (C)

Unit gross profit margin

Cumulative gross profit margin

1

8000

–3000

–3000

2

6800

–1800

–4800

3

6186

–1186

–5986

4

5780

–780

–6766

8

4913

87

–6679


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Strategic Marketing Management – Instructor’s Manual 16

4176

824

–5855

32

3750

1250

–4605

40

3017

1983

–2622

Solutions to Problems

The unit cost falls sharply and at 40 units, the unit gross profit margin is about 40 per cent of the selling price. However, the average unit cost is equal to 5 328, which is above the proposed selling price. The computed estimated profit shows that the break-even point requires only 6 units to be sold if the slope of the learning curve observed is equal to the one anticipated. With an absolute potential market of 100 units, the new activity should clearly be adopted.

Question 11.3 Break-even point is total fixed cost divided by unit margin (no profit/no loss). Equilibrium takes into account a minimum profit level. P – C = M = $90/unit – $33/unit = $67/unit Q = 350 000 units

but E (Q) = 30% × 1.2Q + 50% × 1.0Q + 20% × 0.8Q = 1.02Q = 357 000 units F = $3 000 000 each year

Advertising = $10 000 000, then $3 000 000 and $3 000 000 r = 10% K = $50 000 000

Depreciation rate = 70% and hence multiplicator = 1 + (1 – 70%) + (1 – 70%)2 = 2.49 (One unit sold in year 1 leads to 2.49 units sold over 3 years) 1.

Break-even (first year)

= ( F + Advertising) / M

= (10 000 000 + 3 000 000) / 67 = 194 030 units Break-even (three years) = ( F + Advertising) over three years/ ( M × multiplicator) = (16 000 000 + 9 000 000) / (67 × 2.49) = 149 853 units 2.

General equilibrium (first year)

= ( F + Advertising + r K ) / M = (10 000 000 + 3 000 000 + 5 000 000) / 67 = 268 657 units

General equilibrium (three years) = ( F + Advertising + r K ) over 3 years / (M × multiplicator) = (16 000 000 + 9 000 000 + 15 000 000) / (67 765

×

2.49) = 239

As all these points are below the expected quantity sold (357 000 units) the situation is satisfactory. 3.

There is still: 30% probability of selling

1.2Q = 420 000 units

50%

1.0Q = 350 000 units

20%

0.8Q = 280 000 units

We can immediately see that the pessimistic quantity (280 000 units) is even higher than the equilibrium point, so there is no risk. Detailed computation of the expected profit is shown below. The worse profit is > $15 000 000, which confirms that the global equilibrium is reached.


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Probability

Quantity

Profit

Profit x Probability

30%

420 000

(420 000 x 67* 2.49) – 25 000 000 = 45 068 600

13 520 580

50%

350 000

(350 000 x 67* 2.49) – 25 000 000 = 33 390 500

16 695 250

20%

280 000

(280 000 x 67* 2.49) – 25 000 000 = 21 712 400

4 342 480

E (Q)

357 000

(357 000 x 67* 2.49) – 25 000 000 = 34 558 310

∑ = 34 558 310

Question 12.5 Discounts are multiplied and not added up (since it reduces the reduction!). With quantity discount, the purchase price is $4 × (1 – 0.07)= $4 × (0.93)= $3.72 With quantity and promotional discount, the purchase price is $4 × (1 – 0.07) (1 – 0.05)= $4 × (0.884) = $3.53 And not $4 × (1 – 0.07 – 0.05) = $4.(0.88) = $3.52

Question 12.6 The VAT is a mark-up margin while the distribution margin is usually a discount. Price = Cost × (1 + VAT/1 – Distribution margin) Price = $120 × (1.205 / 1 – 0.30) = $206.57 The price without VAT is 120

×

(1 – 0.30) = $171.43

The distribution margin is $ 51.43 = 0.30($171.43) The VAT is $35.14 (20.5% × $171.43). It is also paid on the distribution margin.

Question 13.1 Q = 300 P = $3.00C = $2.50

M = $3.00 – $2.50 = $0.50 M * = $0.50/$3.00 x = – 10%

x)(100) ∆Q(in %) = x / ( M * – ∆Q = 0.10 / (0.167 – 0.10)(100) = 149.3% or a sales multiplicator of 2.493.

The required volume: Q’ = 300(2.493) = 747.9 units Implied price elasticity: +150% / – 10% = – 15 (very unrealistic)

Question 13.2 P = $19.80 30 000 units

C = $9.90 + $3.30 = $13.20 M = $19.80 – $13.20 = $6.60 Q =

∆Q = 3 000 units

Advertising = $39 600 ∆ P = [( M ) (Q) + (Advertising)/( Q+∆Q)] – M


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Strategic Marketing Management – Instructor’s Manual ∆ P = [(6.60)×(30 000) + (39 600)/(33 000)] – 6.60 = $0.60

The new price should be: $ 19.80 + $0.60 = $20.40, assuming no price elasticity.

Question 13.3 1.

Target price = C + F /Q + r × K / Q C

= $20

F

= $2 000 000

Q

= 10% 1 000 000 units K = $10 000 000 r =

10% = 20 + 2 000 000/1 000 000 + 10% 10 000 000/1 000 000 = $22

P

Solutions to Problems

2.

Perceived value price = Average price × score of the product / Average score all products

Attribute Brand

A

B

Elix 10

6

9

Lumina

8

7

Importance (1)

0.50

Score C

Total

8.75 9 0.25

0.25

Average : 0.71

0.00

Imp*Diff

0.18

0.00

0.88

0.80

0.20

0.00

Determinance (2)

Adjusted

(1)

mean(2)

(1)

9.20

$52.24

$54.12

8.00

7.80

$47.76

$45.88

(2)

8.5

$50.00

$50.00

1.00 8.375

Differentiation 1.41 0.71

Mean

Price

1.00

Value price for Elix, based on importance is $52.24 but, based on determinance it will be $54.12 3.

Optimum price = C (ε / (1+ε )) C = $20 ε = – 1.7 to – 2.0 P 1 = 20 ( – 1.7 / (1.0 – 1.7 )) = 20 × 2.4285 = $48.57 P 2 = 20 ( – 2.0 / (1.0 – 2.0 )) = 20 × 2.0000 = $40.00

4.

A decision has to be taken about which price to choose, as they differ greatly. We recommend the target price ($40) as it maximizes profit under pessimistic assumption (highest ε ) while in line with perceived value and target prices.

Question 13.4 Transfer price would be between the full cost ($12) and the market price less distribution margin ($16 – $2 = $14).

Question 15.5 Vidale and Wolf’s model is δ q/δ t =

β s (Q – q)/Q – (1 – L) q The data are:


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