University of Sunderland BA (Honours) Business Management
MKT306 Marketing Strategy Version 2.0
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Marketing Strategy
Contents How to use this workbook Introduction Unit 1 What is Strategic Marketing? Introduction Defining marketing Customers Profit Marketing mix Marketing orientation A definition of strategy Linking corporate strategy to marketing strategy Missions, visions and corporate objectives From purpose to strategy Marketing orientation revisited Tactics The traditional marketing concept versus the relationship marketing concept The structure of a marketing strategy References
1 2 3 5 6 9 12 13 17 18 19 21 22 23 29
Unit 2 Assessing the Internal Environment Introduction The value chain based view (VBV) Working with customers to create value Understanding the value chain Developing the firm’s competitive advantage Competition analysis in an industry using Porter’s 5-forces Development of a dynamic benchmarking model, Hollensen (2003) References
31 37 39 40 43 47 57 60
Unit 3 Assessing the External Environment Introduction U n iversity of Su n derlan d
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Consumer Behaviour Influences on consumer decision making Environmental influences Environmental forces Organisational forces Measuring Customer Satisfaction Competitor analysis and intelligence Learning about our competitors Identification of competitors’ chosen markets Understanding relationships in the marketplace Relationships with suppliers PESTLE, PLESTIE, SLEPT or PEST Factors References
63 73 78 80 81 84 88 89 91 93 95 97 102
Unit 4 Developing Marketing Strategies Introduction Corporate objectives Managing a portfolio of products Market segmentation and positioning Segmenting the B2B market References
103 108 111 120 125 133
Unit 5 Developing Marketing Programmes Introduction Service strategies Product life cycle Pricing The economist’s view of pricing Distribution Criteria for choosing distribution channels Controlling distribution channels Marketing Communications How to improve levels of response in marketing communications Branding Sponsorship References
135 137 141 142 144 148 149 152 159 162 166 173 176
Unit 6 Organising, Implementing and Controlling the Marketing Effort Organisational structures Marketing audit Setting sales targets
179 183 188
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Marketing strategies and programmes Customer lifetime value References
190 192 203
Unit 7 Focus on Direct Marketing and Customer Relationship Management Introduction Defining direct marketing Relationship marketing The strategic role of direct marketing Loyalty What Creates Loyalty? Loyalty schemes Understanding lifetime value Direct marketing strategy Acquisition Allowable marketing cost Retention References
205 206 208 213 216 218 221 227 231 233 237 249 258
Unit 8 Marketing, Technology and E-commerce Introduction Innovation and change How innovation happens Direct marketing and technology Reasons for the growth of direct and relationship marketing approaches The importance of the database E-commerce and loyalty The Internet and the marketing concept The World Wide Web and web ‘presence’ Buyer behaviour online E-commerce marketing strategy References
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How to use this workbook This workbook has been designed to provide you with the course material necessary to complete Marketing Strategy by distance learning. At various stages throughout the module you will encounter icons as outlined below which indicate what you are required to do to help you learn. This Activity icon refers to an activity where you are required to undertake a specific task. These could include reading, questioning, writing, research, analysing, evaluating, etc.
This Activity Feedback icon is used to provide you with the information required to confirm and reinforce the learning outcomes of the activity.
This icon shows where the Virtual Campus could be useful as a medium for discussion on the relevant topic.
It is important that you utilise these icons as together they will provide you with the underpinning knowledge required to understand concepts and theories and apply them to the business and management environment. Try to use your own background knowledge when completing the activities and draw the best ideas and solutions you can from your work experience. If possible, discuss your ideas with other students or your colleagues; this will make learning much more stimulating. Remember, if in doubt, or you need answers to any questions about this workbook or how to study, ask your tutor.
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Marketing Strategy
Introduction LEARNING OUTCOMES On successful completion of this module, students should be able to: Knowledge and Understanding
· Explain the nature of marketing strategy and its significance for the organisation.
· Assess the drivers and factors affecting the choice of marketing strategies.
· Evaluate appropriate models and techniques that aid the strategic marketing process.
· Analyse contemporary marketing issues and problems in a strategic context. Skills
· Research skills. · Interpretation of advanced information and marketing data handling skills.
· Assessing communications skills to develop effective relationship marketing.
Content synopsis The module aims to review the nature and scope of marketing strategy and evaluate how strategies are developed, given different organisational contexts. The module considers that strategy is a fundamental pattern of present and planned objectives, resource deployments and interactions of an organisation with markets, competitors and other environmental factors. The module lays the foundation by appraising the mechanics of marketing strategy, considering the evolving models and practices that are essential to the development and implementation of strategy. The module examines U n iversity of Su n derlan d
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Marketing Strategy – Introduction
Marketing Strategy
contemporary issues and problems that dominate the thinking of marketing executives as they establish and execute a range of marketing strategies.
Amplified content Portfolio Analysis – the management of groups of brands, product lines and services. The analysis focusing on the interrelationship of products and services within a product / service mix. The performance of the mix will be emphasized in the module. Segmentation – the process of dividing a market into distinct groups of buyers with similar requirements. The approach provides one of the main ways of implementing the marketing concept but also directs a firm’s marketing strategy and resource allocation among different markets and products. Environmental Analysis – the broad societal forces that shape marketing activities. The external environment represents sources of opportunities and threats. Marketers must be able to prioritize these opportunities and threats according to such factors as the relevance to the organisation, the cost effectiveness of strategies to deal with the threats and opportunities, and the urgency of the threat and opportunity. New Product Development – new and improved products hold the key to business survival. Many organisations develop new products based on orderly procedures, employing comprehensive and relevant data, and intelligent decision making. Competitor Analysis – the process of identifying key competitors; assessing their objectives, strategies, strengths and weaknesses, and reaction patterns, and selecting which competitors to attack or avoid. Value Chain Analysis – the chain of activities by which a company brings in materials, creates a product or service, markets it and provides a service after a sale is made. Each step creates more value for the consumer. Building sustainable competitive advantage based on the company’s positioning in the value chain. Internal Marketing – marketing efforts aimed at a company’s own employees with the purpose of ensuring that appropriate policies are in place to support the marketing strategies aimed at customers and other shareholders. Marketing Audit – the systematic examination of a business marketing environment, objectives, strategies and activities with a view to identifying key strategic issues, problem areas and opportunities.
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Marketing Strategy – Introduction
Relationship Marketing – the process of creating, maintaining and enhancing strong longterm relationships with customers and other shareholders through mutual exchange and trust. It seeks to build a chain of relationships between the company and its main stakeholders. Evaluation and Implementation – considering drivers affecting strategy, formulation, reflecting upon options available, and the priority routes to be followed. The factors affecting how strategies are implemented. ETechnology in Marketing – considering the reasons for the rapid development of ecommerce and evaluating the alternative routes for profitable ecommerce strategies. Reviewing how the business vision supported by advanced information technology can increase the effectiveness of the business relationship between trading partners. Contemporary Issues in Marketing – looking at the range of issues – branding, marketing ethics, services marketing, not for profit marketing, and small business marketing.
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Unit 1
What is Strategic Marketing? Welcome to the strategic marketing module. This builds upon your previous learning about marketing by looking in more depth, and with a more critical eye, at the development of a marketing strategy. This module combines theory with practice so that you can see how, by definition, strategic decisions made at each stage have material consequences on the long term health of a company or organisation. To reflect an international student body that has a range of business experiences to draw upon, the examples, activities and case studies refer to a range of organisations of varying size and various currencies (sterling, euros and dollars). In some instances, a calculator will be needed to enable you to work through examples. The core textbook for this module, Svend Hollenesen’s Marketing Management: a relationship approach (2003) is used throughout but not exclusively. The relationship approach is referred to, but is also balanced by an acknowledgement of the traditional tools of strategic marketing management. However, relationship marketing (RM) is an important concept and in order to develop your understanding of the practice of RM, a later unit focuses on direct marketing principles. Two other units focus on the impact of technology on making strategic marketing decisions and on the wider responsibilities of organisations in terms of their social, ethical and environmental impact.
Introduction In this first unit we will consider what marketing is and what marketing organisations do. It is important to consider the definitions of marketing and the marketing function since it varies from person to person and from company to company. On the one hand marketing may be considered to be a set of tools and techniques but on the other it can be a philosophy that inspires the entire company and informs its corporate strategy. This unit summarises a number of ideas that are looked at in more depth in later units to give you an overview of strategic marketing and how it is planned.
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LEARNING OUTCOMES After studying this unit you should be able to
· Define marketing and marketing management. · Describe the role of marketing in the wider company strategy. · Distinguish between different marketing orientations. · Distinguish between objectives, strategy and tactics. · Demonstrate an appreciation of the complexity of strategy development.
Defining marketing In this section we think about the position and role of marketing within an organisation. Inevitably, the importance of marketing will vary from company to company and, perhaps, between industries. This is hardly surprising since the level of marketing expertise also varies widely. It is, perhaps, useful at this stage to review what you understand by the term ‘marketing’.
ACTIVITY From memory, write as full and complete a definition as you can of marketing.
ACTIVITY FEEDBACK It is highly likely that you wrote something like the following: “Marketing is the management process which identifies, anticipates and satisfies customer requirements efficiently and profitably.”
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This definition comes from the Chartered Institute of Marketing (CIM) in the UK, the largest professional marketing body in the world. It contains many of the key terms central to the marketing function. “Marketing is a social and managerial process by which individuals and groups what they need and want through creating, offering and exchanging products of value with others.” Kotler (1999) “Marketing is an organisational function and a set of processes for creating, communicating and delivering value to customers, and for managing customer relationships in ways that benefit the organisation and its stakeholders.” American Marketing Association (AMA) We will now consider some of the key terms used in these definitions.
Customers Above all else, and more than any other functional department in an organisation, marketing is concerned with customers. In one sense it is easy to argue that without customers there would be no company. They are, after all, the only source of income for companies. Having the very ‘best’ product in terms of its performance or specification means little if there are not enough customers willing and able to buy the product. You will consider this at greater length in Units 2 and 3 and as you learn about segmentation in Unit 5. However as Malcolm McDonald (McDonald 1999, p8) says – “Cheapness, efficiency, quality (in the sense of international standards such as ISO) or, indeed, any other measure, are not criteria of effectiveness, since there is little point in producing anything cheaply, efficiently or perfectly if people don’t actually want it and don’t buy it.” So, even where we can identify that there are many customers already active in the market, that is buying similar products to meet similar needs, we still need to understand the nature of these needs as fully as possible.
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Customer needs Customer needs, or more properly their needs and wants, can only be fully met by understanding how and why these needs arise. We also need to understand how different customers seek to meet these needs and wants in different ways. Malcolm McDonald again – “In the commercial sector, research has shown that there is a direct link between longrun profitability and the ability of a firm to understand its customers’ needs and provide value for them. For industries previously protected from competition, such as the airline industry and telecommunications, many now know that sustainable profitability can only come in the long run through continuous customer satisfaction.” (McDonald 1999) Some may argue, however, whether marketing is really concerned with needs or even wants. Critics of marketing suggest that its main role is to stimulate demand. Furthermore in those organisations, such as charities and governmentrelated bodies such as health service providers, whilst needs are very easy to define, the idea of a customer is less easily understood. In some cases marketing techniques may be employed to promote changes of behaviour – such as stopping smoking – or to regulate demand of a finite resource such as benefits for elderly people or health screening. These issues will be looked at in Unit 8. It is clear, however, that for virtually all firms customers or consumers are a key variable in planning. In a competitive market, the company that will experience most demand is that which best meets the needs of the majority of customers. It follows then that a company must be aware of what consumers need in order to be able to produce it. As a result marketing is often depicted as the custodian of customer interests within the firm. Despite this many companies do not have marketing representation at a senior level and this can hinder the firm’s responsiveness to customer demands. The problem is exacerbated when one considers the lead time in producing many products. Ideally marketers should be concerned with customers before they become customers! They should also be looking into the future to anticipate needs and help operational departments produce products and services that will meet these needs. Again these are issues dealt with at greater length in Units 2 and 3.
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Having produced a product, the company also needs to be able to distribute it and monitor its use – especially customer satisfaction levels.
Profit The CIM definition above refers to the need to deal profitably with customers and there is no doubt that lack of profitable customers is a major cause of company collapse. Companies with very high levels of turnover and very many customers inevitably fail if they make insufficient profit. In the last ten years this has been graphically demonstrated by the number of internetbased companies which have grown rapidly handling millions of customer transactions but which have failed to develop a business model that yielded profit. Even Amazon, the online bookseller and arguably one of the most famous ‘dotcoms’, has only recently begun to break even. (The use of technology and its impact on marketing is the subject of much of Unit 8). At first, the desirability of profit may seem uncontroversial yet there are many instances when transactions with customers do not result in a profit for the company. The basis of many sales promotions, as well as direct and relationship marketing techniques, is to give the customer exceptional value in an initial transaction with a view to securing future (more profitable) sales. In the meantime, it is also clear that many organisations that utilise marketing techniques do so without ever seeking to make a profit. Some of these have been referred to above and are dealt with in Unit 9. For such organisations it is very often difficult to implement marketing strategies because the very idea of profit (and by implication marketing) is alien.
Internal marketing Given the above spread of responsibilities it is clear that marketing functions have a considerable influence on other parts of the company. If new product features are demanded by the customer, marketing needs to communicate these requirements to production and new processes and new machinery may need to be employed. Likewise, if consumers change their patterns of shopping or seek more information regarding the safe use of the product, the marketing department may require an organisation to employ new, or a different kind of, salesperson or to employ a call centre. Quite apart from the organisational impact, such changes have financial consequences. It has often been said that every marketing decision (with one exception) results in expenditure. U n iversity of Su n derlan d
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Marketing mix The key elements of marketing decision making are often summarised with reference to the 4Ps – product, price, place and promotion. These are dealt with in greater depth in Unit 5. In addition, a further three or four elements of the marketing mix have been suggested – especially with regard to service industries.
ACTIVITY List the four Ps and summarise what you understand them to be. Then list a further three or four that apply to services.
ACTIVITY FEEDBACK The marketing mix is, conventionally, –
· Product. · Price. · Place. · Promotion. In addition –
· People. · Process. · Physical evidence. In addition, to cover the importance of the culture of an organisation
· Philosophy.
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ACTIVITY Read the case study below and then answer the questions at the end. Case study: Tyrells Potato Chips Adapted from Sunday Times 9 January 2005 Tyrrells Potato Chips have just as much sodium and oil as its more downmarket neighbours on the supermarket shelf, but made from potatoes grown on the farm, hand-fried and packed immediately for maximum freshness, they look like a ‘piece of the sunlit Herefordshire fields in a bag’. Potato farmer William Chase had grown tired of growing for the supermarkets. After travelling in the US, he came back with the concept of a premium, hand-fried chip that was thicker and with more flavour than a crisp…and which might shift the balance of power away from the retailer. In 2002, Chase invested £1.2m to convert his potato sheds into a factory. He sent samples to Fortnum & Mason, Harrods and a host of upmarket delicatessens and cafes and began a designer snack boom. “People don’t just want any old bag of crisps – they want a bag of the best,” said Chase, who points out that the premium snacks market in the UK is growing at some 10% a year. Tyrells now has 25 staff and 3,000 independent customers with net margins of 23% on sales of £2m for the year ending March 2004. Current figures suggest turnover of £6m for the year. But the question for Tyrrell’s is ‘what next?’ There are now some 14 producers of premium hand-fried potato crisps in the UK. Chase has kept ahead of them by launching new products, including root vegetable crisps made from celeriac and beetroot or parsnips, bags of salted broad beans and garlic grissini. A range of dips, including caramelised red onion and red pepper are being made for Tyrrell’s by a small external supplier. Kettle, the UK’s number one player in premium potato crisps, has already launched its own parsnip product and, more worryingly, Walkers, the market leader in crisps, has successfully launched its ‘Sensations’ brand; thicker cut and with exotic flavours. Chase could expand his range, but he may not be able to manufacture them all down on the farm. “The question is whether we would dilute that message by moving into products made elsewhere.” He could go after export markets – currently one third of sales. So far, export sales have followed a personal visit to a very upmarket store in the target country. Now he is considering building a factory in eastern Europe to supply the continent and reducing the cost of getting the product to market. “The big issue U n iversity of Su n derlan d
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for us” says Chase “is not whether there is a market; we know there is. The problem is that I can’t be in two places at once. We can’t build a factory until we have someone to run it.” Even now, Chase and his operations director can sometimes be found frying and bagging up chips on the factory floor. “I’d rather have a small well-paid well-motivated team doing double the work.” However, Chase is ambitious. At the age of 40, he believes he can double the size of the business each year for several years. The production capacity in Herefordshire can take him to £30m sales. But to do this, over the next 18 months he will have to start hiring purchasing officers, quality officers, production managers and others. Perhaps the reason Chase is so driven is that ten years ago the farm he inherited from his parents went bust and it took him some years of punishing work – growing potatoes – to regain ownership. www.tyrrellspotatochips.co.uk Answer the following questions on the Tyrrells’ Potato Chips case. 1.
To what extent do you believe that marketing is at the heart of Tyrrells?
2.
Who do you identify as Tyrell’s customers and consumers? Does this distinction suggest any issues for the company?
3.
What would you identify as William Chase’s main objectives? To what extent are these based on customers and market opportunities?
ACTIVITY FEEDBACK 1.
Tyrrells certainly started with the identification of a market opportunity. William Chase saw a growing consumer demand for premium snacks and allied this to his own ability to produce the key product ingredient – potatoes. In producing a product to meet a clear need, Tyrrells have grown to generate significant profits. But they are increasingly under pressure, and the recent entry of major competitors such as Walkers into the premium chip market heralds a significant change. Although the company began with the exploitation of a new market, marketing (as we have defined it above) is no longer central in the company’s strategic thinking.
2.
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Tyrrells’ main customers are the upmarket food stores and supermarkets which require a high quality, more exclusive product.
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Tyrrells’ core values relate to this exclusivity and the perceived product quality. The consumers are, by extension, those who purchase the product in these upmarket outlets and who also value Tyrrells’ core values. Distinguishing between the two can lead to insight into how value is delivered by/to partners in the value-chain. For example, Tyrells may seek their customers’ involvement in developing new products which can be displayed alongside their potato chips. 3.
William Chase’s objectives are concerned with his company’s expansion. This is an internal requirement and closely related, perhaps as a result of Chase’s personal history, to his own needs and wants as opposed to those of his customers. In addition Chase is clearly concerned to maintain the culture of the company and this may have to be balanced against market opportunities.
Marketing orientation Marketing orientation is the “underlying marketing corporate philosophy” (Sutherland and Canwell 2004) and is concerned with the centrality of customer needs and wants to the corporate strategy.
Strategic level
Unit of analysis
Examples of major issues
Examples of new organisational forms
FUNCTIONAL
Marketing
Organising and coordinating
Channel management.
subsystems
sub-functions of marketing such as advertising, marketing research, sales operations
BUSINESS
Marketing department
Logistics/services specialists. Information/technology specialists.
The departmentalisation of
Sector/segment management.
marketing and internal structure of
Trade marketing. Investment
the marketing department. The
specialists. Venture/new product
integration of marketing
departments.
sub-functions. Relationships with other functions. CORPORATE
ENTERPRISE
Divisional marketing
Centralisation/decentralisation of
Marketing exchange and
responsibilities and
marketing decision-making and
coalition companies. Network
group-wide
relationships between central and
organisations
marketing issues
peripheral marketing units
Strategic alliances and
External relationships and
networks
boundary-spanning with stratgeic
Partnerships. Alliances.
marketing partners. Marketing ‘make-or-buy’ choices.
Figure 1.1: Levels and focus of organisational analysis in marketing.
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Marketing Strategy
Source: Piercy N and DW Cravens (1999) ‘Marketing Organisations and Management’ in Encyclopaedia of Marketing. London, International Thompson Business Press The degree to which marketing thinking is ‘embedded’ in the company culture, of course, depends upon the history of the firm but often also depends on the level of familiarity with marketing concepts amongst key personnel. This, in turn, often depends upon their level of business and marketing education.
ACTIVITY The following is adapted from McDonald (1999, pp18-19): Choose 9 – 10 of the following as reflecting your views most accurately.
10
1.
The planning and execution of all aspects and activities of a product so as to exert the optimum influence on the consumer, to result in maximum consumption at optimum price and thereby produce the maximum long-term profit.
o
2.
Deciding what the customer wants; arranging to make it; distributing and selling it at a profit.
o
3.
Marketing perceives consumption as a democratic process in which customers have the right to select…by casting their money votes to those who supply the good or services that satisfy their needs.
o
4.
The planning, executing and evaluating of the external factors relating to a company’s profit objectives.
o
5.
Adjusting the whole activity of the business to the needs of the customer or potential customer.
o
6.
Marketing is concerned with the idea of satisfying the needs of the customer by means of the product and a whole cluster of things associated with creating delivering and finally consuming it.
o
7.
The total system of interacting business activities designed to plan, price, promote and distribute products and services to present and potential customers.
o
8.
Marketing is the world of business seen from the point of view of its final result; that is, from the customer’s viewpoint. Concern and responsibility for marketing must therefore permeate all areas of the enterprise.
o
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9.
The activity that can keep in constant touch with an organisation’ customers, read their needs and build a programme of communications to express the organisation’s purposes.
o
10.
The management function which organises and directs all those business activities involved in assessing and converting customer purchasing power into effective demand for a specific product or service and moving the product or service to the final customer or user so as to achieve the profit target or other objectives set by the company.
o
11.
The marketing concept emphasises the vital importance to effective corporate planning and control of monitoring both the environment in which the offering is made and the needs of the customers, in order that the process may operate as effectively as is humanly possible.
o
12.
The organisation and performance of those business activities that facilitate the exchange of goods and services between maker and user.
o
13.
The process of (1) identifying customer needs, (2) conceptualising these needs in terms of the organisation’s capacity to produce, (3) communicating that conceptualisation to the appropriate locus of power in the organisation, (4) conceptualising the consequent output in terms of the customer needs earlier identified, (5) communicating that conceptualisation to the customer.
o
14.
In a marketing company all activities – from finance to production to marketing – should be geared to profitable consumer satisfaction.
o
15.
The performance of those business activities that direct the flow of goods from producer to consumer or user.
o
16.
The skill of selecting and fulfilling customer wants so as to maximise the profitability per unit of capital employed in the enterprise.
o
17.
The economic process by means of which goods and services are exchanged and their values determined in terms of money prices.
o
18.
The performance of business activities that direct the flow of goods and services from producer to consumer in order to accomplish the firm’s objectives.
o
19.
Marketing is concerned with preventing the accumulation of non-moving stocks.
o
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20.
The activity that can keep in constant touch with an organisation’s customers, read their needs and build a programme of communications to express the organisation’s purposes…and means of satisfying them.
o
ACTIVITY FEEDBACK The numbers below equate to the above statements. Tick how many of your selected statements appear in each row –
Group A
1
2
4
7
10
12
15
17
18
19
Group B
3
5
6
8
9
11
13
14
16
20
Figure 1.2: Scoring statements relating to marketing orientation.
Malcolm McDonald describes group B definitions as making an “unambiguous reference [to] identifying and satisfying customer needs and building systems around this principle” (op cit) rather than ‘doing things to’ the customer for internal purposes. The more group B definitions you selected, the higher your personal marketing orientation.
A definition of strategy At this point it is worth defining, more precisely, what we mean by ‘strategy’ or ‘strategic’. It has been said that strategic issues are those which are longterm and important. According to Michael Baker (Baker 2000), Igor Ansoff offered a more precise definition when he described a ‘policy’ as a contingent decision (a statement of what must to be done in given circumstances) and a strategy as a ‘rule for making decisions’ (ibid, p53) – especially when the decisionmaker’s knowledge was less than complete. This distinction is important in that almost all marketing decisions are made on the basis of incomplete information. Nevertheless, such
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decisions must be made. An organisation that has strict rules about marketing processes may stifle managers’ creativity. On the other hand, poorly defined strategies – that do not lead to practical tactical plans – can leave important tasks undone.
Linking corporate strategy to marketing strategy In order to understand how marketing fits into the wider organisation we need to consider how corporate strategy is developed.
P ar t 1: The internal situation
P ar t 2: The external situation
SW
OT
P ar t 3: SWOT analysis
S t r at egy: Corporate strategy
Feedback
Business strategy Other functional strategies e.g. R&D Marketing management strategy
P ar t 4: Marketing programme
P ar t 5: Action planning
Figure 1.3: Strategy development.
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Conventionally, corporate strategy is supposed to be determined before marketing strategy. In many multinationals and companies with many strategic business units (SBUs) this is indeed the case. A strategy for the survival of the whole group must be at least considered independently of the component subsidiary companies. However, as we have seen, customers are the sole source of a company’s wealth and so it is difficult to imagine any corporate strategy that does not take into account the potential future revenues from the markets it serves. This conventional, hierarchical system of strategy development is illustrated on page 3 of Hollensen (2003), reproduced in Figure 1.3. Here we see that an audit of the internal and external situation is carried out leading to an analysis of strengths, weaknesses, opportunities and threats (SWOT). This forms the starting point for most business planning processes. We look at this in more depth in Units 2, 3 and 4. In the hierarchical process, corporate strategy leads to business strategy which, in turn, leads to other functional strategies and to marketing. In this framework then, a strategy is a statement of how particular objectives are to be achieved. Whereas an objective is a destination, a strategy is the route we are to follow in order to arrive there. It follows then that the objectives have to be clearly defined.
Objectives A simple mnemonic helps focus objectives. A statement of an objectives should be:
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S
Specific
It should be clearly stated.
M
Measurable
The scale of measurement should be in place.
A
Aspirational It should be challenging (given the market situation).
R
Realistic
It should not be overoptimistic.
T
Timebased
There should be a specified date of completion.
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ACTIVITY Evaluate the following example objectives against the SMART checklist.
Objectives
S
M
A
R
T
tick as appropriate 1
“To be the best ice cream manufacturer in the world”
q
q
q
q
q
2
“To gain 35% increase in turnover by the end of next financial
q
q
q
q
q
q
q
q
q
q
q
q
q
q
q
year”
3
“To be rated best by customers on safety and value for money by the year-end”
4
“To gain 12% markets share in the agricultural generators market in the Middle East”
5
“To treble in size by October 2006”
q
q
q
q
q
6
“To continually exceed the expectations of our customers”
q
q
q
q
q
7
“To become number one in our market and increase profitability
q
q
q
q
q
by 9% within three months”
Figure 1.4: Some example objectives.
ACTIVITY FEEDBACK You will notice that in all cases it is impossible to judge if the objectives are realistic. Clearly one would have to have carried out some considerable analysis, both internal and external, before being able to judge!(See Units 2, 3 and 4).
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Objectives
Marketing Strategy
S
M
A
R
T
ý
ý
þ
q
ý
þ
þ
q
q
þ
q
þ
þ
q
þ
þ
þ
þ
q
ý
ý
ý
þ
q
þ
ý
ý
þ
q
ý
q
q
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q
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tick as appropriate 1
“To be the best ice cream manufacturer in the world” Comment: Whilst this is undoubtedly inspirational it may be difficult to judge if or when this might be achieved.
2
“To gain 5% increase in turnover by the end of next financial year” Comment: This objective is precise and very clearly expressed. As a corporate objective, however, it should be treated with caution since turnover could be increased at the expense of profit. Similarly, if market growth is 20% this objective is hardly aspirational!
3
“To be rated best by customers on safety and value for money by the year-end” Comment: Given that such a rating was already in place this could be a marketing objective. It combined two measurable outcomes, however. Pursuing the ‘safety’ objective may add costs that impact on customers’ perception of value for money.
4
“To gain 12% market share in the agricultural generators market in the Middle East” Comment: A conventional objective such as this is often included in a one-year marketing plan. The time-frame is therefore implied. It is good practice to make the target date explicit. Again, profit is not referred to.
5
“To double in size by October 2006” Comment: The objective does not specify what is to grow; overheads, staff, turnover? This objective might also not seem so realistic if expressed as 100% growth!
6
“To continually exceed the expectations of our customers” Comment: Whilst a fine, aspirational marketing sentiment, this fails to define any measurable outcome. Even the best company will not exceed
7
all customers’ expectations
“To become number one in our market and increase net profit margins by 9% within three months” Comment: This statement combines two objectives that should be separated out. What measurement is to be used to define ‘number one’?
Figure 1.5: Some example objectives evaluated.
Of course, any of the objectives above can be questioned, and should be, especially in the context of the corporate objectives. The debate around objective-setting during the planning process is almost as useful as the objectives themselves.
Now we will consider how the marketing objectives might link to broader, corporate objectives.
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Missions, visions and corporate objectives The implication from the above diagram (Figure 1.3) is that all objectives ‘cascade’ from the predetermined corporate objectives, and this is a popular view in management training. The formula is often expressed as MOST or Mission, Objectives, Strategy, Tactics. Campbell and Alexander (1997) suggested that developing a winning strategy is messier than any text book allowed for. In their important paper in the Harvard Business Review, the two directors of the Ashridge Management Centre pointed out that many corporatelevel objectives are often simply statements of the ‘rules of the game’. For example, look at the corporate objectives below.
ACTIVITY Consider these, generic (but often used) aims or objectives. Can you think of others?
· To provide superior returns to our shareholders. · To provide better returns to all stakeholders. · To pay above-average market salaries and create career opportunities for our staff.
· To provide better value for our customers. Can you now think of a company that might NOT want to achieve some or all of these?
ACTIVITY FEEDBACK You might also have added to the above something concerned with making profit, but you should have found it difficult to add anything new. Campbell and Alexander’s point was that such objectives point towards what all companies should be aiming at – developing sustainable competitive advantage. Rather than stating these as objectives, such statements could also be described as constraints. A company must make profit in order to survive and so such objectives do little to inform a strategy.
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Campbell and Alexander suggested that a company needs to be aware of its ‘purpose’. In part this comes from its internal strengths and the forces driving it – especially ‘key implementers’ such as the executive directors and senior managers. In smaller companies, and those with a charismatic leader such as Virgin’s Richard Branson, it is often inspired by one person. For example, the Body Shop has a clear set of values originated by Anita Roddick, the founder, that inspires most, if not all, of its strategic decisions. ‘Making cosmetics without harming animals or the environment’ imposes some limits on strategies that may be selected, even before any objectives are determined. It is not clear, from Campbell and Alexander, how the concept of purpose is very different from, say, that of a mission, vision or a statement of values. Nevertheless a company with a distinctive set of shared aims and values has many advantages over its competitors.
From purpose to strategy Defining purpose, however, is not the end of the strategy development process. The hierarchical model suggests that strategies follow from objectives as, in turn, do tactics. Inevitably strategies suggested to achieve a given objective are tested, at least in debate, against known market conditions and against managers’ experience. Subsequent strategy suggestions are modified in this light. Successful strategies, according to Campbell and Alexander, therefore depend on ‘insight’ into creating more value than competitors. Since this is essentially about marrying internal competencies to external market opportunities (see Units 2 and 3), this is a process that must involve marketing thinking. Campbell and Alexander suggest that insight can come from anywhere – from a production process, from relationships with suppliers or with other stakeholders but, in the end, they must lead to superior value for customers who are willing and able to purchase the product. Perhaps most disturbing of all, Campbell and Alexander warn that there is no single, systematic way to generate such insight. After all, if one way proved to be best then all competitors would adopt it and the competitive advantage would be lost!
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Unit 1 – What is Strategic Marketing?
Marketing orientation revisited To reiterate, the marketing concept places the customer and his or her needs at the centre of the organisation – not simply at the heart of a marketing plan. Different organisations exhibit this orientation to different degrees. Some still pursue a ‘production orientation’ where efficiency of manufacturing or service delivery is paramount. Others focus on selling, persuading more and more new customers to buy a standard offering. These latter two approaches probably seem outmoded and this is a measure of how far this debate has passed into history. However, the reality for many organisations is that there is a constant struggle to keep customer focus from being eroded by other concerns. These concerns can be quite legitimate; for example, the loss of an important supplier or cash worries caused by a client failing to pay. However, many distractions are about internal systems, efficiencies and politics where the organisation inhibits the meeting of customer need. This philosophy or culture of marketing is often illustrated with reference to major companies, indeed whole industries who succeeded or failed because of their understanding of what constituted a market. Famously, Theodore Levitt (1960) explained the decline of the railways in the USA as the failure of the railways to recognise the need they were meeting – convenience as much as comfort. Likewise, Charles Revson is said to have redefined the Revlon business as manufacturing cosmetics, but selling hope. This ‘reframing’ of the whole organisation in terms of what it does for its customers is closely related to the concept of ‘purpose’ discussed already. However, the extent to which this purpose comes from closeness to customers or from some wideranging research aimed at predicting the future is a subject for debate. The danger, it is argued, with staying close to customers is that larger, more sweeping changes may not be immediately noticed. This is largely the ‘myopia’ of Levitt’s influential paper. On the other hand, companies that see to predict the next major market change may fail because they do not have close understanding of what their customers really want and need. (Slater and Narver 1998; Connor 1999; Slater and Narver 1999).
ACTIVITY Re-read the case of Tyrells potato chips. William Chase has asked you to analyse the company’s strategic marketing orientation. Do you think they are
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suffering a form of marketing myopia? Is the company being customer-led, market-led or is it not marketing orientated at all? What practical steps could you suggest to correct the situation?
ACTIVITY FEEDBACK You have already examined this case and, at the time, we suggested that the driving force seems to be William Chase’s own desire to grow the company and to build personal security. In small and medium-sized companies this is not unusual. Nor is it possible to say that this is wrong. Ownership of a business, over and above the wealth that it may generate, is an important motivation for an entrepreneur. However we might consider that much of the Tyrrell’s strategy is based on a ‘feeling’ for what the market wants. The company may engage in extensive market research to discover what is likely to happen in the chip or snack market over the next ten years (a market orientation) but this presupposes that Tyrrell is in the snack business. Another way of viewing this is to attempt to understand what customers are buying when they purchase a Tyrell product. This is further complicated by the point previously made about the distinction between customers (the retailers) and the consumers (the retailers’ customers). The Tyrell brand may perform a particular function for the retailer by fitting into their image of sourcing high quality, handmade foods for example. For the person who eats the chips, the product may be seen as a treat or as being more healthy than conventional snacks. Of course, these issues would have to be explored more fully in order to make important strategic decisions, but the key is that they must be explored and debated.
Companies that are truly customer focused may have to undergo considerable, and uncomfortable, change in order to ensure that the change is not superficial.
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READING ACTIVITY Read Hollensen, exhibit 16.2, page 660-661. Examine figure 16.7 on page 661. Think about the possible effects on a company of undergoing such change. What are the possible disadvantages?
ACTIVITY FEEDBACK Effects of changes such as those undergone by Ciba Speciality Chemicals may include –
· Loss of focus on the day-to-day business issues. During a period of change, staff may feel overworked and suffer stress.
· Staff unrest and dissatisfaction may lead to resignations of key staff and loss of specialist knowledge. In extreme cases, staff may take industrial action.
· Customers may be confused. Having dealt with a particular department they may now lose that contact.
· Customer groupings may be inaccurate or may not reflect customers’ own perceptions. All these possible pitfalls point to the need for change to be managed. If the change is led by marketers and marketing departments, it is still necessary to win the hearts and minds of as many people as possible within an organisation. If the whole organisation shares a marketing orientation, then this should be easier.
Tactics Although this unit is module is about strategic marketing we feel it is worth mentioning a further distinction that is often the source of confusion. That between strategy and tactics. We have defined strategies as being the route towards an objective. Tactics, therefore, can be considered to be the vehicles used along the U n iversity of Su n derlan d
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way. So whilst the planned route will remain broadly the same (unless the destination is changed), the tactics will be picked up and set down at different times and in different stages of the journey. Confusion often arises because, in developing a plan, it is tempting to allocated budget and to decide on concrete tasks, before fully resolving the interdependent objectivestrategy issue. To reiterate, strategies can only be evaluated against objectives with the addition of some insight into their likely effect in the real world. This is an iterative and messy process. However, having determined SMART objectives and the strategies to achieve them, the tactics can then be specified. Another way of distinguishing strategy and tactics is to think of the former as the way we will do things and the latter as what we will do to customers, intermediaries and so on. As the effects of an implemented plan are measured and monitored, the strategy may be judged to be wrong, in which case those who developed the strategy must be involved in taking corrective action. On the other hand the strategy may be right, but progress is insufficient or, possibly, too rapid. In this case, tactics (what we do to actors in the marketplace) can be changed. Many of the issues surrounding implementation are dealt with in Units 5 and 6.
The traditional marketing concept versus the relationship marketing concept Perhaps the most developed expression of the marketing orientation concept is that of relationship marketing (RM). This is discussed more fully in Units 7 and 8. RM addresses some of the issues raised above about the ‘embeddedness’ of the marketing concept by conceiving all relationships as customertype relationships. As such they can be managed by modified marketing techniques. RM is distinguished by the tendency towards cooperative modes of working between companies, between companies and customers and within companies. In addition, RM places less stress than traditional marketing upon gaining new customers, and more stress upon keeping customers and increasing their value to the company.
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In Hollensen (2003) as in this module, the two approaches, traditional and relationship, are dealt with together since most companies mix their use.
The structure of a marketing strategy What ever process is used to arrive at a marketing strategy, part of the marketer’s job is to present it in a clear and logical way. Unit 6 looks at the implementation of a marketing plan but, at this stage, it is worth summarising the main form and function of a strategic marketing plan. The outline recommended on page 651 of Hollensen is –
· Title page. · Table of contents. · Executive summary. · Introduction. · Situational analysis. · Marketing objectives and goals. · Marketing strategies and programmes. · Budgets. · Implementation and control. · Conclusion. Remember a plan may be an internal document dealing with the whole of a corporation or it may be concerned with a particular SBU or brand. A plan may be produced for an investor or to convey marketing plans to a parent company. Whatever its immediate purpose, the principles remain the same and it should follow much the same format. In all cases it is wise to bear in mind that the document should contain an actionable plan; that is, it should be compiled such that a competent marketer or business person could pick up the plan and discover from it everything he or she needed to know in order to start.
READING ACTIVITY Hollensen goes into some detail about the content of each section of such a plan in section 16.3, pages 651-655. Read the description of each section and bear these in mind as you work through the remaining units in this module.
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REVIEW ACTIVITY Review questions 1.
From memory, write a definition of marketing.
2.
Which parts or departments of a large organisations should a marketing department communicate with most? Which ‘assets’ does a marketing department manage?
3.
What are the main differences between production, selling and marketing orientations?
4.
Why do you think it might be useful to think about ‘purpose’ and ‘insight’ as much as objectives and strategy?
5.
What do the initials ‘SMART’ stand for in relation to objectives?
6.
Read the following simplified case study and answer the questions that follow.
Case study: S&J Printers. S & J Printers have one printing press in their small workshop. Currently they print anything and everything that comes their way – although the press only prints two colours at a time they have printed very complex four-colour work for large companies. They didn’t make much money on those jobs because they had to buy in finishing services such as folding and stitching; so-called ‘outwork’. The two-man company has worked out that the press can run for a maximum of 8 hours in a day and needs a minimum of around 2 hours ‘make-ready’ between jobs, although for complex jobs this can be longer. Apart from dealing with finishing suppliers (outwork such as folding and binding, etc) John Jones gets all the work in for the company by visiting local businesses. Ted Smith runs the press, but also deals with suppliers of ‘repro’ services, more outwork, such as plate-makers and sometimes typesetters. Early on they decided not to charge on a cost basis, rather they wanted to charge what a job was worth. They pride themselves on printing a very clean job and always delivering at the agreed time. A rough breakdown of their current work is given by the examples in Figure 1.6.
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Type of client
Unit 1 – What is Strategic Marketing?
Type of job
Local garage
Business
For directors of
cards
Make-ready time
Printing time
Value of job
2hrs
2hrs
£850
Cost of outwork £50
£ profit* (%) 400 (47)
company
Local florists
Greetings
Designs and artwork for
cards for
local company to
bouquets
4hrs
4hrs
£1000
£200
0 (0)
promote itself through its own selection of cards
Local estate agent
Property
Background sheets to
details
2hrs
4hrs
£1200
£120
480 (40)
be overprinted on photocopier
Large financial services HQ
Business
2hrs
6hrs
£2000
£150
cards
1050 (53)
Cards for managers and directors
Large financial services regional office
Brochure
6hrs
48hrs
£8500
£1200
1900 (22)
Colour brochure showing company as local employer
Figure 1.6: Examples of work done by S&J printers.
*Profit is calculated after deduction of outwork and after overheads are allocated on an hourly basis. There are many competitors in the area – some with better facilities, some with the same or similar equipment to Smith & Jones. Their main aim is to be able to pay themselves a little more and to pay off the debts incurred in setting up. a.
Describe their current marketing mix. How do they use the ‘Four Ps’?
b.
How would you suggest the company adapt its marketing mix and why?
ACTIVITY FEEDBACK 1.
From memory write a definition of marketing.
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Whilst you may have memorised a definitions such as “anticipating and meeting customers needs, profitably”, you may also have constructed your own. Your definition should have focused on customers and may have specified profit. If you are more familiar with non-profit organisations, then your definition may have been different. You may also have stressed the need for marketing to retain customers as well as acquire them. 2.
Which parts or departments of a large organisations should a marketing department communicate with most? Which ‘assets’ does a marketing department manage? A marketing department should be involved in every aspect of a business, since every part of a business can be, and arguably should be, orientated towards delivering customer satisfaction. Customers are the most valuable asset a company has since they are the primary source of future income.
3.
What are the main differences between production, selling and marketing orientations? A production orientation is about making products more efficiently. A selling orientation is about finding more customers to buy products. The marketing orientation is concerned with what is necessary to succeed in the market – meeting customer needs.
4.
Why do you think it might be useful to think about ‘purpose’ and ‘insight’ as much as objectives and strategy? Purpose defines the core beliefs and aims of a company, and acts as a ‘filter’ for future strategic decisions. Insight into the source of value, both now and in the future, from business processes and from customers, generate possible strategic directions. Once evaluated and chosen, these can be expressed as objectives and strategies.
5.
What do the initials ‘SMART’ stand for in relation to objectives? S M A R T
6.
Specific Measurable Aspirational Realistic Time-based
Case study: S&J Printers.
The following is an outline which you can follow to compare with your own answer and to organise further thoughts you have. In common with the owners of many small companies it is likely that John and Ted don’t really consider what they do as marketing. It clearly is, since they are
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attempting to identify and meet customers’ needs, but there is little evidence in the case as to their current marketing plan. Essentially they need to have an appreciation of the internal marketing factors and the external marketing factors; on the one hand their strengths and weaknesses and on the other the opportunities and threats – a SWOT analysis. Internally... They must examine their own motives, their ‘purpose’ – whilst they wish to be able to generate more profit, they also take pride in the work they do and they deliver on time. They must look at their own competencies and skills – their skills in marketing to the different kinds of customer and the ease with which they can meet certain customers’ needs. There may be a source of insight that suggests opportunities. S&J must look at the resources they have available for marketing (principally time, but they may also see the need for some investment in the marketing mix – see below). Crucially they must determine their competitive advantage – perhaps clean, accurate high quality work delivered on time. Externally... Who are the customers? They need to be examined closely in terms of their characteristics and buying behaviour. Business cards for large local companies seem to offer a good combination of profitable and regular work. With little in the way of outwork and simple set-ups, John will be free to pursue more clients – and may also be in a better position to gain the larger jobs that they can do profitably. How big is the market and what is happening? In other words, is the chosen target market sufficient, sustainable, growing or declining? This will demand research. The printers may choose to look at the trends in the industry they are serving; for example, what is happening to financial organisations? It may pay them to look more closely at why financial organisations have been good customers in the past. Is it because they have a large salesforce and/or a high turnover of staff? Is this likely to continue? The competition must also be monitored. Not only might the target market be already well served but there may be competition from in-house print facilities. Again what is their competitive advantage? Finally, S&J must also look at the wider environment. For example. technologically, are they likely to be left behind? What economic factors may present threats or opportunities? They must strike a balance between serving the customers they know and looking more widely at the market. U n iversity of Su n derlan d
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Marketing strategy Having looked at the broad picture, some strategic choices will emerge. Crucially the company needs to set out some marketing objectives which must be SMART. 1 The current marketing mix S&J currently have a muddled marketing mix. They do not offer a distinctive product (printing anything that comes along), their promotion relies solely on personal selling and word of mouth. However, their pricing policy seems to be based on their understanding of what the customer will pay (indicative of a customer focus rather than a production focus), and their approach to delivery (which reflects on the product) seems to offer some potential competitive advantage. 2 Suggestions for adapting the marketing mix Having been through a strategic review, S&J need to orientate their marketing mix towards their chosen marketing objectives. The company must not standardise their marketing mix, but must have a strategy. Their advantage is that they know each of their customers; each is different, each can be developed in a relationship approach. Product. They may choose to redefine their product as a quality on-call print facility. Effectively offering their clients the advantages of in-house printing without the overheads. They may augment the product by taking away the difficulties their corporate clients have with ordering small items, by offering a stock call-off system and telephone ordering. They should be continually improving the product quality for the customer – perhaps recommending new stock (paper) upon which to print. This is essentially about adding value through service or augmenting the product; giving a tailored product. It is the continual improvement that is the key, not just the quality of paper or ink. Place. With guaranteed delivery built into the product and telephone ordering, place ceases to be an issue. Price. Pricing is already flexible but this may encourage customers to pressure for discounts. Hence, prices need to be defended by increasing the perceived quality in the other elements of the mix). The company may try structuring the price so that they agree to invoice on delivery but print stock to call off when the need arises. Hence, the customer is paying for the ready availability of new stock and deals with a lower unit of price (per invoice) – it also helps cash flow.
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Promotion. John should be able to spend more time developing relationships with customers. The value of networking should not be underestimated – especially with a complex buying process. Promotional techniques should be low-key in accordance with the emphasis on a quality service and personal/direct. ‘Discount’ promotions would be inappropriate but trials may be. Existing, satisfied customers, should be encouraged to recommend other potential customers, perhaps with some kind of appropriate incentive. In their marketing plan S&J should be seeking to build barriers around their customers, making it difficult for them to go to competitors. At the same time they should be continuously seeking to improve the level of satisfaction amongst their customers so that they want to stay with them.
References Baker, M. (2000). Marketing Strategy and Management. Basingstoke, Macmillan. Campbell, A. and M. Alexander (1997). “What’s Wrong with Strategy?” Harvard Business Review NovDec: 4251. Connor, T. (1999). “Customerled and Marketoriented: A Matter of Balance.” Strategic Management Journal (20). Gracie S. (2005) “Tyrells Potato Chips” Sunday Times, 09/01/2005 www.enterprisenetwork.co.uk/knowledge_store Hollensen, S. (2003). Marketing Management: a relationship approach. Harlow, Person Education. Levitt, T. (1960). “Marketing Myopia.” Harvard Business Review (July/August). McDonald, M. (1999). Marketing Plans. How to Prepare Them: How to Use Them. 4th edition. Oxford, ButterworthHeinemann/CIM. Slater, S. F. and J. C. Narver (1998). “Customerled and Marketoriented: Let’s not confuse the two.” Strategic Management Journal (19). Slater, S. F. and J. C. Narver (1999). “Marketorentated is more than being Customerled.” Strategic Management Journal (20). Sutherland, J. and D. Canwell (2004). Key Concepts in Marketing. Basingstoke, Palgrave Macmillan.
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Unit 2
Assessing the Internal Environment LEARNING OUTCOMES After studying this unit you should be able:
· Demonstrate an understanding of how firms create competitive advantage using the resource-based view (RBV) and the market orientation view (MOV).
· Demonstrate an understanding of the core competencies of organisations and how they are used in competition.
· Make an assessment of the competitive capabilities of companies. · Analyse an industry using the Porter’s 5-forces model. · Show how companies are able to gain competitive advantage in the market and to compete internationally.
Introduction In order to assess a firm’s competitiveness it is essential to consider its current situation. The purpose of carrying out an internal audit is to establish which resources it possesses in terms of its people, its finances and its products or services. For many this is similar to carrying out stock control, but instead of just looking at products or services, we must also consider the capabilities of the staff who work for us, how we manage our finances and how we are developing our products or services in order to satisfy our customers now, and in the future. In carrying out our internal assessment we can identify our key competencies and also highlight some areas of weakness. In looking at the Microsoft and Lego case study, we will see that both companies are considered to be global players with strong brands, widespread distribution and obvious competitive advantages. However the use of an alliance allows both companies to improve their strength in a market place, by buying into the reputation of the other company.
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CASE STUDY ACTIVITY Read the Microsoft and Lego case study in Hollensen, page 27, and answer the following questions: 1.
Which of the two partners will benefit most from the alliance?
2.
What kind of further joint marketing exercises could both companies benefit from in the future?
CASE STUDY FEEDBACK 1.
This is an alliance of two very powerful global brands. Without doubt Lego is the most established of the two brands, in terms of age, and on a global basis enjoys widespread recognition and is known for its excellent product quality. It holds a unique position in terms of its appeal to children as well as parents who grew up with the brand. However, in terms of turnover and overall brand value, Microsoft is the more powerful of the two.
2.
There are significant benefits for both parties from this alliance. There are a number of joint marketing exercises which they might wish to undertake: a)
Both Microsoft and Lego could benefit from joint exercises linked to the marketing of the X-box. This could easily be a promotional campaign to highlight the new alliance between X-box and Lego.
b)
There is scope to increase distribution through joint sales promotions with existing and new suppliers. The addition of either name would be sufficient to attract new distribution outlets.
Creating Competitive Advantage In order to understand how firms might gain competitive advantage by using their internal resources, Hollensen (2003) considers two approaches. These are a market orientation view (MOV) and the resourcebased view (RBV).
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Resource-based view (RBV) In order to further categorise resources, we can break them down into two different categories. These are tangible, meaning that they we are able to touch them, or that they exist in a physical state and that ultimately can be quantified. These include things such as the people employed within the organisation, the means of production, manufacturing equipment, finance and access to the raw materials needed to make our goods. Intangible resources are, therefore, those which do not exist physically but contribute to the resource base of our organisation. Think about our reputation and brand image, our trademarks and any patents that set us apart from competitors and even the organisational culture (Hollensen 2003). Let us imagine the resources of a company like Microsoft. The value of its reputation, its copyrights and the knowledge of the people who design and create their physical products might be considered to be their key resources, and none of these are tangible or exist in a physical state. However, without the physical resources of their people, their means of production and their financial resources, they wouldn’t be able to make and market their software. In order for us to consider the most important resources, Hollensen (2003) in considering the work of Grant (1991), and Prahalad and Hamel (1994), proposes the following as the most important. See Figure 2.1:
Competitive Resources
Factors to take into consideration
Competitive
Considers the extent to which research carried out by the firm has contributed to
Superiority Test
differentiating the company from its competitors. This includes average annual spend on market research, and on research and development costs.
Imitation Test
This looks at the potential competitor and considers how difficult it would be to recreate our resources in such areas as its physical difference or any economic barriers to imitating our resources.
Duration Test
Measures to what extent our resources will be produced in the future. This will include such factors as recruitment and training in relation to competitors.
Appropriateness
Considers whether the company is able to take advantage of the resource in the
Test
market. Is this a new market for the company or do they have existing networks of suppliers?
Substitutability
To what extent can a competitor introduce a produce or service with an alternative
Test
but with similar advantages. The company’s success in introducing new products or services can be taken into consideration.
Figure 2.1: Competitive Analysis model.
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Finding the figures Companies who carry out research are usually in a position to answer the question posed in Figure 2.1 In order to establish how our resources are perceived in the market place or how they stand in relation to our competitors, we must be able to produce data through are research activities. In some cases, by simply monitoring our internal resources against those of our competitors, we will be able to establish workable comparisons. We will need to consider tools of measurement such as percentage of turnover spent on research and development or on research and training. We might also be able to consider awards for training or innovation by industry bodies.
CASE STUDY ACTIVITY Read the Honda case study on page 33, Hollensen (2003), and briefly say what you think Honda’s core competencies are:
CASE STUDY FEEDBACK Honda’s core competence, and an area where they enjoyed competitive advantage, was in the area of small engine production. While the company was associated predominantly with motorcycle engine manufacture, they had a key competitive advantage in perhaps a less glamorous market, such as small engines, but ultimately one which enabled them to develop a key competitive advantage and which was more profitable.
Core Competence A core competence is considered by Hollensen (2003), in reviewing the work of Prahalad and Hamel (1990), to have three main traits: it makes a contribution to perceived customer benefits: it is difficult for competitors to imitate: and it can be leveraged to a wide variety of markets. There have been numerous examples of companies who, having identified their core competencies as being marketing and distribution, have contracted out the manufacture of their products to other companies.
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The roots of competitive advantage If you look at Hollensen, page 34, he considers the main resource categories and the roots of their competitive advantage.
Technical Resources These include areas such as Research and Development capabilities, process engineering and worldwide patents. Companies who enjoy such resources are Microsoft, Hewlett Packard and IBM.
Financial Resources These cover areas such as having a reputation for paying and being creditworthy as well as being able to put their plans into operation. Consider the many millions of dollars that companies such as Gillette put into the production of their new razors.
Human Resources We need to cover areas such as managerial skill, the capabilities of employees and the companies focus on group or individual learning. This latter point relates to corporate culture and the way in which the organisation approaches staff training and development.
Marketing Resources We need to be able to evaluate our relationships with customers, how loyal our customers are, and the value of our brand or brand equity.
Information Systems This covers the area of decision support within the organisation and the importance it places in managing information within the organisation
Resource-based strategy options Having considered the ways in which we might measure our resources in relations to those of our competitors, we can now consider the strategic options available to us. If we look at Hollensen’s model (2003) we are faced with four different options, based on using either new or current resources versus looking to attract current or new customers.
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New
Current
Marketing Strategy
3. Renew and nurture the resource base
4. Further business developments
(example: Epson)
(example: Virgin)
1. Exploit resources in existing business
2. Stretch resource base to new customer groups
Establishing relationships with suppliers (case: Siemens, Boeing)
(example: Dassault/Falcon)
Upstream
Downstream
Establishing
relationships with customers (case:
Lockheed
Martin) Current
New
Figure 2.2: Customer types.
Current resources for existing customers It is important to develop relationships with existing customers and suppliers. By working closely with our customers we might be able to take advantage of their expansion plans. If our customer uses our products or services in the manufacture of their products, an expansion in their sales should lead to a similar increase in our sales as well. Hollensen (2003) talks about the strong relationship that Lockheed Martin (USA) enjoys with its customers. By working closely with its customers, this can create significant barriers for our competitors. Companies who tie in their customers to their products can guarantee the future sales of the products needed to service the main product.
Current resources for new customers The opportunity to exploit its existing resources for new customers has arisen for many new technologybased companies. Specialist software producers have been able to target new customers using the success of their existing products as leverage.
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New resources and current customers With this strategic option companies look to expand their existing resource base in order to serve existing customers. This may be as a result of an opportunity to do this or due to increased competitive activity which forces the company into looking for new resources. This strategy can present some problems to firms and may put pressure on its existing resource base, particularly where this involves the cost of developing new products.
New resources and new customers This is very often the most problematic strategic option for companies as this involves stretching resources to target new customers as well as developing the existing product or service to satisfy these customers. Both represent new areas and are, therefore, difficult to achieve successfully.
The value chain based view (VBV) Having considered the resourcebased view (RBV) which takes into account what the firm has, we now must look at the value chain based view (VBV) which looks at what exactly the firm does in the market place. We must look at this from a value pointofview or the value that the company adds for the customer. Hollensen (2003) If we consider Hollensen’s view then, if the benefits of a product or service exceed the costs, there is a good chance that the customer will at least consider buying from us. It is important for us to focus on the benefits that our products or services offer potential customers and compare these with those of our competitors. Consider a commercial or industrial product and how we might add value. A good example is the German manufacturer of industrial dishwashers, Winterhalter, used in large hotels, educational establishments and restaurants. Winterhalter approached their market from a value point of view and their research findings helped them to identify the value which they needed to add to their current service. The traditional approach was to be competitive on price and to focus on the capabilities of their dishwashers over those of their competitors. What their clients told them in research was that they wanted their dishwasher to be reliable and they feared that if it broke down then this would have a dramatic impact on the running of their business. Imagine a large restaurant with one of its dishwashers out of action and the impact that it might have on the service to their customers. They also worried about keeping enough stock of dishwasher cleaning products, which became another product which they had to remember to
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purchase. Again if they ran out of these products then it would disrupt the smooth running of the kitchen. Winterhalter then reconsidered their product from a value point of view and changed their focus. They offered a monthly charge which included the use of a dishwasher, a guaranteed repair time or indeed replacement of the machine, if they weren’t able to repair it, and constant supplies of cleaning products for their customers. They had added value by dealing with the customer’s fear of machine breakdown and taking away the task of ordering cleaning products. By offering these additional benefits they were also able to charge a higher overall price as their customers were very happy with this additional value. As a result of this strategy they retained more customers and more importantly achieved competitive advantage in a highly competitive market. Their reputation within the marketplace improved which enabled them to make more sales. In order to use this approach we need to consider our products or services from the customer’s point of view, which challenges the more traditional approach. Consider another example: large firms spend considerable sums on fresh flowers for their offices, which they use to create a more welcoming reception area. The traditional approach is to sell them flowers, which they arrange and dispose of, and then order them more which we supply them. The valuebased approach is to supply them flowers on agreed dates, already displayed in vases and then to dispose of them and replace immediately with new displays. This increases our sales revenue and means that our customers enjoy a readymade professional presentation.
CASE STUDY ACTIVITY Let us reflect upon the value chain and the way in which we can add value to our products and services. Read the short case study on the value chain of Acme Axles, Inc, page 41 in Hollensen (2003), and state how you think Acme’s internal value chain can be broken down.
CASE STUDY FEEDBACK You will see that Acme’s internal value chain can be broken down into six components of which only two, manufacturing and custom axle design, are directly related to the production of their core product, the axle. They differentiate their product from those of their competitors through the customisation of axles for a range of clients.
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Working with customers to create value The key to providing customers with added value is to work closely with them on the development of new products and services. Spending time trying to understand their problems and designing a new product or service to meet those problems, not only delivers customer satisfaction but also can provide a barrier to competitors. The problem facing a number of print companies is the need for constant customer feedback during the printing process. It was not uncommon for the printers to produce a sample for a client and to send it off for comment by motorcycle courier. This incurred extra costs and while it was possible to get relatively quick feedback a solution was needed to improve this process. It was innovative printers, who by looking at the problem from their client’s position, came up with a solution that added real value. Some printers developed their printing and were able to postup their work on their website and invite their client to make comments. The next step was also to provide their customers with a personal computer and some training which enabled them to make slight amendments, and improve the turnaround time. This gave their clients increased flexibility and reduced some of the pressure on deadline times. The cost of implementing such a system was soon covered by the cost savings on transport, but again added real value for their customers. This approach to adding value ties in to the old suggestion of marketers around thirty years ago, such as Kotler and Doyle, who suggested that in order to understand customers, companies needed to put themselves in their shoes in order to look for solutions. While currently new technologies offer companies opportunities to add value, they are usually used effectively to support traditional methods of doing business rather than to replace them.
READING ACTIVITY Read the article about information management at Caterpillar on page 42 in Hollensen’s book, and consider how they try to create competitive advantage by adding value to their customers.
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READING ACTIVITY FEEDBACK The example of Caterpillar’s use of an information management system shows that they are approaching this from their customer’s point of view and ultimately adds some value to their brand. This is similar to the Winterhalter dishwasher example that we looked at earlier in this unit. Caterpillar has a very strong reputation in the manufacture of machines used in the construction industry. Their reputation has developed over a number of years and their investment in new products means that they continue to lead the market. In order to defend this position they have looked at the problems that their customers might face. Many firms in the construction industry use this equipment on multi-million dollar projects. If you visit building sites around the world you will see Caterpillar equipment. Many of these companies work to very strict deadlines and often have fines imposed for missing deadlines. Their biggest problem arises when a machine stops working and the subsequent time taken to diagnose and resolve the problem. For every day that a machine is out of action it costs their customers in terms of lost time. By introducing sensors to identify failing parts and giving their suppliers and distributors access to the system, means that they are in a much stronger position to reduce the impact of machine breakdown.
Understanding the value chain In order to identify the key value activities, Hollensen (2003) suggests breaking value activities into two broad categories of primary activities and support activities.
Primary Activities 1.
Inbound logistics Here we need to consider all of the activities linked to the handling of distribution of the product or service, to include transportation, stock control and materials handling.
2.
Operations These include the activities that result in the final product or service such as packaging, manufacture, assembly and testing.
3.
Outbound logistics This involves the collection, storage and distribution of our products to customers. For services, this might include taking the customers to a sports event. Hollensen (2003)
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4.
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Marketing and sales This is about making people aware of the product or service and making it available for them to purchase.
5.
Services Services include any activity which enhances the value of a product or service, including installation, repair, spare parts and training.
Support Activities 1.
Procurement This is linked to obtaining the resources necessary to service the primary activities.
2.
Technology development This refers to any value activity that is linked to research and development, product design, technical knowhow or an improvement in raw materials.
3.
Human resource management This refers to the activities concerned with the training, development and reward of staff involved in the company.
4.
Infrastructure This covers all of the planning activities of the firm, such as finance and quality control, as well as any of the structures within the company that help to maintain its culture.
CASE STUDY ACTIVITY Read the Amazon and Toys ‘R’ Us case study on pages 53 to 54 of the Hollensen book and attempt the following questions: 1.
Identify the core competences of Amazon.com and Toys ‘R’ Us. How are these competences in harmony with each other?
2.
Does the Amazon-Toys ‘R’ Us relationship make sense from resource-based view (RBV) and a market orientation view (MOV)?
3.
What are the chances that the partnership will turn out to be a financial success?
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CASE STUDY FEEDBACK 1.
The core competences of Amazon are: a)
The handling of customer service on-line.
b)
Taking care of all aspects of warehousing.
c)
Handling the development of the website and front end operations like taking orders and customer service, again in large volume.
The core competences of Toys ‘R’ Us are: a)
Merchandising (being able to display products effectively) and purchasing expertise, and offering the right product mix to suit their customer base.
b)
Taking care of relationships with toy manufacturers.
c)
Toys ‘R’ Us, in collaboration with its bricks-and-mortar parent, will select, purchase and manage inventory.
In this alliance both partners are able to concentrate on their key strengths. Amazon is very good at taking care of all online sales, whereas Toys ‘R’ Us is very good at finding the right product-mix for the end-consumers and presenting the goods in the most appropriate way (merchandising) as well as maintaining good relationships with suppliers (the toy manufacturers).
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2.
The alliance between the two companies shows consideration for both the resource based view (RBV) and the market orientation view (MOV). However, concentrating on each other’s core competences has its starting point in a resource based view (RBV). Trying to get as many internet users to see the offers of Toys ‘R’ Us on Amazon’s website, is based more on MOV.
3.
This is always a difficult question to answer. On the face of it the alliance makes sense and adds value to each of the companies. The success of the venture will depend principally on their being demand in excess of their estimated costs, and that both partners can deliver on their promises. The fact that sales must increase by 300 to 400% suggests that the targeted new sales are high.
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Developing the firm’s competitive advantage Having considered the core competences of the firm, we have an understanding of some of the factors which make our firm competitive. We are competing with a number of different firms, all with unique strengths and some weaknesses. While our own firm is successful and profitable, we can’t allow ourselves to become complacent. There are far too many examples of organisations that lose their position in the marketplace, with a subsequent loss in profits and valuable staff. We must always be aware of what being competitive means in our marketplace. Perhaps we are a company which has gained market share as a result of taking advantage of a competitor’s weakness. It is too easy for a company to be so focused on itself that it forgets to monitor its competitors’ business. The main factor which we need to take into account is that we do not operate in isolation in a marketplace and we must always research our competitiveness in relation to our main competitors. Perhaps the biggest threat to our business is now an overseas competitor, and monitoring an overseas competitor presents an even bigger challenge to us. Hollensen (2003) identifies seven factors that contribute towards competitive advantage and we should be able to measure our firm’s capabilities with those of our competitors. If we are unable to provide the data from our existing information sources, then we should look to fill in the gaps through research activity.
1. Economies of scale In order to understand the concept of economies of scale we need to consider the manufacture of a fast moving consumer good. One of the latest razor blades developed by Wilkinson or Gillette, is made in highly efficient, uptodate production plants, which produce this high quality product twenty fours a day in very large quantities. When developing this new product, speed and ease of production is a major factor to be taken into consideration, and will contribute towards a relatively low cost of production. This cost of production might be so low that firms will be reluctant to release the actual cost. This low cost will bear no relation to the final price to the consumer. Firms have to take into consideration the high research and development costs which have to be covered in the sale price of the product. It is estimated that the new Gillette razors absorbed research and development costs of around one billion dollars. Firms who enjoy considerable economies of scale are also very efficient in using up their production capacity. If we refer back to the Amazon.com case study, we saw that Amazon has excess capacity which it needs fill. By filling this excess then it will be able to spread more of its fixed costs. Those firms who have the lowest production U n iversity of Su n derlan d
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costs may use this as a way of deterring new entrants into the marketplace.
2. Economies of Scope Economies of scope are enjoyed by key players in international markets. Hollensen (2003) includes the transfer of resources, transfer of experience and the transfer of ideas and successful concepts across products and markets. Firms who enjoy economies of scope are able to gain much quicker entry to new overseas markets, taking advantage of the skills and knowhow developed by the company in other markets. For major players such as Colgate and Unilever, they are able to transfer key personnel to developing markets, and regularly share ideas and good practice with colleagues in other markets. Linked to this is also the power of the brand, which we will discuss in more detail in Unit 5, which makes it much easier to penetrate new markets or introduce new products or services. The discipline of New Product Development has been revolutionised by the transfer of knowledge allowing companies to reduce the amount of time it takes to introduce new concepts to the marketplace.
3. Strategic thinking as a core competence In order for companies to compete effectively, they should think strategically. While driven from the managers within the organisation, the challenge is to develop a culture of strategic thinking at all levels. The key to achieving this is through the recruitment of strategic thinkers, people with a proven background and to introduce training in strategic management within the organisation.
4. Exploitation of local advantages One of the issues facing companies who operate in global markets is whether to standardise their product or service offering or whether to adapt it to meet the local market conditions. While there are obvious cost advantages in introducing standardised products, it is often necessary to adapt in order to move closer to the needs of the consumer. Global companies who are aware of the need to take advantage of local conditions are likely to enjoy more success.
5. Ability to provide global services Companies with a global outlook look to take advantage of the considerable benefits which global players can enjoy. Global companies
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use their developed systems and expertise as a source of competitive advantage.
6. Company-specific competitive advantages In order to remain competitive, companies need to understand the factors that give them a competitive edge. Research suggests that it is the relationships that they have built up with their customers, and being able to offer services which their competitors find difficult to match, that gives them an advantage in the marketplace. This may be as a result of their manufacturing excellence and the relationships developed with their distributors or customers.
7. Using human resources in developing competitive advantage Strategic marketing must also consider the role of people in the planning process. There are many excellent books which explore the issue of human resource management including Leopold et al. (2004). Those companies who invest in training and rewarding staff usually benefit from a more motivated workforce and a lower staff turnover rate. It is too easy for firms to take their workforce for granted or to even look overseas to outsource some of the functions of the organisation. However, the investment in developing firmspecific skills and in attempting to introduce a more peoplefocused culture may give them a competitive advantage. Employees who have a strategic awareness will not only make a more positive contribution to the efforts of the organisation, but are also more likely to look for ways of improving the processes within the company.
Levels of International Competitiveness In order to gain a better understanding of the three levels of competitiveness see Hollensen (2003), page 69.
Analysis of national competitiveness Using the Porter Diamond, Hollensen (2003), we need to take into consideration factor conditions, demand conditions, related and supporting industries, firm strategy structure and rivalry, chance, government and competition analysis in the industry.
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Factor conditions In our analysis we should look at the factors of production which might give a nation a competitive advantage. This might be natural resources, skilled workforces or a specialisation in certain industries. We must also consider service industries and the factors which impact service. We might consider the southern coasts of Spain which not only favour tourism but also have developed into regions for sporting and corporate events. We must also take into consideration the availability of capital, which is a feature of the most developed economies. Hollensen (2003) cites the example of Japanese firms who were forced to consider the automation of their production process as a result of a shortage of skilled labour and production space.
Demand conditions We need to understand the demand conditions in the market place and how this impacts on competitiveness. Consider factors such as dense populations, a feature of Spanish and Japanese cities or less dense populations in countries such as Finland or Sweden. Germany has become a major producer of manufacturing systems as a result of their heavy emphasis on the technical capabilities of their products. Saab produced cars in the seventies and eighties for the harsh winter climate of Sweden, and rapidly developed a reputation for more robust vehicles which easily stood up to the demands of less harsh winters in other parts of Europe. Fuji in Japan developed the reputation for producing high quality products for photographers as a result of the demands of their own discerning Japanese consumers.
Related and supporting industries It is normal for the suppliers of components to be based near to their customers. This makes economic sense from the point of reducing transportation costs, but also it enables a concentration of skilled labour. Not only do companies benefit from proximity to suppliers or customers, but there also advantages in terms of marketing connections. Hollensen (2003) cites the example of the semiconductor industry in Japan which is based near the electronics manufacturers, who are their principal customers.
Firm strategy, structure and rivalry Hollensen (2003) considers the results of Porter’s studies, which showed that strong domestic competition in an industry, enabled companies to compete more effectively in global markets. In order to face intense competition, the firms had invested in new technologies,
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product development and training in order to improve production and skills development.
Chance When we consider the history of particular industries, they may be based in one particular country simply because the inventor of the product came from that country and decided to set up business there.
Government The support of governments can be a key factor in the development of major industries. They can achieve this through developing the necessary infrastructure, such as transport or education. In addition, tax incentives and assistance with the building of production facilities can also encourage companies to locate in a particular area.
Competition analysis in an industry using Porter’s 5-forces Pot ent i al ent r ant s Threat of new entrants
Bargaining power of suppliers
I ndust r y compet it or s
S uppli er s
Bargaining power of buyers B uyer s
Rivalry among existing firms Threat of substitute products or services S ubst it ut es
Source: Reprinted with the permission of the Free Press, a division of Simon & Schuster, from Competitive Strategy: Techniques for Analysing Industries and Competitors by Michael E Porter. Copyright 1980 by Michael E Porter
Figure 2.3 Porter’s five forces model.
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If we look at Figure 2.3 we see that Porter considers the factors which he considers to be important when assessing a firm’s competitiveness in the market. The players within an industry are those that produce the same products or those that might be considered a substitute product. As you will see in Figure 2.3, the market is made up of new entrants to the market, suppliers, buyers, substitutes and market competitors. Hollensen (2003), page 7475, uses the Porters’ 5forces model to analyse the metal container industry. The suppliers to the industry are potential future competitors as are their buyers, and there is a considerable threat of substitute products and the entry barriers to the market are low. Overall the profit potential of this market is also considered to be low.
Market Competitors Hollensen (2003) discusses the degree of rivalry between existing competitors in the market. The level of rivalry will depend on the following factors:
The concentration of the industry In markets where there are competitors with a similar market share then this is likely to lead to intense rivalry. The United Kingdom grocery sector is characterised by intense competition between Tesco, Sainsbury’s and Asda.
Rate of market growth In analysing the market we also need to establish the current growth rate and to try and estimate the future growth rate. In markets with a slow growth rate, the fight to retain market share is much fiercer, and where the growth rate is stagnant then companies will need to be more competitive in order not to lose share.
Structure of costs In industries where there are high fixed costs, there is a tendency to cut prices in order to use up excess capacity.
Degree of differentiation In analysing our product or service offering we need to establish whether our offering is differentiated from those of our competitors. If they are similar then we can expect much greater competitive activity.
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Undifferentiated products in a slow market may be drawn into price competition which can have a serious impact on profitability. Companies who are drawn into price competition find that it is very difficult to break away from this strategic direction. The ultimate result is a highly undifferentiated market with very strong price competition and falling profits for all players in the marketplace.
Switching costs When we enjoy a good relationship with our customers and have attempted to tie them in to our product or service, it becomes very difficult for them to switch to one of our competitors. Early distributors of ice cream gave their customers free refrigerators in return for distribution rights, effectively putting a barrier in place for competitors.
Exit barriers When markets become saturated and competition is fierce, the strategic alternative for some companies will be to look at new markets. However, if they are tied in to a market due to high cost of exiting, or where there are a lack of opportunities in other markets, then firms will find it difficult to leave the market and be forced to continue competing.
Suppliers In markets where suppliers face little competition, they are in a strong bargaining position to fix process. Hollensen (2003) cites the example of Microsoft as suppliers to the computing industry. As their products are in effect the industry standard they are in a strong position to negotiate prices with their customers. Car manufacturers have taken more control of the supply of components to their business by appointing several suppliers of the same component. In this way there are much keener discussions on price. An alternative open to companies is vertical integration, whereby they take a stake in their suppliers or set up their own supplier.
Buyers Buyers have more power over their suppliers when they are the major customer. When your leading customer accounts for more than 60% of your total business then this gives them considerable purchasing power. In order to reduce the dependency on a buyer then firms must look to increase their total number of customers and produce highly differentiated products.
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Many companies compete fiercely to have their products sold in major supermarket chains. Supermarkets need only sell those brands which enjoy a strong position in the marketplace and enjoy a loyal consumer following. While supermarkets stock many thousands of product lines, you will notice that there simply isn’t room for all of the fast moving consumer goods (fmcg) brand names. A new manufacturer will find that it is very difficult to achieve distribution of new products, and those that do so usually have to accept the supermarket’s terms and conditions.
Substitutes When analysing our market we need to be aware of substitute products or services which might replace out existing products or their components. In order to counter this threat we should build up barriers which, should our customers wish to change supplier, would incur considerable switching costs.
New entrants New entrants to a market will have a significant impact on competition. In order to reduce the possibility of new entrants we need to consider our brand identity, and the impact of our brand in the market place. A highly differentiated product with strong brand identity will make it harder for new products to join the market. Other barriers to entry are businesses that require a significant investment or where expenditure on research and development are high. We discussed the men’s razor market earlier in the unit. Wilkinsons and Gillette both produce highly differentiated products as a result of their investment in manufacturing facilities and high expenditure on research and development. They both also enjoy very strong brand identities, a reputation for quality and excellent relationships with their distributors. While this is an attractive market for other companies to enter, Wilkinsons and Gillette have made it difficult for new companies to join.
The collaborative ‘five sources’ model Companies are increasing looking to collaborate with competitors as a strategic alternative to competition. There is a recognition that each has strengths or weaknesses in particular markets, and by working together they are able to better serve their customers. Hollensen (2003), in reviewing the work of Burton (1995), considers the five sources model alongside Porters’ five forces model.
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Market competitors Here companies collaborate with competitors who make similar products, which has become a feature of the international car components market.
Suppliers Here companies work with their suppliers, integrating vertically, which is particularly noticeable in the Japanese market for electronics and cars.
Buyers Here companies form alliances with specific customers which guarantee them a certain level of distribution.
Substitutes Companies choose to work with companies who sell or produce substitute products. Hollensen cites the example of mobile telephone companies merging with traditional telephone providers, which has enable them to increase the size of their network.
New entrants Here companies diversify into new areas, some with a technological link. The merging of media companies with internet providers is an example of this strategy.
Value chain analysis/benchmarking Hollensen (2003) considers competitive advantage with companies who are operating at the same competitive level in the market place.
The competitive triangle There are two factors to be taken into consideration. The perceived value of a product or service which includes the way that our customers judge our whole service in terms of delivery, training, aftersales service and new product developments, and the relative costs of all of these factors.
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Perceived value advantage In all of our activities we are judging value from the customer’s point of view, which not only includes the tangible benefits, but also the intangible factors such as brand identity and reputation. Hollensen (2003) suggests that our task is to understand what value the customer is seeking from our products or services, or in other words the value chain. Hollensen suggests that we look at the traditional 4P marketing mix of product, price, place and promotion, as well as the additional factors of people, physical aspects and process highlighted by Booms and Bitner.
People Here we must consider not only our customers but also the people who work for us. It is important that our staff receive sufficient training to understand how important their role is in delivering quality of service, and how this adds value to our business.
Physical aspects Here we consider the location of our experience and the factors which we introduce to make our service more tangible. This involves our premises or, in the case of a hotel, the physical environment.
Process Firms are investing heavily in new technologies in order to make the business process more effective for customers. This includes using new technology to improve booking systems and to reduce the time involved in purchasing good or services. Low cost airlines have invested in efficient online booking systems which are easy to navigate, which has given them a competitive advantage over traditional airlines. Their competitive response has also been to develop similar booking systems.
Relative cost advantage Hollensen (2003) suggests that successful businesses are able to provide the highest possible perceived value to the final customer at the lowest possible delivered cost. Firms must also have an idea of their competitor’s costs at all levels of the value chain, which in most cases will be based on estimates.
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Hollensen considers the factors that affect costs:
Capacity utilisation This is better expressed in terms of percentage of capacity used. A restaurant with 100 covers (seats) which uses on average 60 per night, assuming that they only have one sitting, is working to 60 per cent capacity. If a firm does not use its capacity to the maximum then it incurs costs.
Linkages If we invest in improving the quality of our service, then this might lead to a reduction in the cost of aftersales service.
Interrelationships Companies who belong to a group or conglomerate can work together on research and development or sharing other business activities as a way of reducing costs.
Integration Companies are increasingly looking to outsource some of their operations in order to reduce costs.
Timing Companies who are to first to reach the market with a new product or service can achieve significant cost savings particularly as they don’t face any direct competition.
Policy decisions Companies who introduce policies on customer service, their choice of distribution channels or on their product ranges, can achieve significant costs. A number of companies who have extensive brand portfolios might sell off less profitable brands or even look to kill off brands which they don’t believe will be successful in the future.
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Location In an industry where the transportation or warehousing of goods accounts for a high percentage of the cost of a product or service, relocating production might offer significant cost savings. Gillette introduced centralised production of their shaving products in Europe in an attempt to increase specialisation or reduce costs.
Institutional factors Uncontrollable factors such as local taxes or changes in government regulations will have an impact on costs.
Competitive benchmarking Benchmarking is essentially about being able to compare your product or service with those of your competitors. While this might be from a technical point of view, whereby you obtain samples of your competitors’ products and break them down (a practice which is often associated with the automobile industry), we need also to benchmark customer perception of our company and our competitors. The most effective way of measuring these competitive differences is through market research and indepth interviews with customers. Hollensen (2003), page 90, suggests a framework for competitive benchmarking. (See Figure 2.4)
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Examples of value chain functions
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Customer
Own firm
Key competitor
(Firm A)
(Firm B)
Importance to
How do customers
How do customers
customers
rate performance
rate performance
of our firm?
of key competitor?
(mainly downstream functions)
(key success factors)
High
Low
importance
5
4
Good
Bad
Good
Bad
importance
3
2
1
5
4
3
2
1
5
4
3
2
1
Uses new technology High technical quality and competence Use proven technology Easy to buy from Understands what customers want Low price Delivery on schedule Accessible for enquiries Takes full responsibility Flexible and quick Known contact person Provides customer training Takes account of future requirements Courteous and helpful Specified invoices Gives guarantees ISO 9000 certified Right first time Can give references Environment conscious
Figure 2.4: Framework for competitive benchmarking.
When we carry out our benchmarking exercise we use the value chain functions and ask customers to rank our company against our competitors in order to give us a more accurate measure. The results of the interviews should reveal our key competitive strengths as well as opportunities for improvement.
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ACTIVITY Outsourcing We have made some reference to outsourcing, where a company contracts out parts of their operations to other organisations. This might be outsourcing production, parts of the production process, training and staff development, distribution and logistics, marketing activities and even the personnel or human resources function. What are the advantages and disadvantages that outsourcing presents for organisations?
ACTIVITY FEEDBACK Outsourcing There are many examples of how outsourcing has been used in business. In the past five years this has even involved some service industries being outsourced to overseas countries. The impact of new technologies has made this more feasible. Nor are we presenting this as a new idea. Historically companies have used outsourcing to prevent the need for moving to new premises. Some of you might work for training organisations, which in the past may well have been outsourced by a large company. The advantages and disadvantages of outsourcing: Advantages
Disadvantages
Allows companies to make cost savings in a wide
You need to be able to convince companies that it
range of areas
is in their interests.
Enables companies to concentrate additional
Can put a strain on traditional communication
financial resources in different areas
processes
Can make companies more competitive which
Can have the same impact as introducing new
ultimately can improve their performance in the
staff, but can be even more unsettling for existing
market
staff
Allows specialists to take control of important
Can create problems with staff and unions
areas such as production or distribution Allows companies to improve quality standards
Can be a problem where it leads to the
and become more efficient
outsourcers having direct contact with customers Short term savings might be made, but lost if this leads to higher transaction costs overall
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Development of a dynamic benchmarking model, Hollensen (2003) Stage 1: Analysis of situation (identification of competence gaps) We need to provide our own internal assessment of the firm’s current performance in the market place and those of industry experts who can give us their assessment of the market and its future potential. We must focus on critical success factors (Hollensen 2003) and to what extent we meet the demands of customers in the market. We must determine whether our competences match the expectations of customers. Stages 2 and 3: Scenarios and objectives We need to develop future scenarios for the market, including the development of competitors in order to identify how near we will be to match future demands. We should then set our objectives in line with our own competences and the likely changes in the market. Stage 4: Strategy and implementation Our next stage is to set out our future strategy and implementation plans. We will develop this further in Unit 5.
CASE STUDY ACTIVITY Read the BBC Worldwide case study in Hollensen, pages 100-101, and answer the following questions: 1.
What are the core competences of BBC Worldwide in relation to the value chain?
2.
Define the differences in the business system of the BBC’s TOTP and the Pepsi Chart Shows. Which of the two chart shows would have the biggest chance of being successful in the international market?
CASE STUDY FEEDBACK 1.
The principal core competence of the BBC is product development in the upstream part of the value chain. The series ‘Walking with Dinosaurs’ was recognised as a highly innovative development in TV
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production, and as a result of their partnership with Discovery, they have been able to sell the programme in a number of key markets. While the BBC is a government funded organisation, and as such has limited funds, it has created relationship competences with other partners in the industry such as Discovery. This has also enabled them to buy into Discovery’s existing network of customers. Discovery has two important channels in Animal Planet and People + Arts, which already enjoy widespread distribution. 2.
This is a difficult question to answer, and your current perception of Pepsi and the BBC will have shaped your answer. While TOTP is a strong brand in the domestic market, there is no strong link with the BBC in International markets. The Pepsi Chart Show, while a newer programme than TOTP, has the benefit of association with one of the biggest brands ever, Pepsi, and as such can benefit from this global association. The future of both shows in the international market will depend on the marketing resources of both companies. TOTP should be more successful in Europe as it has existing links, but the Pepsi Chart Show should be more successful in other markets due to the sponsorship money available from Pepsi and the reputation of the Pepsi brand name globally.
REVIEW ACTIVITY Procter and Gamble to buy Gillette for $ 60 billion? When rumours emerged at the end of 2004 that Procter and Gamble were to buy Gillette for $ 60 billion dollars, several business commentators started to predict the global impact that this might have on their respective businesses. Procter and Gamble claimed that this was part of their future plans to remain competitive and ahead of its major competitors. The following facts were released to the press: Procter and Gamble has 16 brands in its portfolio with sales of more than $1 billion per annum. Gillette has five brands with sales of more than $ 1 billion per annum. The combined turnover of both companies would amount to around $ 60 billion per annum. Gillette has an estimated 74% share of the $ 7 billion global wet shave market.
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More than 2 billion people a day use a Procter and Gamble product, while the same figure for Gillette is 1 billion people per day. The combined annual advertising budget of Gillette and Procter and Gamble (P&G) would be around $ 3 billion, with P&G accounting for around $2.1 billion.
Questions 1.
To what extent do you think companies like P&G can increase the distribution of the products which it acquires when it takes over a company such as Gillette, which already has a main presence on retailers’ shelves?
2.
What sort of cost savings do you think will be possible as a result of this merger?
3.
Will P&G be able to dictate to supermarket groups such as Wal-Mart and Tesco as a result of this multi-billion dollar merger?
4.
Read the Teepack case study in Hollensen, page 57, and answer the following questions: a)
State how you think that Teepack has developed its competitiveness in the global tea bag packaging market.
b)
Describe the ways in which Teepack can develop and maintain customer relationships
REVIEW ACTIVITY FEEDBACK 1.
Historically Procter and Gamble have increased the distribution of the brands they have acquired, due in no small part to their strong working relationship with retailers. They managed to increase the shelf facings of the ‘Iams’ range of pet foods. Having presence on retail shelves is a difficult task in highly competitive markets, and retailers look to work with companies who can supply products which generate substantial turnover in their stores.
2.
Considering the current levels of expenditure of P&G and Gillette, the merger will present P&G with several cost saving opportunities. There should be considerable cost savings due to increased efficiencies in the supply chain, as well as savings in the outsourcing of some production. There are likely to be some savings with the merger of research and development departments. With a combined advertising budget of U n iversity of Su n derlan d
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some $3 billion dollars, there should also be some cost savings. According to figures announced in the press, there may be as many as 6000 jobs saved out of a combined workforce of around 140,000. P&G have also increased their growth projections form 4-6 per cent per annum, to 5-7 per cent. 3.
Much is written about P&G trying to dictate terms to multiples, although they would obviously deny this. They perhaps are simply gearing up, trimming down to take on markets in the next 10-15 years, and looking to work more closely with retailers. It is more likely that the merger will put additional pressures on their rivals. The new lines that P&G have acquired will complement many of the lines they already carry. Multiples such as Tesco and Wal-Mart have developed very profitable relationships with P&G and will welcome the addition of new lines to their portfolios.
4.
a)
Teepack was able to take advantage of technological innovation. It was the first firm on the world market with the double-chamber tea bag technology. Since then Teepack has further developed the technology and the tea bag packaging machines have been developed in close relationship with its customers.
b)
Teepack might consider the following ways for trying to develop and maintain their customer relationships: The further development of single production machines to complete tea bag production lines. They might consider developing the global Teepack service system, used for advising on and repairing the tea bag machines, vital for tackling the problem of down time. Further service visits can be used to gain feedback from customers, to inform future developments. Teepack might consider increasing its own knowledge of tea production, working towards the end-users need for well made tea.
References Hollensen, S, (2003), Marketing Management: a relationship approach. Pearson Education, Essex, England, ISBN 0273643789 Times online, 29 January 2005, Pressure is on rival, not on supermarkets. www.timesonline.co.uk
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Unit 3
Assessing the External Environment LEARNING OUTCOMES After studying this unit you should be able to:
· Recognise the decision making process that consumers follow before they purchase a good or service, and identify the factors which affect their decision making.
· Demonstrate an understanding of and evaluate decision making in organisational markets and the factors which influence those decisions.
· Identify the way in which the decision making unit (DMU) works. · Recognise the role that competitor analysis and intelligence play in strategic decision making.
· Analyse the competitive situation in the marketplace and identify the strengths and weaknesses of competitors.
Introduction If we consider the definition of marketing that was used in Unit 1, and the underlying principles of marketing, we must focus our efforts on customers. The term we will use for business to consumer is B2C. We need to recognise also that while many of our customers are individuals and purchase a range or products from the most basic such as bread and milk, to more involved and expensive purchases such as cars or houses, some customers may also be businesses. The term business to business (B2B) is used to cover the role of businesses which sell industrial products or products which are used in the production process such as machinery. In some texts you may also see reference to Industrial Marketing. Hollensen (2003) categorises B2B customers as original equipment manufacturers (OEMs), intermediaries and governmental buyers. As marketing managers it is our job to try and understand the process which our customers go through when deciding to purchase
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products. We refer to this as the decision making process whether we are talking about individual customers or businesses as customers. In the next exercise you will read about BASF, and learn about how they deal with their customers.
CASE STUDY ACTIVITY Read the BASF case study on page 107 in Hollensen (2003) and answer the following questions: 1.
Which of the potential customers presented in the case study should BASF approach for its liquid thickener Luvigel® EM? You need to discuss the criteria which you would use to select a customer from the list in the case study. Remember that BASF is introducing a liquid thickener, Luvigel® EM, which reduces manufacturing time and provides better thickening for the manufacturers of skincare products.
2.
Describe the possible decision-making process of a buyer of Luvigel® EM.
CASE STUDY FEEDBACK 1.
We can identify the following companies as potential customers: L’Oreal (France), Unilever (UK), Estee Lauder (USA), Procter & Gamble (USA), Benckiser Group (Germany), Revlon (USA), Body Shop (UK), Wella (Germany), Boots the Chemist (UK). Indeed, working as a supplier to any one of these giants can generate high levels of business. The criteria to use might be: The customer’s yearly production volume of skincare products. Is the cosmetic manufacturer willing to mention (on the end-product) that Luvigel® EM is an important ingredient? The benefit of an association with a key player in the market would be highly advantageous to us. How well does BASF and the customer’s organisation fit together? What is the physical distance and the psychic distance to the customer?
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Based on these criteria, BASF could possibly start with the German cosmetic manufacturers Benckiser and Wella. 2.
The decision making process would need to take the following into consideration: The recognition of a problem or need. The determination of characteristics and quantity of needed products or services. The determination of the product or service desired and quantities needed. The search for potential suppliers and preliminary evaluation of their suitability. The acquisition and initial analysis of proposals (samples) from suppliers. The evaluation of proposals and selection of supplier(s). The selection of an order routine. The performance review, feedback and evaluation of the relationship with the customer.
You will now consider some of the other ways of looking at decision making processes.
Consumer Behaviour According to Solomon et al (1999) consumer behaviour is the study of the processes involved when individuals or groups select, purchase, use or dispose of products, services, ideas or experiences to satisfy needs and desires. We need also to understand that a number of different people might be involved in the decision to purchase a product. We must consider that the purchaser and the consumer might not be the same person. Research shows that many successful men do not purchase their own clothes, but rely on the choice of their partners. We need also to understand what part an influencer plays in the purchase of a product. Many children are heavily influenced by their peers when they purchase items of clothing. Children can also influence many of the products purchased by parents or guardians during a shopping trip. The importance of ‘pester power’,
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which refers to the pressure children put on their parents or guardians when out shopping, should never be underestimated. In understanding the processes that people go through in making a decision to purchase, we are able to spot traits or characteristics which will form the basis of future research, and identify potential market segments. We will explore market segmentation further in Unit 4.
Consumer Decision Making We need to bear in mind that we are all consumers of products, and if we can try to understand the decisions that we have to make, or the decisions that our friends or families take, then we should have a better understanding of the decision making process. Ask yourself the following question? Given that skincare products of one form or another have been around for a number of years, why has it taken so long for a product like Nivea for Men to be introduced? One of the reasons is that men have felt uncomfortable talking about skincare or their use of it. Market researchers have known for a long time that men and boys have used skincare products belonging to female members of the family. Perhaps in your own country this might still be the case? We need to consider a framework to help us understand the way in which consumers make decisions and what influences them to consider certain products or services, particularly in the highly competitive global markets we are researching.
Culture
S
Social influence S t imulus
Reference group Marketing mix
P
Psychological factors P r ocess ( or ganism)
Physiological factors Perceptions and feelings
R
Attitudes and beliefs R esponse
Buying behaviour Buying practices
Figure 3.1 The SPR (SOR) Model.
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Hollensen (2003) suggests that there are three main areas in which we need to focus our attention. If we look at Figure 3.1, the SPR model, we can see these three broad areas. These are the stimuli that make us consider a product, the process we go through in deciding to purchase this product and the response that we make having evaluated the alternatives. When we consider stimuli, these might be from our own messages, as an organisation to consumers, or the elements of the marketing mix, such as the way goods are displayed. We might be influenced by people around us or reference groups to which we belong. It is important to consider that we might not be conscious of all of these stimuli. The next stage we go through is the process. Here we are evaluating our responses to the stimuli which might be psychological factors, physiological factors or our feelings towards or perceptions of a product. If this is a new category of product for us then we might take longer to choose the product. We then move to the response stage where we are affected by our attitudes and beliefs, our buying behaviour and our buying practices. Let us think back to our male cosmetics example. Companies are wary about introducing such products, particularly as a result of well publicised failures. Through all of these decisions we must take into account the fact that some products are low involvement purchases and therefore require less consideration. If we are buying an everyday product such as a newspaper then while we might be attracted to another newspaper as a result of a promotional campaign or after comments from our peers in the workplace, we will probably purchase our usual newspaper. If we are considering a more involved purchase such as an item of clothing, then we are likely to be affected by various stimuli and may take longer in choosing to purchase the item. Hollensen (2003) suggests that when we consider purchasing products or services, we take into account our perceived importance of the product and the perceived risk associated with its use. The perceived risk is usually higher when we purchase a more expensive product, but also if this product is linked to our selfimage. The risk if buying the wrong item of clothing and the fear of ridicule by peers are factors that we might take into consideration. If you are not affected by this problem as a consumer, then you might well be in a minority. While we regularly purchase some products, there may be others that we consider but during our evaluation phase decide to buy the products with which we are familiar. However, the fact that we are considering a product suggests that we are aware of stimuli, and there might be a choice of purchase in the future. Companies often target potential brand switchers in their marketing communications.
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The decision making process We can try to understand the consumer decision making process through the decision making model in Figure 3.2. This model might explain the rational decisions that consumers make, but may not be accurate when we consider impulse or irrational purchases. When trying to understand the decision making process for a product or service, you should try to work through decision making using this model. Try to consider purchases that you have made recently, or are contemplating, and ask yourself where you are in the process.
Problem recognition
Information search
Evaluation of alternatives
Product choice
Outcomes
Figure 3.2 Stages in consumer decision-making.
Problem recognition We need to understand at what stage our customers or potential customers consider themselves to have a problem which can be satisfied by purchasing a product. In the case of a car tyre that needs replacing, we have little option but to consider a purchase. If we are starting to worry about our image then we will start to consider the actions necessary to remedy our problem. We might also be influenced by a new product which makes us consider a solution to a new need. A kitchen gadget to make liquidised fruit drinks might not be a product which we considered before, but could be the solution to our need to
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improve our diet. In many developed countries, where lifestyles are having an impact on the amount of time people have to spend on household chores, consumers are actively looking for products to solve their problems. Consumers will now pay a premium for solutions to these problems. Perhaps you live in a country where consumption of airfreshening products is low. You might be surprised by the obsessions of consumers in more developed countries. The need for houses to smell fresh has seen the introduction of premiumpriced plugin air fresheners that release fragrances on a regular basis, and no doubt in many of these houses bad odours were not actually noticeable. Remember also that these problems may have existed for a considerable amount of time. Investment in researching this area, may bring rewards. Consider the history of the suitcase. We have used this form of product for more than two hundred years. However, it is only in the last ten years or so that manufacturers decided to put wheels on cases. This has now become the standard for the industry.
Information search If we consider the case of the tyre which needs replacing, then we might refer to our stored information. We are aware that Kwikfit offer a rapid tyre change service, and we are aware of their location. The fact that Kwikfit have invested in communicating information to their customers has paid off in this instance. We might also go back to memory search and remember the garage which we used before. If we haven’t encountered this problem before then we must carry out an external search; check in the phone book, look on websites or even contact people who we know might be able to offer some guidance. For some consumers their search for information is ongoing. If we consider that one of our most important roles is to provide information to existing or potential customers, then we might be helping people through the decision making process. In highly competitive markets this is essential.. Take the example of purchasing a holiday. In many cases the search for information for holidays begins immediately after the last holiday. We need to try and understand the impact that a holiday might have on a family or group of friends. This is a considerable investment, and may account for 15% of a person’s annual income. Why would somebody spend so much on an activity that only accounts for 4% of the whole year? There are several reasons. The holiday represents relaxation, time away from the pressures of work and home life, it might be an opportunity to try out new activities and it is a chance to make memories. We now see that this is therefore a very important purchase. At what stage then do we need to send out information to our customers? In some cases straight after the last holiday, or in other cases at times when families are likely to be gathered together. The annual Christmas holiday in the UK is a time when television adverts are
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dominated by holiday companies. Is this because the family are reliving there previous holidays? How do we know that this is the information search for purchasing holidays? The answer is that we invest in market research to try and understand our customers and their decision making habits.
Evaluation of alternatives We now pass to an evaluation phase having stored the information that we need, and in many cases having several brands to choose from. As marketing managers we are still interested in researching this phase as this can give us some indication about how our consumers arrive at their final decision. Solomon et al (1999) looks at ways of identifying these alternatives. In Figure 3.3 we see that our alternatives can be broken down into three sets. The evoked set includes those alternatives that are already in the memory or our retrieval set, as well as those which are readily available and on display in a retail setting. Research tells us that in certain product categories we may have 5 or 6 brands in our evoked set. This will vary across product categories. If we are aware of products, but have no intention of buying, then these are in our inept set. If there are products of which we are not aware and, therefore, unlikely to purchase, then these are in the inert set.
All alternatives
Evoked set
Inert set
Inept set
Prominent products in environment
Retrieval set
Figure 3.3 Identifying alternatives.
It is essential that our product is in a consumer’s evoked set as this gives us more chance of being considered. If our research indicates that we are not in the evoked set then we can set this as one of our objectives, and develop our marketing programme to try to achieve this. We must have research data to help us understand the alternatives open to our customers. Consider loyal purchasers of our product. If we believe that our loyal customers will never purchase a competing
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product, then we must invest in maintaining this loyalty. You might be living in a country where there are many established products. Perhaps you bank with the same bank that your family has always used, or drink the same brands as your family and friends. Even if your customers are loyal, you can’t take this for granted. Traditional businesses, such as banking,, have now started to suffer from increased competition, and their customers have moved on to more attractive alternatives, even though they had been banking with the same company for more than twenty years. If you are working with a company that sells to consumers, can you categorise your consumers in terms of loyalty to your brand? What percentage of your customers might consider switching brands? If you can’t answer these questions then you need to address this through market research.
Product choice When consumers are making their final choice they are looking for factors which differentiate products. When products have similar attributes then consumers may have to look for other reasons to purchase. Solomon et al (1999) suggest that in order for companies to address this issue they should look to convey three specific types of information in their marketing communications. It should point out the differences between attributes of brands. It should supply the customer with a decision making rule, and finally that it convey a message that shows how the customer used the product when he or she last purchased it. The Fishbein Model is used to try and establish a consumer’s attitudes to products. It is a multiattribute model as it tries to measure more than one attitude. Solomon (2002), suggests that the Fishbein Model can be used to help understand the decision making process. We can use the model to measure the attitudes of a number of different product attributes, which enables us to measure one brand against another. Hollensen (2003) considers the four attributes we might use to evaluate products or services.
Cost attributes Here we need to consider not only the cost of purchase, but also the costs associated with operating, repairing or with selling on the product when we want to replace it.
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Performance attributes These include the quality of the materials used, how reliable the product is and how generally it performs. This includes such attributes such as taste, safety or efficiency.
Social attributes These include some intangible benefits such as its reputation, image and popularity with friends and peers, style or fashion.
Availability attributes We need to consider how easy the product is to purchase, such as a snack bar or soft drink, if there are credit terms for more involved purchases such as a car, or other factors such as delivery time and quality of service. Try to think of the attributes of the products that you buy on a regular basis. Are these attributes important when you decide to go and eat out or go out to meet friends? What are the alternatives? Branding plays a significant role as far as product choice is concerned. The power of the brand is immense in encouraging loyalty and in communicating a consistent message to customers. In Unit 5 we will look at the importance of branding. Consider the importance of brands in your own decision making. How important are foreign brands compared to domestic brands? Consider the situation in China, where a number of new domestic brands are challenging more established foreign brands. What does foreign mean to you? Does it represent luxury, better quality, the acceptance of your peers or is it an inferior product?
Outcomes Once the consumer has made the final decision to purchase, he or she will either be satisfied with the purchase or dissatisfied with the purchase. If the purchase represented a level of risk to the consumer, then it is still likely that there are doubts. Consumers will very often question their own purchase, which we refer to as cognitive dissonance. Car manufacturers target recent buyers with communications to allay their fears and to convince them that they have indeed made the right decision. Once the purchase has been completed, the consumer then returns to the problem identification and is open to information about this or new products. Car manufacturers have to monitor this period quite closely. A car buyer who replaces their car every year will be open to receiving information about new cars on a regular basis.
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Try to think of a purchase that you or your friends have made recently where you are considering whether or not you have made the right choice. Have you had to contact the supplier about the product? Many companies now see aftersales service as important as the purchase in helping to maintain their client base. The buying of computers is such a purchase. Consumers in developing countries are starting to invest heavily in personal computers. What happens when the computer isn’t working as well as you expected. How easy is it to contact the manufacturer? Do they resolve the problem quickly or are you made to feel guilty by the people you deal with on the phone. If you are able to deal with these issues quickly, then you will almost certainly add value to the brand in the eyes of your consumer.
ACTIVITY Ford car dealers One of the problems that Ford faces in a number of its markets around the world, is the reputation and service of the dealers who sell Ford cars. In many cases these are private companies who represent Ford, and usually work exclusively with Ford. Perhaps understandably one of the problems is the sales person’s understanding of customers. They are given sales targets, and in many cases their basic salary is low, with the incentive to make money by taking a commission on every car that they sell. The average sales price of a new car is usually around $ 16,000. One of the frequent complaints of the sales people themselves is that too many people visit their showrooms just to look at the cars, and seem to have little intention of buying. The sales people refer to these as ‘tyre kickers’ and refer to people who leave without a buy as a ‘walkout’. One of the problems with sales people is that they can be seen to be too keen to get the sale, a factor confirmed by ‘mystery shoppers’, who are people sent by market research agencies undercover to test customer service in dealerships. Female customers also complain that male sales people tend to be patronising, and in a case where they take a male companion to the showroom with them to help them buy a car, find that the sales people usually always direct their sales pitch to the male, even thought it is the female who has the budget to buy the car. Using the knowledge that you have gained from studying the decision making process, give some advice to the dealerships to suggest how they might change their approach to the people who visit their showrooms.
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ACTIVITY FEEDBACK There are several areas to address and you will have listed some of the following: 1.
The first factor to take into consideration is that a car is an involved purchase, and requires considerable thought on the part of the buyer. It is a basic error of a sales person to assume that it is the male who is making the purchase.
2.
Consideration sets – Ford may be part of a consideration set, and so the potential customer is collecting information, has several questions to ask, and therefore must leave the showroom satisfied. Even if the Ford is the best car that they have seen, they might still move on. A sales person needs to establish if the customer has an information gap that perhaps they could fill now, or after they have left the showroom. Ask for this person’s details so that more information can be sent.
3.
Showroom – remember that for most customers this might be the only opportunity to see a car close up, hence the title showroom. Many car dealers encourage people to visit their showrooms and offer advice and information in a no pressure environment.
4.
Decision time – even when somebody is armed with the information they need they still might wait before they take a decision. Try to get the potential customers details and keep sending them information on a regular basis. It just might jog the memory.
5.
Repeat purchase – many car buyers have a purchase cycle for cars. A ‘car interested’ person needs to visit showrooms so that they can make informed decisions at a later date. The showroom should be an inviting place with refreshments and information to help this type of potential customer.
6.
‘Die hards’ – these are your brand evangelists. They help to sell your cars to their friends. They should always be welcomed and offered information so that they go out and spread the word.
7.
Cognitive dissonance – remember that current customers may still be anxious about their purchase. A sales person should try to maintain regular contact to reassure them about their purchase.
You may have made more specific points and these should generally be in the area of improving customer service and presentation of the showrooms.
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Influences on consumer decision making We need to explore further the factors which influence consumer decision making and we must try to understand to what extent these factors affect our products or services.
Needs Maslow’s classification is often used as a framework for understanding the needs of customers. These are considered to be the five basic needs of humans: 1.
Physiological – water, food, shelter, sleep.
2.
Safety – security and protection. These needs are taken into consideration when mobile phones are bought for children or partners, and may be an important reason why more women drive cars.
3.
Love and belonging – usually family and friendship. In a developed society where more single people choose to live by themselves and where the number of single households increases annually, this has become a very important consideration.
4.
Esteem – status, prestige and self respect – these may be taken into consideration when purchasing luxury cars. Consumers may well use products in order to improve their selfimage.
5.
Self actualisation – self fulfilment and personal achievement – increasingly these needs are being met by products or services designed to target high achievers and those looking for self fulfilment.
Perception According to Solomon (2002), perception is the process by which our sensations, such as how we respond to light, colour, sound or odours, are selected, organised and interpreted. Hollensen (2003) suggests that consumers tend to avoid information that contradicts our current beliefs and attitudes. The current legislation whereby manufacturers print stark warnings on their packaging is likely not to be noticed by smokers.
Memory Hollensen (2003) discusses the idea of short term and long term memory. Information is processed in the short term memory and if stored will pass to the long term memory. As consumers we are U n iversity of Su n derlan d
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constantly bombarded by short term messages, many of which we will never remember. However, when faced with a decision to make about a new category of product, or one that we haven’t purchased for a while, memory or recall of an advertising message will have more of an impact on our decision than we realise. Solomon (2002) considers the way in which we store information. Stored information will only be important if we can attach some meaning to it. Solomon suggests that messages we receive from adverts may be affected by the type of programme being shown just before the ad break. Research shows that we recall less when adverts are placed during stopgo sporting activities. Solomon (2002) states that recall of the most recent TV advertisement that we saw can be as low as 7%.
Attitudes Attitude surveys are used to measure our attitudes. We must aim to understand consumer attitude towards our product or service, and if necessary we may need to try and change attitudes. Our attitudes are likely to affect the purchases that we make, and it is therefore an important part of consumer behaviour. We can form attitudes towards a product simply because of the way that it is advertised. The main objective of the advert may simply be to change consumer attitudes. Solomon (2002) suggests that some adverts are aimed at our emotions and attempt to evoke positive feelings towards the product. We must also consider tracking consumer attitudes over a period of time in order to try and identify changing attitudes.
Socio-demographic variables Age/social class/demographics These variables help us to try and categorise our customers and can form the basis of early attempts to segment the market. Age usually has some impact on the products we consume. In particular we need to be aware of products or services which make us feel better about ourselves and which perhaps are more associated with younger age groups. Think of the products which we consume in order to make us feel or look younger. Social class differences are more noticeable in some countries than in others. It is evident in developing markets that older consumers are changing their consumption behaviour. Solomon (2002) refers to this as age subcultures. Many consumers in the 5565 age group began their adult life in the sixties, and grew up experiencing more freedom than previous generations. This group are now approaching retirement and are trying to relive their earlier experiences. As a result this group does not conform to the conventional idea of an old aged pensioner. They
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demand new types of products, and look for specialist holidays and social activities.
Lifestyles The way in which we live our lives is reflected in the products or services that we purchase. There are currently regular television bulletins about lifestyle and diet. There is a strong association between fast foods, considered to be healthy and nutritious, with obesity and lack of fitness. Such is the problem that the UK and USA governments are putting pressure on the food industry to promote healthier eating.
Culture/subculture Culture has many definitions. It is shared beliefs, attitudes and behaviour patterns which are passed on from one generation to the next. A subculture is a group within a culture who might share similar ideas. In trying to understand culture we must focus on the way in which cultural beliefs or values affect the purchase decisions that we make. Solomon (2002) considers the introduction of the TV dinner, which reflected changing family values and traditions.
Reference groups/family We need to understand to what extent our family of reference groups have an impact on the goods or services which we produce. These can also include family and colleagues and their attitudes to products may influence us more than we realise.
The family It is difficult to measure the impact of families across different borders. Consider the Chinese policy of one child per family. This means that there will be a whole generation of consumers who do not have aunts, uncles or cousins, and who are increasingly spoiled by parents and grandparents who invest huge sums in their ‘little king’ or ‘little queen’. Consumption of personal computers for young people in China has escalated as a result of this phenomenon.
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Family life cycle The family life cycle shows how households spend their income over their lifetime. Once children have left home then parents reach their peak in spending and very often purchase goods that are rewards, such as expensive motorbikes, sports cars or cruise ship holidays. In some cultures, the extended family (whereby two to three generations live in the same household) is quite common, whereas in some developed markets this happens very infrequently. Solomon (2002) talks about the nuclear family, which consists of a mother, father and one or two children living in a typical household. While the average number of children per family is around 1.4, there is a common perception that mother, father and two children is the typical household. In the United Kingdom and the USA there are increasingly single households, with more people choosing to live by themselves than in previous years. These households consume a high percentage of ready made food.
Organisational decision making (B2B) Earlier in the unit we considered the B2B market, where the customers are other businesses, governments and institutions. The output from this business will eventually end with the final consumer. Hollensen (2003) suggests that the demand for these products and services arises because of a derived demand for the finished products and services that these companies produce. The main buyers in the B2B sector are manufacturers, intermediate customers or resellers such as wholesalers and retailers, public sector markets, such as schools, prisons and hospitals, and public sector tendering procedures, where companies bid for contracts.
Buying situations The three different buying situations in B2B markets are new task buying, modified rebuy and straight rebuy. Each situation suggests how much work the seller has to undertake in order to gain business.
New task buying In B2B, buying a new product or service involves a considerable amount of thought and planning, and the higher the overall value of the project then the more time is put into the decision making process. There are also likely to be a number of people involved in the decision making process, a factor we need to take into consideration in our communications when targeting new companies.
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Straight rebuy In a situation where companies are making routine purchases of our product or service, we need to ensure that our booking systems and operations are set up to make this process as simple as possible, and we should invest time in maintaining and developing this relationship. We should be aware of potential competition and look to set up barriers to competition.
Modified rebuy This is relatively straightforward in terms of decision making, however as a supplier we must be aware that this might open the door slightly for a competitor. We should try to turn this situation in to a straight rebuy situation as soon as possible. We might also be the initiator for a new product or service, particularly if we have a good working relationship with our customers. Good companies are constantly looking for new solutions to problems and work closely with suppliers who help them to develop these new solutions.
Webster-Wind model for organisational buying behaviour The WebsterWind organisational buying behaviour model is another useful framework we can use when trying to understand the B2B buyer or, as it is also called, the organisational buyer.
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E nvir onment al I nfluences PLESTI + C These influences are exerted through suppliers, customers, governments, trade unions, etc.
Or ganisat ional I nfluences The organisational climate – physical, technological, economic, cultural Organisational goals Organisational structure – communication, authority, status, rewards and workflow Buying technology – buying tasks
B uyi ng Cent r e I nfluences Various roles in the buying centre – users, buyers, influencers, deciders, gatekeepers Interpersonal interaction – role expectation, behaviour, relationships Group processes – leadership, tasks performed, structure
I ndividual P ar t i cipant ’s I nfluences Personal and organisational objectives Personality of buyer Perceived role set Motivation Cognition Learning
B uying deci sions
Fig 3.4: Webster Wind model.
Source: Webster FE and Wind Y (1972) “A General Model of Organisational Buying Behviour” Journal of Marketing 36, April
Environmental influences We have already considered the PEST figures in this unit, and the PLESTI + C is another way of looking at the influences exerted upon us
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by external factors such as political, legal, economic, social, technological, industry and customers. We will discuss this in more detail later in the unit.
Organisational influences We must try to understand the climate within the organisation as this will affect their buying decisions. We understand that if we work with supermarket buyers that they are under pressure to deliver innovative solutions within stores, and to consider ways of improving distribution. We must also try to consider their structure, lines of communication and the reward structure within the organisation. The closer we can be to their expectations of a supplier then the more we are likely to be chosen as a supplier.
Buying centre influences In line with other models we have to establish the roles of key people within the decision buying centre or decision making unit. An understanding of their structure and their roles is more likely to open them up as a potential customer.
Individual participant’s influences This person is very often our first point of contact. While they are only part of a decision making unit (DMU), they are our access to the DMU. We need to build up an understanding of this individual, their personality, motivation and their role. Good salespeople build up important dossiers on their customers in order to develop the working relationship. Within certain business cultures the role of the personal relationship is critical to a successful working relationship. Japanese business culture is heavily influenced by the need for a strong working relationship, and entertainment is critical.
Evaluating suppliers If we look at Hollensen, page 137, we can see an example of a supplier evaluation form for the Chrysler Corporation. If we look at this form then we can see how our potential customers consider their suppliers, and against which criteria they are being evaluated. This is an important checklist for potential suppliers and we can feasibly use this form as selfevaluation, and as the basis for researching our competitors.
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Influences on the buying process We need to consider the four key areas which have an influence on the purchasing decisions of companies. In Figure 3.5 we see that these are environmental, organisational, individual forces and group force. Hollensen (2003).
E nvi r onment al for ces
1. Recognition of a problem/need 2. Determination of characteristics and quantity of needed product/service 3. Determination of the product/service desired and quantities needed I ndividual for ces
4. Search for potential suppliers and preliminary evaluation of their suitability and qualifications
Or gani sat i onal for ces
5. Acquisition and initial analysis of proposals (samples) from suppliers 6. Evaluation of proposals and selection of supplier(s) 7. Selection of an order routine 8. Performance (review) feedback and evaluation
Gr oup for ces
Figure 3.5: Influences on the buying process.
Environmental forces Economic influences While our primary concern as a B2B supplier is our customer, we mustn’t forget that ultimately their products are likely to be destined for the enduser market. As a result, a supplier of car components should take an interest in trends in the car market. We therefore need to monitor economic changes and consider the likely impact on our particular market.
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Technological influences Current developments in technology and the use of webbased technologies have revolutionised business, in particular the B2B sector. Manufacturing processes are increasingly computerised and for many companies the solutions for their needs lie in technological developments. This will have significant cost implications and our ability to finance future developments is very important.
Organisational forces Strategic solutions Our relationship with key customers is critical to our survival. Our understanding of the strategic decisions which our customers need to take may be important to help us develop our future business. The supermarket business changed dramatically once distributors formed strategic alliances with their customers. There was a recognition that distribution was a not a core strength of the supermarket and, by passing on distribution to strategic partners, they were able to divert more resources to their core business of retailing and customer service.
Strategic role of purchasing Companies are increasingly looking at their costs as a strategic consideration. They are interested in looking at ways to drive down costs in order to maintain a competitive advantage. This means looking at the role of their suppliers and looking for ways of improving purchasing. In some cases, where they run several divisions, they might be looking to centralise some of their purchasing. As suppliers we should maintain dialogue with our main customers and work with them at ways of reducing costs.
Group forces The people within an organisation who take part in the decision making process are sometimes referred to as the decision making unit (DMU). We need to understand exactly how the DMU works within an organisation. We might need to target each group with a different communication message. If we are selling industrial grass cutters then we must consider the operatives as well as the engineers, the finance directors and the purchasing department.
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The Decision Making Unit (DMU) We can categorise the different people within the decision making unit but we should never underestimate the influence of them individually.
Users These are the people who use our products or services. Not only are they important in the decision making process, but they are also key when we are developing new products which they will use. Their expertise will be important in the new product development process.
Influencers These are people who can influence a decision to purchase as they may be involved in the development of a project. They might be people with technical knowledge who can influence other members of the DMU.
Buyers These are usually people within the purchasing department who, while their main role may be to authorise the decision of the DMU, may also have some input in the final decision.
Deciders These people might have the final decision when choosing between suppliers. It is up to our sales and marketing people to identify who the deciders are and to make sure that we have satisfied their main criteria.
Gatekeepers These are people who can control the flow of information within the organisation. If we send details of our new product to a purchase manager only, then we are reliant upon this person to share the information with other people within the organisation. We may, therefore, decide to target more than one person within the company.
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Individual forces We need to understand the power of individuals within the decision making process. There are individuals who have a much greater stake and perhaps have more say in the final decision.
ACTIVITY Ford Motor Company used its research data in order to make key members of staff aware of the importance of loyalty and satisfaction. There is often confusion between loyalty and customer satisfaction and an assumption that satisfied customers will remain loyal and that loyal customers are satisfied.
Vulnerables
True loyalists or enthustiasts
High 30%
Loyalty
20%
Probable lost
Switchers or
customers
variety seekers
40%
10%
Low
High
Low
Satisfaction
Consider the information, where you are faced with the fact that research indicates that 30% of your current customers are ‘vulnerables’, 20% are ‘true loyalists’, 10% are ‘switchers’ and 40% are probable ‘lost customers’. What are the options available to you as Ford’s marketing director? What specifically would you recommend that they do to address the issues raised by this research?
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ACTIVITY FEEDBACK Ford customer loyalty 1.
Low loyalty and low satisfaction – one of the problems facing Ford, and all companies in the car industry, is the fact that the length of time between purchases in a customer’s life may be several years. This accounts for about 40% of all customers. We know that the cost of recruiting new customers will be high, so we will need to divert some resources to addressing these issues. The problem with the customers in this section is that at present they seem the most unlikely to buy a Ford car again. However, there are still some in the group who could, with some targeting, be moved more towards the high satisfaction segment.
2.
Vulnerables – Ford must recognise that this group of Ford owners remain loyal to the company, but generally aren’t satisfied with Ford. This implies that this may have something to do with current levels of service, and so existing customers need to be targeted, and attempts made to improve their levels of satisfaction. We can assume that their loyalty may fall, in which case they could potentially be lost customers in the future.
3.
Branding – Ford’s research revealed that more work needed to be done to reinforce their brand image. Ford’s brand had history, heritage and customers who had grown up with exciting cars like the Mustang and what was needed was more investment in building up brand image. Research also showed that style and presentation of vehicles was also more important than they had realised. They launched a major research and development campaign and put more emphasis into the design of their vehicles. Not only did they need to win over their customers, but also their staff. They needed to make people believe in what was one of the greatest brand names of all times. The next range of cars to be launched included the Ka, Focus, Puma and Cougar. The Ford Focus won European car of the year, and people started to talk about the style and design of Ford cars. The investment in staff training also started to pay off.
Measuring Customer Satisfaction If we look at Hollensen’s model in exhibit 4.5, pages 147 to 148, we can see that our performance as a customer can be measured against the importance that our customers attach to particular criteria. In this case Hollensen has looked at product quality, sales, value, design, customer service, transportation and delivery and invoice and administration.
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S ummar y char act er i st i cs
Durability Appearance Reliability
P r oduct qual i t y
Shipment timeliness Shipment damage Driver courtesy
T r anspor t at i on and del iver y
Representative’s accessibility Representative’s knowledge Reliability, follow-up
S ales
Structural designs Sample timeliness Technical quality
D esign
Complaint resolution Telephone response Information accuracy
Cust omer ser vi ce
Invoice accuracy Invoice timeliness Inquiry responsiveness
I nvoice and admi ni st r at i on
Total cost of use Market price Supply costs Productivity
Cust omer loyal t y Over al l cust omer sat i sfact i on
F i nanci al per for mance Commit ment
B ondi ng/ r epeat buyi ng Cust omer r et ent ion
Sales Market share Lifetime customer value Customer profitability Total profit
V al ue
Figure 3.6: Customer satisfaction model.
If we look at Hollensen’s model, we can measure our performance against the seven criteria as a way of measuring overall customer satisfaction. In B2B we need to take into consideration the various members of the DMU who will have some say in the way that we handle their account.
Customer satisfaction loyalty and bonding In order to increase customer satisfaction we need to consider the bond which exists between us, as suppliers, and our customers. To what extent we bond with our customers will be dependent upon the contact opportunities, the barriers in place to prevent other suppliers or the activities which we undertake to develop our bond with customers. If you are working for a small or mediumsized business, or in fact own such a business, it is likely that you can’t answer these questions in relation to your customers. The simple test is to focus on your most important customer, the one that may account for forty per cent of your business. They are your most important customer, but are you their most important supplier? If you aren’t then you need to consider improving this bond, before you start to look for new customers.
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CASE STUDY ACTIVITY Read the Manchester United case study in Hollensen, page 160, and answer the following questions. Remember that even if you don’t like football you should approach this case study as if you were a consultant. Many of the commercial activities of a sports club have very little to do with one’s knowledge of the sport itself. 1.
How would you describe Manchester United customers on the: a) B2C market? b) B2B market?
2.
What are the short-term and long-term benefits and pitfalls of the Manchester United-New York Yankees alliance for both partners?
3.
What are the prerequisites for establishing Manchester United as a global brand?
4.
Is the Manchester United-New York Yankees alliance the right way for realising a global brand strategy?
CASE STUDY FEEDBACK 1.
The customers on the B2C market for Manchester United are: The audience at the game. Television viewers. Online visitors on www.manutd.com. Visitors to retail-shops in Singapore, Dublin, Kuala Lumpur and Capetown. The customers on the B2B market are Vodafone (sponsorship arrangements). BSkyB (joint television channel).
2.
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Benefits: The fact is that the average American doesn’t follow soccer, and much prefers established American sports such as baseball, basketball, American football and ice hockey. The men’s soccer game attracts very little media attention in the USA and, in fact, the game for women in the USA is more established and they have also won the World Cup. The Yankee representatives understand the USA sports market and feel that the timing is right to introduce the Manchester United brand to the USA. Pitfalls: There are serious concerns about the ‘Americanisation’ of Manchester United and ‘soccer’. The sports cultures in the USA and UK are so different. European football (‘soccer’) will have a difficult time in penetrating the US sports culture and the same can be said for baseball in Europe. Baseball is not a similar sport to soccer, and perhaps a partnership with an American football team like the Dallas Cowboys would have been better. 3.
Manchester is well on the way to becoming a global brand. The United brand is already known in Africa, China, Japan, India and Latin America. The management of Manchester United could consider if football/soccer is enough to carry through a global brand strategy, and they could perhaps look to make it an entertainment brand.
4.
One of the possibilities lies in targeting areas of the world where they love both soccer and baseball. An alliance with another club may help to establish a quick presence in the US market, and also increase their overall global presence. Assuming that the New York Yankees have a global presence then Manchester United can piggyback on that success. Given the US sporting links with other countries, as a result of its high Hispanic population, might open up some Latin American markets to Manchester United.
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Competitor analysis and intelligence In order to make key strategic decisions we need to have a clear understanding of competitor intelligence. Hollensen (2003) suggests that there are three stages of competitive development in an organisation, namely competitor awareness, competitor sensitive and competitor intelligence. As a company moves through these stages, they become more responsive to competitors and ultimately will develop systems to monitor competitor intelligence.
Who are our competitors? The key to marketing orientation is to focus on the needs of the customers. The key to understanding competition is to be able to define your market from the point of view of the customer.
ACTIVITY Consider the following list of products in the first column. In the second column write down a list of their likely competitors.
Product
Competition
Can of Coca Cola
Other cola drinks Other soft drinks Any other drinks that may be bought for convenience
A package holiday to a Greek island
A Parker writing pen
A Harley Davidson motorbike
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ACTIVITY FEEDBACK
Product
Competition
Can of Coca Cola
Other cola drinks Other soft drinks Any other drinks that may be bought for convenience
A package holiday to a Greek island A Parker writing pen
Other holidays to Greece Holidays to a similar priced destination Other pens Other products such as chocolate or books that might also be purchased as a present Other corporate gifts
A Harley Davidson
Other motorcycles
motorbike
Sports cars A swimming pool
You will notice that in certain situations we face direct competition from similar products. You might ask why a swimming pool is in competition with a motor bike? The answer is because the Harley for many consumers is a purchase made once their children have left home and the house loan has been paid. Many consumers are men in their mid-fifties. The swimming pool is another product that perhaps their wives or partners would rather purchase with their money. It might seem obscure but research has shown that this is often the case. The example of the Parker Pen is much easier to understand. A high percentage are bought as gifts and they therefore compete with gifts within a specific price range.
Learning about our competitors There is much discussion about the ethics of gathering competitor intelligence. It is generally agreed that companies are paying more attention to information gathering about competitors and indeed it is often the focus of some of their marketing research activities. The different ways of gathering this data are as follows:
· By gathering information from internal employees and employees of competing companies.
· By gathering information from competitors’ customers.
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· By gathering information by observing competitors or by analysing physical evidence.
· By gathering information from published materials and public documents.
Analysing the strengths and weaknesses of competitors In order to complete our marketing audit we need to measure the strengths and weaknesses of our competitors. Hollensen (2003) suggests a four stage approach. 1.
Identify the factors that companies look for when choosing a supplier and what they expect from the product or service. We can then rank the most important factors.
2.
Assess the company’s and competitors’ performance on different value functions.
3.
Compare how our company rates on different attributes with each of our competitors. Where we identify weaknesses then we must take some action to try and remedy these.
4.
We must monitor our customer values on a regular basis if we are to remain competitive. We must avoid complacency at all costs.
What are the objectives and strategies of our competitors? For many companies trying to understand and estimate the objectives and strategies of competitors may be difficult. However, there are usually key indicators which will enable us to make an assessment, and thus allow us to plan our strategic direction.
How to assess our competitors’ current strategies We need to constantly monitor the activity of our main competitors Hollensen (2003) suggests that the three main areas that we need to consider when assessing the current strategies of our competitors are:
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1.
Identifying their market or markets.
2.
Identifying their strategic focus or the way in which they have chosen work in their markets.
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The marketing mix which they have adopted.
Identification of competitors’ chosen markets Prices When considering our competitors’ pricing strategy we need to consider what their current approach to pricing is. We should have a good idea of their costs, and certainly be able to estimate them. When we can estimate their costs we can then see how aggressive their pricing strategy is. While we accept that price competition can ultimately destroy our profits, we need to be in a position to respond to changes in price.
Product features We should monitor the development of our competitors’ extended product. By this we mean such things as levels of service or innovation in developing existing products or services.
Competitors’ strategic focus We will look at strategic options in more detail in Unit 4. We need to establish what the future plans of our competitors are. If they are planning expansion, either at home or abroad, and developing new products or services, then this gives us some idea about their strategic intent.
Our competitors’ marketing mix We can compare the aspects of our marketing mix, namely product, price, place and promotion, with those of our competitors. In doing so we may be able to identify areas of weakness which might represent an opportunity for us. This, of course, will be supported by our market research activities.
CASE STUDY ACTIVITY Please read the Virgin Case study in Hollensen page 191 and answer the following questions: U n iversity of Su n derlan d
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1.
What have been the main reasons for the disappointing performance of Virgin Cola (Virgin Drinks division) ?
2.
Which segmenting, targeting and positioning strategy would you recommend to Virgin Drinks for its comeback in the US market? (Use Tables 5.2 and 5.3)
For a more in depth understanding of segmentation, targeting and positioning, you can read Hollensen (2003), chapter 8 pp 304-352, or refer to the section on segmentation in Unit 4 of this handbook.
CASE STUDY FEEDBACK 1.
The main reason has been the dominance of the two giants Coca-Cola and Pepsi Cola, who are well entrenched in the market and enjoy considerable customer loyalty. Virgin’s product line of standard cola and a diet cola is too narrow. The company overestimated the impact of the Virgin brand in the USA. There is a much stronger association between the brand and Richard Branson in the United Kingdom and the brand has a very strong identity. Richard Branson is not as well known in the USA as he is in the United Kingdom.
2.
Virgin Drinks should broaden their product concept by adding new flavours to the line. They might even want to introduce a new energy drink to compete in the same market as Red Bull. There is considerable growth in this new market. In terms of their geographic segmentation and targeting, Virgin Drinks should target a much smaller part of the USA. In such a vast country it is very difficult for a newcomer to achieve nationwide distribution. They might want to consider the East Coast where UK products have a much stronger following. Positioning – it is likely that the groups to target are less conventional, more outgoing groups.
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Understanding relationships in the marketplace A key success factor for a number of companies is the development of relationships with customers, other companies and suppliers and in some B2B situations, with the customers of their own customers.
The value net In considering the value net, Hollensen (2003) discusses the role of a competitor and a complementor. A complementor is a company which supplies goods which complement the goods of another company. A clear example is that of a company which produces computer software being a complementor to one which produces computer hardware. Complementors work at the same level in the distribution chain. Hollensen (2003) cites the ARA network model developed by Hakansson and Johansson (1987) which looks at the role of actors, resources and activities in developing networks.
Actors Actors operate at different levels in the network. Actors are constantly trying to take more control of the network in the marketplace.
Resource ties In developing a relationship, companies will combine their resources in order to improve their effectiveness in the market.
Activities These refer to any shared activities that are aimed at making companies more effective. Companies who work together on production schedules or in improving service to endusers are setting up activity links. These can present a barrier to other competitors.
Relationships with customers There is common agreement in marketing texts that it is more cost effective to develop relationships with existing customers, than it is to pursue new ones. This lies at the heart of relationship marketing (RM). We have considered, earlier in the unit, how companies can put up U n iversity of Su n derlan d
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barriers to their competitors. Companies which enjoy a very strong relationship with their customers find that it is difficult for them to break links with them.
Customer behaviour Hollensen (2003) uses the marketing relationship continuum developed by Jackson (1985) to classify the types of relationships that we might enjoy without customers. The continuum looks at the ‘alwaysashare’ customers who focus mainly on transactions which share their business across a number of different suppliers. At the other end of the continuum are the lostforgood customers, who work closely with their suppliers to create barriers to entry for their competitors.
International strategic alliances In order to gain rapid entry into overseas markets, many companies are opting to form strategic alliances with overseas partners. In many cases this might be of mutual benefit. Chinese firms, in particular, are using this mode of entry in several markets. However, there are other benefits. Shanghai Motors in China has offered to invest money in the failing British company Rover cars. For Shanghai Motors the main incentive would be to work with a recognised research and development team who will help to improve the design of cars made in China. For Rover motors this offers them the opportunity to be a key player in the rapidly developing Chinese car market. Perhaps the biggest test for both partners would be the bringing together of two very different management and work cultures. However the benefits of achieving a smooth integration are clear for both parties.
CASE STUDY ACTIVITY Philips and Jordan Read the Philips and Jordan case study in Hollensen, page 197 and answer the following questions
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1.
What would be the benefits for Philips of the Optiva acquisition? How would Optiva benefit from the acquisition?
2.
If you were a part of Jordan’s senior management group how would you react to Philips’ acquisition of Optiva?
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CASE STUDY FEEDBACK 1.
Philips’ acquisition of Optiva gave them access to a 35-40% market share in the USA market for electrical toothbrushes. They also gained access to Optiva’s revolutionary technology which had created such an impact in the market place.
2.
You might consider that Philips’ purchase signals their intent to remain a major player in the marketplace, which might have an impact on the relationship with Jordans.
Relationships with suppliers Suppliers are recognised by marketers as key stakeholders for companies, and as such the relationship and information flow to them needs to be managed carefully. Consider the situation where the financial papers publish a story about the financial difficulties of a major company. Imagine then that you are one of their main suppliers, supplying them with $ 100,000 of materials per week. How will you react to this news? The danger to the customer is that the supplier cuts supplies which ultimately affect their ability to supply the enduser, and vital sales could be lost.
Buyer-supplier relationships In order to understand the relationship between buyer and supplier, we need to consider the bargaining power of each party. Hollensen (2003) has developed a matrix (see Figure 3.7) to be able to plot the relationship between buyers and suppliers.
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SUPPLIER One
Few
Many
BUYER One
Few
Co-operative System ¬
Unequal
Unequal
distribution of
distribution of
power
power
Unequal
Balanced power or protection
Unequal
Unequal
Unequal
distribution of
distribution of
Adversarial system
power
power
distribution of power Multiple
distribution of power
®
Figure 3.7 Buyer–supplier relationships.
1. Cooperative system In this situation there exists a strong relationship between supplier and buyer. In such instances, the supplier may well have invested in systems and technology to improve supplies to the buyer. Such a relationship will make it very difficult for competitors to become new suppliers. 2. Balanced power or protection Where there are few buyers or few suppliers in a market then the balance of power between the supplier and the buyer is similar. In some cases this might suit a buyer who doesn’t want to rely on just one supplier. Suppliers who take on more than one buyer will be confident of their ability to satisfy both current demands and future demands. 3. Adversarial system In this situation where there are many suppliers and buyers, then the buyer tends to be in a much stronger position. The emphasis in the working relationship with suppliers will be based mainly on price, due to competition, with buyers able to switch suppliers easily.
Relationships with complementors Hollensen (2003) highlights complementor relationships as a growth area. Companies join together to develop projects with each bringing their own expertise to the alliance. There are several examples of major brands working together to serve customers. Hollensen cites the example of an alliance between Esso and Tesco to develop mini stores
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on petrol station sites. Tesco benefits from the volume of customers generated at Esso’s garages, and Esso is able to offer its customers the retail expertise that has turned Tesco into the leading multiple in the United Kingdom. Hollensen also cites the example of brands which are used to add value to products, in what is referred to as ingredient branding. The best examples of these are Nutrasweet, a sweetening product use in fast moving consumer goods, and Intel, who provide ‘chips’ for leading computers.
PESTLE, PLESTIE, SLEPT or PEST Factors A useful acronym to help you to consider the key external factors which are likely to have an impact on our business is PESTLE or PLESTIE. We are going to concentrate on the PESTLE, and present a framework for analysing the key factors. Each of the letters stands for Political, Economic, Social, Technological, Legal and Environmental. We need to remember that all of these factors are external and not internal, and while they might affect our business, they are also referred to as uncontrollable factors. By this we mean that our company is not able to change these factors but must be aware of them, and more importantly, is able to monitor their changes.
Political factors What are the key political factors which might affect our business? These are factors such as the government currently in power, the political climate in a country and the amount of support that a government gives to business. In some volatile international markets political factors are likely to be more important than in stable markets. We will find that some political factors might also appear in legal factors. This isn’t a problem, as the most important function of the PESTLE is to identify key factors which are relevant to our business.
Economic factors We must take into account economic factors which have a direct influence on our business or on our customers. The key indicators are inflation, both current and predicted as this will have a bearing on costing and pricing. Other factors include interest rates, Gross Domestic Product (GDP), exchange rates and unemployment. While we might know the GDP per person in the market, we also need to be able to interpret its impact on our business. While interest rates are low an economy tends to function more effectively, but this won’t have a direct impact on all business.
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Social factors Here we are concerned with the social factors which might impact on our consumers or on the endusers of products. We can identify some of these factors in this unit where we look at consumer decision making. Research will enable us to identify those social factors which have an impact on our business. We can predict future impact, simply by studying current growth rates. A fall in the birth rate will have a definite impact in the future on markets which sell products to parents, and an increase in divorce rates might also have an impact on housing. It is those companies which are able to predict future trends which are likely to have the most impact in the marketplace in the future. Economists are making many predictions about the impact of the aging population in developed countries, and the future demand for products.
Technological factors We need to understand the technological environment in the markets in which we operate. We mentioned the software market and how this is linked to the development of the hardware market. Given the rapid increase in technological development, it has become even more important to understand the technological environment.
Legal factors Legal factors are linked closely to political factors. Legislation can have a direct impact on our business. In the UK market, when the government changed the tax levels on company cars, in an effort to encourage companies to purchase more fuel efficient cars, Ford introduced the new 1.4 litre engine car, as this fell within the new legislation on company car tax.
Environmental factors Under environmental factors we can introduce the areas that we covered in this unit and Unit 2. Here we must consider the competitive environment in which we operate. This will also include competitor analysis and how we see our competitive position in the market. Remember that the PESTLE must only include those factors which are relevant to our business and our markets, and for that reason it is a useful tool for marketing planning.
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CASE STUDY ACTIVITY Dandy Chewing Gum Read the Dandy case study in Hollensen, page 245, and answer the following questions: 1.
How are Dandy’s competences in the value chain used in the alliances to create value for the Dandy-Joyco and Dandy-KGFF partnerships?
2.
What should Dandy’s future product market strategy be? You can draw up a SWOT analysis to help you answer the question. Should they develop their own brands (Stimorol, Dirol and V6) or should they function more as a sub-supplier to large multinational confectionery or healthcare/pharmaceutical companies? The SWOT analysis is covered in more detail in Unit 4 and in Hollensen (2003), pp 265-271.
CASE STUDY ACTIVITY FEEDBACK 1.
In the Russian market, Dandy’s distribution competencies are used in the Dando-Joyco alliance. In the alliance between Dandy-KGFF, Dandy’s competence in dragee production technology is used.
2.
If we carry out a SWOT analysis we can identify the following: Strengths – A market leader in the European dragee segment. Their production technology in dragee chewing gum. Weaknesses – Compared to Wrigley they lack financial resources Opportunities – The consumption of chewing gum has generally changed from mainly sticks to dragees. Threats – Other American competitors such as Warner Lambert could be more aggressive in the European market. As a leader in production technology and with know-how of dragee products such as Dirol and Stimorol, Dandy should concentrate on these core competences. Dandy would be advised to concentrate on its core competences and develop their existing products, and any new products could be U n iversity of Su n derlan d
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marketed under the existing brands of Stimorol, Dirol and V6. Dandy might also consider acting as a consultant and sell its knowledge about dragee products to companies who are looking to outsource their production and/or product development of dragee products. Dandy has already produced dragee products for other manufacturers or retail chains under their own private label. As Dandy’s core competence is considered to be the best then it should consider the World market and not just the European market place. In relation to global competitors, Dandy is a small player. They might consider developing expertise as a sub-supplier of dragee chewing gum to multinational companies.
REVIEW ACTIVITY Read the Viagra case study in Hollensen (2003), page 165, and answer the following questions: 1.
How do you see the future market development for drugs against ED?
2.
What can Pfizer do to increase the sales for Viagra?
3.
What are the key stages when conducting a competitor analysis?
4.
To what extent will it be possible to predict a competitor’s response to our marketing activities?
5.
In the case of a car manufacturer, what are their major sources of competitor intelligence?
REVIEW ACTIVITY FEEDBACK 1.
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Possible the biggest factor which might impede the market development of such a drug is the refusal of potential customers to own up to the problem of ED. In certain cultures such a condition might impact on virility and a man’s self-esteem. If this is a product targeted at over 50 year old males, then as the average life of males increases across the globe, this might reflect on the sales of Viagra. There will almost certainly be increased competition in the marketplace. However, Viagra is the name that is strongly identified
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with this category of drugs. There will also need to be continued efforts to educate potential customers. 2.
There will still be growth in sales to males for ED. However, there are opportunities to introduce a similar drug for women and a version of Viagra for diabetes sufferers.
3.
When conducting an analysis of our competitors, we can follow these stages: We need to establish who are our competitors. We need to understand the relationship between our competitors. We need to discover how we can learn about our competitors, and gather the information that we need. We need to carry out a competitor audit to establish the strengths and weaknesses of our competitors. We should establish what we think their objectives are, and what their likely strategies will be. We should try to work out exactly how our competitors respond to competition.
4.
Our competitor intelligence will help us to predict the likely response of our competitors to our activities in the market. We need to establish how they have responded to competitive pressure historically. If we are planning to gain share from competitors then we would expect them to respond. If we know that their objectives are to grow in the market then we can predict what impact we will have on them. Companies which are planning to introduce an improved version of their product will possibly not be bothered by a direct competitor to the old version. In carrying out our competitor audit, we should be trying to identify their weaknesses and use our strengths to take advantage of these. If our research shows that customers are unhappy with the service and attitude of our competitors, then this might give us the opportunity to win this business. It is likely that their response based on price reduction might not influence a customer who is unhappy with service levels. We need to remember that our up-to-date competitor and market information will help us to take out some of the risk of taking customers away from competitors.
5.
Much of the information that we require is likely to be circulated throughout the company. Our primary source of information will be gathered from our customers, many of whom will have purchased cars through dealerships. We should also target the customers of other car manufacturers to establish current levels of satisfaction. We will constantly monitor our competitors and collect physical evidence U n iversity of Su n derlan d
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about their products. Does this mean obtaining a competitor’s car and checking it in our research and development workshops? The answer is almost certainly yes, as well as collecting any published information about our competitors.
References Hollensen, S, (2003), Marketing Management: a relationship approach. Pearson Education, Essex, England, ISBN 0273643789 Solomon, M, Bamossy, G and Askegaard, S. (1999), Consumer Behaviour, A European Perspective. Prentice Hall Europe Solomon, M (2002), Consumer Behavior. International Edition, Prentice Hall
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Unit 4
Developing Marketing Strategies LEARNING OUTCOMES After studying this unit you should be able to:
· Identify a company’s current internal and external situation by using a SWOT analysis.
· Demonstrate an understanding of how and why companies set corporate and marketing objectives.
· Recognise the strategic options available to companies when deciding upon their future marketing strategy.
· Analyse a company’s portfolio of products or services. · Evaluate the range of segmentation variables firms might use when deciding who to target and how to position their products or services.
Introduction In Units 2 and 3 we have considered the internal and external factors which we need to understand. We now look at exactly how we will use this information in order to develop our marketing strategies. Without a clear understanding of exactly how we stand in the market in relation to our competitors, we will find it difficult to guide our business in the right direction. We must carry out an honest appraisal of our internal strengths and weaknesses, while considering the external threats and opportunities.
Mission statement We need to offer some direction to our company and in particular our staff. We should have a mission statement which clearly indicates the direction of the company. It is easy to suggest that the mission statement should be as short as possible and communicated effectively, but that is what we should aim to do. When a well established United States distribution company introduced its mission statement which was ‘to
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deliver on time’, it seemed far too simplistic. However, what this statement did was to address a key opportunity which was to achieve competitive advantage and satisfy customers. Companies in the business of distributing goods had forgotten that this was the first priority of its customers. As we discussed in Unit 1, we must consider whether or not this mission was sustainable over a period of time? To what extent does it give staff an insight into the way the company is moving forward? If its purpose was to make staff and customers aware of its intention, then after a period of time this would need to be revised. You will no doubt be aware of other mission statements, and you might even work in a company where there is a clear mission statement. If you are in a position to look at another mission statement, you might want to consider how much insight this gives you into the direction the company wants to move forward.
SWOT analysis This is a simple technique of analysing the strengths and weaknesses of our organisation (SW), or internal factors, and the opportunities and threats in our external environment (OT). It is also down to all departments within the organisation to contribute to the SWOT analysis. Our internal strengths and weaknesses should focus on the people within the organisation and their levels of training or expertise; our financial capabilities and resources; our production facilities and service levels; our internal communication; our market share; the way in which customers perceive our products, and their perceptions of our pricing, product development and quality. We must also produce a SWOT analysis at all levels of the company and not fall in to the trap of producing just one SWOT analysis for the whole company. Hollensen (2003) suggests that we conduct SWOT analyses at corporate level, at a Strategic Business Unit (SBU) level, at product level and at market level.
Problems with the SWOT analyses When companies attempt to compile a SWOT analysis for the first time, it usually highlights an area where the company lacks information. Far too many companies carry out their analysis without making reference to their customers or through making assumptions. Far too many SWOT analyses simply state that there is an opportunity to gain new customers in a market, and assume that their customers are happy, when in fact there is a real threat of losing some business to competitors. These issues should be addressed when we collect information and in particular when we are carrying out marketing research.
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Carrying out an effective SWOT analysis The SWOT should not just be a list of strengths, weaknesses, opportunities and threats, but should be trying to highlight areas which will make the marketing planning process more effective. Hollensen (2003) suggests a grid for effective SWOT analyses. 1. The matching of strengths and opportunities Our marketing research should provide us with a measurement of the way we are perceived by our customers and potential customers. As we are concerned by strategic issues then we should ideally be able to measure customer perceptions of our competitors. We should therefore be able to identify the key strengths of our company and performance, and match these to opportunities which exist in the market place. 2. Converting weaknesses and threats By identifying weaknesses we can develop our plan to address these issues. Ford’s market research in the 1990s showed that while an established brand, customers were critical of the style and design of Ford cars. Ford addresses this issue with considerable investment in the design of their vehicles, launching cars like the Ford Puma, Focus and Ka. Hollensen (2003) suggests that one way of addressing weaknesses and threats is to reposition our products or services. We are aiming to use our SWOT analyses as a way of setting ourselves specific targets in our marketing plan.
ACTIVITY Read the following mini case study and produce an outline SWOT analysis. You may need to make some assumptions about the company, particularly as you will see that it is based on a small to medium sized business. The Man in the Moon Stewart Wilde had always wanted to own his own bar and brewery, having worked in the award winning Fat Cat public house in Sheffield, England, while he studied at Sheffield University. The bar belonged to his economics lecturer, who had also introduced the concept to the USA. Stewart’s dream was to become a reality some fifteen years later when he opened the Man in the Moon bar in Northern Spain, as well as the Vitoria Brewery Company. He had travelled from Spain to England to research brewing and bar design. In order to position his bar as an authentic British pub, he needed to recreate the look and feel of a British bar in a city where the vast majority of bars were much smaller, and unmistakably Spanish in style. He knew that he would have to recreate traditional British beers to sell in a market where lighter and much gassier beers dominated.
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He knew that he would also need to develop his own brands, and was able to design brands for his new beers, which on the face of it looked as though they could have been introduced a year ago. He launched Albert’s Ale and Dark Moon with his business partner, having brewed and tested several recipes. He was surprisingly good at brewing, and the beer was accepted by a handful of discerning expatriates, and the many local people who had been drawn to the bar by its distinctive design. Stewart was able to take out a loan through the local chamber of commerce and produced his beer at a small purpose built brewery about 40 kilometres from the bar. His calculations had been correct. He was able to produce a pint (approx half a litre) very cheaply, and on the advice of a relative, was able to sell the beer at a premium price, and therefore position it as a quality product, while at the same time differentiate his beer from his competitors. While he was making a healthy profit on the beer, he was still only working to 60% capacity, and the balance of the sales were made up by traditional Spanish beers, coffees and spirits. Stewart set about imposing his mark on the Man in the Moon and it soon developed into one of the most popular bars in town. He was able to combine his love of music with being a bar landlord and was soon offering an outlet to local musicians and bands. He also introduced quizzes which were very popular with students at the local university who were keen to practice their spoken English. The bar was unmistakably Stewart’s bar, and on days when he wasn’t working in the bar, there always seemed to be less people in. Spanish bar customers were notorious ‘bar hoppers’ and would soon move on to the next pub if they didn’t like the atmosphere in a bar. His early attempts at advertising and promotion were hampered by cash flow and the dismissal of advertising as it didn’t generate the expected level of sales increase. However, running a bar and a brewery was starting to take its toll on Stewart’s family and social life and he wasn’t able to develop the business in the way that he had first planned. He experienced some difficulties with staff and his plans to sell food were not as successful as he had hoped. At times it seemed a long way from his days in the Fat Cat in Sheffield. When you produce your SWOT analysis you will cover areas such as marketing, production and operations, people, management and resources. For the external analysis, consider the key political, social, economic and technological factors, as well as competition and relationships with suppliers. You may need to make some assumptions. List the main points in order of importance. Only show the main points
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Strengths
Weaknesses
Opportunities
Threats
What are the main considerations for the company based on your findings? List the most important points.
ACTIVITY FEEDBACK
Strengths 1
Branding – the bar and beers were cleverly
Weaknesses 3
positioned in their respective markets 2
Lacked financial resources to develop the business further
On the face of it the bar and brewery have
4
Staff training
achieved some success and are recognised by
5
Marketing – high expectation of advertising
a loyal customer base
expenditure 6
Time management – it is not uncommon for people who are new to business to find it difficult to delegate
7
Market research – lack of market information gathering (assumption)
Opportunities 8
To sell spare capacity of unique product to
Threats 10
other bars, using new brands 9
To ‘franchise’ the concept in other towns and cities
Intense rivalry in bar sector and possible reduction in sales
11
Threat of entry of ‘me-too’ products
12
Hands-on approach to running the bar prevented future planning
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What are the main considerations for the company based on your findings? You may not have identified exactly the same points but in a case like this you should have identified that the threats to the business were considerable and that there are some weaknesses to overcome. The most noticeable feature of this analysis is that there are more weaknesses than strengths, which will need to be addressed in order to move the business forward. Facing the likelihood of increased competition and the introduction of ‘me-too’ bars, the option to expand through franchising is very attractive, and enables rapid expansion with relatively low expenditure. Unfortunately, this case study is all too familiar. Underlying this, there is a lack of market information gathered by the owner. In many cases people invest in new business ventures, confident that they will be successful, when the available secondary market research data suggests otherwise. The fact is that the bar market in Spain is saturated with small bars, and the only significant development is through chains of bars and larger corporations buying into the market with themed bars. People setting up individual bars do so at their peril.
Corporate objectives Consider the objectives that a company might wish to set itself. Where do we start? Companies who are embarking on the planning process for the first time will find that a shortage of information about the current position of the company, will make setting objectives very difficult. Of course, we can assume that one of our principal objectives will be to make a profit of some kind, and perhaps as a new starter we will set ourselves a breakeven target. We can use past performance as an indicator, however it isn’t the most accurate way of predicting the future. When setting our objectives remember that we need to make them SMART. ( See Unit 1) By that they must be:
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1.
Specific – an objective that relates specifically to an activity which we can easily identify, and which those within the company can identify.
2.
Measurable – our objective needs to be quantifiable. Multiple retailers might set their objectives in terms of the number of new stores they aim to open in the coming year.
3.
Aspirational or Actionable – we must be able to carry out the actions required to achieve our objectives. Imagine a company which lacks adequately trained marketing personnel. How easy will it be to address image or awareness problems without the right people in U n iv ersity of Su n derla n d
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place? Aspirational objectives will say something about what the company is striving to achieve, in a way which guides its employees. You may see both of these ideas in other marketing texts. 4.
Realistic – we need to ensure that the company is capable of achieving our objectives. Remember that in a failing company we will need to deal with problem areas. It will mean that perhaps expansion will be difficult without tackling the root cause of the problem. We must liaise with the departments responsible for helping us to achieve these objectives.
5.
Timed – we need to put a timescale on our objectives. These may be broken down into actionable plans. IKEA are renowned for their attention to detail when they introduce a new store. They have in place a system which means that new stores can be equipped and opened within an agreed time.
Hollensen (2003) lists a number of key corporate objectives. In Figure 4.1 you can see that corporate objectives can be broken down into three broad categories of profit and financial, growth and marketing objectives and social responsibility objectives.
Objectives
Performance criteria
Possible measures
Profit and financial
Profitability
Profit
objectives
Profit as percentage of sales Contribution margin Return on investment (ROI) Contribution to owners
Earnings per share Price/earnings ratio
Utilisation of fixed assets
Capacity utilisation Fixed assets as percentage of sales
Growth objectives/
Per cent yearly growth
Marketing objectives
Sales Unit sales Profit
Competitive strengths
Market share Brand awareness Brand preference
Contribution to customers
Price relative to competitors Product quality Customer satisfaction Customer retention Customer loyalty
Social responsibility
Contribution to employees
objectives
Wage rates, benefits Personnel development, promotions Employment stability, turnover
Contribution to society
Contributions to charities or community institutions Growth in employment
Figure 4.1: Corporate objectives.
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We will need to monitor our plans to ensure that we do not fall short of our targets. If we do fall short then we might need to review our planning.
Growth Strategies Let us consider the options that are open to us as a company if we want to grow. Using Ansoff’s well established matrix there are four options available to us. We can concentrate on our existing products or markets or consider new markets and new products.
Existing markets
New markets
Existing products
New products
Market penetration strategies
Product development strategies
Market development strategies
Diversification strategies
Figure 4.2: Ansoff’s product-market matrix
If we consider each of the four categories in Figure 4.2 then there are clear examples of how companies have used these strategies to develop.
Market penetration strategies This is usually the first strategy to consider as it enables us to concentrate on our core strengths and in markets we should have developed expertise and contacts. We also know that it is also the easiest option for our competitors. We will need to call upon our current knowledge of our competitors before embarking upon these strategic options. If the market is growing then this perhaps is more straightforward, but in a maturing market then this poses more problems. Breakfast cereal manufacturers have frequently tried to increase sales by communicating new uses of their product to customers. Showing a cereal as an evening snack for particular segments may have some impact. Some companies have used their market research activities to identify new uses of a product.
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Market development strategies With our existing products we look for new markets. This might include looking at overseas markets. We can also look to identify new customer groups. Sports manufacturers realised that sporting clothes had a limited potential in sports markets, but had huge potential as fashion items. The international market for training shoes has developed considerably over the past 15 years, but this is due to them being positioned as fashion accessories. In some European markets the training shoe is the preferred shoe for everyday wear among younger consumers.
Product development strategies New product development ranges from introducing entirely new products into markets to modifying and improving existing products. Improved versions of products may help us to attract new customers in our existing markets.
Diversification As a strategic option this should be carefully considered as this involves moving into entirely new markets with new products. Companies who have enjoyed success using diversification usually enjoy the reputation of a very powerful brand and have an existing network of important customers. We must also consider the option of vertical or horizontal integration. By integrating vertically we might take over one of our suppliers or a retail outlet, and by integrating horizontally we might take over another manufacturer in a different field of expertise.
Managing a portfolio of products A feature or large companies is that they manage a range of products, which they handle within a portfolio. A company such as Cadbury’s has an extensive range of products, and across a wide range of markets. Within the portfolio, the products will be at different stages of development, ranging from new products through to well established products. By managing them as a portfolio they can divert funds from established products to developing products and may even face a situation where they need to withdraw or sell off products. Perhaps the most often used model for managing a portfolio is the Boston Consulting Group, or BCG Matrix.
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R elat ive mar ket shar e High
Low
High
S t ar
Quest ion mar k or pr oblem child
Cash cow
D og
Mar k et gr ow t h
Low
Figure 4.3: Boston Consulting Group (BCG) Matrix.
If we look at Figure 4.3 we can see that there are four main categories within the BCG matrix, measured against the rate of growth within their market and their market share relative to their largest competitor. Market growth rate is an important indicator of future market potential. When the market grows we may be investing in the development of one of our new products and so extra cash is needed. In terms of our relative market share, the higher our market share is in relation to our competitors then the higher should be our profitability.
Question marks or problem children Operating in a highly attractive market, question marks need investment if they are to grow and challenge more established competitors.
Stars As the title suggests, they are the main income generating products in the portfolio, although they still require investment to maintain their dominant position in the market. It is when the market slows down and they maintain their position that they become cash cows.
Cash cows These well established products enjoy a high relative market share in a low growth market. As such they tend to require less investment and can be ‘milked’ to provide investment for question marks in the portfolio.
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Dogs These are the least attractive members of the portfolio as they offer very little profit in a low growth market. These may ultimately be sold or kept going but with very little investment.
CASE STUDY ACTIVITY Microsoft’s X-Box Read the case study in Hollensen, page 263, and answer the following questions: 1.
Taking Microsoft’s X-Box and the Windows product into consideration, show how you might place them in a Boston Consulting Group (BCG) matrix.
2.
Do you think that Microsoft should carry out market testing for online gaming in Japan?
CASE STUDY FEEDBACK 1.
The Windows product is a cash cow product in that it enjoys a high market share in a market where the growth rate has slowed down.
2.
Since online gaming is one of the product advantages which X-Box has compared to Sony Playstation II, it is one of the ways that X-Box can gain a competitive advantage over Sony Playstation II. Although ‘broadband’ is not widespread, it is certainly going to be the next development in the market.
General Electric market attractiveness matrix Similar to the BCG, the General Electric matrix focuses on our competitive position in the market and the attractiveness of the market in terms of growth rate. This matrix can also be used to show a company’s international portfolio.
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B usiness st r engt h High
Medium
Low
High
Mar k et at t r act iveness
Medium
P r ot ect posit ion
I nvest t o build
B uild select ively
B uild select ively
S elect ivit y/ manage for ear ni ngs
L imit ed ex pansion or har vest
P r ot ect and r efocus
Manage for ear nings
D ivest
Low
Figure 4.4: General Electric Matrix – strategic implications. Source: Doole and Lowe (2003)
If we look at Figure 4.4 we can see that there are nine areas where our business units can be placed, and that each shows us the options available when deciding our future strategy. Within the grid the shaded segments are the most attractive to a company. The nonshaded areas imply a company should consider a change in its strategic direction. Hollensen (2003) considers the factors that might contribute to the attractiveness of a market and our competitive position within that market.
Market/country attractiveness
Competitive strength
Market size (total and segments)
Market share
Market growth (total and segments)
Marketing ability and capacity (country specific know-how)
Buying power of customers
Product fit to market demands
Market seasons and fluctuations
Price
Average industry margin
Contribution margin
Competitive conditions (concentration, intensity, entry
Image
barriers) Market prohibitive conditions(tariff/non tariff barriers,
Technology position
import restrictions) Government regulations (price controls, local content,
Product quality
exports) Infrastructure
Market support
Economic and political stability
Financial resources
Psychic distance (from home base to foreign market)
Access to distribution channels
Figure 4.5: Factors of market/country attractiveness and competitive strength. Source: Hollensen (2003).
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If we look at Figure 4.5 we can see the factors that we need to take into consideration when estimating the market or country attractiveness and our competitive strength. Hollensen (2003) suggests also the use of a questionnaire in order to be able to position our company on the grid.
Analysing supplier relationships In order to carry out an analysis of the attractiveness of our suppliers we need to consider the factors which make them attractive to us. These might be economic factors, performance factors, technological factors and organisational or cultural factors. Against this we need to evaluate the things that influence the strength of our relationship with them. These will include economic factors such as exit costs, the length of the relationship, the amount of cooperation between the two parties and the physical or cultural distance. S t r engt h of r elat ionship Low
Average
High
High
R elat ive supplier at t r act iveness
Medium
Low
1
10
Figure 4.6: Supplier portfolio. Source: Hollensen (2003).
If we consider Figure 4.6 we can plot each of our suppliers on the grid. We might represent this value in terms of the total amount of business with a supplier against the total amount of business with all of our suppliers.
CASE STUDY ACTIVITY Read the Ford Motor Company case study in Hollensen, page 300, and answer the following questions: 1.
What are the main differences in buying behaviour of golf cars for:
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a) Closed communities for older people b) Golf courses? 2.
Prepare a SWOT analysis for Ford’s entry into the golf car market.
3.
Prepare an outline marketing strategy for penetration of Ford’s golf car into golf courses around the world. You should focus principally on the four Ps.
CASE STUDY FEEDBACK 1.
When targeting the closed community for elder people, a growth market in developed countries where the population is aging, the elderly person or elderly couple is the decision maker. (B2C market) The golf course buyer is an organisational buyer (B2B), as the managers of golf clubs are the main decision makers.
2.
We could include the following for Ford’s SWOT analysis: Strengths (Internal) – A strong reputation and brand in the passenger car market. Ford possesses a strong research and development department (R&D) for passenger cars. We must not underestimate the Ford brand as a key strength. As well as being an established brand, with a reputation for consistency, product quality, and now for design, adding the brand to new product lines might give it a significant advantage in the market place. Ford are able to support the new vehicles with their considerable resources. Weaknesses (Internal) – Ford has no specialist knowledge of this market. Ford’s staff are new to this market, which is very different to their existing markets. Ford’s brand isn’t positioned in this market, and key buyers in the market are already used to buying established brands. Opportunities (External) – To gain a share in a growth market with significant potential. Ford can aim to position itself as the premium-priced vehicle in the market. Threats (External) – Other companies such as Yamaha or E-Z-Go who have already established themselves in the car market. The repeat purchase cycle of golf buggies is likely to be low.
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Ford has already set up a wholly owned company to market their new line of battery-powered vehicles. Their 4P strategy could be:
- Product – Ford can position their new line of battery-powered vehicles as the premium brand in the marketplace, with several new design features which reach new safety standards.
- Price – There is an opportunity to sell a premium-priced luxury brand, in order that consumers regard it as more than just a golf buggy. It is possible that they will produce a range of buggies in order to target the various price segments in the market, as they have done with personal cars.
- Place – Ford’s distribution outlets for traditional products offer them widespread distribution, and a facility in which to situate the maintenance engineers necessary to service the golf car market. Online and telephone support will enable them to deal with after-sales issues more effectively.
- Promotion – In order to target this new market, Ford will need to mobilise an effective sales force for face-to-face selling. Direct marketing will enable Ford to target the most important buyers in the Decision Making Units (DMUs). Ford should use exhibitions in order to demonstrate their new products in this new market.
Using market research data to calculate segments When we are trying to quantify segments, we can use a technique where we can identify a group of people who we think are most likely to consume our product, and then using national statistics, start with the total population for our chosen age group, and then reduce it down to a more realistic total. We want to manufacture a new soft drink in China, where our primary segment is likely to be young adults between the ages of 18 and 24, currently in further or higher education, they are single and not married, prefer western style drinks to traditional drinks, and we estimate that they would consume 2 units of drink per week. We will first make the calculation based on Beijing, and we are assuming that the current population is around 25 million people. We can, of course, extend this exercise to different areas, or calculate the size of other defined segments for this drink.
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Variable
Marketing Strategy
% value
Population
Source of information
Population of Beijing
100%
25,000,000
Population trends
Young people 18-24
10%
2,500,000
National Statistics
Secondary sources of information
Young people 18-24 in
60%
1,500,000
Department of education
Single (not married)
70%
1,050,000
Local statistics
Prefer western style drinks
55%
577,500
Market research survey
Expressed a preference for
60%
346,500
Consumer testing results
40%
138,600
Company experience of
higher education
the new drink Those who will actually purchase when given the
those that will actually
option
purchase
Those who will continue to
20%
27,720
Forecast based on
purchase after an initial
experience of
period of one month
introducing new
Primary sources of information
products into the Chinese market Number of units consumed per week
2 units
55,400 units
per week
per week
We can see that the expected quantity, based on our segmentation variables, secondary research sources, and our own primary research data, calculates the size of this group as 27,720 people, with a total weekly consumption of 55,400 units.
ACTIVITY Using the segmentation activity data listed, answer the following questions:
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1.
What are the strengths and weaknesses of this type of forecasting model?
2.
What will be the final outcome if only 30% of this age group are in higher education?
3.
What will be the outcome if we introduce the population of Copenhagen in Denmark of about 6 million, and leave the other variables as they are?
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ACTIVITY FEEDBACK 1.
We can consider the strengths followed by the weaknesses. Strengths This forces a potential entrant to the market to face up to the reality of new product take-up. When this technique is used as a consultant to firms, they are very often surprised by the results of this. Imagine if the starting population is Copenhagen with a population of only 5 million people, then the final figures may seem insignificant. The system enables organisations to improve other aspects of their marketing planning. They are able to see the impact of improving the take-up of their new products through communications and samples. If it is used properly then it forces companies to invest more in research and may reduce the risk of failure. Market research serves to reduce risk taking in marketing decisions. It is better to invest £ 20,000 in research to find out a product will fail, than an extra £ 500,000 in launching in and then see it fail. Weaknesses Companies who are determined to make their product succeed tend not to be pessimistic enough in their forecasts. The system is only as good as the accuracy of the data. If the figures are 20% out in the beginning then this will have a significant impact on the outcome. The segmentation variables, while only acting as guidance, need to be more accurate and reflect lifestyle data.
2.
If only 30% of the age group are in higher education, then this equates to: There are 750,000 people of this age group in higher education. Those that are single and not married = 525,000 Those that prefer western style drinks = 288,750 Those that expressed a preference for the new drink = 173,250 Those who will actually purchase = 69,300 Those who will continue to purchase after a month = 13,860 With an average consumer buying 2 units per week = 27,720
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This is half of the original estimate and a significantly different proposition. 3.
If we introduce the population of Copenhagen then this will equate to: 6,000,000 starting population 600,000 18-24 year olds 360,000 in higher education 252,000 single and not married 138,600 preferring this type of drink 83,160 preferring this actual drink 33,264 who will actually purchase 6,654 who will continue to consume after one month This equals 6,654 multiplied by 2 units per week = 13,308 units per week
Market segmentation and positioning Market segmentation is the marketers way of trying make more effective use of their resources. The recognition that even major companies, operating in high value markets, are more effective if they target specific groups of consumers, has encouraged more companies to opt for segmentation strategies. The key to successful segmentation is through market research activities which give insight in to consumer decision making. Our aim is to identify groups of consumers with similar wants and needs who will respond to a similar marketing programme. In order to segment markets, Hollensen (2003) considers the requirements for defining market segments
· Adequate size – segments should be large enough to justify a separate marketing programme.
· Measurability – as in all marketing activities, we need to be able to quantify the likely size and value of particular segments.
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· Accessibility – having identified a likely segment, we must then be able to access them with our product or service.
· Responsiveness – we must understand how segments react to various marketing mix elements.
· Compatibility – we must ensure that our strengths as a company match the needs and wants of or chosen segments.
Segmenting in B2C markets There are several criteria that we might use to segment markets. Hollensen suggests four broad categories of sociodemographic, behaviouristic, psychographic and benefits sought. We need to be aware that while some of these segmentation variables are easy to measure, they might not be representative of the segments we need to research.
Sociodemographic variables These tend to be the most often cited and are usually the easiest to measure. While we can use age, gender, family life cycles, geographical locations, income, occupation and education, we might also want to consider race and ethnic origin, social class and events such as holidays, sports or birthdays
Behaviouristic variables Here we are attempting to segment based on a consumer’s behaviour towards a particular product, using past behaviour as a guide to future behaviour or consumption. We might also segment by a consumer’s readiness to purchase a product. We might also segment based on a consumer’s media and buying habits. To what extent has our segment changed its shopping behaviour with easier access to the Internet? We might consider our consumers’ experience and ability to use a product. Consider the computing market, or is it the IT solutions market? We might also consider consumer loyalty towards our products. Are there groups of people who are intensely loyal to our brand or do they switch from brand to brand? We might consider the case of the newspaper where there has been intense loyalty towards individual brands. We can also segment by usage frequency. Are our consumers heavy users or light users? Can we convert our light users to become more frequent users? We can also look at our consumers’ attitudes to wards innovation and their choice of products. Some groups of people are avid consumers of new products, whereas others lag far behind.
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Psychographic variables Segmenting by psychographic variables perhaps gives us a much better idea of how people consume, but it can be more difficult to identify and access them. Here we consider segmenting by lifestyle and personality, segments that might not be easy to measure using sociodemographic variables. The explosion of ready meals in developed markets suggests that consumption is due mainly to busy lifestyles. Is this also the group that consumes recipe books for quick meals, but still doesn’t find time to cook? It is likely that we might be able to create sub segments by age and occupation.
Benefits sought variables When we use benefits sought from a product or service to segment our customer base then we are using an area which is perhaps the most difficult to segment. We need to consider factors such as reliability of the product, taste or even levels of service. We may find that consumers in these groups might be spread across a wide range of ages and social groups.
Segmenting the Ford way If we look at Figure 4.7 we can see the variables which Ford used in their dealership training. You will see that the criteria, in line with those that we have already considered in this unit, act as a way of categorising actual and potential customers. Your first reaction might be to look at this numerically and start to calculate the various combinations. This isn’t necessary, as we are looking for specific segments that are most likely to buy our cars. Remember that we have our existing data and we will understand that there are already natural segments.
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SOCIO DEMOGRAPHIC VARIABLES
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Age Sex Education Occupation Family Family life cycle Income Home owning status Ownership of durables Socio-economic grouping
GEOGRAPHIC INFORMATION
Region Area type Area density Neighbourhood type House type
BEHAVIOURAL DATA
User status Use frequency Brand/Dealer loyalty User value (existing and potential)
PSYCHOGRAPHIC PROFILE
Personal values and attitudes Attitudes to fashion Life style orientations System of assessing benefits
Figure 4.7: Segmenting the Ford way.
ACTIVITY Using the categories in Figure 4.7: 1.
Say how the dealers might use segmentation to target potential customers.
2.
Suggest where they can obtain the data necessary to make use of these segmentation variables.
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ACTIVITY FEEDBACK 1.
By encouraging dealers to segment the market for cars in their area, this will help them to identify and compare different marketing opportunities. In many cases, income will not be the main variable, but the personal values and attitudes of some customers. This might be the case in some developed countries. In the UK, a high percentage of the population will borrow money in order to purchase a car, which they will justify as their car is seen as a necessary purchase. In many cases they will incur unnecessary debts in order to run a car. This decision is more a result of personal values, rather than for economic reasons. By recognising these segments, dealers will be able to adjust their marketing mix, in terms of the message they use in their communications or the way that they send out messages. They have a much better chance of reaching their target. Ford had taken note of the success of the Renault Clio early advertising campaigns. The message seemed to be addressed at the younger female market, when in fact they knew that this would appeal to the young at heart, increasingly more independent over 40 year old female. The dealers will also be able to value a particular segment and adjust their marketing expenditure in line with the value of the segment.
2.
The dealers were encouraged to look at data sources in terms of internal, or information which they already had, and external sources, some of which were available to them through the Ford marketing department. Their internal sources were their sales, orders and service records, as well as any information they held about enquiries or responses to their marketing activities. External sources included lifestyle data provided by Ford’s market research agency and general research data such as Mintel and Euromonitor. Ford’s own research across European markets, identified the outer directed groups, who were status conscious, image aware, materialistic, security conscious and optimistic about the future. This group of people were attracted to specific brands, and price considerations were not the most important. Another important group were inner directed, had a creative outlook, worried about the look of their purchases (aesthetics), were independent and pessimistic about things. They worried about fuel emissions and wanted to know that the car they purchased had features to deal with this. Ford’s earlier work on design and image appealed to customers who were optimistic and confident as a result of their increasing affluence, and wanted freedom, but at the same time they were concerned about
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increasing levels of pollution. Ford looked to deliver a brand which balanced this desire for pleasure with the need to feel responsible. Considerable emphasis was placed on training dealers to recognise these traits.
Segmenting the B2B market In Unit 3 we looked at the characteristics of B2B markets. In comparison to B2C markets, B2B customers tend to be fewer in number, will usually make high value purchases and rely upon a group of people or the decisionmaking unit (DMU) to purchase a product or service. Traditionally attempts to segment focused mainly on the size and type of company. However, we can consider the decision making unit (DMU) in companies, and segments based on the attitude of the members of the DMU and their attitude towards their suppliers. Hollensen (2003) proposes the approach of Bonomo and Shapiro (1983) and their micro/macro segmentation approach.
Macro segmentation Here we consider variables such as the type of industry, the size of companies within the market, their relationship with the enduser market and the way in which the products are used.
Micro segmentation Here we focus on the internal characteristics of customers and consider the personal characteristics of the buyers within companies. This can also focus on the personalities of buyers and the relationship that they enjoy with sellers. Hollensen (2003) suggests a relationship approach to segmenting the B2B market, based on buyer loyalty and the perceived value to the seller. In Figure 4.8 we can see the variables in the segmentation matrix. In order to locate within the matrix we must measure the buyer’s degree of loyalty against the value to the seller. Where there is a high buyer loyalty and high value to the seller then we have a partnership.
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B uyer loyal t y Low
High
Low
1. S impl e ex change
2. N ot r elevant
3. N ot r elevant
4. P ar t ner shi p
V alue t o seller ( per cept ion)
High
Figure 4.8: Relationship framework. Source: Hollensen (2003).
Targeting We need to be able to divide our potential market into those segments which are most likely to respond to our product or service while discounting those who are least likely to respond. If we are players in international markets then we will carry out the same process across overseas markets.
Positioning In order to understand positioning we must consider the competitive nature of the markets in which we operate. If we are competing in the soft drinks market, then we are likely to face strong competition, and in many cases we are marketing quite similar products. We can use positioning, therefore, to differentiate our product from those of our competitors. In order to position we must first understand the way that our customers see our product. We are in effect trying to give our products their own personality that might make them stand out. In most cases our products have many attributes but we use them to position the product. In the Polish beer market the leading brands have used positioning in order to stake a claim in the market and prevent their competitors from making the same claim. One brand has claimed the traditional position while another has claimed the sporting position by associating itself more with sports. Consider the car market in your country and how companies have positioned their products. In some markets where we sell high value products, then we must emphasise image in order to position the product. If we operate in B2B markets then we must build up brand image and emphasise our leading edge technological developments.
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When we consider the positioning of our product or service, we are trying to create in the mind of the consumer an image, or a perception, of our organisation and its position relative to that of our main competitors. Once we have claimed our position in the marketplace, then it can be very difficult for our competitors to make the same claim. We must, therefore, position our product or service in a way that makes consumers feel as though it is providing the main benefits for which they are looking. At the same time this positioning will give us an advantage over our competitors. This decision to position in the market, will have implications for all the elements of out strategic marketing programme. We can use a diagram, or map, to show how customers perceive certain types of products in relation to competitive products. We can use this either at a product or brand level. In the perceptual map each axis represents the two extremes of an aspect of the product, based on the most important variables, which we establish through our consumer research. We are going to look at an exercise in which we use a positional map for breakfast foods, where we consider the time taken to prepare and consume the product versus the cost of consuming them. Remember that the variables must also be the most important to consumers in the market.
CASE STUDY ACTIVITY Read the Ballygowan case study in Hollensen, page 304, and answer the following questions: 1.
Explain the differences in buying behaviour for a) bottles of mineral water b) water coolers.
2.
Using the information contained in the case study, where do you think that Ballygowan should target its marketing resources?
CASE STUDY FEEDBACK Ballygowan 1.
a) Bottles of mineral water would be predominantly sold in the B2C market, targeted at individual households or family units. This would appear to be a growing market. U n iversity of Su n derlan d
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b) The water cooler is mainly sold to B2B markets, with organisations the main target group. A rapid deterioration of water quality in some markets has seen an increase in the number of water coolers sold in the domestic market. 2.
Current market share figures suggest that as the market share of Ballygowan is so low in the UK, where they only have a share of 1%, that effort should be made to increase its sales.
ACTIVITY Using the table below construct a perceptual map for the following breakfast foods. You will need to plot toast or bread, cold cereal, hot cereal, a cooked breakfast and new Nutrigrain nutritional breakfast bars. You can also use the map to show how typical breakfast products in your own country are positioned.
ex pensive
t ime consuming
quick
inex pensive
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ACTIVITY FEEDBACK
ex pensive
USA breakfast Cooked breakfast
t ime consuming
Nutrigrain bars
pancakes and syrup
quick Hot cereal
Typical breakfast in China
Young professionals who are time poor but concerned about health
Hot coffee and buns
Cold cereal
Popular with children
Toast/ bread
Typical French, Spanish or Italian breakfast
inex pensive
You will see that based on a European perspective that cold cereals, toast or bread and Nutrigrain bars are all relatively quick, whereas a cooked breakfast and hot cereal are more time consuming. How did you get on plotting the typical breakfast from your own country? You might have a range of breakfast options to choose from, a feature of many cultures. It is likely that the time you have to prepare and consume your breakfast will determine your choice. Travelling to different countries, one usually finds that breakfast can present a huge culture shock. Consumers from those countries who are used to eating a bread based product with coffee are horrified by the sight of a cooked British breakfast. Parents are also interesting consumers in many developed countries. In families where both parents work, breakfast is essential for growing children, but time can be a major issues. The option of cold cereals, particularly once the children are able to serve up their own breakfasts, is the perfect choice for parents. Cereal packets left on the table with activities and information, are also good ways to keep children entertained at the table.
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Competitive strategies In order to consider the strategic options available to us, we use Michael Porter’s matrix. Porter developed a matrix which considered a company’s position in the market based on its ability to differentiate its product or service from those of its competitors, and also its costs, relative to those of its competitors.
T hr eat of new ent r ant s Barriers to entry Economies of scale Product differentiation Capital requirements Switching cost to buyers Access to distribution channels Other cost advantages Government policies Incumbants’ defence of the market share Industry growth rate
D et er minant s of supplier power Supplier concentration Availability of substitute inputs Importance of suppliers’ input to buyer Suppliers’ product differentiation Importance of industry to suppliers Buyers’ switching cost to other input Suppliers’ threat of forward integration Buyers’ threat of backward integration
R ivalr y among ex ist i ng fir ms Number of competitors (concentration) Relative size of competitors (balance) Industry growth rate Fixed cost vs. variable costs Product differentiation Capacity augmented in large in increments Buyers’ switching costs Diversity of competitors Exit barriers Strategic stakes
D et er minant s of buyer power Number of buyers relative to sellers Product differentiation Switching costs to use other product Buyers’ profit margins Buyers’ use of multiple sources Buyers’ threat of backward integration Importance of product to the buyer Buyers’ volume
T hr eat of subst i t ut e pr oduct s Relative price of substitute Relative quality of substitute Switching costs to buyers
Figure 4.9: Porter’s Five Forces.
It is important for us to assess our position against our competitors in the market. We must also take into consideration our portfolio of products, which means that while we are able to focus on a particular market, or achieve cost leadership in others, it might be acceptable to have a product in the disaster box. The most important consideration, in line with comparisons to warfare, is that we understand the market, that we understand our competitors (enemies), and that we try to introduce new products or services which our competitors aren’t expecting.
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CASE STUDY ACTIVITY BMW’s Mini Read the case study in Hollensen (2003), page 344, and answer the following question: Consider the personal car market and suggest some segmentation categories. List the main segmentation criteria which you think are the most relevant.
CASE STUDY FEEDBACK Developed car markets are usually highly segmented, and marketing training for the dealers who sell cars focuses heavily on how to target specific segments. If we consider demographic variables then we might segment by gender, the age of the driver, the size of the household, occupation, income and education. If we segment by social group then that would be lower, middle and upper middle. Segmenting by type of family might include single households, couples, married with or without children and even breaking this down into the age of the children in the family. Vehicle usage such as local journeys only, transporting children, utility vehicle or family vehicle might also be considered. Psychographic variables such as lifestyle and personality could also be used to segment the market. New vehicles with a stylish image might attract an outgoing person or an achiever.
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REVIEW ACTIVITY 1.
Why do companies use product portfolio analysis to help them construct their marketing plan?
2.
What are the advantages and disadvantages of using portfolio models in marketing planning?
3.
Why do we use a SWOT analysis, and which factors do we need to take into account when using it?
REVIEW ACTIVITY FEEDBACK 1.
The product portfolio approach forces companies to assess the performance of all of its products or services over time. By categorising these products, it enables them to divert resources into supporting products with market potential, while also helping them to sell off or lose products that lose money. The portfolio approach, therefore will help a company to develop strategic alternatives for its products: a key consideration in marketing planning, and also identifying new opportunities.
2.
The main advantages of portfolio analysis are that they are easy to use and give clear strategic direction. The simplicity of the models means that it is easier to use it as a training tool in companies. Their strategic value is in the fact that they can show strategic activity in the market, and also be used to track the developments of leading competitors, and so give a clearer indication Their biggest disadvantage is in the fact that it is sometimes difficult to accurately define a target market or target segment. While it is a simple tool, many feel that is too simplistic. Many portfolio models are only based on two variables and so do not always give an accurate picture of the market.
3.
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The main purpose of a SWOT analysis is to identify the most appropriate marketing strategies that our company is able to follow. Its accurate use will help us to develop the most appropriate marketing plan. When using the SWOT, we should be looking for information that will help us to make the best decisions based on an accurate reading of both our internal strengths and weaknesses, matched to the best opportunities, while taking into account our biggest threats.
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References Doole and Lowe (2004). International Marketing Strategy. Fourth Edition, Thomson, England, ISBN 1844800253 Hollensen, S, (2003), Marketing Management: a relationship approach. Pearson Education, Essex, England, ISBN 0273643789
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Unit 5
Developing Marketing Programmes LEARNING OUTCOMES After studying this unit you should be able to:
· Demonstrate an understanding of the role of product or service strategies in developing marketing plans.
· Recognise the importance of new product development (NPD) and the role of the product life cycle in marketing planning.
· Identify the factors which influence price and pricing strategies. · Evaluate the range of distribution channels available to companies when devising their distribution planning.
· Consider the factors which determine a firm’s distribution strategy. · Recognise the range of marketing communications tools available to the firm.
· Demonstrate an understanding of how to apply the most appropriate communications tools when developing a plan within a set budget.
Introduction Having considered the internal and external environment in previous units and looked at the various segmentation options open to us, we now move into the compilation of our marketing programme. We should now have a much clearer understanding of the competitive environment in which we operate, and through an assessment of our current position and those of our competitors we are now in a position to set out our marketing activities. This has traditionally been referred to as developing our marketing mix, in which we make decisions about the product, place, price and promotion. We will also set objectives for each of the activities which we undertake.
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Product or service decisions In Unit 4 we looked at the product and how we might gain competitive advantage. We will now look at the product mix, levels of service, new product development, the concept of the product life cycle and the area of branding and brand equity measurement. We now have a good understanding of our products and services and understand that we need to consider them not in terms of their features, but in terms of the benefits which they offer our customers. If we are also to communicate this message to our staff then we need to be clear about this. If we consider the comment of a former L’Oreal Marketing Director in charge of cosmetics, he said ‘in the factory we make cosmetics, and in the marketplace we sell hope.’ This illustrates the importance of understanding the needs of our customers. If we think back to the exercise in Unit 3 where we looked at competition, we can see that our competition may even come from a product in another product category.
Augmented product concept If we look at Hollensen 2003, page 452, he considers the breakdown of the product. As a marketer, and faced with constant changes in the market, we should always be looking to augment, or increase, the value of our product to our customers. If we look at Figure 11.2 in Hollensen, he describes the three levels of a product.
Core product benefits At the first level of the product we consider the performance of our product, the features of the product, its level of technology and its image. We must bear in mind that competitive products might also offer the same core benefits.
Product attributes At the next level of product we consider factors such as design, packaging, quality of production and, in the case of cars, colour variants and design specifications. Where customer service is an important component of the product, then we can also evaluate staff behaviour.
Support services At the third level of the product we look to find components which will help us to differentiate our product. By including delivery, installation or aftersales service, then we are adding value to our product. At all levels of the product, our research will concentrate on understanding these levels of product as well as those of our competitors.
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ACTIVITY Gym manager Imagine that you are the marketing manager of a new multi-purpose gym in a country where a high percentage of the population are overweight or in need of more frequent exercise. Being a member of a gym is an obvious solution to help people improve their fitness. Why is it that the biggest problem facing us as the marketing manager is not just recruiting members, but also trying to stop new recruits from terminating their membership after only 3-4 months?
ACTIVITY FEEDBACK Let us think about this from the customer’s point of view. Perhaps what the customer is buying is the expectation of improving their health, losing weight and with it an improvement in their appearance, or is it what we might call experiencing the ‘feel-good’ factor? You might argue that the cost of the monthly membership of around £40 might cause people to eventually leave. This may well be the case, but the membership fees are discussed at the beginning and we can assume that the customer found them to be affordable. What about lifestyle? We may have customers who belong to the ‘cash-rich, time-poor’ segment who, while they enjoy their visits, can’t then fit them in. Perhaps we need to research customer expectations. Is it not perhaps the case that what we want is a change in body shape and a reduction in weight? However, it is unrealistic to achieve any noticeable change in a very short period of time. Here customer expectations are unrealistic. Some gyms are now sending text messages to their members to encourage them to turn up more frequently. Certainly what we need to do is to understand our gym customers and to segment them through research. This will then provide us with the information that we need to develop our future marketing programmes.
Service strategies You may have more experience of services than you do of physical products and we need to understand the key aspects of service. You
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may also work in a product environment where service is an important part of the product offering. Academic research into the area of services marketing is increasing. What are the key attributes of a service that make them different to products?
Intangibility A key characteristic of a service is intangibility, meaning that it can’t be touched as it doesn’t exist in a physical state. If we consider the experience of watching a film, going to the theatre or attending a major sporting event, then what is it that we can take away from the experience? This is an issue which the growing area of sports marketing deals with. In the case of the marketing manager of a sports team, the performance of the team or the outcome of the event are often unpredictable and uncontrollable. However, research by Tomlinson et al (1995) showed that sports fans attend sporting events not just for the event itself but also for prematch refreshments and other factors that contribute towards the atmosphere.
Perishability A key characteristic of a service is the fact that it might only have a limited life. If we consider the case of a visit to the theatre or a oneoff event, then an empty seat represents lost revenue for the theatre owner. New lowcost airlines have introduced a more flexible approach to pricing in order to try and ensure that they make the most effective use of their capacity.
Heterogeneity In service situations the experiences of customers vary and may depend upon the levels of customer service. In this case people are very important in helping to deliver the best experience for customers. In a restaurant we have chosen to eat a particular style of cuisine but our enjoyment of this might be affected by the poor service of the staff in the restaurant.
Inseparability If we refer back to our experience of the sporting event we can’t separate the event from the consumption of the event. In order for our service to be successful then we must be able to reach potential customers in a specific time frame.
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Types of service Hollensen (2003) refers to three broad categories of services.
People processing In this situation customers become part of the production process, in the case of students at a university or diners in a restaurant.
Possession processing Here the service is being performed to the possessions of the customer in the case of repairs to a customer’s products.
Information-based services These include services such as telecommunications or information services where the customer isn’t involved in the production of the service. Recent improvements in technology have meant that this is one of the fasting growth areas in business.
Service quality gap We need to be able to measure service levels within our organisation as part of our focus on customer satisfaction. Service levels can be communicated to staff and can act as targets within the organisation. Not only do we measure service levels but we must also understand what our customers’ expectations are of service. It is important for us to build up a reputation for good service delivery and to maintain expected levels of service. Some organisations build this in to their systems and encourage regular customer feedback. Good hotels strive to deliver a regular level of service in an attempt to gain regular business and in order to develop their reputation.
After sales service This is still a major area of weakness for companies in service industries. Many can cope with systems and delivering good service, but the real test is how they deal with after sales service. Hollensen (2003) cites a number of key writers who suggest that, in many cases, after sales service offers companies an opportunity not only to build reputation, but also to increase profitability. In Unit 2 we discussed the approach of Winterhalter, the manufacturer of dishwashers, who offered a full service contract, thus tying in more of
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their customers to the business. We must consider the service needs of our customers and look at ways of setting up service contracts. Not only does this improve customer satisfaction but it also helps to develop relationships with customers and create barriers for competitors.
New product development When we consider new product development (NPD) we know that extra resources are needed to finance these developments, that the risk of failing may be high yet to do nothing may offer our competitors an opportunity to develop new ideas and gain valuable market share. We might also be competing in the communications market where innovation is essential just to stay in the market. The developments in the mobile phone market are an example of how quickly products are changing. Hollensen (2003) talks about the modular approach to developing new products as a way of reducing overall investment costs. Here companies share the cost of developing components, processes, knowledge and people. The main benefits to the company are that they spend less time and money developing new products, bring down the variable cost per unit by sharing production and reduce the overall cost of investment in production. Black and Decker have used this approach to develop a wide range of hand held tools for growing domestic markets.
CASE STUDY ACTIVITY Joyco India Read the case study in Hollensen, page 481, and answer the following questions: 1.
What are the criteria for successful marketing in the Indian bubblegum market?
2.
What are the main reasons for Joyco’s success over Perfetti in the bubblegum market?
CASE STUDY FEEDBACK 1.
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In such a large country it takes time to achieve widespread distribution. The fact that Joyco have been able to reach 400,000 outlets using 1650 distributors has contributed to the success of Joyco.
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The use of innovative promotional campaigns targeted at young people has also been important. Joyco’s introduction of a transfer incentive caught the imagination of its consumers and this sales promotion campaign delivered an increase in sales. Joyco not only achieved widespread distribution but also introduced glass jars to display their products which proved successful in keeping retail outlets happy. Joyco resisted the temptation to target several segments, unlike its competitors, but concentrated on its key segment. The company also timed its entry into the Indian market with considerable skill and helped to grow the market through its innovation and understanding of consumer needs. 2.
Apart from the factors already identified, Joyco made an important assessment of the market and the needs of its consumers, and developed its product strategy to meet the challenge. As a result they targeted the most important customer segments, and developed the most appropriate marketing mix. They appear to have developed good relationships with its distributors and looked at ways to stay ahead of their competitors.
Product life cycle Sales & profit ($)
Sales
Profits
Introduction
Growth
Maturity
Decline
Time
Figure 5.1: Product life cycle.
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The product life cycle theory is recognised as a key tool in helping companies to decide future product strategy. Companies are however advised to use the model with caution and in the case of managing portfolios, it should also be used with portfolio analysis such as the Boston Consulting Group (BCG), as highlighted in Unit 4. Perhaps it is our better understanding of how to improve the new product development process which is having an impact on product life cycles. We must recognise that some products follow a fashion life cycle which means that some product sales decline very rapidly as the product reaches the end of its fashion life cycle. Much greater emphasis has also been placed on the development of new products in international markets, supported by rapid technological developments. Greater emphasis on cost control in the production process has also given companies more flexibility when setting prices, enabling a much quicker takeup of new products. The ownership levels of mobile phones and personal computers have increased rapidly and are projected to grow significantly.
Pricing Pricing is possibly one of the hardest components of the marketing mix to get right, and can cause the most discussion within the company and also with distributors and intermediaries. How many consumers are concerned with paying low prices yet buy products which have high value added? Is it in our interests to steer consumers away from price discussions towards looking at the extra value our products or services offer? The answer to these questions is that there are many examples of where we pay relatively high prices for products which have a low cost of production and it is definitely in the interests of companies to add value for their customers. The impact of a price war is considerable. It is not in our interests to take part in a price war unless we know that we can win! The sign of a highly developed market is very often the amount of value which companies have added. Consider the allinclusive holiday packages which are increasingly popular where the price includes all food, drink, entertainment and extra activities with the hotel complex. What is the main attraction for the buyer? Is it not the fact that they don’t have to worry about working out how much spending money to take or that they don’t need to worry about carrying money around? Pricing from an economist’s and accountant’s point of view The price of a product will influence the demand for that product in the market. The economist’s view of pricing is that the demand for a product is based on the price set. This is referred to as the price elasticity of demand. In this case higher prices will cause demand to fall and lower prices will make demand increase.
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The accountant’s viewpoint is based principally on the cost of producing goods or supplying services. Once the sales of a good reach the level of the costs of the product, it is said that the breakeven point has been reached. In order to calculate the breakeven level, we must calculate the fixed costs, which are those costs which a company has to pay in order to be able to produce costs, such as rent or premises. On top of that the unit costs, or the additional costs of producing each unit, are called variable costs. These theories of pricing do not explain the principal of premium pricing, whereby goods which command a premium price still command a high level of sales.
ACTIVITY Consider the all inclusive price of a two week holiday in Cuba, where all food, drink, evening entertainment, horse-riding, tennis, dance lessons, excursions, Spanish lessons, flights, child care and transport to and from the airport are included. 1.
What are the benefits for the customer?
2.
What, if any, are the benefits for the tour company or hotel selling the offer? You will need to focus on cost, profit and adding value.
ACTIVITY FEEDBACK 1.
The benefits for the customer are: The piece of mind of knowing that you don’t have to pay for expensive extras while on holiday such as horse-riding or local excursions. The customer doesn’t need to worry as much about money transfer or changing to local currency or having to carry money at all times. Frequent travellers to overseas destinations have grown tired of hotels charging excessive prices for food and drinks not included in the cost of the holiday.
2.
The benefits to the hotel are: Sales volumes increase overall enabling the hotel to negotiate lower costs.
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The hotel gains a higher overall percentage of the holidaymakers spend which can increase overall profitability. Perhaps the emphasis is more on customer experience and less on maximising sales. If consumer satisfaction is high then loyalty can improve and increases repeat business. While there are benefits to both parties the main aim is to deliver customer satisfaction and experience.
The economist’s view of pricing Pricing rules Let us examine the importance of pricing to the company once again and why it is important to fix the right price. 1.
The price that we charge for our product or service will help to position the product in the marketplace.
2.
The value that we add to our product or service will help us to hide the true price of the product.
3.
The price that we set determines our profit margin and will ultimately provide us with some of the funds that we need to develop our new products or services. This will also include an allocation of funds to cover marketing costs such as advertising.
In many global markets, women’s perfume is positioned as a premium priced product. However, very few, if any of its consumers are aware of the cost structure of this type of product. If you suggest to a consumer that the cost of the bottle may be higher than the cost of the perfume itself, your comments would be dismissed. It is estimated that if a bottle of perfume sells for US $ 40, that the cost of the perfume might only be $ 3 USD but that the packaging and the bottle might be US $ 6. The cost of advertising and promotion might easily be US $ 5 per bottle. Of course, very few perfume manufacturers would ever divulge this information, but it tells us a lot about price, image and positioning.
Pricing developments We are currently witnessing significant changes in pricing in certain B2C global markets. This is due in part to rapid technological innovation which delivers superior new products at lower costs. We
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might consider the personal computer (PC) market where price levels have fallen rapidly and in a very short period of time. Each new version of a PC has more functions, more memory and at a relatively lower price. A digital camera which cost US $ 500 two years ago can easily be purchased for US $ 200 now. It is only because firms are competing in global markets that they are able to spread the development costs of the product, and sell much larger volumes for very low profit margins, but who ultimately are producing an adequate rate of return on their investment. We need to consider, therefore, the factors which we need to take into consideration when fixing prices.
Factors influencing pricing Hollensen (2003) considers the following factors we need to take into consideration when setting our prices.
Firm level factors These factors will determine the pricing levels which we set for our products. If our corporate objective is to penetrate a market then it is likely that our pricing will need to be set at a level that allows rapid penetration. This could well be setting prices at levels lower that the existing market price. If we aim to position our product at the premium end of the market then we will use premium pricing in order to position. Remember the example of perfume and how this price will be based on the levels necessary to position and not necessarily based on the costs of producing and marketing the product.
Product factors In Units 2 and 3 we looked at internal and external factors which might contribute to our success or failure in the marketplace. Our understanding of our product features, in relation to our competitors’ products or services will help us to set the most appropriate prices. Hollensen (2003) considers price escalation, where goods are sold to overseas intermediaries, whose additional costs may cause the price to the end consumer to rise dramatically. It is essential for us to be aware of this concept and to encourage intermediaries to maintain cost control.
Environmental factors We need to be aware of factors in the marketplace which might impact on prices. In overseas markets we should understand tariffs and government regulations or taxes which will raise the final price. We are U n iversity of Su n derlan d
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also aware that a change in exchange rates can either increase the costs of goods to overseas customers or might bring down the price.
Market factors In setting prices we need to understand the dynamics of the market in which our goods or services are going to compete. Strong competition is likely to put pressure on pricing and we have already established the need to understand our competitors. Faced with strong competition we must consider the positioning of our product and look to add value. We have discussed ways in which we can erect competitive barriers for our products, and one of these is to include extra services which tie the customer in to our business.
Pricing strategies Consider the pricing strategies that are open to us. Before we can apply the appropriate pricing strategy we need to understand our competitive position in the market. There are two broad approaches, namely penetration pricing and skimming. If we adopt a penetration pricing strategy then we use price as a way of gaining rapid market share, in what would be considered to be an aggressive strategy by our competitors. In order for us to be successful we would need to know that our competitors were not in a position to make a rapid response. We might use penetration pricing to win customers in an attempt to set up competitive barriers. A price skimming strategy is where we are able to charge a premium price as a way of recouping some of the money that we have invested in bringing the product to the market. The possibilities of adopting this strategy are reduced to rapid technological development in certain product categories.
Experience curve pricing It is generally accepted that as a company gains experience in producing a product, that the cost of production will fall. Some consultants teach business executives about a concept called dynamic accounting, where companies are encouraged to look at ways of reducing the cost or production. This is important in markets where prices start to fall. During this phase it is the inefficient producers that will be forced out of the market place.
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Product line pricing In order to be able to target different segments in price sensitive markets, we can develop new products that will form part of our overall product line. In the case of car companies, they offer a range of products, with some at different price levels. This allows them to position each product appropriately.
Price bundling In order to place more emphasis on product value, we should consider the issue of price bundling. Here we attempt to bundle extra service to our product offering. While this adds value to the customer, it also enables us to spread costs across a number of different services.
CASE STUDY ACTIVITY Harley Davidson Read the Harley Davidson case study in Hollensen (2003), page 514, and answer the following questions: 1.
What are the main reasons for Harley Davidson’s success in the last 15 years?
2.
Describe Harley Davidson’s general pricing strategy.
3.
What does the company’s positioning have to do with its pricing strategy?
4.
Should Harley Davidson alter its price, given that there are strong price pressures from rivals?
CASE STUDY FEEDBACK 1.
The company has realised the value of the Harley brand and the relationship it enjoys with its existing and its potential customers. The bike has ‘symbolic’ meaning, and according to its followers stands for freedom, adventure and individualism. Its customers also expect to pay a premium in order to own this product.
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Harley Davidson have added value to their core product through selling finance, insurance and merchandise. 2.
The Harley pricing strategy is clearly premium price, which Harley will try to maintain by adding value and protecting the image of its brand.
3.
As Harley are able to trade on the reputation of the brand, their customers do not see price as a deterrent to owning the product. One could argue that the exclusive prices appeal to their customers and add to the exclusivity of the bike.
4.
This is a question that the marketing team of Harley ask themselves all of the time. It is unlikely that a competitor will develop a product which will attract the main Harley customer and so a premium pricing strategy would be followed. Harley may choose to use a new brand to compete in other sectors of the market.
Distribution The basic function of distribution is to link the manufacturer of goods and services with final consumers. The decision we face is then to decide how many intermediaries are needed to link us, as the producer, with the marketplace. The technological revolution in consumer retailing continues to change the marketplace. Current estimates for goods purchased via the Internet in the UK during the Christmas holiday period, suggest that around 5% of all purchases will be made online. The expertise which we gain in distributing goods or services in our domestic market may not be transferable to overseas markets, where distribution systems vary. We must also take into consideration the fact that the cost of distributing goods may account for about 25% of the final sales price, which means it is important to find the most appropriate channels. Perhaps with this in mind we should reconsider technological innovations and their ability to deliver customer satisfaction. Reports from consumer groups in the UK suggested that as many as 1% of all goods ordered online, failed to turn up in time for Christmas, in spite of delivery guarantees made by suppliers.
Channel length We must consider the number of intermediaries involved in the channel. At the first level we start with the manufacturer. In some markets the manufacturer then sells to the retailer. The retailer then sells to the consumer. In this case there are two intermediaries, in what is a traditional distribution channel. A key consideration in channel structure is that each member of the channel needs to make a profit from their business, and therefore each adds extra costs in the channel.
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Criteria for choosing distribution channels Customers An understanding of our customer groups will determine the choice of channel. Our research is likely to show us their geographical concentration, or where they are based, their preferred distribution outlets, and their usage of the product or services. The key consideration is to identify trends in distribution and to offer the channels which best serve the identified customer base.
Product characteristics It is perhaps obvious to state that the size and frequency of purchase of a product should determine how it is distributed. Large business to business products, which are likely to incur large distribution costs, should be situated as near as possible to the final consumer. Fast moving consumer goods, which are produced and distributed frequently, are likely to have widespread distribution.
Competition In specialist markets we may have little choice but to use the same distribution outlets as our competitors. Stores which sell products for the home and garden are usually situated in outoftown locations and we would have little choice but to distribute through these outlets.
Legal factors This is particularly relevant in a number of overseas markets. Government control over the distribution of alcohol or cigarettes may be in place in some markets
Market coverage Hollensen (2003) talks about the three broad categories of distribution namely intensive (a wide number of channels), selective (which might favour some geographic areas over others) and exclusive (which might involve only one distributor).
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Channel length Here we need to consider the number of parties involved in the distribution chain. In more traditional distribution channels there may be a wholesaler and retailer, and in some markets there may even be more that one wholesaler. The main feature of a multilayered channel is the extra cost involved. As each party needs to earn money for their work, this might impact upon the final price to the consumer.
Control When choosing the most appropriate distribution channel, companies face a trade off between the amount of marketing control they can exercise over the channel and the cost of maintaining the channel. Generally, the more intermediaries that we use in our distribution, the less we can control distribution. The most effective control is to have our own distribution channels, but in many markets the cost of doing this is prohibitive.
Vertical and horizontal integration In order to gain more control of distribution, manufacturers might purchase channel members at the next level of distribution, or vertical distribution. Many breweries have purchased retails outlets in order to control the distribution of their products. Horizontal integration is where suppliers take control of companies at the same level of distribution, usually by taking over their competitors.
CASE STUDY ACTIVITY Read the Denka Holding case study in Hollensen (2003), page 518, and answer the following questions:
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1.
What are the advantages and disadvantages for Denka of using franchising to enter markets?
2.
What are the disadvantages of using franchising compared to selling directly to furniture shops?
3.
What are the problems and opportunities in BoConcept’s cooperation with the Inspiration chain?
4.
What are the problems of selling through BoConcept’s franchise shops and large furniture chains?
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CASE STUDY FEEDBACK 1.
The main advantages for Denka are: Finance – the burden of financing a franchise falls to the company which takes on the franchise of the franchisee. Capital – the franchise does not use up much of Denka’s capital. Marketing – the franchiser is able to develop a concept and brand which is more likely to be recognised and accepted by the market. The main disadvantages to Denka are: Control – as the number of franchisees increases then the harder it becomes to control their performance. Poor performance – the poor performance of one franchise outlet may also damage the brand’s reputation in the wider market place.
2.
The main advantages to Denka are: Denka retains more control over marketing effort as this is part of the franchise package. Denka will be able to develop its own furniture-chain brand in the future. The main disadvantage for Denka is: Franchising is more resource intensive than selling to furniture stores. Remember that McDonalds fast-food restaurants found that controlling franchisees caused them many problems, which ultimately reflected upon their brand.
3.
BoConcept and Inspiration sell complementary products. BoConcept gain from the access to the know-how of Inspiration, and Inspiration may gain access to the international market through BoConcept.
4.
The biggest challenge in managing multiple outlets is one of pricing. While it is possible to suggest a recommended price, we can’t insist upon this. If we think back to the unit where we looked at competition, it might not be in our interests for the same product to be sold at very different prices.
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Controlling distribution channels In order to compare potential distributors we should apply the selection criteria as suggested by Hollensen (2003), as shown in Figure 5.2.
Distributor 1 Criteria
Weight
Rating
Distributor 2
Distributor 3
Score
Rating
Score
Rating
Score
4
5
20
4
16
3
12
5
4
20
3
15
2
10
3
4
12
3
9
3
9
4
3
12
3
12
3
12
3
5
15
4
12
4
12
Product compatibility (synergy or conflict?)
3
3
9
4
12
4
12
Pertinent technical know-how at staff level
-
-
-
-
-
-
-
Adequate technical facilities and service
-
-
-
-
-
-
-
Adequate infrastructure in staff and facilities
1
5
5
3
3
3
3
Proven performance record with client
2
4
8
3
6
3
6
1
3
3
3
3
3
3
1
3
3
3
3
3
3
1
4
4
3
3
3
3
Financial soundness and depth of channel member Marketing management expertise and sophistication Satisfactory trade, customer relations and contacts Capability of providing adequate sales coverage Overall positive reputation and image as a company
support
companies Positive attitude towards the company’s products Mature outlook regarding the company’s inevitable progression in marketing management Excellent government relations
Score
111
94
85
Scales: 5 – Outstanding, 4 – Above average, 3 – Average, 2 – Below Average, 1 - Unsatisfactory
Weighting: 5 – Critical success factor, 4 – Prerequisite success factor, 3 – Important success factor, 2 – Of some importance, 1 – Standard
Figure 5.2: Criteria for selecting channel members. Source: Hollensen (2004).
As the table shows, it is not only important to identify the key success criteria, but also to rank them in terms of their overall importance. We must concentrate on those factors that are relevant in helping us to
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compete in the market. In using weightings to rank the success criteria, we may need to change this for particular types of products.
Contracting channel members It is essential to draw up a contract with our distributors in order to establish what exactly is expected. This will deal with issues such as stock levels, levels of aftersales service and sales territories. This is even more important in international markets to ensure that our distributors stick to specific geographical areas. Other areas will deal with payment terms and agreed levels of communication between parties.
Motivating and controlling In order to motivate channel members we must maintain a regular flow of information that might help to sell our products. While financial rewards are important, there is a tendency to sell only the products which sell well. We must take into consideration the fact that in some outlets our distributor might also be selling our competitors’ products, and so it is vital to provide regular communication that might help to sell our products. We must set specific and realistic agreed targets for our distributors, which will enable us to have more control over the relationship. We must also use these agreements as a way of monitoring performance, with a view to terminating the contracts of those which perform poorly in the market.
Retailing The main feature of the retailing market on a global basis is the increasing presence of global retailers. Established retailers such as WalMart from the USA and Carrefour from France continue to dominate traditional markets, and along with Tesco from the UK are constantly expanding into new forms of retail outlets. The strength of a retail brand may enable certain retailers to attack new markets both within their own country and overseas.
Retail marketing The criteria used in Figure 5.3 are based on work carried out by Cook, G (1997) which referred to Lindquist (1974) to identify the key components which retailers needed to address, in order to be customerfocused. This research, now more than thirty years old, still acts as a checklist for retailers to follow, when trying to deliver customer satisfaction U n iversity of Su n derlan d
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IMAGE COMPONENTS
ATTRIBUTES
1. Merchandise
Quality Assortment Fashion Guarantee Pricing
2. Service
General Staff service Telephone handling Ease of return/problem solving Delivery
3. Clientele
Social class Self-image Store personnel
4. Physical
Facilities Layout Shopping ease Architecture
5. Convenience
Location Parking Opening hours Convenience with regard to competitors
6. Promotion
Sales promotion Displays Advertising (local) Advertising (brand) Events
7. Atmosphere
Congeniality Class “No pressure” environment
8. Institutional factors
Conservative/modern Reputation Reliability
9. Post transaction
Satisfaction Loyalty
Figure 5.3: Retail marketing toolbox.
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ACTIVITY Using the criteria identified in Figure 5.3, give examples of how retail outlets with which you are familiar use the “toolbox” to deliver customer satisfaction. Try to identify a store which you feel addresses most of these components in their retail marketing mix.
ACTIVITY FEEDBACK There are obviously several stores you could use to attempt this exercise. A clothes retailer would cover most of these components, particularly the physical environment, atmosphere, service and levels of merchandise. Remember that it is because of these attributes that the vast majority of consumers will not shop online for clothes. Of course, your country of origin will also impact upon your expectations of retailers. Shop opening times in China and Hong Kong are geared towards the satisfaction of consumers, whereas more conservative opening hours in the UK or France would simply not be acceptable in other countries. Institutional factors are very often the hardest attributes to change, and usually areas for improvement for many retailers. Mystery shoppers are used to look at such areas and to look at levels of service. Very often it is in the area of levels of service where we, as customers, are not aware of how the retailer deals with some of these attributes, until we feel that we have reason to complain. As marketers, remember that we are in the business of building up long term relationships with customers, which in many instances can be undone by staff, when dealing with customers who want to return goods or make a complaint. This is an area for staff training in order to deal with returns or complaints. Atmosphere and environment are critical success factors for stores such as Tesco. Like many multiple retailers they are aware of the need to consider visual aspects, aural (such as background noise), olfactory (such as scent and freshness), and tactile components (such as softness, smoothness and temperature). Many supermarkets have introduced in-store bakeries in order to create a more appealing atmosphere for their shops. The retail marketing toolkit is a useful checklist for any marketer working in the retail sector, and can de adapted to a variety of different retail outlets. There are no set guidelines for particular sectors, only examples of good or poor practice. Good practice in retail marketing can very often be transferred across to other sectors, and forces organisations to focus on their customers. IKEA have carefully researched their business and have provided out of town stores, U n iversity of Su n derlan d
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which cater for a wide range of consumers, but which has engendered a high degree of loyalty. Spare a thought for WH Smith, a retailer in the UK which would appear to have a confused positioning. Faced with recently reported falling sales, researchers have discovered that some of its potential customers use the store to check out their CDs, books, DVDs and gifts, and often leave the store with nothing more than a daily newspaper, returning home to buy the other products online.
ACTIVITY Imagine that you are the marketing director for a major retailer such as Tesco which traditionally has sold groceries, and any new products have also been sold in a supermarket environment. You might want to visit the Tesco website at www.tesco.com, but this is not essential. You can also assume that Tesco are planning to expand their business. Consider the following questions: 1.
How might you express your corporate objectives? These do not have to be accurate projections but show your understanding of how companies are managed.
2.
Taking into account your corporate objectives how might you express your distribution or place objectives?
3.
How might you express your pricing objectives?
ACTIVITY FEEDBACK 1.
You are likely to have expressed you objectives in terms of turnover taking into consideration your current situation and the actual and projected market trends in your key sectors. The first objective may be to grow turnover, for example, by 7% per annum, which might be the current rate of growth. If we apply this to the actual turnover then multiply this by 7% to generate a turnover figure. We might also take into consideration our current relationships with suppliers and the economies of scale that expansion offers us. We might, therefore, express our objectives in terms of further developing
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our relationships with suppliers and any reduction in costs that might come with this. 2.
Taking into consideration our corporate objectives, our increase in turnover may also be expressed in terms of numbers of new stores opened or the number of stores that are to be expanded. Remember that at corporate level we might express a new store in terms of the average level of turnover a new store brings. If the average turnover of a new store is £ 100,000 per week then this equates to £ 5 million pounds per annum. We can further break this down into the types of retailer. We might be looking to open more of the Tesco convenience stores or in terms of the new clothes outlets they are currently investigating. Remember that this can also be expressed in terms of weekly or monthly targets. A supermarket that is looking to finance the development of 24 new stores may easily express this in terms of 2 new stores per month.
3.
Remember that when we looked at pricing, companies may have already established their position in the market place. Tesco might easily express their pricing in terms of customers receiving value for money, which will be researched as part of the market research plan. Cox, D.A. et al (2003) researched female store shoppers and discovered that ‘bargain hunting’ was an important consideration for shoppers across a number of different socio-economic groups. Tesco understand that a positive retail experience is key for their shoppers and that their pricing will be competitive in the market place as a result of the economies of scale gained through the sheer volume of their business. Creating areas in their stores for heavily discounted goods might satisfy the bargain hunting needs of their customers. You will no doubt have realised that there are a range of possible objectives in the areas we have discussed, which can be confusing. You must note, however, that these options are reduced if the corporate objectives are to simply maintain their current status in their markets or if indeed they need to downsize their business.
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CASE STUDY ACTIVITY Red Bull Read the Red Bull case study in Hollensen, page 552, and answer the following questions: 1.
Give the reasons for the international success of Red Bull.
2.
What are the threats and opportunities which Red Bull face by planning to increase its market share in the USA?
CASE STUDY FEEDBACK 1.
Red Bull GMBH had clearly identified segments across a number of international markets and were able to deliver a consistent message to consumers. The company’s strategy of reinvesting funds into marketing enables the brand to remain prominent. The company’s use of extreme-sports sponsoring has helped to position the Red Bull brand in line with the ‘young adult lifestyle of working hard and playing hard.’ The company used packaging and promotion to draw attention to what is an entirely new product for certain markets.
2.
The US market, while extremely diverse, represents a considerable opportunity for Red Bull. The identified segment will almost certainly be a considerable size in the USA, particularly on the East and West coasts. The biggest threat to Red Bull is the fact that it might be a fashionable brand and as such the growth might not continue to grow. Other drinks manufacturers will have been attracted to this new sector and will certainly be researching new drinks to compete with Red Bull.
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Marketing Communications The range of tools available to the marketing communications manager comprise the following:
· Advertising. · Sales promotion. · Publicity (Public relations). · Personal selling. · Sponsorship. In order to communicate effectively with consumers or potential consumers, we must understand that we will need to use a range of communication tools for specific market situations. The use of more than one tool is referred to as Integrated Marketing Communications (IMC).
Push or pull strategies? In communicating with our customers we have the option of using push or pull strategies. If we use pull strategy then we are trying to stimulate our consumers so that they request the product from retailers and ‘pull’ the product through the distribution channel. If we target channel members and offer them incentives to persuade more customers to buy our products then this is called ‘push’ strategy.
Above the line or below the line? Above the line activities have traditionally been mainstream advertising which were the main function of an advertising agency. Other activities that are aimed at stimulating sales, but were not carried out by the advertising agency, such as sales promotion, are referred to as below the line activities.
Theories of communication There are several theories of communication, including Schramm’s theory, and it is important to understand the broad principles of these theories. Essentially, research tells us that if we use a television advert, which reaches a potential audience of 12 million viewers, a percentage of this audience will switch over as the advert is shown, and some people will be distracted and not notice the advert. Of those that do watch the advert some will not form part of the target audience, while
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some will watch the advert and will possibly have forgotten it after a short while. Some may take an interest in the advert, and possibly the smallest percentage of all will be stimulated by the advert to take any further action. This is often referred to wastage, and something we need to take into account when communicating with potential customers. However, even though our final audience may be much smaller than the total potential audience, advertising can have a very high impact and can lead to increased sales or move people closer to the decision to purchase. We also looked earlier in Unit 3 at consumer behaviour and the way in which consumers make decisions to purchase products or services. Using communication theory, as well as the likely impact of our marketing communications, means that we are able to calculate the cost of our communications and the value of the outcomes of research. We need to understand some key terms in communications: Reach – This is commonly referred to as an opportunity to see (OTS), where we calculate the number of people in our target group who are likely to have seen the advertisement placed at least once. Frequency – Here we need to calculate the number of times a person is likely to be exposed to our communication. If we consider that most campaigns are shown several times during a specified period, then we can set our communications objectives in terms of the frequency with which our communications are likely to be seen. Gross rating points (GRPs) – This is the way in which the media sell their advertising space. Here we multiply the reach of the advert by the frequency it appears in the media. Here, for example an advert which has a reach of 50 per cent, which has a frequency of 3, has a GRP of 150.
Customer response index (CRI) A useful tool for measuring the impact of advertising is the customer response index (CRI). The CRI, in line with consumer decision making decisions, tracks consumer reaction to adverts from being exposed to the advert, through awareness levels, their understanding of the advert, any intention to buy, to their purchase of the product or service. This takes into account the wastage that we discussed earlier in the unit If we look at the calculation of those who are exposed to the advert, the people then are aware of the product, those who understand what the product is and could do for them, those who have expressed an interest in purchasing and then those who actually do purchase the product, we can see that this equates to 9.8% of the original group who could potentially have seen the advert when it was shown.
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The CRI is also a useful tool for forecasting the impact of future adverts, and for looking for areas of improvement in the effectiveness of the advert.
Understand (72%) Exposure to adverts (54%)
Purchase (85%)
Intend to purchase (62%)
CR I 9.8%
No action (15%)
Awareness (48%)
2% No intention (38%)
Do not understand (28%)
7.1%
7.1%
Unaware (52%) 28% No exposure (46%)
46% 100%
Calcul at ion Those who will purchase the product: CRI = % exposed X % aware X % understand X % intending X % purchase = 0.54 X 0.48 X 0.72 X 0.62 X 0.85 = 0.098 or 9.8%
Figure 5.4: Customer response index.
ACTIVITY Using the figures in Figure 5.4, calculate the following: If the reach of our advert is 10 million people then calculate: a)
The total number of people who were not exposed to the advert.
b)
The total number of people who are likely to purchase the product.
c)
The total number of people who are likely to purchase the product if we are able to increase the percentage of people exposed to the advert from 54% to 68%
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ACTIVITY FEEDBACK a)
If the total reach of the advert is 10 million then the total number who are not exposed is: 0.46 x 10,000,000 people = 4.6 million.
b)
The total number of people who are likely to purchase the product is: 0.54 x 0.48 x 0.72 x 0.62 x 0.85 x 10,000,000 = 983,507 purchases.
c)
If we increase the percentage of people exposed to the advert from 54% to 68% then the total number likely to purchase would be: 0.68 x 0.48 x 0.72 x 0.62 x 0.85 x 10,000,000 = 1,238,491 purchases. This represents an increase of 254,984.
Of course, the CRI is a useful tool for forecasting and can only be used accurately when we collect accurate data about the response of customers to our adverts. We will be able to use these figures as a benchmark for future campaigns, and it also helps us to set targets for those responsible for communicating with customers.
How to improve levels of response in marketing communications If we look at the key stages of the communication process in Figure 5.4, each stage suggests area where we might improve our overall communications. Remember that an improvement in any or all of the stages will lead to a better outcome. Every improvement between stages moves more people towards the decision to purchase. If we first of all consider our advertising strategy, we must identify ways in which we can improve exposure to the adverts, awareness of the adverts, increase overall understanding of the adverts, make consumers consider our product or service as one of their possible purchases, and then move them to the final stage of purchase. We must
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not underestimate the importance of the postpurchase decision, and make the purchase as smooth as possible in order to encourage repeat purchases in the future. We will now consider ways in which we might improve our advertising strategy.
ACTIVITY Look at the table and against each poor response factor and communications problem, suggest ways in which we might look to improve consumer response. You might want to give some examples of advertising campaigns with which you are familiar.
Stages of communication
Marketing
Suggest improvements to advertising and
communications
marcomms strategy
issues or problems 1
Low levels of
Low levels of media
consumer exposure to
exposure, possibly
advertising output.
due to poor selection of media
2
Low levels of
Possibly due to the
awareness of
poor content of the
advertising campaign
adverts and lack of frequency necessary to create awareness
3
Low levels of
Possibly due to the
understanding of the
poor content of the
adverts
adverts and lack of frequency necessary to create awareness
4
Low levels of
Possibly due to the
consumers showing
lack of frequency of
any intention to buy
the advert and
the product or service
advert’s proposition failing to encourage consumers sufficiently
5
Low levels of the
Possibly due to the
desired final outcome,
lack of frequency of
or the main objective
the adverts and the
of the advertising
desired outcome not expressed sufficiently
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ACTIVITY FEEDBACK
Stages of communication
Marketing
Suggest improvements to advertising and
communications
marcomms strategy
issues or problems 1
Low levels of
Low levels of media
consumer exposure to
exposure, possibly
advertising output.
due to poor selection
·
Improve understanding of target group by reassessing market research data.
of media 2
Low levels of
Possibly due to the
awareness of
poor content of the
advertising campaign
adverts and lack of frequency necessary to
·
Do we need to review our target group’s media habits?
·
What is the cost of achieving higher awareness levels? We might consider
create awareness
increasing advertising expenditure, but would this achieve further awareness?
3
Low levels of
Possibly due to the
understanding of the
poor content of the
adverts
adverts and lack of frequency necessary to create awareness
·
Consider an increase in frequency of adverts, but must forecast the likely response.
·
Review the content of the adverts, with a view to making some amendments for future campaigns.
4
·
Low levels of
Possibly due to the
consumers showing
lack of frequency of
by changing the exposure periods of the
any intention to buy
the advert and
advert. A ‘long short’ burst could be
the product or service
advert’s proposition
replaced by intermittent bursts over a
failing to encourage
slightly longer period.
Possible look at reinforcing the message
consumers sufficiently 5
·
Low levels of the
Possibly due to the
desired final outcome,
lack of frequency of
purchase, perhaps through a campaign of
or the main objective
the adverts and the
sampling? This proves to be popular for
of the advertising
desired outcome not
new products.
Are there other ways of encouraging
expressed sufficiently
Additional feedback
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1.
In order to run more effective communication campaigns, it is essential to be in possession of good market information, which gives you an insight into the way in which your potential consumers purchase products and how they live their lives. Remember that in Unit 4 we looked at segmentation variables and it is important to be able to break down a market into these identifiable segments.
2.
A good example of how a product fits into the life of a consumer is the example of Jello, a jelly dessert sold in the USA. Sales were high, but repeat sales were low. Research identified a group of consumers who had ‘stock’ of products in their cupboards, and Jello was one of these products. However, in order to be able to consume Jello it had to be made at least 3-4 hours before it was consumed. After dinner, when
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the choice of dessert was made by this particular segment, Jello was never an option as it would take so long to make. The solution to getting more sales therefore was to encourage their consumers to make Jello in the morning while they boiled water for their morning drink, so that it would be ready to be consumed in the evening. Jello changed the message in their adverts and there was an instant increase in sales of Jello.
Improving response rates (continued) If we consider the consumer adoption process, we can look at the ways in which the consumer adoption process is improved. We looked at the situation in our example earlier in this unit, but let us consider some other options. In research carried out by Percy (2001) and Dibb et al (1997), the role of key people who might influence the buying process was considered
Decision making stage
Promotional activities
Awareness
Mass appeal media such as television, press, and magazines
Interest
Mass appeal media such as television, press, and magazines
Evaluation
Personal sources – relatives, friends, colleagues, peers
Trial
Personal sources – self, influencers, sales personnel or trades people
Adoption
Personal sources – self, influencers, relatives, family, friends
Figure 5.5: Promotional techniques and consumer buying decisions. Source: Adapted from Percy, L (2001) and Dibb et al (1997).
If we consider the various stages we notice that while in the beginning the use of mass media options are very important in generating awareness and interest. We mentioned earlier that it is essential to raise awareness and interest in order to stand any chance of moving consumers nearer to the decision to consider the product. As we move into our evaluation, trial and purchase phases, we can see the importance of influencers such as our family, friends or other people who we consider to be key in recommending the use of the product. We must also take into consideration the role of self in the decision making process.
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Branding It is important at this stage to distinguish between a product and a brand. Throughout this course, the term ‘product’ could be replaced with ‘brand’ without fundamentally changing the meaning or effect of much of what you learn. Philip Kotler, according to Keller (2003), defined a product as anything that can be offered to a market, from an automobile to an idea. A brand, said Keller, is “…a product, but one that adds other dimensions that differentiate it in some way from other products designed to satisfy the same need.” It should not be confused with a brand name or mark which is designed merely to distinguish a product or to denote ownership of a product by a particular company.
ACTIVITY Read exhibit 11.5 in Hollensen, p 468. What do you think prompted Mars, Nestlé and Cadbury – manufacturers of confectionery (mainly chocolate) products (sometimes called ‘countlines’) – to try and extend their brands into the biscuit market? What would convince them that the investment in manufacturing capacity was worth the risk of launching a new product? Having entered the biscuit market, where else could they take their brands?
ACTIVITY FEEDBACK Confectionery brand owners have been capitalising on the value of their brands by extending them into other, closely related, markets. In fact, Mars had experienced mixed fortunes with the Twix Top perhaps because it was changing both the category and the product at the same time. It is likely that this test was studied closely for the future. Multipacks of chocolate snacks such as Twix proved successful because they represented good value to the consumer who recognised the brand and had a perception of price based on single products sold through independent confectioners, tobacconists and newsagents (CTNs). The risk of launching new variants and brand extensions was reduced by the strong brand awareness and image of the countlines.
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Further extensions included branded ice cream bars and miniature wrapped chocolate bars in gift packs such as Cadbury’s ‘Miniature Heroes’. In both these markets these well-liked and trusted brands could have a great impact against relatively under-promoted brands and enabled Mars, Nestlé and Cadbury to command premium prices.
The key to branding is in the concept of adding value to the product and thereby building competitive advantage. This may be done through associating the brand with product performance but many add nonfunctional, emotional differences. The benefits to a consumer of a brand include those of the brand mark – assigning responsibility for the product to a specific manufacturer. But more importantly brands acquire meanings and values for customers because of the social context in which brands exist. Brands are talked about, they are trusted, they let customers down, they are the ‘stars’ of TV commercials and, increasingly, of Hollywood movies and sporting events. To an extent, the best known global brands have (and, indeed, are) personalities. The trust and loyalty consumers put in some brands can be very deep rooted and may be dependent on personal experience but need not be at all rational. Indeed, in the UK, Saatchi and Saatchi refer to these emotive and involving brands as ‘Love Marks’ (www.saatchi.co.uk). One of the most famous branding mistakes took place when Coke in the US responded to their archrival’s ‘Pepsi Challenge’. Relaunching their product with a sweeter formulation, as their research told them, Coke nevertheless found they had misunderstood the relationship between the brand and the consumer. Legend has it that even people who did not drink Coke contacted the company to protest against the change. Coke’s rapid change back to ‘The Real Thing’ proved that the brand was as much the property of its customers as the CocaCola Company. According to Ira Herbert, former chief marketing officer of the company, “We’d have been massacred had we not brought it back.” (Ohmann 1996) Even functional differences can, occasionally, be attributed to the brand rather than the product. Devoted Nike customers may, understandably, assert that their shoes look better than the competition, but they often simply believe that they are better. A more compelling example appeared in the UK medical journal, The Lancet, some years ago when researchers published the results of a blind trial of painkillers. Specifically they tested the reported effectiveness of generic aspirin tablets. One group of subjects was given an unbranded packet, the other a pack with the marketleader’s brand name on.
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The functional effectiveness of the tablets in the trial was undoubtedly affected by years of advertising and promotion and perhaps millions of pounds of marketing expenditure. The subjects, almost universally, reported the brand leader as being more effective as a pain killer despite the two tablets being chemically identical. Increasingly, as production processes become more sophisticated and leadtimes for the introduction of new products shortens, manufacturers find it hard to maintain an advantage on product performance alone. For some organisations, therefore, the brand is a significant source of sustainable competitive advantage. Brand advantage is sustainable because it is almost impossible for competing brands to occupy the same social or mental space as each other.
Brand equity There is no industry or product sector in which branding is impossible. However, the significance of branding varies from industry to industry. According to the UK consultancy Brand Finance, much of the value of media companies and pharmaceuticals is found in their ‘intellectual property’ in contrast to companies such as retail food stores and utility suppliers with large real estate assets. See Figure 5.6. Amongst these companies, for example, food manufacturers have strong assets in the brands they produce and not in the factories that produce them.
Figure 5.6: Assets of the FTSE 350
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The same research, from Brand Finance, also showed that, all things being equal, strongly branded companies performed better than market averages, a finding supported by long term research on the profit impact of marketing strategy (PIMS). In order to measure and, therefore, manage these intangible assets, the concept of brand equity was developed. Although it has directed attention to an important outcome of marketing activity, brand equity has also been the source of some confusion since it has been defined and used in many differing ways. According to Keller (2003), however, the key points are –
· Differences in outcomes arise from the ‘added value’ endowed to a product as a result of past marketing activity for the brand.
· This value can be created in a number of different ways · Brand equity provides a common denominator for interpreting marketing strategies and assessing the value of a brand.
· There are many different ways in which the value of a brand can be manifested or exploited to benefit the firm (i.e. in terms of greater proceeds or lower costs, or both). (Keller, op cit, p42) Hollensen (op cit, p470) describes brand equity as “…additional cash flow achieved by associating a brand with the underlying values of the product or service.” However, it is sometimes dangerous to equate brand with cash measures since investment in brand building cannot often pay immediate dividends. In categories as diverse as chewing gum, soft drinks and men’s razors, the market leaders (at least in the US) in the 1990s were the same brands as in the 1920s (Keller 2003). At the same time many leading brands such as The Body Shop and Amazon.com have been built without any of the obvious supports of massive advertising expenditure or mass distribution. So, building up brand equity is not an easy, rapid or riskfree enterprise. Developing a strategy for a brand is similar to that for a product or company. Many of the analytical tools looked at in Units 2 and 3 can be used to assess the relative strengths of brands in a company’s portfolio or in the marketplace. The only difference is the unit of analysis. Brands do best when they are strong and well supported; that is to say, when they have a good market share. But Bain & Co’s detailed research
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of the profitability of premium brands in 40 categories of consumer goods (Vishwanath and Mark 1997) found another significant factor. A brand’s relative market share (RMS) had a different impact on profitability depending on whether the overall category was dominated by premium brands or by value brands to begin with. Therefore, brand strategies, they argued, should also take into account the brand strength of the competition.
R elat ive mar ket shar e High
T he H it chhik er ROS 15-20%
T he H i gh-R oad B r and ROS > 20%
T he D ead-E nd B r and ROS < 5%
T he L ow -R oad B r and ROS 5-10%
P r emium degr ee of cat egor y
Low Low
High
Figure 5.7: Bain & Co’s strategies for brands.
The key to strong brands in competitive market was innovation and this was a feature of the socalled highroad brand (more than 20% return on sales or ROS). Brands with ROS between 15% and 20% should, the research recommended, focus on innovation and niche marketing. However, ‘deadend’ brands demanded tough decisions from their owners – invest heavily or cease their support. Unilever, during the last five years, delisted several hundred brands that were both in overcrowded categories and had weak brands. Hitchhiker brands, prosper as market fragments. The authors cite the example of the automobile market where new niches, such as ‘people carriers’ and sports utility vehicles (SUVs) have developed. However, the research also showed that these brands, which enjoyed current profits due to their premium price but had low market share, were vulnerable to price moves by the marketleader which can leave them struggling to justify their higher price policy.
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ACTIVITY Gillette is a strong brand that has been leading its sector for over 80 years. When Bic and others introduced disposable razors their first reaction was to launch their own in the knowledge that, given the same price and performance, consumers would choose the trusted brand. Was this the right decision? How would you characterise the Gillette brand in the Bain & Co matrix?
ACTIVITY FEEDBACK In fact, the first reaction of the Gillette management was misguided. A dominant share of the low-end market, where customer bought on value-for-money, would only give them a ROS of 5-10%. Gillette was, in fact, a high-road brand and the company subsequently poured $200 million into developing an even more sophisticated product, the Sensor, that became the highest price ‘shaving system’ on the market by 25%. Some 15% of the customers in fact traded up from disposables and Gillette has continued to trade up customers by introducing new innovations.
Vishwanath and Mark (1997) point out that markets can drift towards low price, so called ‘low road’ competition. But this then opens up the opportunity for a premium brand to take the high road. Perhaps the most troublesome aspect of branding is knowing how far its value can be exploited. Brand extensions attempt to use the values of an established brand and transfer them to products and services in new (but related) market sectors. An elaboration on Igor Ansoff’s growth vector matrix by Baker and Hart (1999) demonstrated that product development and diversification where strategies which were supported by appropriate brand extension.
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S upply - T echnology - P r oduct - B r and Present
New
Present
Mar k et penet r at ion (lowest risk)
P r oduct development (lower risk)
New
Mar k et development (higher risk)
D iver sifi cat i on (highest risk)
D emand | Mar k et | Cust omer s
Figure 5.8: Extended growth vector matrix
The principle source of risk is moving away from known customers and their needs. So taking this strategic move with a brand that already has high recognition and levels of trust may ameliorate this.
ACTIVITY Kingfisher lager is a premium beer from India that has gained significant penetration in the UK market by securing distribution through many of the country’s independent Indian restaurants and then expanding to the take-home sector through supermarkets. Now, from May 2005, the Kingfisher name will be on new Airbus A320s, flying between the UK and various destinations in India as a new low-cost airline takes off. Dr Vijay Mallya who is Chairman of UB (United Breweries) Group, one of India’s largest companies and the parent company of Kingfisher Airlines says, “we plan to have a ‘fly the good times’ approach to offering our passengers a unique on-board experience as well as value for money.” The in-flight meals will, of course, consist of Indian cuisine. “Kingfisher is a well recognised brand, both in India and internationally, standing for exuberance and lifestyle, combined with a long-standing credibility built over many decades. These qualities will be integral to the Kingfisher Airlines platform of ‘fly the good times’” says Dr Mallya. (Sources: the Times Newspaper, 29.1.05. www.kingfisherworld.com and www.airlinequality.com) Do you think this is an appropriate brand extension? How would you evaluate the contribution of the brand to the new venture?
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ACTIVITY FEEDBACK Low-cost airlines seem to be frequent targets for entrepreneurs with strong brands – EasyJet is one such, whilst Virgin has taken a ‘higher road’ approach concentrating on longer haul routes. The question is really whether the brand is strong enough to make its presence felt and the market for low-cost air travel is likely to be profitable. Bain and Co’s research referred to above might suggest that a low cost position is unlikely to yield great profits. But air travel is increasingly seen as a commodity business and the industry is highly regulated allowing customers to make easy comparisons between the few competitors for specific destinations. At first glance, Dr Mallya seems to be extending the brand into new products and technologies as well as into new markets and customers. Crucially, however, the UB Group already has experience of the charter flight business and is expanding principally in India where there is little competition and growing demand. Kingfisher could be another Virgin and expand into a range of services such as banking, mobile phones and other markets where a reliable brand may be at an advantage.
Brands remain possibly the most valuable, yet misunderstood, marketing asset a company has. The key to successful exploitation of brand equity is to monitor the perception of the brand amongst customers and others involved in purchase decisions, including other parts of the valuechain. This must be done constantly since it is only in the minds of consumers that the brand has its effect.
Sponsorship Sponsorship, as an academic research area, continues to attract increasing attention. While sports sponsorship is estimated to account for around 70 per cent of all sponsorship (about one 2 billion dollars per annum in the UK alone (Duffy, 2004)) there are signs of increased activity in broadcast, arts and causerelated marketing. There is no doubt that sponsorship is high profile and therefore attracts a lot of attention and, as Duffy (2004) states, it enables marketers to connect with consumers in a passionate environment. What are the benefits of sponsorship to sponsors and why are so many sponsorship deals considered to be poor value for money? The main reasons cited by Chadwick (2004) and Duffy (2004) are:
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1.
Planning – the sponsoring companies enter into a sponsorship deal without a clear sponsorship plan. Sponsors need to be clear about what it can achieve for them and set objectives for the sponsorship.
2.
Sponsor matching – the match between the sponsor and the sponsored isn’t appropriate. Sponsors can use sponsorship to improve their positioning. In the case of the soft drink Sprite, the sponsorship of the exciting and youthful sport of snowboarding enabled the company to reposition Sprite in the market place. Many cases of unsuccessful partnerships may simply be because the chairman of the company has chosen to sponsor her favourite football team, but where there is little benefit to the company.
3.
Poor targeting – many sponsorships are linked to events, and recall research shows that on many occasions there is poor recall of sponsors’ names. Research from Sports Marketing Surveys showed that 52% of viewers recalled that Wendy’s Burgers sponsored an event where, in fact, McDonalds were the principal sponsor.
4.
Not integrated with the marcomms plan – too many companies treat their sponsorship as a separate activity. Successful sponsorship campaigns, like the Barclaycard sponsorship of the English Premier League, are integrated with sales promotion activities, promotions for staff and part of the overall PR plan.
ACTIVITY Foster’s ten year deal for the British Formula 1 Grand Prix Foster’s beer has a ten year deal to sponsor the high profile British Grand Prix. Briefly list and describe the benefits to Foster’s of such a sponsorship. Source: Chartered Institute of Marketing Magazine
ACTIVITY FEEDBACK Benefits to Foster’s: 1.
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Global media coverage – the fact that the British Grand Prix is shown in 140 countries and with an estimated 600 million audience will enable Foster’s to increase exposure to its brand.
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2.
Brand Association – Formula One racing is extremely high profile and is considered to be an exciting pastime. Brands which are associated with the race benefit from the reputation and glamour of Formula One.
3.
Internal Communications – Foster’s are able to use the sponsorship of Formula One to motivate and reward its staff. In line with other high profile sponsorship deals, staff are a major stakeholder and this allows them to visit the event or to receive merchandise associated with the event.
4.
Hospitality – when companies sponsor high profile events it enables them to offer hospitality to key stakeholder groups. According to Pippa Collett, Shell’s sponsorship director, paddock tickets at a Formula One race can cost as much as five thousand dollars per person, and are extremely popular with clients. These can be included as part of a sponsorship deal.
5.
Venue sales – the deal enables Foster’s to sole distribution rights at the event, not only generating revenue but also exposing the brand to new consumers.
You may have included an increase in sales of Foster’s as a result of exposure on television. While this may in fact happen, research suggests that it is very difficult to measure the success of a sponsorship in terms of increased sales of a product.
REVIEW ACTIVITY 1.
How does the product life cycle theory impact on product development strategy?
2.
What are the differences between value-based pricing and cost-based pricing?
3.
What are the current distribution trends in world markets?
4.
Why do companies find it difficult to standardise their advertising messages on a global basis?
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REVIEW ACTIVITY FEEDBACK 1.
The Product Life Cycle theory tells us that in many cases, existing products will start to decline in the market. In order to stay in touch with the consumer, we need to keep introducing new products or services. Once a product has reached its saturation stage then we should consider developing it, or introducing a new product to eventually replace it.
2.
Cost-based pricing is the traditional approach to pricing. Here the company calculates it costs, adds on a profit margin and sets a price. This takes very little of the current market level, the perceived value of the product or the expectations of consumers. A value-based pricing approach requires an understanding of how consumers perceive prices and brands in the market.
3.
There are some significant trends in global distribution, with much of it centred round the increasing internationalisation of retail outlets. Frequent travellers comment on the similarities in shopping complexes around the world and the standardisation of retailing. There is also a considerable change in traditional retailing with vertical integration leading to a lower number of intermediaries. The rise of multinational retailers, such as Wal-Mart and Tesco, has seen an increase in the power of retailers and their ability to dictate terms to their suppliers.
4.
Cultural differences mean that it is very difficult to standardise messages across markets. Many words or expressions do not travel across borders, and in some cases may have a totally different meaning. Our beliefs, religion and education will also affect the way that we receive messages, and so it is very difficult to standardise the message. Occasionally firms are successful. Gillette’s main message about comfortable shaving does not lose very much in translation and so ‘the best a man can get’ has been used in several diverse markets.
References Baker, M. and S. Hart (1999). Product Strategy and Management. Hemel Hempstead, Prentice Hall. Beech, J and Chadwick, S (2004), The business of sport management. Pearson Education,Essex, England, ISBN 0273682687 Cook, G, (1997) Retail Marketing for Ford. Part of the marketing series publications.
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Cox, D.A., et al, (2003), Reassessing the pleasures of store shopping, Journal of Business Research, No. 58, pp 250259 Duffy, N. (2004), A game of two halves, CIM Magazine, Issue 6, October 2004. Hollensen, S, (2003), Marketing Management: a relationship approach. Pearson Education, Essex, England, ISBN 0273643789 Keller, K. L. (2003). Strategic Brand Management. Building, Measuring and Managing Brand Equity. Prentice Hall. Ohmann, R. (1996). Making & Selling Culture. Hanover NH, Weslyan University Press. Tomlinson, M, Buttle, F and Moores, B, (1995) The Fan as Customer: Customer Services in Sports Marketing, Journal of Hospitality and Leisure Marketing, Vol. 3, No. 1, pp 1936 Vishwanath, V. and J. Mark (1997). “Your Brand’s Best Strategy.” Harvard Business Review 75(3).
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Unit 6
Organising, Implementing and Controlling the Marketing Effort LEARNING OUTCOMES After studying this unit you should be able to:
· Identify the range of marketing objectives that companies set themselves as part of the marketing planning process.
· Identify some of the techniques used to set achievable targets in the marketing planning process.
· Define the key elements of the marketing control system. · Demonstrate an understanding of the need for the evaluation and control of marketing plans and identify appropriate control mechanisms.
Organisational structures Much has been written about organisational structures and their importance in achieving customer focus within the organisation. It is important to understand that there are very often changes in organisational structures as a firm grows or takes on new products and markets. We will look at the five broad categories of organisational structure as suggested by Fifield and Gilligan (1999) and McDonald (1999). 1. Small business or owner manager This type of business is characterised by the founder of the company who takes on most of the roles within the organisation. The staff employed have specialist roles and may often be working by themselves and, therefore, have no management responsibilities. The organisational structure is, therefore, informal, with the owner/manager at the centre, with informal links to the other staff within the organisation. This structure allows the owner to have maximum flexibility and frequent communication with employees. As
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the business grows, and they take on more customers, there will be a need to adopt a more formal structure. 2. Formal structure As a company moves towards a formal structure then management roles are created. In the first instance, managers will be appointed in sales/marketing, production and finance, which will be expanded as the company grows. Each department will employ specialists to take on new roles. There is a much greater need for more formal communication and departments will be given budgets. All departments will report to the managing director.
Managing Director
Sales/marketing
Finance
Production
Figure 6.1: Formal structure.
3. Matrix structure A more developed organisational structure is the matrix structure. Here organisations can split responsibilities by product category and by market, or on an international basis by product category and geographical region. In Figure 6.2 the product categories are split by laundry services and cleaning products, while the market sectors are split by schools, restaurants and hospitals. While each department has a defined role, there may be some confusion over the development of new products. The structure does allow for more frequent communication.
Schools
Market structure
Hospitals Restaurants Laundry services
Cleaning products
Product/service structure Figure 6.2: Matrix structure.
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4. Centralised structure
Marketing function at centre
Figure 6.3: Centralised structure.
Under a centralised organisational structure, the marketing function is operated from the centre and marketing programmes are developed for the other companies within the organisation. Each branch or strategic business unit (SBU) has its own specialist departments. The biggest problem facing the organisation is that a centralised marketing department can be slow to respond to the needs of the other companies within the group. 5. Decentralised structure
Marketing decentralised
Figure 6.4: Decentralised structure.
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Under a decentralised structure each operating unit has its own marketing department. While they take responsibility for their own operating unit, they should liaise with the other marketing departments. There tends to be a duplication of marketing effort and some waste. Excessive waste and duplication is likely to lead to restructuring towards a more centralised structure.
CASE STUDY ACTIVITY Adidas-Salomon Read the case study in Hollensen (2003), pages 647 to 649, and answer the following questions: 1.
What are the main motives for the new Adidas-Salomon organisation?
2.
Should a separate marketing plan be made for each of the three divisions?
CASE STUDY FEEDBACK
182
1.
The main motive for Adidas-Salomon’s organisation is to set up their divisions based on their positioning in the market. The organisation should, therefore, reflect the differences in consumer needs. The three divisions operate along the same lines as strategic business units (SBU). In setting up their three divisions the organisation are demonstrating that they are customer focused. The development of these three divisions also reflects the changes that have taken place in the leisure/sports markets globally over the past few years.
2.
As the divisions are based on three different market sectors, then each should produce its own marketing plan. Each of these plans will link in to the overall corporate plan, and there may be some marketing activities which are shared across divisions. However, it is important to emphasise that as their customer bases are likely to be very different, then this should be reflected in their plan. There might be some difficulty in separating the customers of the three footwear divisions.
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Marketing audit In Units 2 and 3 we looked at both the internal environment and the external environment of the firm. A marketing audit is carried out to identify the main external and internal factors which are most likely to have an impact on the marketing plan. We will use a SWOT analysis to bring both internal and external factors together and help us to identify our key strengths or weaknesses and the main opportunities and threats which face us in the market. For most companies the data required to carry out this audit will have been collected during the course of the year, and many of the research activities undertaken will provide us with the necessary information upon which we can base our marketing plan.
Why develop a marketing plan? The main reason for the marketing plan is to establish the company’s current situation in the market, help it to consider the future direction possible, based on its current situation and then set out what it needs to do to achieve its objectives. While it is the function of the marketing plan to analyse the current situation, it is generally accepted that its objectives are stated for each segment in which it operates.
The structure of a marketing plan There are several ways to present a marketing plan, including McDonald (1999), Dibb et al (1997) and Hollensen (2003) who suggests the following structure:
· Title page. · Table of contents. · Executive summary. · Introduction. · Situational analysis. · Marketing objectives and goals. · Marketing strategies and programmes. · Budgets. · Implementation and control. · Conclusion.
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Title page This quite simply specifies the name of the business units covered, authors and the time scale of the plan.
Table of contents This indicates the key sections in the plan and is important in guiding individuals to their key areas of responsibility.
Executive summary As with all summaries, the executive summary gives a brief overview of all of the sections in the plan, and will state which products or services are included, the amounts to be invested and a summary of the expected outcomes of the plan. It will also identify the key objectives of the plan.
Introduction The introduction will deal with the product or service to be included in the plan and its current situation in the market. The introduction will also state what the main purpose of the plan is.
Situational analysis The situational analysis covers the current external and internal situation that the product or service now faces. The SWOT analysis is used to present this data, with strengths and weaknesses (SW), the internal factors, and opportunities and threats (OT), the external factors. They will cover some of the following points:
Internal assessment These are also sometimes referred to as controllable variables, as the firm can have direct control over its staff, resources, products and the manufacturing process. Here we will identify the main personnel who are going to drive this plan forward. We will need to concentrate on their experience, training and skills from which the plan will benefit. It might also look at the future personnel needs of the organisation, when dealing with the later stages of the plan. This section will also deal with the main lines of communication between key personnel, as well as saying something about the culture within the organisation.
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External assessment This part of the plan should consider the main opportunities and threats facing the organisation. This will include details about the key segments, the main target markets and their patterns of consumption, and the share of this market in both value and volume terms. There will be a separate section detailing current market trends, future forecasts, and a section to deal with competitive activity and the main players in the market. This was covered in Unit 3. The external assessment will also consider the PEST factors, or the main political, economic, social and technological factors, which will affect the future performance of our organisation and products or services. We will need to look at any legal considerations which are likely to affect our product or service. Consider the current movement towards reducing the impact of cars. This is an issue that might have a considerable impact on car sales in the future, but an issue which car companies are monitoring, and including in some of their communications with key stakeholders. Established companies in the market will be monitoring competitive activity and will be paying attention to new entrants in the market.
Marketing objectives and goals The main marketing objectives will be expressed in terms of market share, sales, profit and return on investment (ROI). All of these should be expressed in quantified terms such as percentages or numbers, with the time taken to achieve those goals. Their accuracy will depend heavily on the information available to the company. They should be accurate and realistic as opposed to an unrealistic wish list. As McDonald (1999) states, marketing objectives are about products and markets only. We might express our objectives in terms of our image and reputation in the market with customers and potential customers, and use research to measure these variables. More and more firms are considering their social responsibility which we will cover in more detail in Unit 8.
ACTIVITY Setting marketing objectives Wood (2004) breaks marketing objectives down into external and internal objectives. Again when you consider the process of setting objectives, you will see the importance of having accurate market data. We will concentrate on the external objectives only. Using the grid for marketing objectives, fill in the gaps with some of your own suggestions. The first column looks at the marketing objectives which a
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company might set, the second column considers how to measure them, and the third column is for examples of these objectives. This is meant to serve as a checklist for key objectives, which does not mean that all companies should set the same type of objectives.
Objective
How to measure objectives
1. To increase
Market research survey on
customer satisfaction
customer satisfaction
2. To retain existing
By setting up and monitoring
customers
sales plan for existing
Examples
customers
3. To encourage
Sales promotion and
product trial
sampling with the use of coupons, telephone numbers and point-of-sale samples
4. To acquire new
Sales plan with key customers
customers
targeted
Marcomms plan with a message for new uses of product
5. To acquire/defend
Monitoring sales targets and
market share
responses to communications
6. To expand/defend
Number of outlets opened
distribution
and new distribution partnerships set up
7. To build brand
Market research survey,
awareness
before, during and after marketing activities
8. To enhance brand
Market research survey to test
image
customer perception of the company against key variables
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ACTIVITY FEEDBACK
Objective
How to measure objectives
Examples
1. To increase
Market research survey on
To increase customer satisfaction levels of
customer satisfaction
customer satisfaction
65% to 70% in year 1, 75% in year 2 and 85% in year 3 through an improved staff training programme.
2. To retain existing
By setting up and monitoring
To retain the 20% ‘most loyal’ customers (from
customers
sales plan for existing
Ford example) and to maintain current sales
customers
levels
3. To encourage
Sales promotion and
To reach 20 test drives per showroom per
product trial
sampling with the use of
month (Ford example) over the next six
coupons, telephone numbers
months, and to achieve a conversion rate of
and point-of-sale samples
20%
4. To acquire new
Sales plan with key customers
To target the ‘luxury’ segments of the
customers
targeted
European package tour holiday market, and
Marcomms plan with a
acquire twenty new customers per month, for
message for new uses of
the next 12 months
product
5. To acquire/defend
Monitoring sales targets and
To maintain current market value share of
market share
responses to communications
25% through a programme of staff training
6. To expand/defend
Number of outlets opened
To establish 10 new franchise partners
distribution
and new distribution
(Thorntons) in the next 12 months, with a
partnerships set up
projected turnover of £ 500,000 per annum, per store
7. To build brand
Market research survey,
To increase current awareness levels of brand
awareness
before, during and after
from 5% to 15% in 12 months, through an
marketing activities
integrated campaign of advertising, sponsorship and sales promotion
8. To enhance brand
Market research survey to test
To establish the position of being seen as the
image
customer perception of the
most innovative and reputable company in the
company against key
industry, through public relations activities
variables.
There are, of course, several examples you could have listed, and there are, as we have established before, no right answers. If we aren’t able to set specific targets then we do not have sufficient understanding of the market, nor how consumers behave within the market.
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You will probably want to know how you can set, for example, a target for improving awareness of the brand in the market place. The simple answer is that we need to understand what is possible and use current examples as benchmarks. It is well documented that high profile sponsorship might only improve awareness levels in the first year by about 10-15%, so we can bear this in mind when setting our own objectives. We also know that short term sponsorship might deliver an increase in awareness, sometimes as high as 20%, but that this then falls once the sponsorship ends. Setting objectives and developing your training programmes around this, means that all key people within the organisation are aware of what we are trying to achieve, and can work towards these goals.
Setting sales targets Marketing consultants will usually find that when they visit a new client the main objective of the client is to increase sales significantly. They often have very ambitious targets and want to know how this will be achieved. Of course, the first thing that we need to establish is how existing customers feel about the business, and are they happy with our service at present. Existing customers are very often neglected, when they can represent the easiest new sales to make. A company which manufactures sophisticated computing software, was able to make additional sales of £ 60,000 (or 8.6% of their current turnover) in two weeks simply by contacting their existing customers. In order to set sales targets for our client we can follow this sequence:
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1.
Establish the current conversion rate for sales. If they need to visit four clients in order to get one sale then they have a conversion rate of 25%.
2.
Establish also how many prospects their sales force are capable of visiting in a week.
3.
Calculate how many calls need to be made, or how many pieces of information need to be sent out, in order to get a response for the sales team to follow up.
4.
Ask the client to state how many new sales they need in the next year.
5.
Now calculate how many people they will need to see in order to get their desired sales target.
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ACTIVITY Sales targets You are acting as a consultant for a company which sells a software management system to golf course managers that handles accounts, bar and restaurant takings as well as membership information. You are given the following information. The sales people have a conversion rate of 20%, that is to say they that if they are given five leads then they will usually convert one of them. They want to find 50 new customers in the coming year and they currently have two sales people. They split the country up between them by north and south. Each sales person can only visit a maximum of two potential clients per week as a result of the travelling time involved, and the time needed to demonstrate the product. Once a prospect is converted then this involves extra administration time to finalise the sale. If they send out 1000 mail shots then they usually get a return of about 20 new prospects. 1.
Calculate the number of people they will need to visit in order to reach their sales targets, establish how they will identify their sales prospects, and work out how long it will take the sales team to visit the prospects you have identified.
2.
Suggest ways in which they can improve their conversion rates.
ACTIVITY FEEDBACK We can work out the following. 1.
To find 50 new customers with a conversion rate of 20% means that they will need 250 prospects to visit, or 125 each. They each have a capacity of about 8 per month, or 192 per annum between them. This means that in the first year they will be able to visit 192 prospects, and the remaining 58 will take 3-4 months more. In order to get 250 prospects, we start by dividing 250 by 20, which is the number of prospects that they get from a 1000 mail shots, which gives us a factor of 12.5. Therefore, if we multiply 12.5 by 1000 mail U n iversity of Su n derlan d
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shots, then we get a figure of 12,500. This means that they would need to send out a mailshot of 12,500 to get a figure of 250 prospects. 2.
In order to improve their conversion rates they could do the following: Sales conversion rates – consider improved training for sales team. An improvement of only 10% means that they will need to visit less people, and spend less time looking for new prospects. Improve communications – with potential customers this will not only improve response rate, but also improves a potential customer’s perception of the organisation. This can be achieved by reviewing the current practice of preparing communications literature and also consider investment in additional training.
Marketing strategies and programmes We can break down our marketing programmes into pricing, product, distribution and communication, or we may wish to express them as the 4 Ps of product, place, price and promotion. In each section, we will state what we are going to do, and at what time, and the sum of all of these activities are aimed at achieving our objectives.
Budgets We will look at budgeting in more detail, later on in this unit. Our budgets will take into account the cost of undertaking our product, communications and distribution activities. This will include our expenditure on advertising, our product development costs and the costs of increased distribution. This will be presented to include targets and will identify some of the key areas and those responsible for monitoring them.
Implementation and control We will cover these in more detail later in this unit. Under implementation and control, we will measure the progress of our actions and carry out a financial analysis. This will also involve monitoring our budgets.
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Conclusion Here we will include details of how our marketing strategy worked, highlighting the advantages that our product or service has over our main competitors.
Budgeting In order to control our marketing plan we should aim to stick closely to our budget. This means that we have an amount of money to spend on our marketing activities and, as effective planners, we should also have expectations of what our actions will achieve. We should express our intended outcomes as objectives, which we should then express in measurable terms. By expressing our objectives in measurable terms means that we can monitor them to see if they have been achieved. At the lowest level we should be able to set sales objectives and profit expectations, and also look to express the outcomes of our other marketing activities. We need to consider how we monitor customer awareness, brand perceptions or even our overall image. What about developing new products? We know that they involve high levels of research and development funding, but how can we reduce the risk of them failing, and within a specified budget? It is at this level that we look to differentiate ourselves from competitors and concentrate on building up value in our business.
CASE STUDY ACTIVITY Teekanne Read the case study in Hollensen (2003), page 669, and answer the following questions: 1.
To what extent is it an advantage for Teekanne that it manufactures tea bag machines and branded tea bags?
2.
Teekanne wants to expand its tea sales outside Germany. Are there any countries that you would recommend?
3.
Teekanne suggests that Sean Connery could be used to help change the image of tea. Is this a viable option?
4.
What other European promotional strategy might Teekanne use, as an alternative to Sean Connery, to increase sales of its brand in the European tea market?
5.
Through the sales of tea bag machines, Teekanne already has knowledge of and contacts with the main tea brand manufacturers in
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the US market. How might Teekanne use these contacts to plan the market penetration?
CASE STUDY FEEDBACK 1.
The main advantage is vertical-integration, as they are both a supplier and a manufacturer. This allows the company to have a much closer feel for the market, and also for the end-user. Through Teepack they can test machines and through Teekanne they are able to supply the market with newly developed tea bags, with a more efficient production time.
2.
There are several opportunities. It would appear that the United Kingdom and Ireland might be attractive markets, due in part to their very high sales of tea and the ‘low psychic distance’ of the two countries.
3.
One of the biggest mistakes that companies make in targeting celebrities is that they undervalue the actual cost of hiring a celebrity. A company might expect to have pay a round $ 50,000, when the price demanded might be $ 500,000+. The other consideration is to be certain that the celebrity’s ‘positioning’ will appeal to your target groups.
4.
The company might use a mix of TV commercials, newspapers, magazines, internet-promotion, sponsorship or sales promotion. The most important consideration is to be clear what your promotional objectives are and use the most appropriate activities.
5.
Teekanne can use its contacts to:
- gain up-to-date market information - get access to a distribution network through one of the tea brand manufacturers
- consider co-operation, or an alliance with one of the tea manufacturers, with a view to supplementing each other’s product lines
- consider purchasing a tea manufacturer with potential and which has already penetrated the market.
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Customer lifetime value Customer lifetime value will be covered in greater detail in Unit 7.
Barriers to implementation of market strategy The barriers that stand in the way of successful implementation of marketing strategy fall broadly into three categories. 1. Pressures external to the organisation External pressures on the organisation will act as barriers to the implementation of marketing strategies. In carrying out our external analysis we should identify those factors which might affect our marketing plans. We should be aware of any pressure groups who might work against us, and consider which other political, social, economic or technological might pose a risk to us. This emphasises the importance of categorising these PEST factors and carrying out an effective risk analysis. 2. Pressures on the marketing function from within the organisation. When we look at the Thornton’s example later in the unit, we will see that in order to carry out effective marketing plans, marketing training will be necessary for all of those involved in implementing the plan. Far too many plans do not take into account the prevailing organisational culture. UK banks, in particular, found it very difficult to implement some of their marketing activities due to the attitude of some of its staff. They are very often neglected during implementation, even though they are in the front line dealing with customers. It is unrealistic to design a customerfocused marketing strategy without considering the organisation’s ability to deliver on its promise. Some organisations will have an existing structure which is simply not designed to be able to deliver the proposed marketing strategy as is intended. 3. Pressures within the marketing function It is often assumed that the marketing function is able to implement the marketing activities as set out in the plan. This can be a problem when companies are planning to expand their business, but haven’t considered how the marketing function will carry this out. Their execution of the plan is critical and they are very often the first group to be evaluating and controlling the plan.
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Marketing Control In order to establish if we have achieved our objectives, or that we are on our way to achieving them, we need to establish control mechanisms as part of our plan. It is well documented that this is the most neglected area of planning, (McDonald (1999) and Hollensen (2003)) and, therefore, merits more attention. The problems encountered in control are usually as a result of an inadequate monitoring system, or the reluctance of some of the designers of the plan to face up to early problems, choosing to continue in the hope that the plan will be successful.
Setting up a control system Hollensen (2004) suggests splitting a control system into two broad areas. The first is output control, which is mainly based on financial measurements, and the second is behavioural controls, which focuses on nonfinancial measurement. Output control requires the constant monitoring of expenditure against set targets in order to track changes. This enables us to take any necessary corrective action. Behavioural controls are more about how we train and motivate the staff who we use in order to deliver the plan. We can address these issues through a programme of training within the organisation, with the people who will help us to achieve our overall objectives.
Marketing control system If we look at the marketing control system in Figure 6.5, we will see that at the first stage of the control system we need to decide what exactly our overall outcomes are likely to be at the end of the plan, which we do by setting objectives. Following from the objectives, we decide our marketing strategy, which shows how we are going to achieve our objectives in broader terms. Our strategy will then break down into detailed plans (see Unit 5) where we state specifically how we will manage pricing, promotion, distribution and product issues. Having laid out our plans for implementation, we must then set our specific performance standards in the areas of product, distribution, communications and pricing, in which we specify exactly what is expected at each level. This may be in terms of numbers of sales visits and conversion rates. We must then locate the people who are responsible for delivering the expected results of our plan. This may be down to our brand manager or possibly shared with the manager responsible for sales. The control mechanism should be set up in such a way that the managers
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responsible can evaluate actual performance against the standards we set. It is important that they are able to take corrective or supportive action if we are deviating from the plan. At this stage there are three tasks that those responsible for monitoring the plan will need to execute. The first stage is to deal with individuals and their contribution to the plan. It may be necessary to praise, offer advice or even reward them through salary increases, bonuses or even promotion. If the deviation is as a result of inappropriately set objectives or unrealistic marketing performance standards, then corrective action will need to be taken. Alter objectives
Alter standards
D ecide on: objectives strategies plans for implementation
E st ablish mar ket i ng per for mance st andar ds product distribution communications pricing
L ocat e r esponsibilit y
E valuat e per for mance against st andar ds
Reward, promote, advise, punish
T ak e cor r ect i ve/ suppor t i ve act ion
Figure 6.5: Marketing control system.
Early performance indicators There are several key performance indicators that will help us to monitor the progress of our marketing plans. Hollensen (2003) in reviewing the work of Samli et al (1993) , suggests that there are six key indicators. These include a drop in the quantity of goods demanded,
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sudden movements in sales patterns, complaints from customers, a noticeable impact on the sales of competitors’ products, significant returns of our goods and an increase in the request for parts or repairs. All of these indicators require further investigation and may require some corrective action on the part of those responsible for the plan.
ACTIVITY Thorntons Confectionery Thorntons are a UK based confectioner, who have developed a reputation for a range of confectionery, including Belgian style chocolates and toffees. Consumption of chocolate per head of population in the UK is high, and the total market is worth around £ 3.6 billion per annum, with a household penetration of around 41%.
£ millions
2002/2003
2001/2002
+/- change
Turnover
167.1
163.8
2.0%
Profit before tax
6.4
7.1
(9.9%)
Operating cash
21.3
23.9
(10.9%)
flow
Figure 6.6: Sales trends. Source: Thorntons Confectionery.
1.
Look at the sales figures, profit before tax and operating cash flows in Figure 6.6 and briefly comment upon them.
2.
What might your sales objectives be for the following year?
ACTIVITY FEEDBACK 1.
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We need to be careful when commenting upon incomplete figures as the true pattern may be hidden. We can see that Thorntons have increased their sales by 2 %. If we look at their interim sales for the following year we see that they have increased by 4.4%. There would appear to be a year-on-year increase. U n iv ersity of Su n derla n d
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Both profits and operating cash flows show a decrease. Upon further investigation we will see that this is due mainly to a significant investment in plant and technology. What we can see is that where a company makes investments then it will reflect in key indicators such as profit or cash flow. 2.
We might make the assumption that the confectionery market is growing and our sales objectives should reflect this. If the market was growing by 2.5% then we should look to grow by at least that amount. If we have ambitions to grow market share then this would be reflected in a higher percentage target than the current growth rate in the market. Remember that our objectives must be realistic and achievable, given the current company situation.
ACTIVITY More from Thornton’s confectionery
£ millions
2002/2003
2001/2002
+/- change ( % )
Own shops
133.8
134.5
(0.5)
Franchise
12.3
11.3
8.8
Private label commercial
12.6
12.2
3.3
Thornton’s branded
3.1
1.6
93.8
Gift delivery service
5.3
4.2
26.2
Total
167.1
163.8
2.0
commercial
Figure 6.7: Breakdown of sales 2002/2003 by outlet.
If we now look at the breakdown of sales we can also consider a breakdown of our preliminary ideas on our sales objectives.
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What might your sales objectives be, in light of the additional information?
ACTIVITY FEEDBACK The breakdown of figures suggests that our core business, that is turnover generated through our own shops, has fallen slightly but against a background of a rising market. This may also be due in part to the fact that we have increased our franchise business, but it should not have had such an impact. Let us make some assumptions:
· Own shop revenues should grow by a target rate of 2% or £ 2.68 million.
· Franchise revenues to grow by 8% or £ 980,000. · Private label commercial to grow by 3% or £ 380,000. · Thornton’s branded commercial to grow by 20% or £ 620,000. · Gift delivery service to grow by 20% or £ 1.06 million. This makes a total revenue increase of about £ 5.75 million or 4.3% increase overall. We have made a conservative estimate of 20% increase on the Thornton’s branded commercial sector, which actually showed a growth of 93.8%. At this stage we don’t know the underlying reasons for this. This does, however, represent a move away from their traditional business, but nevertheless an exciting opportunity. This probably increases access to the market by opening up distribution outlets. It suggests also a different emphasis in our overall marketing plan. As Thornton’s has traditionally been very successful at key selling times such as Christmas, Easter and Valentines Day, a move towards branded commercials reduces the dependency on these times, even though they are always likely to be key selling times. These targets can be broken down into regional targets and ultimately can be measured at shop level. These will be some of the ‘early performance indicators’ which we considered earlier in this unit. The increase in sales through franchise outlets will depend also on Thornton’s plans to increase the number of franchises.
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ACTIVITY Thornton’s international plans: opportunity or threat According to Thornton’s annual report, their plans to expand overseas appear to be on hold yet again. In a presentation to shareholders they revealed that the possibility of international franchises had been ‘rejected for the foreseeable future.’ The possibility of exporting products to the USA or to any Commonwealth countries is under review, but they do not see this as a ‘short payback opportunity.’ The company’s main priority is to continue focusing on the UK market where they consider the most potential to be. What do you think of Thornton’s international plans? Do you think that they are right to put off their franchise plans for overseas markets?
ACTIVITY FEEDBACK At first hand it would appear that Thornton’s appear reluctant to step outside their domestic market. While they do not see that there are opportunities to be gained by operating overseas, they have perhaps underestimated potential threats, and given the developments in China, they have also underestimated the opportunities. They seem to have an old-fashioned view of marketing goods overseas. They have a well established product, a wide range of product lines and considerable expertise in marketing their products. China is a rapidly developing market, and simply by operating in one major city might give them a bigger target market than half of the total UK population of 56 million. While the market potential is huge, the opportunity to work within China would also open up the Far Eastern markets, as well as present them with a chance to reduce some manufacturing costs considerably. China has a rapidly expanding middle class with a passion for western style goods. Past experience of international marketing also tells us that companies who become entrenched in their own market run the risk of new overseas competition in their domestic market.
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REVIEW ACTIVITY 1.
Read the SCA case study in Hollensen (2003), page 701, and answer the following questions: a)
What are the differences in buying behaviour between the consumer/retail and non-domestic B2B tissue markets?
b)
SCA wants to increase market shares, both in Europe and the USA. How could SCA set up a budget system that would enable the company to control the budget if marketing objectives are met?
2.
What are the main factors which we need to take into consideration when setting marketing objectives?
3.
Why do companies need to have marketing controls in place?
4.
What are the problems involved in setting up and implementing a marketing control system.
5.
What are the benefits of the matrix organisational structure?
REVIEW ACTIVITY FEEDBACK 1.
a)
In the consumer/retail market the consumer buys tissues in order to improve the quality of life, to make daily life easier and in some instances a useful standby product. For the business-to-business market, tissues are bought to help in the production process as a way of improving quality, safety and productivity.
b)
2.
200
The budget system should contain elements such as market share, sales and profitability. In order to set this up to reflect overseas involvement, customer groups could be replaced by countries formed into regions, such as Europe and the USA.
The marketing objectives are used as a means of guiding the company in the right direction, or a target for future activities. In order for the company to achieve these objectives, or targets, they will be expressed in terms of sales objectives, market share, by volume and value, and can also include the expected return on investment as a result of undertaking these activities. We will also use our objectives to establish U n iv ersity of Su n derla n d
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the time needed to achieve them, and at all times make them achievable and understood in key areas of the business. We can also use our marketing objectives to set targets in our marketing mix areas such as pricing, promotion, place (distribution) and product, again setting ourselves measurable and achievable targets. We can also set societal objectives (covered in Unit 8 in more detail) in terms of how we can best serve the interests of society, taking into consideration our social responsibilities in terms of the way that we reward and treat staff. 3.
Companies need to have marketing controls in order to measure how they have performed, when executing their plans. Companies need to measure their performance in order to move to the next phase of their plan. The options available to them are to moderate their plans if they are not achieving their targets, or to continue with the plan if they are. Marketing controls are, therefore, important in that they are used to try and influence the performance of those responsible for executing the plan.
4.
One of the most difficult problems with setting up a control system is to know exactly how to establish what constitutes the right amount of control. Control mechanisms should be tight enough to identify deviations from the plan, but not so tight that they get in the way of the planning process. The term control may also be viewed negatively by people within the organisation, and may impact on the performance of individuals. A control system should not be perceived to be a way of punishing performance in the company, but as an early detection option to help put the plan back on course. We have already established that one of the key problems with control systems is that they can become too rigid, and fail to identify the deviations from the plan, for which they were set up.
5.
The matrix structure is most advantageous for companies who have a wide range of products and services and which are spread over a wide geographical area. When companies move to a matrix structure it is usually achieved by two of their existing structures intersecting each other. A matrix structure typically creates a dual focus to ensure that conflicts between a product area and a geographical area are identified and analysed.
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References Dibb, S, Simkin, L, and Bradley J, (1997), The Marketing Planning Workbook. Thomson Business Press, London, England. ISBN 1861523491 Hollensen, S, (2003), Marketing Management: a relationship approach. Pearson Education, Essex, England, ISBN 0273643789 McDonald, M, (1999), Marketing Plans: How to Prepare Them, How to Use Them. ButterworthHeinemann, Oxford, England. ISBN 0750641169 Wood, M, (2004), Marketing Planning: Principles into Practice. Pearson Education, Essex, England. ISBN 0273686798
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Focus on Direct Marketing and Customer Relationship Management LEARNING OUTCOMES After studying this unit you should be able to:
· Demonstrate an understanding of the key strengths of direct marketing approaches.
· Demonstrate an understanding of the need to develop distinct acquisition and retention strategies.
· Demonstrate an understanding of the nature of customer loyalty and how it may be delivered.
· Demonstrate an understanding of how to develop budgets and strategies based on lifetime value and allowable marketing cost.
· Be able to calculate the impact of different strategies on customer value and profitability.
Introduction In this unit, we will be focusing almost exclusively on direct marketing. Direct marketing is often represented as a subset of marketing communications but, we argue, many of the techniques of direct marketing are essential to the proper strategic applications of the currently ‘fashionable’ concepts of relationship marketing and ecommerce. Direct marketing stakes a unique claim with regards to its measurability and accountability. But these are not lofty, theoretical strengths of a broad approach. In direct marketing the ‘devil is in the detail’. It is simply not possible to implement a successful direct relationship or online (potentially ‘onetoone’) strategy without understanding and tracking the value of individual customers. U n iversity of Su n derlan d
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Defining direct marketing According to Graeme McCorkell, the veteran direct marketing consultant and writer, direct marketing – “…produces or uses data from interactions with customers or prospects in order to target marketing activity, generate continuing business and maintain control over marketing expenditure.” McCorkell (1998) McCorkell (1997) also describes the cornerstones of direct marketing as
· Targeting – who will be interested? · Interaction – how did they respond before? · Control – what was the return on our investment? · Continuity – how can we further the relationship? These elements all interlink with one another and it is impossible to say that one is more important than the other. Nevertheless the key, according to Tapp (1998), is that a direct marketing company captures individual customer details as soon as there is contact between them – “so that the marketer can begin a relationship with that customer, subsequently treating them differently over time in order to generate repeat business” In other words, in response to knowing more about a customer any aspect of the marketing mix may be changed. Drayton Bird, another long serving and influential direct marketer in the UK defines direct marketing as – “Any activity which creates and exploits a direct relationship between you and your customer as an individual” (Bird 1989) The Institute of Direct Marketing in the UK describes it as – “The planned recording, analysis and tracking of consumer and business direct response behaviour to develop marketing strategies for current and future customers” (www.theidm.co.uk) This latter definition points to the potential strategic importance of a direct marketing approach.
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ACTIVITY Look again at the definitions of direct marketing (and review the definitions of marketing in earlier units). What do you think are the key strengths of each with regard to developing competitive advantage?
ACTIVITY FEEDBACK Here we have taken just the main direct marketing definitions – Definition
Strengths
“ Marketing is the management process
The conventional, transactional definition from Unit 1. It
which defines, anticipates and satisfies
speaks of customers and their needs. Arguably it does
customer requirements efficiently and
not refer to the strategic importance of keeping
profitably” (CIM)
customers in the longer term.
“Any activity which creates and exploits a
This pithy definition focuses on the value of the
direct relationship between you and your
individual customer relationship. It suggests that this
customer as an individual” (Bird 1989)
relationship is, itself, an asset. However, the ‘exploitation’ of the relationship may raise ethical issues for some, and there is no suggestion that the relationship should be maintained for longer term gains.
“The planned recording, analysis and
At first difficult to understand, this definition emphasises
tracking of consumer and business direct
the ‘technocratic’ nature of direct marketing. It is about
response behaviour to develop marketing
planning and about detailed recording of customer
strategies for current and future
behaviour. Crucially that behaviour is in response to
customers” (www.theidm.co.uk)
direct activity. The purpose is made clear; to continually inform strategy.
Table 7.1: Strengths of various definitions of direct marketing.
In neither of the ‘direct’ definitions are the interests of the customers represented. Perhaps this is taken as understood as part of marketing, but given what we know about the level of marketing knowledge in some companies (see Unit 1), this may not be wise. Tapp’s definition above does, at least, talk about the need to generate repeat business – as does the quote from Graeme McCorkill – presumably by satisfying customers. Hence, direct marketing encourages looking to future revenues which can only be secured by satisfying customers now and in the future.
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Relationship marketing Since the early 1980s, a new strand of (direct) marketing has emerged. Relationship marketing (RM), discussed briefly in Unit 1, builds on the strengths of direct marketing and translates them into strategies for the whole business. The notion of relationship marketing has been championed by, amongst others, the Cranfield School of Management. The key text for this course by Svend Hollensen, refers throughout to a ‘relationship approach’ in contrast to a ‘transactional’ one. Having completed six modules you should, by now, be familiar with this distinction. Payne (1995) identified the key features of relationship marketing:
· A focus on maximising lifetime value of selected customer segments.
· Concern with customer service as central to retaining customers.
· Emphasis on quality throughout an organisation – the measurement of customer perceptions of quality rather than objective standards of production quality.
· A shift in focus from transactions to relationships between suppliers and customers.
· An emphasis on the importance of a wide network of relationships in delivering value to customers. The first three points resonate closely with a direct marketing approach and, like direct marketing, can be supported by the intelligent use of technology, particularly in sharing information between customers and the company – and within a company. We will look at this in Unit 8. The last two points above move beyond direct marketing in staking a claim for marketers, and marketing expertise, to have influence throughout the network of relationships that sustain a company. This latter point is a concept very close to the value chain or value network explained in Hollensen (2003). Whilst direct marketing is almost universally accepted as one approach to marketing at a tactical level and an increasing number of companies are recognising the strategic importance of developing long term relationships with customers, few are yet adopting the relationship approach with other stakeholders as well.
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Relationship marketing is contrasted with transactional marketing in Hollensen (op cit) chapter 1, pages 913. As you learn some of the essential techniques of how direct marketing deals with customers, you might like to reflect on how direct marketing principles might help manage other stakeholder relationships. The significant change of emphasis from short term transactions already described in with respect to direct marketing is even more significant for the relationship marketing perspective. A whole industry has grown up around the implementation of customer relationship management (CRM) which is based on the principles of relationship marketing. Beyond the key features above, Payne (2000) also summarises the key strategic contributions of Cranfield’s RM as being –
· Understanding the economics of customer retention and thus ensuring the right amount of money and other resources are appropriately allocated between two tasks (retaining and attracting customers).
· Highlighting the critical role of internal marketing in achieving external marketing success.
· Showing how the principles of RM can be applied to a range of diverse domains, not just customer markets.
· Recognising that quality, customer service and marketing need to be integrated in a much closer manner than has previously been the case in many organisations.
· Illustrating how the traditional marketing mix concept of the four Ps (product, Price, Place and Promotion) does not adequately capture all the key elements which must be addressed in building and sustaining relationships with markets.
· Ensuring that marketing is considered in a crossfunctional context. Payne and others have developed a ‘Multiple markets model’ (reproduced diagrammatically in Hollensen, p10 and below) with which they demonstrate the importance of noncustomer relationships in addition to those with existing and potential customers.
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I nt er nal mar k et s Internal marketing: every employee is an internal customer or an internal supplier
S upplier mar k et s Collaboration with key suppliers Cust omer mar k et s (Customer retention, customer lifetime value)
R ecr uit ment mar k et s Human resources/ skilled people
R efer r al mar k et s Creation of advocates (besides customers): intermediaries, agencies, etc.
I nfluence mar ket s Industry related influencers, associations, government departments (universities, etc.)
Figure 7.2: Relationship marketing’s ‘Six markets model’. Source: Hollensen (2003:10).
The point of considering these as potentially marketing relationships is that they can be managed in an integrated and coordinated way to achieve corporate objectives.
ACTIVITY Think of a small business with which you are familiar, it may be a local retail store or a supplier of services such as cleaning or catering services. Try and list the different companies and organisations with which the company has a relationship. Are these equally important? Which could be managed using marketing techniques? Now, for a charity or voluntary organisation, repeat the exercise. Are the relationships different?
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ACTIVITY FEEDBACK You may have listed suppliers, staff, others in the value-chain such as agents or distributors as well as customers. For a charity or voluntary organisation, the relationships are inevitably different. For example, you might separate out donors and clients (the recipients of the charity’s help), governmental departments, volunteers and others. Payne (2000) refers to five generic ‘markets’ in addition to the customer markets.
· Internal Markets Every employee or department is a customer to another.
· Supplier and Alliance Markets Increasingly suppliers are identified as crucial in most companies’ operations. Sometimes suppliers become allies or partners.
· Recruitment Markets Appropriately skilled workers are in demand in almost every industry. Some companies owe their success to recruiting better people than their rivals.
· Referral markets Direct marketing identifies the most committed customers as ‘advocates’. These people recommend highly favoured brands to their friends. In other product sectors, intermediaries are important referrers of business.
· Influencer Markets For large publicly listed companies these include financial analysts, stock brokers and others who may assess their performance. Relationship marketing reminds us of the complex web of interactions that must be managed by a company to deliver something of value to the end consumer. Viewed as a sequence of ‘events’, this is Porter’s concept of the Value Chain, but you will recall that Hollensen depicts this in more dimensions as a ‘Value Network’.
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ACTIVITY Read Hollensen sections 1.3 to 1.7, pages 9-20. Develop your answers to the discussion questions on page 22.
ACTIVITY FEEDBACK What are the similarities between relationship marketing (RM) and transactional marketing (TM)? The two approaches have the same starting point: focus on customer satisfaction. Furthermore both approaches need the same powerful instruments in the implementation of the marketing plan: personal selling, budgeting revenues and costs, etc. The instrumental dimension has been largely neglected in the early academic discussion of the RM concept. However, proven tools are available in the discipline of direct marketing. How does a relationship marketing strategy differ from a transactional marketing strategy? In the ‘pure’ versions of TM and RM, Table 1.3 (pp12-13in the Hollensen textbook) gives an overview of the differences between the two approaches. The exchange-based TM approach is based on a notion of mass markets where individual customers are anonymous. The goal is to make customers choose one particular brand over competing brands. This easily creates a situation of competition between the marketer and the customer. In transaction marketing situations, customers, as unidentified members of a segment, are exposed to a number of competing products, and they are supposed to make independent choices from among the available options. The two parties have conflicting interests. The starting point is that the customer does not want to buy; he or she has to be persuaded to do so. Although Peter Drucker said that the aim of marketing is to make selling superfluous. RM emphasises cooperation rather than competition and consequent conflict among the parties and among the marketing actors. In relationship marketing, where interactions and cooperation exist at some level, the customer and the supplier or service provider are not totally isolated from each other. The relationship is based on value creation in interactions between the supplier or service provider and the customer, cooperation is required to create the value
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that the customer is looking for. Of course, this does not mean that conflicts could not exist; however, cooperation is the driving force, not conflict. Which kind of industries could benefit from the use of RM versus TM and vice versa? You could refer back to the discussion on direct marketing and loyalty and to the earlier discussion of the use of technology. Industries favouring RM could include complex computer-systems, building projects and similar situations where because cooperation and partnership between the partners is needed to get a satisfactory solution for the customer. Industries favouring TM may include those where mass production of standard products is taking place, like foodstuffs, components or raw materials (like cement). It may also be appropriate where each customer buys small amounts of a product of low value and they do so infrequently. In which situations would customers not be expected to be interested in RM? Market situations characterised by low customer interactivity/arm’s length, and impersonal contact with manufacturer. In this case, there may be more of a role for intermediaries and they may employ RM techniques.
The strategic role of direct marketing It is important to understand that there is a difference between applying direct marketing techniques and implementing a direct, or relationship, marketing strategy. As discussed in Unit 1, strategy concerns long term, important decisions that lead towards stated objectives in uncertain conditions. Decisions such as this have an impact throughout an organisation. Tapp (1998) suggests that there are three levels of direct marketing in which – A.
Direct marketing drives the business; the entire company is run according to the direct marketing approach from the design of the product to communications. Pricing is dynamic and adapted to different customers at different times and the product is only sold direct.
B.
Direct marketing drives part or all of the marketing strategy; it improves the return on investment in other forms of marketing. Often a particular segment of the market is managed directly whilst traditional channels are still used if appropriate.
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C.
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Direct marketing is used as part of the communications mix; there is no direct marketing strategy but, perhaps, direct response communications are used amongst other more conventional techniques.
ACTIVITY Try and find examples from your own experience or from your reading of companies that fit into each of these categories. Can you think of reasons why they might have chosen to follow one or other of these approaches?
ACTIVITY FEEDBACK It is highly likely that you found it easy to identify companies who use direct marketing techniques amongst many others (the third category above). Most global brands such as McDonalds and major brand owners such as Unilever and Proctor and Gamble have experimented with direct techniques. They continue to spend heavily on mass advertising primarily to maintain brand awareness in markets where there are many substitutes and competition is intense. In the UK, Heinz experimented with a direct marketing strategy but soon found that the costs outweighed the benefits of selling additional cans of soup and beans. In the end, companies supplying fast-moving goods have to deliver the product efficiently and cheaply to the customer. For many this inevitably means using the major supermarkets, and opportunities to ‘go direct’ are few. Companies such as BA and other major airlines use direct marketing intensively in certain markets where there are high value customers they would like to keep. These (identified as the second level of direct marketing) use direct mail, e-mail and specially tailored offers to build barriers around their best customers. Often these are called loyalty, privilege or ‘gold’ schemes. You may also have found it easy to think of companies that are entirely ‘direct’. In the UK and Europe, financial services have been revolutionised by the emergence of telephone and internet based providers of insurance and banking. Many of the success stories of e-commerce, such as Amazon, are retailers that have no ‘offline’ presence and deal with customers entirely directly, but at a distance.
Those companies that have embedded direct marketing into their company are likely to be those that value longerterm customer
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relationships. This is an important point. Direct marketing companies are those that look at the value of their customers over the longer term. Companies need new customers, indeed they must recruit new customers before they can go on to become longterm, loyal customers. But in almost every business, new customers then become more expensive to recruit. It is, therefore, tempting for companies to chase only those customers who will be profitable in the short term, say as a result of the first transaction. But it is precisely these customers that will also be targeted by the competition. Knowing the ‘lifetime value’ of customers (LTV) can enable a company to make better decisions regarding which customers to target, with what product or service and how much to spend in doing so.
ACTIVITY As Daewoo UK re-brands as Chevrolet, it is looking to attract younger customers to its small car range. They know, however, that they will have to use big incentives to get young adults to shift allegiance from Ford, Vauxhall and others. The question is how big? The profit margins on new cars are slim – at most 10% on a new car of £4,500 (€6,500), but much of that can disappear in conventional marketing costs. They know that once they have a customer the chances of a repeat purchase within three years is high (as much as 50%) so how might the idea of lifetime value help them make their decision?
ACTIVITY FEEDBACK It is clear that re-branding for Daewoo/Chevrolet is going to be expensive. Apart from the cars themselves, the dealership network has to change and they will be advertising heavily to educate the public. If they consider only the current financial year then it is difficult to justify reducing profitability now by adding marketing costs. However, if they look over the next three years and predict that half of their customers will return, then they can also predict future revenue and profits. If half of those re-purchasing a Chevrolet in three years time return yet again, then those customers are even more valuable.
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Loyalty The main protagonist of the concept of loyalty in marketing is Frederik Reicheld (1996) who researched the impact of loyal customers noting that many companies lost 10 to 30% of their customers each year. The result was complete renewal of their customer base within 5 years. He also pointed out the oft quoted statistic that it cost between 3 and 30 times more to recruit a new customer than to keep an existing one. Reicheld reported Bain & Company’s research into the effect of customers leaving and staying. They discovered that, in some cases, a 5% increase in retention (through increased loyalty) could result in a 50% increase in cumulative profitability. In the case of a credit card company the same increase in loyalty was responsible for an improvement in profit of 125%! Traditionally loyalty has been assumed to be closely linked to satisfaction. However, further Bain & Co research has pointed out that it is dangerous to assume that any customers are, in fact loyal. (Jones and W. Earl Sasser Jr. 1995)
ACTIVITY In the 1970s Telecom was a subsidiary of the UK’s Post Office. It had a monopoly on the provision of domestic telephones in the UK. Nevertheless, managers were keen to adopt up-to-date techniques and regularly surveyed their millions of customers. This was particularly important when, in the 1980s the business transferred into the private sector and telecommunications was opened up to competition. The main findings of a (fictionalised) customer satisfaction survey are summarised in Figure 7.3.
Totally dissatisfied
Dissatisfied
Neither satisfied
Satisfied
Totally satisfied
35%
5%
nor dissatisfied 15%
20%
25%
Figure 7.3: Summary Telecom customer satisfaction ratings.
If you had been advising Telecom as it prepared to fight its competitors for the first time, how would you have interpreted the figures? On which customers would you have advised they spent their ‘retention’ budget?
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ACTIVITY FEEDBACK Probably your initial reaction was to point out that the company was in danger of losing 35% of its customers; the ‘totally dissatisfied’ and the ‘dissatisfied’. Indeed a SWOT analysis such we discussed in Units 4 and 6, might raise this as a weakness. In fact, Jones and Sasser (1995) reported that this was the concern of many companies as they examined their customer satisfaction survey. However, their investigations came up with some surprising results, replicated across a number of different sectors. Firstly, they discovered that even ‘satisfied’ customers in many industries were prone to defect. In some cases the only thing preventing them was a near monopoly situation. Utility companies (such as Telecom) were an example of this. Secondly, they discovered that the ‘totally satisfied’ customers were up to five times more valuable that the merely ‘satisfied’ because they would stay longer and buy more. Their conclusion was that resources should be focused on increasing and maintaining the satisfaction of customers in the top two satisfaction categories.
Tapp (1998) cites research by the agency Rapp & Collins that illustrates why companies lose their customers –
Reasons
Percentage
Moved away/dies
4
Relationships with other companies
5
Competitive activity
10
Product dissatisfaction
14
Figure 7.4: Reasons why customers were lost. Source Tapp, 1998
Hollensen (2003, p618) points to research that analyses customers’ loyalty on two axes; attitudinal and behavioural.
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ACTIVITY Read section 15.5 in Hollensen, pp617-620. Given the figures above in Figure 7.4, do you think the four categories of loyalty developed by Dick and Basu help address the problem of customer defection?
ACTIVITY FEEDBACK Figure 7.4 shows that nearly 80% of customer leave because they are dissatisfied with the product and or the service they have received. Research such as this must be treated with caution since so-called ‘exit interviews’ tend to focus on the ‘completely dissatisfied’ category of customer who would be difficult to retain in any circumstances. A further 4% of customers move away or die. However, just 15% of customers move because of competitive activity and these must fall into the category of ‘spurious loyalty’. Whilst the classifications from Dick and Basu are useful for conceptualising loyalty they are weak as a management tool. It would be necessary to factor in satisfaction and the sources of that satisfaction in order to develop appropriate strategies. By now you should also have considered the possibility of reflecting on the LTV of such customers. This would assist in allocating budgets to customers segmented by loyalty.
What Creates Loyalty? Different customers in different markets experience many different kinds of loyalty. We have already referred to the idea of physical barriers that prevent a customer leaving. In financial services it is often stated that a customer with four accounts with a particular back is 100 times less likely to defect than a customer with only one account. Banks have huge incentives to retain customers since, often, current accounts simply cannot be run profitably. Above all, satisfaction and service help to create loyalty. In some cases this may be rational when the customer knows that the product
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represents the best value in the marketplace. In the UK this is often the case with mortgages when lenders compete on interest rates and offer ‘feefree’ switching. But commitment can be emotional too. In this respect, brands are ideally placed to build bonds of loyalty but continually meeting the psychological needs of their customers. Whilst retention and loyalty are intertwined, loyalty is not an inevitable consequence of a customer’s longevity. In order to maximise the chances of a customer staying and increasing their commitment a company must develop a ‘contact strategy’ that aims to build loyalty. The process begins when a customer is first recruited.
· Welcome. It has been said that, rather than ‘new’ or ‘free’, the most powerful words in direct marketing are ‘thank you’. Customers are increasingly aware of their own value to a company and appreciate this being recognised. This is not the moment to sell more, but it is a useful time to collect data and capture any problems before they become insurmountable.
· Up Selling. When a customer has only recently joined they can still recall many of their reasons. Assuming their first experience was positive there is usually an immediate opportunity to increase their purchasing.
· Cross Selling. A new product often sensitises customers to other, related needs. Complementary products and services are ideal. A customer investing in a new DVD player may want insurance or DVDs themselves.
· Renewal/Preventing Inactivity. Timing is crucial, renewal should be prompted before customers lose interest. Often subscription marketing offers incentives for payment by standing order or direct debit, or for paying in advance for a longer membership period. A customer may appear to be inactive for many reasons. Historical data may give you clues as to customers buying patterns.
· Reactivating Lapsed Or Inactive Customers. As we have already discussed action to ‘revive’ a customer can go on as long as the results outweigh the costs. The development of a customer from first contact through to a highly loyal customer is often visualised as the ‘ladder of loyalty’.
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D eveloping r el at i onshi ps P ar t ner
A dvocat e
S uppor t er
Cl ient
P ur chaser
P r opect
Figure 7.5: The ladder of loyalty.
Whilst conventional marketing concentrates on the transformation of potential customers into purchasers and established clients, direct and relationship marketing which prizes loyalty seeks to create supporters and, ultimately, ambassadors. Ambassadors are not only fiercely loyal to the company, they also recommend the company to others, hence their name.
ACTIVITY Now might be a good time to take a break from studying! Go shopping for a new experience. Perhaps you could have a haircut or go out for a meal or visit a car showroom or an expensive clothes store just to look (you don’t have to buy anything). The important thing is, it should be a store or restaurant you have not visited before. As you go in search of a new service ‘encounter’ note down all the places you consider. Note how you learn about alternatives, perhaps from friends or family or from advertising, directories or just by browsing. Try to keep a record of how you made a decision to become a customer of the chosen company. As you spend time in the store or restaurant, note how many times you were approached by service personnel (the manager, waiters, sales people, etc). How many times were you unsure about what to do or say; how many times
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did you have to ask for help, or were you ‘pounced’ upon by eager members of staff? At the end of your time in the store, how likely is it that you would go back? Did you end up enjoying the experience?
ACTIVITY FEEDBACK Whatever your experience you will have concluded that it was broadly speaking, enjoyable or not enjoyable. You will have formed an impression of the store, showroom or restaurant. Along the way you will have experienced ‘moments of truth’ when the service personnel had to judge what you, the customer, wanted. At these moments, your experience could have been positively or negatively affected. For example, if you had booked a meal, but then arrived at a restaurant to find your table not available, the service has already failed. If you are then expected to wait a long time and no apology is given, it may be that the quality of the meal itself is irrelevant. Every moment you come into contact with an organisation is called a ‘touch point’. Companies can improve service and customer loyalty greatly by identifying these and managing them.
Loyalty schemes Loyalty schemes aim to reward loyal behaviour by linking increased value, for the customer, to repeat purchases. Often these involve some kind of card, which must be presented at the point of purchase and notional points which can be redeemed against other products or services. Some loyalty schemes, such as AirMiles™ or Nectar™ (in the UK) are stand alone schemes that several brands can buy into. This may make the scheme more attractive to consumers since they are more able to collect substantial rewards. However, the rewards are not unique to a brand and the scheme must be managed carefully so that there is no competition between brands in the scheme. For example, it is likely that
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only one supermarket and only one bank would be in the Nectar scheme. Companies also develop their own schemes. Airlines, for example, have developed ‘frequent flyer’ programmes for their most valuable customers. Subbrands such as ‘Club Class’ and ‘Business First’ are ways of rewarding continued high usage. In fact, if a British Airways Gold cardholder does not travel enough, they have their membership downgraded. Loyalty schemes should not be confused with sales promotions. A sales promotion may be targeted at particular type of customer and may encourage repeat purchase but often sales promotions are shortlived and aim for short term effects. Crucially many sales promotions miss the opportunity to collect important information about customers and are not underpinned by the use of a database.
B r and L oyalt y Mat r i x : t he diamond of l oyal t y
L oyals
H abit uals
Var iet y seek er s
S wit cher s
Figure 7.6 A brand loyalty matrix. Source: Knox, S. (1996)
In some cases, sales promotions can be destructive. Simon Knox (1996) writing about the apparent decline of brand loyalty in the 1980s and 90s pointed out that there were at least two dimensions of loyalty – psychological commitment and active support (through purchase behaviour). When mapped, these two dimensions generated four kinds of customers.
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These were described as –
· Loyals - Active (involved) decision making based on product features, quality, referral
- High perceived risk in changing brands - Small portfolios · Habituals - Passive decision making based on simplification - Latent risk of brand changing - Susceptible to changing brand when first choice out of stock
- Smaller portfolios · Variety Seekers - Multibrand buying, active search based on quality - Large portfolios - Unlikely to defect permanently when choice out of stock
- Seek variety for own sake or alternative usage occasions
· Switchers - Large, varied portfolios - Sensitive to price and promotions - Low perceived risk in changing In contrast to the Dick and Basu classifications of loyalty referred to earlier, Knox’s model focuses solely on existing customers.
ACTIVITY How do you think understanding of a company’s customer base in these terms might influence customer retention activity? Which customers do you think comprise the largest group; which the smallest?
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Would this form of analysis have any effect on the acquisition of new customers?
ACTIVITY FEEDBACK Knox’s ‘Diamond of Loyalty’ suggests that the Loyals are likely to be the most valuable customers. Whilst Habituals have less commitment, they still buy a lot and Variety Seekers, though they are committed actually support many brands. Switchers are likely to be least valuable since they select from many brand alternatives and do not feel committed to any. It is impossible to say which group is the largest. Knox suggests that the categories are relative and determined by cluster analysis. That is, when all customers are plotted according to the strength of their commitment and support, a line can be drawn separating the above four segments. Different companies in different markets may each discover a distinctive distribution on the diamond grid. Interestingly this notion of loyalty has significance for the acquisition of customers too. All brands would hope to gain loyal customers but, by definition, these should be the most difficult to recruit from rivals. By the same token Switchers will be the most susceptible to incentives, but may equally be tempted away. It seems the main battle is likely to be for Habituals and Variety Seekers. Having recruited them, however, the challenge would be to transform them into truly loyal, totally satisfied customers. Promotional activities intended to increase the loyalty of customers must be properly targeted and, likewise, sales promotion activities aiming to acquire new customers must be carefully designed and monitored to ensure that the customers are likely to remain. Research that enabled you to compare the loyalty profile of the customers of competing companies or brands would enable you to assess the vulnerability or strength of the customer bases. This is illustrated simply in Figure 7.7.
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B r and L oyal t y Mat r ix : t he diamond of l oyal t y
Loyals
A B Size of circle denotes volume Switchers
Figure 7.7: Mapping customer loyalty profiles of brand A and brand B. Source Knox, S. (1996)
It is clear that loyalty is a complex idea and that companies often expect loyalty when they do little to earn it. Furthermore some customers, even regular customers, may develop a distinct ‘anticommitment’ to a brand. Jones and Sasser (1995) cited above even went as far as suggesting that some dissatisfied customer could become ‘terrorists’ (the opposite to ambassadors), undermining the brand or company and spreading ill will. Loyalty offers us a basis for segmentation of our customer base that can have enormous benefits. Tapp (1998) reports that the credit card company MBNA found strong correlations between loyalty amongst its users and their profession. Teachers, accountants, nurses and engineers were identified and the company was able to develop successful new products – ‘affinity’ credit cards targeted at clubs and societies with the added incentive of a donation to the group. In the US as many as one in four credit cards is now an affinity card.
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ACTIVITY Case Study: Ocean Spray Adapted from Smith (2003) Ocean Spray is the world’s largest grower of cranberries and producer of cranberry products. World overproduction led to the marketers using sales promotions and advertising to drive demand. In the UK, the juice market had been static and supermarket labels, priced at up to 20% lower, were dominating. However, Ocean Spray had no branded competition in the cranberry juice sector and had 80% awareness. The marketers’ challenge was to encourage consumer trial in the hope that new, frequent, users would be created. The campaign eventually run was principally television advertising supported by price promotions in major supermarkets. Research showed that 58% of new users were attracted by advertising whilst the remainder came from promotions. At the same time, fewer customers who repeated their purchase were generated by promotions (42%) than by advertising (58%). Over 80% of Ocean Spray cranberry juice is consumed by upmarket (ABC1) women who believe it has healthy properties. It is sold in 1litre cartons at around £1. The campaign of around £2 million generated around 2 million trialists. How would you apply the principles of loyalty to this example? What form might a loyalty scheme take?
ACTIVITY FEEDBACK For every 100 customers recruited by Ocean Spray’s campaign, 58 would have been attracted by advertising and 42 by price promotions. Furthermore, of the 58 ‘advertising customers’ some 34 would repeat their purchase whilst just 18 ‘promotion customers’ would. Using Knox’s (1996) model (see above) new customers could not be classified as ‘Loyals’ yet. It seems as though the campaign could be attracting customers who are Habituals and Variety Seekers, who are likely to repeat their purchases. Those that do not repeat the purchase may be Switchers. However, you would need to exercise some caution. Careful research might tell you that Variety Seekers have a ‘repertoire’ of, say, ten juice products. In
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this case they may purchase Ocean Spray only every two or three months and you might wrongly have categorised them as Switchers. Ocean Spray should begin a loyalty scheme which encouraged new purchasers to tell about their purchase patterns. They may note the range of brands they buy, how many different flavours they buy over the year and the basis upon which their purchase decisions were made. The reward for providing this information may be tailored to appeal to Habitual Purchasers (for example, by rewarding frequent purchase over a long time) or Variety Seekers (by emphasising quality and the range of uses to which cranberry juice can be put). The aim would be to establish Ocean Spray as an habitual but essential purchase for those with small repertoires or portfolios and to increase the frequency or amount of purchase amongst those with larger portfolios. At the same time, the loyalty scheme could develop a collectible theme (such as on-pack coupons) to track the heaviest purchasers and to reward them with, for example, a tie-up with a major health and fitness brand or program to build towards high value rewards.
Understanding lifetime value Lifetime value (LTV) of a customer can be expressed as the value of all future contributions expected from that customer. To be even more precise, we could say that LTV should be the ‘net present value’ of all future contributions. This calculation gives us the ability to allow for the cost of spending on these customers now for an anticipated return at some date in the future. After all, at the very least, the additional marketing expenditure we are proposing could be banked and be gaining interest!
The customer ‘lifetime’ The number of years a customer may stay with a company varies. It will depend upon the type of product, the characteristics of the customers themselves, the market and the company’s objectives. Some products, such as insurance policies, often have builtin renewal dates. These are opportunities for customers to go elsewhere and also opportunities for the insurance company to retain them. Given the difficulty of recruiting new customers, customer retention is one of the main strategic options for direct marketing. Customers vary in their ‘loyalty’ to a product, company or brand. To some extent this may be in the power of the company to influence, but U n iversity of Su n derlan d
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there is some evidence that, at least in some markets, customers are intrinsically more or less loyal. In addition some markets tend to experience rapid changes because of technological innovation or because of frequent regulatory changes. Highly competitive markets where there is an element of fashion tend to see customers following the next ‘wave’ or fad and loyalty is low. A company that is struggling to survive will find it difficult to take a long view and often pursues short term sales to maintain cashflow. A stronger company with greater resources can view a direct marketing approach as a (longer term) investment decision. Looking ahead five years gives a reasonable projection for the business, but figures must be based on reality as far as possible. Frequently companies overestimate the loyalty of their customers believing that there is no substitute for their brand or product. It is all too easy to take profit from a customer initially and to fail to invest in the future relationship. Later on we discuss retention activity.
Other advantages of direct marketing The main strength of direct marketing has already been alluded to. It is the emphasis on longer term goals. Whereas traditional marketing is constrained by the financial year in which a plan is actioned, direct marketing must argue for an appropriate timeframe in which to plan. A direct marketing approach has a number of other advantages.
· Targeting. · Motivating action. · Interactivity. · Transactional information. · Relationships. · Databases. · Measurement. · Testing. In order to illustrate the principles and the key strengths of a direct marketing approach it is useful to consider a concept known as the spiral of prosperity. This describes the progression of a direct marketing plan.
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ID prospects
Target media
Analyse
Sell products
Increase customer value
Information
Cross sell, up sell, renewal
Database and analysis
Interact with clients
Figure 7.8: The spiral of prosperity.
The process is reasonably self explanatory but starts (for a new company or new campaign) at the top of the cycle with the identification of potential customers. Identify prospects As with conventional marketing, research is often used to make educated guesses about the consumers most likely to become customers. Target media Media such as newspapers, TV, radio, cinema, outdoor advertising and, of course, direct mail can all be used. The key factor is the efficiency with which they put our product or message in front of the right people. Sell products Assuming some products are sold as a result of our activity, each element (such as a mail pack or a press advertisement) MUST also carry enough information for us to track where the sale came from. Gather information The information from the sale, and from all responses, must be captured. Horror stories circulate about ‘successful’ campaigns that generated thousands of coupons which then languished in a filing cabinet until both the company and its prospective customers forgot.
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Database and analysis The information captured forms a database which can then be interrogated to look for even more useful information. This way we can discover which customers are most valuable, where they came from (via which medium) and, crucially, how much each customer cost to acquire. Interact with key clients Crucially, having acquired customers we need to keep in control of the relationship. The most important clients may have given us thousands of pounds worth of business and these are likely to be vital to our future. Further interaction simply gives us the opportunity to get to know them better and, of course… Cross sell, up sell, renew Having bought one product, customers have already overcome many of the barriers to buying in the first place. This is one of the reasons why so much emphasis is placed in direct marketing on existing customers. Increase customer value By selling more to existing customers, we can increase their value. All things being equal, customers who buy more from us early on are likely to continue buying from us in the future. Analyse We can now analyse our customer base even more. Not only do we now know which media produced the best initial response, we also know which customers then went on to buy two or more products from us in the future. Back to identifying prospects Armed with this indepth knowledge we can select future recruitment activity on the basis of initial response rates x value of orders, or even projected lifetime value. Crucially, we no longer need to spend money on media that does not work. The direct marketing principles are elegantly simple. Based upon eliciting a response from all who we reach with our communications, direct marketing provides us with information to continually improve the efficiency of our marketing spend.
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Direct marketing strategy Having discussed marketing strategy throughout this course, you may have noticed an emphasis on gaining customers as if for the first time. That is, the importance placed on transactions rather than customer relationships that we have noted before. The key point of distinction in direct marketing strategy is that, in fact, there are likely to be two strategies. A company considering the role of direct marketing might follow a model like this suggested by Tapp (1998).
Overall marketing objectives
S t r at egic decision 1 Initial consideration of the role of direct marketing
S t r at egic decision 2 Allocate resources between existing and new customers
Understand the importance of loyalty on profit for your business
S t r at egic decision 3 Keep existing customers
S t r at egic decision 4 Attract new customers
Figure 7.9: Strategic decisions in direct marketing. Adapted from Tapp, 1998.
The two halves of the direct marketing strategy relate closely to the two sides of the ‘spiral of prosperity’ diagram explained above.
ACTIVITY On what basis do you think the strategic decisions listed above are made?
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ACTIVITY FEEDBACK Decision 1 considers whether direct marketing is, in fact, appropriate for the company. It may be, if profit is largely dependent on existing customers or if a small number of customers are responsible for a large proportion of profits. It may also be appropriate when the product or service could be adapted to small segments or even individual customers and where the data collected from customers will tell us about their needs. Strategic decision 2 allocates the budget for marketing activity on the basis of efficiency in achieving the objectives. The intention is to maximise sales within a given budget by converting the least expensive sales first. Most likely these will be existing customers whom we wish to retain. Decision 3 then is about how we should keep customers – a retention strategy – for example, which customers we want to hold onto most of all? It is likely that we will find it useful to segment our existing customers on the basis of profitability and, again, lifetime value. Having developed a retention plan and predicting its results we may then find that we still have not achieved our overall marketing objectives. Often the strategy to gain new customers – an acquisition strategy, decision 4 – will appear to be very similar to a conventional marketing plan. However, experience and data built up on existing customers will help us target new customers more effectively.
The emphasis on assigning value to customers and building towards objectives with the lowestcost sales first is another striking difference between direct marketing and traditional, mass marketing.
Required volume of sales Repeat sales
Former customers
Previous enquiries
New business
Fig 7.10: How direct marketing builds towards an objective.
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So, strategically, a direct marketing plan has to be based on a complete understanding of the value of existing customers and a projection of the value of new customers. In an small B2B situation it is comparatively simple to identify the most important customers, but for many organisations, especially those marketing B2C, the mass of data needed to track and analyse customer relationships demands a technological solution. We will examine this at greater length in Unit 8.
Acquisition We have looked at direct marketing strategy and seen that it divides into two major ‘substrategies’; acquisition and retention. In this section we look at direct marketing’s approach to acquiring new customers. Objectives for the acquisition of customers are likely to be concerned with maximising sales within a set budget or maximising sales at a given cost per sale. With that in mind, we have seen that direct marketing campaigns aim to acquire the lowestcost sales first. These are usually existing customers but if these are insufficient to meet our targets then we will need to approach a hierarchy of targets as below.
ACTIVITY If direct marketing emphasises the importance of existing customers, why do you think acquisition is important? It might help you to think about this example. FirstClass manufactures babies’ nappies (or diapers) and has concentrated on recruiting mothers during their initial stay in hospital. Every year they gain 20,000 new customers but, the sales manager complains, the company still doesn’t grow. Why?
ACTIVITY FEEDBACK Acquisition is important because all companies lose customers. Some customers simply lose touch (it is estimated that annually around 15% of all households change address in the UK) and some, unfortunately die.
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FirstClass, however, have discovered that customers change because of their lifestage. As quickly as babies are born, they are also being potty trained! If the company wants to grow it will have to acquire more customers at the outset…unless it can persuade parents to use their products for longer!
Recently lapsed customers Former customers Enquirers Referrals Profiled prospects Handraisers Suspects
Fig 7.11: The hierarchy of acquisition targets. Source: Tapp, 1998 p150.
Broadly speaking, those at the top of the pyramid are few in number but relatively easy to acquire. Book and music clubs spend considerable time and effort persuading recently lapsed members to rejoin.
ACTIVITY Why do you think someone who has just stopped their membership of, say, a health club and gymnasium might be a better prospect than the reader of a local newspaper?
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ACTIVITY FEEDBACK A recently lapsed member already knows the club, he or she has already shown that the club is convenient and, unless we know to the contrary (i.e. from complaints), they have received some benefit from membership. If you think back to what you know of consumer behaviour (Unit 3), you will remember the influences on consumer decision making. A recently lapsed member is already in the correct segment for the health club. Readers of the local paper, who might be targeted could, of course, be interested in joining but many will be too young, perhaps too old or simply not interested; at best only a proportion of the readers will be suspects. Almost any advertising medium includes an element of waste.
Of course, we would hope not to have lost customers in the first place. It has been said ‘we acquire with product and retain with service’. If the product and service fail to meet expectations no amount of clever direct marketing can make it into a success. We need to know how much our marketing budget can achieve.
ACTIVITY
Customer Segment
Number on list
Historical cost of a sale
Existing customers
2500
€1.50
Customers who have not bought from us for 12
4000
€4.50
Entrants to a competition in the national press
4000
€18.00
Customers who have not bought from us for 36
6500
€7.00
months
months
Table 7.12: Glenmore’s customer lists.
Glenmore sell collectible plates to a small number of very dedicated customers. They have a number of lists of potential acquisition targets that are laid out in the following table along with the known costs of making a sale.
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Glenmore’s objective is to maximise sales with a budget of €60,000. Which customers should they contact? What will their targeted sales be?
ACTIVITY FEEDBACK Glenmore should target the cheapest sales first. Although there are only 2,500 existing customers, they cost 1/3rd of the cost of recruiting customers who bought a year ago. The other lists, though larger, do not present as good value per customer or per sale. The budget is used up selling to the smaller, cheaper lists and Glenmore have no need to use less qualified lists such as the competition entrants.
Customer Segment
Number on list
Historical cost of a sale
Cumulative sales
costs
Existing customers
2500
€1.50
2500
€3,750
Customers who have not
4000
€4.50
6500
€21,750
6500
€7.00
11964
€60,000
bought from us for 12 months Customers who have not bought from us for 36 months
(only 5,464 can be recruited from this list)
Entrants to a competition in
4000
€18.00
-
-
the national press
Figure 7.13: Glenmore’s mailing strategy.
ACTIVITY Now consider what Glenmore should do if they have €150,000 in their budget. Calculate the figures as above. How would you allocate this budget?
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ACTIVITY FEEDBACK You will see that with this significantly larger budget, Glenmore is able to use all the lists they have.
Customer Segment
Number on list
Historical cost of a sale
Cumulative sales
costs
Existing customers
2500
€1.50
2500
€3,750
Customers who have not
4000
€4.50
6500
€21,750
6500
€7.00
13000
€67,250
4000
€18.00
17000
€139,250
bought from us for 12 months Customers who have not bought from us for 36 months Entrants to a competition in the national press
Figure 7.14: Glenmore’s mailing strategy with increased budget.
Leaving €10,750 of the budget unspent. You may have considered spending more on one or other of the lists but this would not have given you any greater return. Of course, these figures are simplified but the crucial aid to your decision making was knowing the cost of acquiring each kind of customer. Looking at the hierarchy of prospects pyramid above, you might consider the competition entrants to be ‘handraisers’; that is, they have simply expressed an interest in the Glenmore product, but they are not committed. You might advise Glenmore to look for other, better qualified customer lists – do they, for example, keep track of all the people they send brochures or catalogues and who have never bought? These may prove to be more efficient lists.
Allowable marketing cost In order to be able to establish realistic acquisition objectives we need to have some idea of what our budget can achieve. Often in marketing the budget is allocated as part of overall budgeting at a corporate level. Sometimes this is simply on the basis of historical figures (i.e. “we spent €100,000 last year so we must spend less/the same/more this year”) but
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direct marketing demands that we account for marketing spend more precisely. Apart from giving us control and being able to establish targets, familiarity with concepts such as ‘return on investment’ (ROI) enable marketers to argue their case with the finance department more effectively. Allowable marketing cost (AMC) is a figure which allocates marketing costs to each customer. So in the above Glenmore example where the budget is €60,000 and a total of 11,964 customers are acquired, the average AMC is just over €5. We should know also what the value of such a sale is and how much profit is expected from each sale and so we can also calculate AMC in a slightly different way.
ACTIVITY Belloud is a security company that installs a simple ‘one-box’ burglar alarm in homes and small offices. The price is €500, whilst the product costs €250 and the cost of the engineer visiting to install is estimated at €40. The ‘required profit’ figure is a 60% mark up on the cost of the product
Selling Price
€500.00
minus Costs Costs of Goods Installation costs
€250.00 € 40.00 €290.00
= Contribution or gross profit minus
Required Profit
= Allowable Marketing Cost per order
€210.00 €150
€60
Figure 7.15: Allowable marketing cost for Belloud.
In the right hand column, you can fill in your own figures adjusting the required margin or the selling price. You might also judge that the costs for the engineer are rather low. What happens to the AMC when you change other figures?
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ACTIVITY FEEDBACK Obviously, changes in the other figures have an effect on the AMC at the end of the calculation. For example, doubling the installation costs to €80 means that AMC is only €20. If this is not a realistic figure for the sales operation (one might imagine that customers will require some reassurance that the burglar alarm is appropriate for their premises) then an additional €40 added to the price restores the AMC to €60. We might also be able to negotiate the level of profit required, but having an analysis such as the one above can only strengthen out argument.
In the future, if our €60 budget is borne out by experience, we may also use this figure to establish an overall marketing budget. If the marketing objective is to gain 5000 new customers then – Marketing budget
= AMC x required number of customers = €60 x 5000 = €300,000
A word about response rates Given that direct marketing is about generating a response there is an awful lot of mystery surrounding levels of response (especially to direct mail) and we have already referred to the wide range of responses received by very different kinds of activity. Let us state clearly – There is no magic number. Response rates used to estimate the effectiveness of future campaigns are without exception based on past experience. The fact is then, that if you have no track record of direct marketing, you cannot know what the response is likely to be. However, given what we now know about AMC, we can set a target response rate.
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ACTIVITY Look back at the Belloud figures. Our objective is to gain 5000 customers with a budget of €300,000. Two possible campaigns have been suggested. In both cases respondents will be sent a brochure and then called by phone to place an order. It is estimated that only 1 in 10 of these will result in an order. Campaign A is to run a series of direct response adverts on a satellite TV channel along with a series of full page adverts in a TV listings magazine. The adverts will cost around €75,000 to make and our €225,000 spend will enable us to reach approximately 1.5 million adults. Campaign B is a mailing campaign to a list of consumers who have previously bought home-improvement products. Total production and mailing costs add up to €1.20 per item allowing us to mail 250,000 names. In each case what would the target response rate be and how would this help you evaluate each option?
ACTIVITY FEEDBACK First of all this case accurately reflects reality in that a high value (and, therefore, high risk purchase) is rarely bought by the consumer in one stage. The campaigns are intended to generate ‘enquirers’. Hence, for every customer to be acquired we need 10 such enquirers. The target of each campaign is then to attract 50,000 responses! Campaign A would require 3.3% of the audience to respond. Campaign B would require 20% of the list to respond. In fact, the only way to judge the suitability of each campaign would be based on past experience which may be your own or that of a specialist direct marketing agency. It is likely that both figures are rather optimistic and this could be an argument to trim the costs of the campaign to enable a larger audience to be reached. For example, if in campaign B the costs of mailing came down to €0.90 per item then we could mail over 333,000 names. Our target response rate would then fall to 15%. Crucially however, the simple calculations have enabled us to set a target rather than simply executing a plan and ‘hoping for the best’.
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Calculating lifetime value (LTV) So far we have mentioned LTV and stressed its importance. In this section we will examine it in more detail and learn how it is calculated and think about the implications for strategy. We have also defined LTV as the total of all future revenues from a customer. In practice, again, this is easier if we have some historical data upon which to base our figures. Even if a company does not have the figures now, it is a strong argument for establishing a database now in order to make decision making easier in the future. In some product categories it is fairly easy to construct the data we need. Financial institutions, for example, must keep detailed records of clients, the products they have and, for example, investments made. The difficulty is often correctly allocating all the costs of sales – not just advertising expenditure, but also the service costs; for example, a call centre for handling policyholders’ queries and the costs of issuing documentation. For companies that are wholly ‘direct’, such as mail order catalogue companies where every transaction is recorded against each customer, the process is more straightforward.
Figure 7.16: An example of lifetime value calculations.
It is easier to understand this if we look at a worked example. The table below could illustrate the figures from two campaign run to recruit
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members to a book club, but you can adapt it to reflect almost any kind of business. It looks at customer lifetime value over 6 years. In this example each line of the table is explained below. Line 1 shows the year under consideration. Note this table shows customers recruited in year ‘0’. This is customary in such calculations because (as we shall see later) applying a discount factor requires us to use these numbers in a certain way. For now it is best to think of these as marking the ‘anniversary’ of the customers’ recruitment. Line 2 shows how many customers were recruited in campaign A and then how many remained with us in the following five years. This decline in numbers is called the ‘rate of attrition’. Line 3 gives net profit from each customer. Hence, their initial order in the first year realises £30 profit whilst in the second year the remaining customers generate only £22.50 each. In subsequent years this declines as customers buy fewer books. Line 4 simply shows the cumulative profit, per customer, from the beginning of the campaign. Line 5 shows the total profit from all customers (acquired from this campaign) each year. Clearly as the number of customers and the amount they spend declines each year, this amount reduces significantly from £30,000 to £2,600. Line 6 is simply the cumulative profit figure for all these customers. These lines are then repeated for campaign B. Note that, in fact, this table is somewhat simplified. It does not break down costs in order to show how the profit figure is arrived at. The allowable marketing cost calculation discussed earlier could be introduced to allow us to track changing costs of order and marketing costs. In this case we are assuming that all the marketing (acquisition) costs come into year 0.
ACTIVITY Familiarise yourself with the figures above and check to see how the figures are calculated. Cover up years 1 – 6 and imagine you are the marketing manager making a decision about which campaign to try and emulate. Which is the most successful?
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Now uncover year 1. Remember this table is showing the ongoing value of customers recruited in year 0 and NOT new customers each year. However, now that you have two years’ information does your assessment of the success of the campaigns change? Now uncover the remaining columns. How would you assess the campaign now?
ACTIVITY FEEDBACK You have just made judgements based on lifetime value. You should have, rightly, concluded that Campaign B was the most effective initially. In fact, it was until we look at years 2 and 3. The problem is that the customers recruited by campaign B simply did not stay and so their LTV over the longer term was lower. This kind of behaviour can be seen in customers who are offered a significant incentive to join or to make an initial purchase. Arguably, Hoover, some years ago offering free flights to the US for UK purchasers of a vacuum cleaner fell into this trap. They certainly did not create loyal Hoover customers – especially when they could not keep up with demand for air tickets!
The next table shows the same calculations but with the added complexity of a ‘discount factor’ This is simply a way of allowing for the fact that £100 today has more value than £100 earned in the future. As we stated before, money earned today could be invested and earn interest. Very often, therefore, calculations of net present value (NPV) use the prevailing bank interest rates. The table below has some additional information. Line 7 shows the selected interest rate for the NPV calculation. Line 8 shows this interest rate translated into a discount factor. Clearly, year upon year, the discount factor is cumulative. Incidentally, that is why the first year is ‘0’. If we apply the discount rate (7%) multiplied by the year (0) we get 0, i.e. no discount. In year 1 we discount by 7% x 1 = 7%. For the sake of completeness, the actual figure shown in line 8 and used to is derived from –
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1 year
(1 + Interest rate as a decimal)
So after the first year (i.e. in year 1) this calculation is – 1 1
(1 + 0. 7 )
=
1 = 09345794 . 107 .
which we round down to two decimal places for the sake of clarity!
Figure 7.17: Lifetime value and net present value.
ACTIVITY Now repeat the same procedure as with the previous table. Cover up years 1-6 and evaluate the campaign. As you work through the columns of figures check the calculations to ensure you understand them. For each year of data, which campaign appears to be the most successful? Now uncover year 1 and repeat the procedure.
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Uncover the remaining columns one by one and review your decision. What has changed?
ACTIVITY FEEDBACK As you worked through year 0 again you should have concluded that campaign B is the more successful. In contrast to the previous example, however, where we were not applying the concept of net present value, campaign B continues to be the most profitable over the longer term until we reach year 4. This is because the discounting of future revenues from campaign A customers ensures that they never generate as much profit as campaign B customers do in years 0 and 1. However, across years 5 and 6 i.e. The extended longer term, campaign A appears to perform better as the dwindling number of customers continue to spend.
Now that you are familiar with the LTV calculation, you should try and set up a spreadsheet in an application like Lotus or Excel to be able to replicate the figures above and to experiment with your own. Such calculations have real business value for a company. If you do not have access to the software to handle spreadsheets then it is possible to do the same calculations manually. An accounting ledger with sufficient columns will help and it is advisable to leave spaces between the columns for some workings. Using pencil enables you to change figures frequently.
ACTIVITY Use the table above with some of your own figures to see the effects of the following scenarios. Start with the original figures and make only the first change suggested. Note the differences and think how this might change your evaluation of the two campaigns. Then add the second change and reflect on its effect. Finally, add the final amendment. A.
What happens when the bank interest rate is very low, say 1.5%?
B.
What happens when we lower our costs of acquisition in campaign A such that the net profit for those customers rises by 10% to £33, £24.75, £21.23 etc ?
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C.
Marketing Strategy
What happens if our incentive in campaign B is less effective and those customers number only 800 in year 0 and 140 in year 1?
N.B. work through your calculations fully before comparing your answers with the feedback.
ACTIVITY FEEDBACK The tables below show the effects fully worked through with some comment.
Figure 7.18: Lifetime value in a period of low interest rates.
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Figure 7.19: Lifetime value with improved profitability in campaign A.
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Figure 7.20: Lifetime value with lower response rates in campaign B.
You might also like to try reverting back to a more realistic discount rate at this point to see the impact. Overall, you should have demonstrated to yourself that the initial value and number of customers is important, but that this is moderated by a consideration of the lifetime value of such customers.
To summarise, acquisition is just one half of a balanced strategy. It recognises the need for customers at the outset or to replace those lost. We have focused on the need to calculate the lifetime value of customers to ensure we budget adequately. As with traditional marketing, however, we need to ensure that every element of the marketing mix is adapted sufficiently to meet the needs of the targeted consumers. Being able to forecast the future value of customers supports strategic decision making.
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Retention The other side of the direct marketing strategy is retention. You will recall that, for an existing company, this is in fact the first ‘strategic decision’ to be made. To what degree can its objectives be achieved by existing customers? Here again the database underpins our decision making by informing us of the value of different customers. We would probably want to segment our customer base by profitability. Again LTV can inform us. We would want to look at both current and future profits from customers. If, however, our projected revenues from existing customers do not meet our objectives, what can be done? The answer is to keep customers longer and encourage them to buy more – the right hand side of the ‘spiral of prosperity’ diagram. Before we look at what activities might encourage customer loyalty, let us look at how we might budget for retention activity and its effect on LTV.
Figure 7.21: The effect of retention activity on LTV.
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customers recruited from campaign B to see if we can improve their longevity. The table shows retention as being low. A 20% retention rate is also an ‘attrition rate’ of 80%. It is clear that keeping customers active for longer would benefit our overall profit. Our expenditure is currently £2 per customer, perhaps sending them a ‘members only’ catalogue or voucher. However, we can see that from year 6 we begin to lose money on customers.
ACTIVITY What should the reaction of the marketing team be to the news that these customers cease to be profitable in year 6? How would you suggest they address this?
ACTIVITY FEEDBACK Once customers become unprofitable a decision may be made to ‘demarket’ them. This may mean ceasing to contact them. In a B2B market, minimum order values may be imposed to deter customers where the cost of transaction outweighs the revenue. However, avoiding this situation is preferable. The aim should be to keep the customers more profitable for longer. Increasing the order value would help. Some mail order companies do this by offering free postage and packing on orders over a certain value. Of course, the cost of the incentive must be accounted for in the allowable marketing cost calculation.
We can go on to test different incentives on a subsegment of customers to see if this improves their rate of purchase or increases the average value of order.
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ACTIVITY Using the data above, suppose we increase our expenditure to £5 per customer and this has the effect of increasing the retention rate to 25%. What is the effect on profit? Repeat this exercise but, in addition, increase the net profit per customer by 20%.
ACTIVITY FEEDBACK The initial results are disappointing. This is because our retention rates are so low to begin with.
Figure 7.22: The effect of an increased retention budget.
The table shows that these customers are simply too costly to maintain. It could be that they are intrinsically disloyal and they search for offers from our competitors.
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Figure 7.23: The effects of increased profitability on customer lifetime value.
Even here, the effect of the retention activity is still minimal and these customers become unprofitable in year 5.
Finally, let us look at a similar scenario to the one above. In this case customers recruited from campaign C are higher value and more loyal. Our retention rate is 70% per annum.
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Figure 7.24: Retention activity with more valuable, more loyal customers.
The value of orders (and profitability) is shown to be of great significance but still there comes a point at which customers can become unprofitable – especially as their value falls.
ACTIVITY What actions would you recommend in year 4 to avoid the loss in annual profit? One very successful mail order book club in the UK mails its lapsed customers (i.e. those who have cancelled their membership and so are generating no income whatsoever) up to 15 times before treating them as ‘lost’. How can this be justified?
ACTIVITY FEEDBACK You may have suggested, as in the previous exercise, trying to rid the company of unprofitable customers. However, it may be worth testing lower-cost retention activities. The book club in question has tested its attempts to revive customers on previous lapsed customers. Again they are projecting LTV, but this time for a
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particular segment of their customer base – rejoining members. They know that the value of orders from these customers covers the investment they make in retention activity up to the 15th mailing. Beyond that they will make little or no profit. In addition, whilst the early mailings and the most successful (and, therefore, can be more expensive), the final mailings may be as simple as a greetings card in a plain envelope bearing the caption – “What can we do to tempt you back? Five books for 50p each.” The mailing itself is very low cost and the selection of books in the offer is likely to be costed very carefully. The book club may well be making some profit even on this order. The important point is that understanding profit on a per customer basis lets us calculate both a target response rate and the allowable marketing cost.
We recommend you familiarise yourselves with the examples we have worked through. Of course you can adjust the figures to develop you own scenarios and to reflect different businesses and markets and different segments of your own customer base. The techniques of making marketing expenditure fully accountable are applicable to all direct and relationship marketing approaches and are very powerful indeed.
REVIEW ACTIVITY
252
1.
What is the difference between direct marketing and direct mail?
2.
How would you define ‘junk mail’?
3.
How might direct marketing be implemented to different degrees in different organisations?
4.
Define customer lifetime value.
5.
Describe the key points of the ‘spiral of prosperity’.
6.
What are the two halves of the typical direct marketing strategy?
7.
What are the key features of relationship marketing?
8.
What do you consider to be the main differences between relationship marketing (RM) and transactional marketing (TM) ? U n iv ersity of Su n derla n d
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Unit 7 – Focus on direct marketing and customer relationship management
9.
In an acquisition strategy, which kinds of customers should we target first?
10.
What is RVA or FRAC analysis?
11.
We are selling a product via direct marketing for €125 that costs €75 to produce. We wish to take a 30% profit margin on the price. What is our allowable marketing cost per order?
12.
When using the concept of net present value to help calculate lifetime values, does a period of higher interest rates make the long term value of retained customers appear higher or lower?
ACTIVITY FEEDBACK 1.
What is the difference between direct marketing and direct mail? You may have referred to a number of definitions including – “Any activity which creates and exploits a direct relationship between you and your customer as an individual” (Bird 1989) The key to direct marketing is the strategic recording and analysis of customer behaviour so that you may treat them differently as a result.
2.
How would you define ‘junk mail’? So called junk mail does not have a precise definition. A customer may call any mail ‘junk’ when it is unwanted. Hence, direct communication runs the risk of being dismissed when it is poorly planned.
3.
How might direct marketing be implemented to different degrees in different organisations? Tapp (1998) identifies three level –
- Direct marketing drives the business. - Direct marketing drives part or all of the marketing strategy. - Direct marketing is used as part of the communications mix. 4.
Define customer lifetime value. The lifetime value (LTV) of a customer can be expressed as the value of all future contributions expected from that customer. U n iversity of Su n derlan d
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Describe the key points of the ‘spiral of prosperity’. The spiral of prosperity is the concept of continuously improving our knowledge of customers. Having tracked them from recruitment we can identify which are the most valuable and attempt to recruit more of the same. The stages are –
- Identify prospects. - Target media. - Sell products. - Gather information. - Database and analysis. - Interact with key clients. - Cross sell, up sell, renew. - Increase customer value. - Analyse. - Back to identifying prospects. 6.
What are the two halves of the typical direct marketing strategy? Acquisition and retention.
7.
What are the key features of relationship marketing? Two lists were given in this unit, they are condensed below –
- RM focuses on retaining customers and maximising lifetime value.
- Customer perceptions of quality and service seen as central to retention.
- Focus shifts from transactions to relationships between a wide network of relationships in delivering value to customers.
- Retention and acquisition are funded according to the known value of customers. Recognising the importance of multiple ‘markets’ including –
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- Internal Markets, Supplier and Alliance Markets, Recruitment Markets, Referral Markets and Influencer Markets. 8.
What do you consider to be the main differences between relationship marketing (RM) and transactional marketing (TM)? This is summarised by Hollensen (Hollensen) in table 1.3, pp12-13
9.
In an acquisition strategy, which kinds of customers should we target first? Acquisition targets are built from the cheapest to acquire up to the most expensive. However, you might also have considered projected lifetime value. Hence, the most cost-effective should be targeted first.
10.
What is RVA or FRAC analysis? Recency, Value, Activity or Frequency, Recency, Amount, Category. They are ways of ‘scoring’ customers on a database.
11.
We are selling a product via direct marketing for €125 that costs €75 to produce. We wish to take a 30% profit margin on the price. What is our allowable marketing cost per order? AMC
= (€125 – 30%) – €75 = (€125 – €37.50) – €75 = €87.50 – €75 = €12.50 per order
12.
When using the concept of net present value to help calculate lifetime values, does a period of higher interest rates make the long term value of retained customers appear higher or lower? In periods of high interest rates, future earnings will appear lower than they would if interest rates were low. This is because the interest rate is used in NPV calculations (of lifetime value) to allow for the cost of deferring income until later.
References Bird, D. (1989). Commonsense Direct Marketing. London, Kogan Page. Logan, R. (1998). Getting to know your database B. Halsey, Ed. The Direct Marketing Guide. Teddington, Institute of Direct Marketing.
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McCorkell, G. (1997). Direct and Database Marketing. London, Kogan Page/Institute of Direct Marketing. McCorkell, G. (1998). How marketing went direct B. Halsey, Ed. The Direct Marketing Guide. Teddington, Institute of Direct Marketing. Stone, M. and R. Shaw (1988). Database Marketing. London, Gower. Tapp, A. (1998). Principles of Direct & Database Marketing. London, Financial Times / Pitman Publishing.
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Unit 8
Marketing, Technology and E-commerce LEARNING OUTCOMES After studying this unit you should be able to:
· Demonstrate an appreciation of the technological changes that are having an impact on markets and marketing.
· Demonstrate an understanding of the implications of e-commerce on marketing strategy.
· Demonstrate an understaning of how to develop strategies for ‘learning relationships’ with customers.
Introduction Marketing has undergone an almost revolutionary change in the last 30 years. Much of this has been driven by changes in technology such as the massive increase in processing power available in personal computers. The developments in communication networks – such as the World Wide Web, satellite television and mobile telephony – have also brought significant changes both to markets and to marketing. Conventional marketing texts tend to focus on how (mass) marketing has been done by large multinational corporations since the 1950s. Whilst much of the theory has proved to be useful and many of the models you have examined in Units 2, 3 and 4 enable you to think creatively about strategy, you should have a recurring tension between this conventional approach, and the direct and relationship approaches referred to in your key text and in Units 1 and 7. We believe this accurately reflects the tension in many companies and organisations today as they seek to reinvent themselves for a new age. In this module, we will look at some of the major changes that have taken place globally and examine the impact they have had – and may have in the future – on marketing strategy. In particular we will examine important marketing concepts, such as customer loyalty which have developed partly in response to emerging technologies, increased U n iversity of Su n derlan d
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competition and related customer needs, and at new strategies emerging in the most current ecommerce markets. In a rapidly changing world how do companies learn, as Tom Peters puts it, to dance on a moving carpet?
Innovation and change The world is changing. Writing in 1997 about his concept of ‘connexity’, Geoff Mulgan said – “The economy is based as never before on the formal processing of information, the action of knowledge on knowledge itself, in everything from steel foundries to genetic engineering. But beyond these purposive linkages it is the capacity to share, to spread, to disseminate and connect that makes sense of them, and gives them value… …Looking forward, the great milestones may include the full integration of television into the Internet, so that it ceases to be a oneway medium, and, further ahead, the implant of a serial port for plugging a computer or network into the human brain itself.” (pp2021) The latter point may seem farfetched, but no doubt when Vint Cerf and Robert Kahn developed the TCP/IP protocol that made the Internet possible over 30 years ago, they would have been amazed at the kind of global network we see today. Even in the early 1990s few people had even heard of the Internet, yet in the space of 15 years as many as 800 million people are using it.
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WORLD INTERNET USAGE AND POPULATION STATISTICS World Regions
Population
Population
Internet
Usage
Penetration
World
( 2004 Est.)
% of World
Usage,
Growth
(%
Users %
Latest Data
2000-2004
Population )
Africa
893,197,200
14.0 %
12,937,100
186.6 %
1.4 %
1.6 %
Asia
3,607,499,800
56.5 %
257,898,31
125.6 %
7.1 %
31.7 %
124.0 %
31.6 %
28.4 %
4 Europe
730,894,078
11.4 %
230,886,42 4
Middle East
258,993,600
4.1 %
17,325,900
227.8 %
6.7 %
2.1 %
North
325,246,100
5.1 %
222,165,65
105.5 %
68.3 %
27.3 %
America Latin
9 541,775,800
8.5 %
55,930,974
209.5 %
10.3 %
6.9 %
32,540,909
0.5 %
15,787,221
107.2 %
48.5 %
1.9 %
6,390,147,487
100.0 %
812,931,59
125.2 %
12.7 %
100.0 %
America/ Caribbean Oceania / Australia WORLD TOTAL
2 NOTES: (1) Internet Usage and Population Statistics were updated on December 3, 2004. (2) Demographic (population) numbers are based on data contained in the web site gazetteer.de. (3) Internet usage information comes from data published by Nielsen//NetRatings, by International Telecommunications Union, by NICs and other reliable sources. (4) Data from this site may be cited, giving the due credit and establishing an active link back to InternetWorldStats.com.
Figure 8.1: Internet usage statistics. Source: www.internetworldstats.com.
ACTIVITY If you were launching a strategic marketing course on the Internet, and given that it is written in English, where would you anticipate your customers coming from?
ACTIVITY FEEDBACK One aspect of the web as a communication technology is that it exposes companies to larger audiences than ever before. Many small and medium-sized
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enterprises (SMEs) have been surprised that the moment they set up websites they receive enquiries from the other side of the world. Of course, you might also take into account the penetration of English as a second language. Students in countries such as Hong Kong or Greece might accept that their education should be in English. You might expect more resistance in France or in Spanish-speaking South America. You might also consider the benefits of translating your material into other languages such as Chinese and Spanish. For universities in the US and the UK, much of the interest comes from Asia. The country producing the largest number of engineering graduates, for example, is China and China is also the provider of the most overseas students in the US university system. In some countries censorship restricts access to the World Wide Web.
However, the growth of the Internet should not blind us to the fact that half the world’s population have never even made or received a telephone call, let alone used the World Wide Web. The range of technologies which affect markets (that is, both customers and producers of goods and services) is almost infinite. Communication technology like the Internet, satellite and digital television and third generation (3G) mobile phones are the most visible to us as consumers. But change in communication is just one manifestation of the deeper impact of technological change. In 1965, Gordon Moore, the founder of Intel, suggested that the number of components fitted onto a chip had doubled each year since 1959 and he predicted that this would continue until at least 1975. Now referred to as “Moore’s Law”, it has been a particularly striking feature of computing development until very recently. The development of the microchip has seen processing power increase such that almost any product from cars to kettles can have a chip implanted in it. Ten years ago Pine, Peppers and Rogers noted the need for technology to be at the service of the customer relationship (Pine II et al. 1995). For example, Bandag, a company supplying truck tyres, planned to embed a chip into a tyre to be able to monitor wear. In this way the company hoped to be able to add value not so much to the tyre but to the relationship with its customers, avoiding emergency tyre changes, keeping trucks on the road longer and, by the way, marginally increasing the number of tyres consumed since they would be changed before they wore out.
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Pine et al also predicted the use of technology to support online grocer retailing such as Opodo and Tesco. They held the opinion that it was insufficient simply to ‘allow’ customers to order online, the retailer had also to learn from the process more about the customers’ needs and wants.
ACTIVITY As a consumer, think about your regular trip to a store to buy basic household items or groceries. How has technology changed this experience in your lifetime? Visit a local store and note down how technology has had a positive (or negative) impact on the customer experience. How might this change in the future?
ACTIVITY FEEDBACK Depending on your local store, you may have noted obvious changes such as increasingly sophisticated tills. Increasingly, tills are part of EPOS (electronic point of sale) systems and facilitate EFTPOS (electronic funds transfer at the point of sale). For many companies such as major supermarkets, tills automatically link to stock control systems and, hence, into logistics. For Wal-mart in the US, for example, their “Retail Link” system is a source of competitive advantage, enabling the store to drive down costs. So important was this to Wal-mart that, in 1998, they threatened legal action over Amazon.com’s employment of two ex-Wal-mart executives, fearing that their system could be copied. By 2001 rumours abounded about the two companies planning to merge their web operations. Other, less obvious trends you may have noticed include the range of products and brands available to you and, as importantly, now familiar to you thanks to TV and other forms of advertising. Or you may have noticed the number of products that invite your comments, or entry into competitions, by telephone, e-mail or on the Internet. In the future, stores will communicate with shoppers in more sophisticated ways using plasma and LCD screens linked to networks. Tesco in the UK is already doing so with considerable success. Potentially, such networks could be global.
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How innovation happens Innovation and the development of new products and brands is central to much marketing success. Often it is supposed that innovation centres around products but it should be clear to you now that innovation can affect any part of the valuechain. Whilst products are often the most visible aspects of value delivered to customers they are often not the most important (see also discussion of branding in Unit 4). How innovation happens is a matter of some debate. Linear models suggest that either technology or the market pushes change. A more likely model is the interactive model explained by Trott (1998).
Latest sciences and technology Advances in society
Idea
MARKET PULL
R&D
Manufacturing
Marketing
TECHNOLOGY PUSH
Commercial product
Needs in society and the marketplace
Figure 8.2: Interactive model of innovation. Adapted from Rothwell and Zegveld, 1985, by Trott (1998) p19
The central row running from left to right represents the conventional new product development process depicted in many textbooks. But all such development takes place in a dynamic environment and, ironically, new technology (most notably the web) enables the faster communication of other changes in technology as well as developments in society across the globe.
ACTIVITY Consider a product such as Apple’s iPod or its spiritual ancestor, Sony’s Walkman. Both designed to make music mobile. But do you think these are inventions driven by consumer demands and changes in lifestyle or is it a case of technology leading the way?
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ACTIVITY FEEDBACK You have probably realised that the answer is somewhere between the two. There is no doubt that digitisation and data compression technology has enabled the iPod and a host of competitors to exist. But it’s also true that without the massive popularity of home computers and the rise in internet access, demand would be much less. There is also a sense in which society has changed. It is now quite normal to see young people with headphones as they walk the streets or ride trains; perhaps this was made possible by the Walkman. More difficult to appreciate, for many, is the rise in ‘audio-piracy’ with the sharing of MP3 files without payment to the copyright holder. Again this has only been made possible by the affordability of data storage and by rapid online access. Of course, without portable players these ‘pirates’ could still download to their PCs and burn CDs (illegally). A small box of electronics that weighs a few grams and holds thousands of tracks makes the whole business a lot easier.
The Chartered Institute of Marketing (CIM, 2004) identified three ‘zones’ of innovation. These are essentially strategies that companies and markets can follow. Zone 1: Basic Innovation, where minor product or service enhancements occur. Zone 2: Relative Innovation, that builds on existing offerings or takes them to new markets. Zone 3: Concept Innovation, which creates breakthrough products or services. Examples of the latter include EasyHotel which offers cheaper hotel rooms if the customer cleans their room or La Caixa offering kioskbased bank services. You may recall in Unit 5 Baker and Hart’s extended growth vector matrix. It suggested that the greatest change (i.e. to both product and market) involved the greatest risk. However, some recent research also suggests that Zone 3 innovators have the opportunity to generate disproportionate profits by creating new ‘market spaces’. There is little doubt that Apple has done just that with the iPod. You can read more about the CIM’s assessment of the risks and benefits of innovation at www.shapetheagenda.com. Change and innovation is not to be seen as simply driven by technology since firms must develop technology into something useful and desired by consumers. If such developments take too long, competitors may meet those consumer needs. On the other hand, if development is too U n iversity of Su n derlan d
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hasty, considerable investment may be made into a product that consumers see no real need for. Marketers need to be aware of change that is being forced upon them and their customers as well as keep up to date with advances in technology that might enable them to deliver superior value.
ACTIVITY Read the following article from the “Wireless Economy” special report from Times Online December 2004
Case: We’ve got your number The latest example of Big Brother, and more a useful tool for vehicle recognition, the e-numberplate has arrived, as Andrew Heavens reports It is not every day that you get to push the boundaries of car number plate design. Michael Cordell and his management team managed it in a few minutes when they sat down for a brainstorming session in the offices of Hills Numberplates, their Birmingham-based company. “We were sitting there with this plate, looking at it, saying ‘What else can we do with it?’” said the managing director of the UK’s leading plate supplier. “Then someone said ‘Look, there’s a great big lump of plastic in the back – we must be able to shove something inside it’.” “We said, ‘Well, you could shove some electronics in it.’” It may not have been the most exhaustive of research and development procedures, but it did the trick. A few months later, Hills was drawing up plans for the world’s first e-plate, a cutting edge, wireless-enabled powerhouse of a number plate that started rolling off the production line this summer. The electronics that they shoved into the back of their plate was a Radio Frequency Identification (RFID) transmitter, a stamp-sized piece of circuitry designed to send out a wireless signal to anyone listening in with a wireless receiver. With the addition of that simple piece of wireless technology, Mr Cordell and his team gave their company a brand new line – a rare thing in the mature industry of number plate manufacture. They also came up with a product that, if it catches on, could have just as profound an impact on the businesses of their customers.
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The key selling point of Hills’ new e-plate is its ability to send out a unique, encrypted radio signal from both ends of a car, lorry or any other kind of marked vehicle. That signal can be picked up be a receiver up to 1,000 metres away, even if the vehicle is driving through thick fog, parked up behind a warehouse or stuck six lanes deep in traffic. That ability, Hills hopes, will make their e-plate a must-have accessory for the burgeoning fleet management and car hire sectors in the UK, Europe and beyond. Up to now, one of the key challenges of the car hire sector has been to keep track of the hundreds of cars moving in and out of their garages. Companies like Avis and Hertz have had to spend millions employing armies of garage hands to check cars in and out of their yards, then bill their customers for every hour on the road. With an e-plate, a lot of that could be done automatically. “You can let your customers return a vehicle any time of the day or night,” said Mr Cordell. “The receiver would clock the car in, let you in to the garage then shut the gates to prevent you driving out.” In a worse case scenario, fleet management companies could also drive around with a mobile wireless receiver to track down lost or stolen vehicles. Mr Cordell’s ambitions do not stop at the commercial vehicle sector. If fleet management companies could use the plates to track down missing vehicles, he reasons, then so could the police. Hills’ development of the new e-plate is an example of the possibilities of technology leading product development. At first glance, Hills seem to have stumbled upon a market opportunity. Before reading on, answer the following questions; 1.
From a marketing perspective, what might be the opportunities and threats from this application for Hills and to other businesses?
2.
What challenges do you envisage for Hills attempting to take advantage of this new opportunity?
Having written your answers to the above questions, read the continuation of the article below.
Case: We’ve got your number (continued) Once every car in the country was fitted with an e-plate, police would be able to set up a receiver at the side of the road and scan for suspect and stolen cars. That vision of the future may not be as far-fetched as it first appears.
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The Department for Transport is conducting a consultation on a wide range of electronic vehicle identification (EVI) technologies that could one day be fitted into every car in the country. Most of the technologies involve some sort of tagging, with various kinds of identification chips lodged in the dashboard, chassis or indeed, in Hill’s case, the number plate. Each chip could, conceivably, automatically report a car for anything from speeding and dangerous driving to road tax evasion. Plans like these have predictably raised the hackles of civil rights and drivers’ interest groups. But fears of a Big Brother future miss the point, according to Mr Cordell. According to him, the wireless technology in his new e-plates could have a much more immediate and subtly subversive impact on the way we live and drive. Hills currently supplies plates to car retailers and manufacturers for about £4.50 a go trade price. Those retailers and manufacturers then sell the plates on to the consumer for as much as £20-£25. But new plates will call for a new distribution chain. To ensure the integrity of the radio equipment in each plate, Mr Cordell thinks he will have to cut out the middle man and supply direct to consumers, for about the same £20 price tag. The retailers and manufacturers could miss out on the deal altogether. “That,” he said, “could wind up a few people.”
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1.
It is clear that the value chain for each different application will be distinct. As it stands Hills appears not to have considered a value-based analysis. (See Unit 2). Hills is straying into the area of new product development (NPD) into which some major manufacturers are already investing. For example, suppliers of electronic components to motor manufacturers may already be meeting the need for tracking by embedding similar technology in other parts of the car. As a consequence, Hills is likely to be seen as a competitor.
2.
The article suggests that Hills have not yet considered who the customers are for this new technology. Possible end-users include car hire companies who might use it to track their vehicles, but the unintended effects of the technology – which may be benefits to the police, government or even to criminals – may create resistance from some consumers.
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Moreover, their existing partners in the value chain (such as car dealers and parts suppliers in the after-care market) may feel aggrieved that Hills is to sell direct to the end user. At the launch of a new product this could be very damaging to Hill’s core business. However, it should be borne in mind that this case is UK based. The constraints and opportunities in another country may be different.
Direct marketing and technology Many of the technological and social changes already mentioned above are leading to the adoption of radically changed marketing strategies. Amongst them, direct marketing is, perhaps, the most significant (see Unit 7).
ACTIVITY Review your understanding of direct marketing and the various techniques or activities that may be included in a direct marketing strategy. How have these been affected by developments in technology? Why is the direct marketing paradigm appropriate in a technologically advanced world?
ACTIVITY FEEDBACK You should have noted the strategic decisions referred to in Unit 7. A company’s decision to apply direct marketing will partly be influenced by the ease with which such a strategy can be implemented. The increasing power of desktop computing has put database applications within the reach of even the smallest firm. In addition, customers’ increasing use of technology either within products and services themselves or in the form of new communication media, opens up new opportunities for companies to differentiate themselves and to meet the needs of ever more tightly defined segments, in some cases a segment of one customer. You should certainly have recalled the parallel emphasis on acquisition and retention and the impact of considering lifetime value.
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A reasonably sophisticated database can track individual customers and, in real time, calculate their value and profit contribution to a company. This kind of modelling can lead to new segments and new insights that may be the basis of retaining customers’ loyalty. A focus on customer satisfaction and their value may defend our market share and profitability – true sustainable competitive advantage. But this must be based on ever improving knowledge of our target consumers. However, technology is not the only driver behind marketing’s progression towards more precise segmentation and accountability.
Reasons for the growth of direct and relationship marketing approaches Writers such as Tapp (1998) and Yeshin (1998) identify a number of reasons why direct marketing should be the greatest area of growth in marketing. Figure 8.3 summarises these –
Fragmentation and
Satellite, cable and digital media along with an increasing number of
proliferation of media
specialist and lifestyle magazines and web sites make large scale brand building more of a challenge. At the same time, such targeted channels are opportunities for direct approaches.
Consumer sophistication
Arguably, consumers are more demanding than they have ever been, expecting continuously improved levels of service and, above all, convenience. So called ‘time-poor’ consumers expect to be able to access services 24 hours a day, 7 days a week. Consumers can also more easily purchase products at a distance, not simply because they can evaluate the product online or on TV, but because of credit and credit cards.
Increasing concern for
Companies are increasingly questioning marketing expenditure and
cost-effectiveness
seeking to make departments accountable for their spending. Direct marketing offers improved levels of control.
The continued fall in
More and more companies are now able to manage sophisticated
computing costs
databases, often without specialist people or equipment.
Figure 8.3: Summary of reasons for growth of direct approaches.
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The importance of the database You may already be thinking that direct marketing is demanding since it requires us to have information about our customers which, in a transactional situation, is often difficult to obtain. For example, a retail store may have hundreds, perhaps thousands of customers visiting each day. How is it possible to track this purchasing behaviour? How can this possibly be analysed? The answer is, of course, that with computer based systems, huge quantities of data can be recorded and analysed. For many retailers the challenge is to capture the data in the first place.
ACTIVITY Consider that you wish to instigate a direct marketing strategy in a retail decorating store selling paint, wallpaper and related items. Itemise the information you would record from customers. Against each one note how you might acquire it; for example, is it routinely recorded when a transaction is made? If not, how might it be gathered?
ACTIVITY FEEDBACK According to Logan (1998) a typical database for B2C marketing consists of – Consumer records – name, age, marital status, number of children, income bracket, lifestyle indicator, job codes, credit indicators Consumer address records – full address, address type, ACORN, MOSAIC or other geodemographic codes, region code, sales area, media area code (e.g. TV region). Accounts data – reference number(s), account type, start date, last used date, average balance, account worth indicator, other accounting codes. Activity data which records actual customer behaviour in response to our contact with them. Activity codes for media or source (in examples of LTV in Unit 7, this might be ‘campaign A’), activity dates, type of response, recency of response, frequency of response and value of response.
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In addition, the decorating store may also have customers that are themselves businesses. In this case, subtly different additional data may be collected – Business person records – name, job code, job title (as they wish to be addressed), telephone number, fax number, e-mail address, department, other decision-makers, type of business (using standard industrial classifications or SIC codes). Business address data – group indicator (holding company, subsidiary, sole), full company name, short company name, full address, telephone number, fax, telex, e-mail, web address, region code or sales area, SIC, product types, importer/exporter, number of employees indicator, turnover indicator. Some data such as the products bought and their value is, of course, collected in a retail setting. But it is often difficult to ‘tie’ this data to a particular customers. Businesses (and students) often make the mistake of assuming that such information can only be collected by research. In fact, most market research is prohibitively expensive for this kind of data collection and customers may well resent being asked for all this information. In fact many organisations, including retail stores, have solved this problem by offering loyalty cards, credit accounts or similar schemes. Loyalty cards offer incentives (usually discounts) for customers to identify themselves when they pay. In this way companies can ensure records are maintained.
You will see that the amount of data held on each customer can be daunting and it is for this reason that computers have been so influential in the growth of direct marketing. In order to make data more manageable, often disparate elements of data are linked under indicators. This is a form of segmentation that makes the data easier to read. However extreme caution must be exercised when clustering customers on the basis of these ‘artificial’ indicators and it is the job of the strategic marketer to question and test these. The most common, and essential, categories of analysis are usually denoted by the acronyms RVA or FRAC to which numerical values may be given in the database. Recency, Value, Activity or Frequency, Recency, Amount, Category
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ACTIVITY Why do you think RVA or FRAC analyses are useful? Would you give a high score to someone who has purchased a large amount from you on the basis that they are more valuable or a lower score on the basis that they are unlikely to buy again for some time?
ACTIVITY FEEDBACK RVA and FRAC analysis can simplify decision making by allocating a numerical value to each customer. A high score is usually based on experience of particular types of customer. Stone and Shaw (1988) argue that the best indicators of future transactions are past transactions. For example, motor manufacturers know that cars are changed, on average, every five years whilst banks know that customers with two or three of their products (say, a current account, a savings account and a mortgage) are much more likely to buy further products (such as a credit card). “The more your customers have spent with you, the more they are likely to spend with you in the future” (Tapp 1998) The logic may seem difficult to accept but it is borne out by direct marketing practice. In fact, the statement can be understood by metaphor. Complete strangers are the least likely to believe what you say (or indeed even listen), whilst your closest friends are likely to trust and like you, will already have talked with you and believed many things you have told them. By definition, your closest friends will trust you and what you say most of all.
Allocating points on the basis of RVA or FRAC enables us, again, to segment customers on the basis of their value to the company. The analysis of the database yields much more important information, and the more accessible the database is, the more it will be used. However, too often simple enquiries of a database have to be made through an (overworked) IT department and this can restrict the utility of the information. For this reason it is increasingly important that marketers understand and are comfortable with computers and their capabilities and remain involved with the design and implementation of marketing databases.
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The use of the database The database supports all the key direct marketing decisions. As such it needs to be flexible and easily updated. Even expensive tailormade databases can run into unforeseen problems when marketers begin to use the data. For example, each time a new campaign runs, new customers will be added. In addition, each time existing customers are contacted or themselves contact the company, that ‘event’ will need to be recorded. Some years ago a company that sold insurance products to the elderly failed to include on its database a method of recording the deaths of its policyholders or their partners. As a result it continued to send offers for life assurance, often addressed to a recently deceased person.
Profiling One of the most intriguing uses of the database is in profiling for acquisition. Profiling is usually carried out by specialist external agencies which have the expertise (and their own, appropriate database) in order to identify and target new customers based on the attributes of the existing customers. The ‘external’ database may contain sociodemographic or lifestyle information (see Unit 3) on many millions of consumers. It will contain many of the same key pieces of information as a company’s own database and it uses these to establish a number of ‘matching’ records. For example, the postcode narrows down the record to one of only a few in a postcode area; a full name and title added could produce a perfect match. When the two databases are matched to some extent – at least 1000 customer records but ideally over 10% – then a range of further useful things can be achieved using this sample. Firstly, the external database can be interrogated to produce a report on the whole database (often itself a representative sample of the whole population) in comparison to the sample of the company database. This analysis will show the under or overrepresentation of certain features. For example, the customer database may be predominantly older people, they may have a higher average income than the population or they may choose particular types of holiday. All this information can be useful when selecting targets for acquisition or, indeed, for understanding existing customers. Sometimes this data may suggest new segmentations or clusters to the marketer.
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Names and addresses from the external database are also usually available to purchase. Hence, a company may test the usefulness of the profiling by, perhaps, mailing a sample of the most closely matched consumers on the external database. The cost of these names and addresses depends on their value and the intended use. Data may also be added into the company database from the external database. However, the customer database must be structured to accept and make use of this data. If it is not then it is often better to repeat the profiling process periodically.
E-commerce and loyalty The boom and bust of the Internet in the 1990s showed that ecommerce was far from easy. Hollensen (op cit, p636) refers to other research (by Fred Reicheld again) that argued that although customers are hard to acquire online they tend to be committed to meeting their needs online. So, once consumers found the website that met their needs they tended to stay with it. This ‘stickiness’ is a new concept in marketing and reflects the speed with which customers can ‘click off’ a website if it fails to deliver the expected benefits. There are two ways of looking at ecommerce and its development. One is to hail it as a new and revolutionary ‘shakeup’ to marketing, the other is to see it in the context of much of what we have discussed so far in this unit. Ecommerce is essentially concerned with transactions on the Internet. As such it is entirely suited to the principles of direct and relationship marketing. This is because it is concerned with the exchange of information between parties involved in the marketplace. Information carried on the web is transferred almost instantly and, usually, on a onetoone basis. Of course, the web cannot distribute physical products but in every other aspect of marketing it can play a significant role.
ACTIVITY Case: Club Nokia’s website creates customer loyalty Read the case study (Hollensen pp391-393) and answer the three questions.
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ACTIVITY FEEDBACK Case: Nokia Explain the purpose of Club Nokia. Do you agree that it is better to have Club Nokia online (as a website) and not offline? Club Nokia is an attempt to increase customer loyalty. Creating Club Nokia offline (in a ‘bricks-and-mortar version’) would be much too expensive. With 3G phones giving seamless access to the web, it makes sense to utilise the technology known to be in the hands of their target audience. Visit Club Nokia’s website (click from www.nokia.com). Do you agree that Club Nokia is able to create customer loyalty? Going there may not be the most exciting experience that you can get on the web. Considering that Nokia is selling so many mobile phones to young people, it should be possible to approach them in a more appealing way. The target market is technologically aware and already heavy web users. In autumn 2001 Nokia launched a new mobile phone accessory, the digital Nokia Music Player HDR-1. With the Nokia Music Player, users will be able to listen to an integrated FM stereo radio and downloadable audio/music files, as well as use it as a handsfree kit for their phone. Using the Nokia Music Player, it is possible to download AAC and MP3 music files via the Nokia Audio Manager PC software installed on your PC. With the 32 MB memory card, the Nokia Music Player can hold up to nine hours of audio content, depending on the encoding format and quality. As the Nokia Music Player requires only one AAA battery, it can easily be used as a stand-alone, independent device. a)
Should the Nokia Music Player be marketed online, offline or both?
Both possibilities should be considered, as it is a kind of standardised product not requiring a lot of service back-up. As Nokia is the market leader in mobile phones it should try to implement a kind of intensive distribution with this product. b)
Would the choice of Club Nokia as the distribution channel for the Nokia Music Player be a good decision, or should Nokia choose another e-commerce strategy?
Nokia is an excellent producer of mobile phones but maybe they are not the right firm to run a website with an e-commerce strategy. One option would be to outsource this kind of e-commerce to a specialist who knows how to attract a web-audience, or to set up an alliance with a strong online brand which already has the target audience and the traffic such as eMusic and MusicMatch.
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The Internet and the marketing concept The Internet can be integrated into the marketing concept for the following reasons A.
It can be used to support the full range of organisational functions and processes that deliver products and services to customers and other key stakeholders.
B.
It is a powerful communications medium that can act as a ‘corporate glue’ that integrates the different functional parts of the organisation.
C.
It facilitates information management, which is now increasingly recognised as a critical marketing support tool to strategy formulation and implementation.
D.
The future role of the Internet should form part of the vision of a company since its future impact will be significant to most businesses.
(Chaffey et al. 2000) In the early days of the web, opponents argued either that the technology would affect all markets or that there were some that it would be impossible to ‘digitise’. It is important for a firm to consider to what extent its whole value offering to the end consumer may be affected by electronic technologies.
ACTIVITY Read Sections 10.2 and 10.3 in Hollensen, pp396-398.
For newspaper publishers over the past twenty years, new technology drove down the cost of production. Initially, digital typesetting and imaging enabled journalists to compose their columns directly onto a page and, thus, to work to ever tighter deadlines. More recently the availability of digital cameras and satellite communication has enabled reporters to file reports, with high quality colour photography, instantly from around the world. Even just in the last year or two, digital cameras integrated into mobile phones have enabled readers themselves to send images – typically of disasters or of celebrities – for publication in the newspaper. However, technology is also leading consumers of newspapers to look online for information that before they would have expected their
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newspaper to provide. Furthermore advertisers, a major source of revenue for newspapers, are increasingly considering online advertising. Local newspapers have traditionally generated much of their income from small ‘classified’ advertisements from private individuals selling anything from cars to second hand goods. Increasingly these sales are going through eBay. Pine, Peppers and Rogers (op cit) pointed out that whilst many firms were rich in information on their customers and should, therefore, be able to customise their offering, they often continued to behave like mass marketers. Pine et al identified 6 kinds of product or service that lent themselves to mass customisation:
· Complex products or services. · Big ticket (i.e. expensive) items. · Digitisable products and services. · Online services. · Luxury and speciality products. · Retailing services.
ACTIVITY In each case note down a few reasons why you think that an offering falling into one of the above categories could or should be customised for the individual customer. Think of an example of a company that falls into each category. Does it customise its offering?
ACTIVITY FEEDBACK Complex products or services Most people do not want to spend a lot of time comparing complex costs and specifications. Hence, despite the technological basis of mobile phone companies there are a large number of intermediaries online selling phones and airtime packages and, crucially, allowing the consumer to compare competing networks.
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Big ticket (i.e. expensive) items Pine et al use the logic of lifetime value discussed in Unit 7 to argue for this category. It is also clear that for a company such as Boeing, manufacturing passenger jets, one customer’s order is very significant to their turnover. Digitisable products and services The most obvious category in many ways. Information, entertainment such as music and video can all be ‘packaged’ and delivered in an infinite number of ways to meet the needs of a consumer. Amazon has taken a standard product and allied it to information about its customers’ preferences to build value for them – as an online service. Online services Obviously, online services (which may deal with digitisable products) should be able to be customised. However, Pine et al point out that some online services fail to do so. (See below; The world wide web and web ‘presence’) Luxury and speciality products Pine et al suggest that in some categories, consumers have complex requirements and tastes which enable the producer to command a premium for modifying their offering. Retailing services Almost by definition, retail services adapt their offering to the individual client. However, the difficulty is ‘standardising’ such adaptation. Pine et al cite the Ritz-Carlton hotel chain in which many different customer-facing staff may meet a given customer and behave in different ways. The key, they say, is to capture and remember important information, such as room preference (smoking or non-smoking) or favoured newspaper so that the customer need not be asked repeatedly.
Learning relationships Clearly the key to learning and acting upon knowledge of individual customer preferences is a database which supports organisational learning. When an organisation, as opposed to individuals within the organisation are focused, then the whole organisation is able to meet and sometimes exceed the expectations of customers. Where these are personal, detailed and complex, then a barrier is built up around the customer. It becomes increasingly difficult for the customer to leave knowing that it will take time for any new supplier to learn the same features of the required service.
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It is not sufficient simply to builds the walls, as Jones and Sasser have warned above. Banks traditionally depend on customers’ inertia and the potential problems of transferring sensitive data from one set of accounts to another. However, in these circumstances customers may still not be satisfied and may look for opportunities to spread their risk, perhaps by taking up products from rivals and so making any future defection easier. Pine et al suggest that there are four distinct strategies that need to be developed in order to maintain true learning relationships.
An information strategy
It is important also to establish a relationship in which information is given by the customer without pressure. Customers increasingly know the value of their personal data and may protect it. Learning relationships are undoubtedly of value to the company, but they should also be of value to the customer. Loyalty cards schemes such as those of the major supermarkets, go some way towards this.
A production/delivery strategy
This item emphasised the importance of integrating the marketing approach with other functional areas.
It is not sufficient to meet all
customers’ many varied needs without also examining the possibilities for reducing the cost of doing so.
Pine et al suggest a modular
approach to production may be the answer- establishing common processes and components in much the way that VW has done in launching its luxury marque, the Phaeton, that shares components with Audi and Bentley models.
An organisational strategy
Rather than following traditional management structures focusing on products and brands, Pine et al suggest ‘customer managers’ responsible for the relationship with customers who have similar needs and tasked with gaining share of the total customers spend, almost irrespective of category. There are early signs of this approach from UK supermarkets such as Tesco which meets the financial service, clothing and other needs (in addition to conventional groceries) of many of its customers.
An assessment strategy
Finally Pine et al advocate the assessment of lifetime value and share of customer as vital. Drawing the connection once more between customer satisfaction and loyalty, they also suggest measuring the gap between customers ideal and what is actually supplied. Again, given a sufficiently sophisticated database, this is to be done for
each
customer.
Figure 8.1: Strategies needed to develop learning relationships. Adapted from Pine et al (1995).
Approaches such as those advocated by Pine et al, have been seen as futuristic. Indeed even ten years ago the ‘deep impact’ of communications technologies was still to be appreciated. By 1999, however, Andersen Consulting was identifying the real effect of ecommerce trends on corporate and marketing strategy (Chaston 2001).
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Vertical disintegration A reversal of the integration of the value chain seen in previous decades. Companies could now move quicker by collaborating with outsourced service.
2.
The Vale of the intangibles Far from being the main location of value, physical assets can increasingly be seen as barriers to rapid restructuring. Knowledge, skills, brands, reputation and customers are all less tangible and, potentially, more valuable. (see Unit 4)
3.
Increasing returns The intangibility of many products on the web lead to the expectation of better returns on investment. Each additional customer on eBay or Amazon.com costs virtually nothing.
4.
Perfect information A principle feature of the classical economist’s model of a market is (almost) a reality. In some markets buyers and sellers have total knowledge of the price of competing offerings and can negotiate on that basis. Power shifts towards buyers and the market is likely to reach an equilibrium price level.
5.
Instant supply chains The electronic integration of the complete supply chain where each order triggers instant orders of materials and production means that customers will increasingly expect instantaneous responses. Companies that have any element of the value chain ‘offline’ will suffer.
The World Wide Web and web ‘presence’ The major tool for ecommerce is the World Wide Web. It is now as unnecessary to describe the web as it is to describe the telephone or television. However, there is still considerable ignorance about the range of technologies, programs and applications which can operate in the web environment and which support ecommerce. There is wide variation in the extent to which companies have incorporated the web into their marketing strategy. Chaffey at al (2000) describe five levels of development of a web presence. The majority of companies worldwide are believed to be at level 2 or below. Level 0. No web site Level 1. Company has an entry in a directory such as yell.co.uk U n iversity of Su n derlan d
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Level 2. ‘Brochureware’ a simple, static website with basic company information Level 3. Simple interactivity with users able to search and access prices or product details and, perhaps, raise queries by email Level 4. Interactive site supporting transactions. Functions such as online purchasing or support Level 5. Fully interactive site supporting relationship marketing
Buyer behaviour online In order to understand what an organisation’s web presence may achieve, it is important to consider how the web is being used by consumers and other businesses. Hollensen uses the notion of market space to distinguish the environment in which online buyers make their decisions from that of real world market places.
ACTIVITY Read Section 10.6, Hollensen, pp410-422. What are the main features of buyer behaviour in B2C and B2B market spaces?
ACTIVITY FEEDBACK The main difference between B2B and B2C buyers online is that consumers are characterised as individuals either making predominantly affective decisions, enjoying the experience of the web environment (hedonistic) or rational, instrumental decisions. Business users, however, may also be consumers but may also be sellers and intermediaries. In fact, as the eBay example illustrates, individual consumers and interest groups can act either as sellers, intermediaries or as members of a group decision-making process. Newsgroups, chatrooms and peer-to-peer file sharing forums are all market spaces where consumers can share experiences, act together to purchase in bulk or promote tools to strengthen the customer in an online transaction.
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For example, programs like Bidnapper (www.bidnapper.com) enable buyers to automate their eBay bidding, whilst online organisations such as Source Services Ltd seek to automate purchasing for businesses in a way that will share the benefits of bulk buying (www.source-services.co.uk). It is clear that, online, the status of any individual or corporate is difficult to assess and so whilst businesses must strive for better information on the consumer, consumers are often striving for better information on potential suppliers.
However, companies should not assume that all customers are about to make all their purchases online. Particular sectors and particular brands are known for their web presence. For example, consumer electronics are high price products where the potential for saving is of great interest to consumers. Given that the main brands are wellknown and have reputations for good quality it is likely that many customers carry out extensive product searches (see Unit 3) and compare price and performance. Similarly, brand loyal customers of Lands’ End or Fat Face wearers may visit the web sites in order to check on the latest offers or to browse through a wider range of products than are in the paperbased catalogue. (www.landsend.com and www.fatface.com). These websites also offer a further taste of the brand values that loyal customers of these companies so admire; for example, Fat Face’s website links to a ‘Fat Planet’ subsite on extreme sports. Even for many of the most dedicated customers, however, online ordering is ignored in favour of a telephone call. One of the concerns consumers have is security. By and large it is impossible to demonstrate that a website is secure no matter how good its technology. As a result, it is in the best interests of the consumer to offer as wide a range of response channels as possible. Apart from placing address, telephone and email details on a website sites can now incorporate internet callback (where a customer books a call from the company) or ‘chat’ in writing on the site with a company representative. Despite the restriction on speed from some customers’ internet connection, some companies also offer voice and or video over the web. (Chaston 2001) Ease of contact, of meeting the immediate need of the consumer (which may be for information or reassurance rather than a product) is likely to increase the ‘stickiness’ of a web site.
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Convergence; ‘clicks and mortar’ Recent research seems to suggest that the web, as a marketplace, is maturing with substantial competition in almost every sector. The acquisition of new customers, therefore, continues to be expensive – perhaps 2040% more for pure internet companies than for stores with both an on and offline presence.
E-commerce marketing strategy There is every reason to suppose that the fundamental arguments about strategy that run throughout these eight units hold for ecommerce as much for entirely offline businesses. The issue is rather that there are now almost no totally offline markets. When webbased businesses can reach millions of customers worldwide and drive down the costs of transactions they have the ability to ‘swoop’ on profit pools and undercut traditional suppliers.
ACTIVITY Read the following case and answer the questions that follow. Case: Glasses Direct (adapted from The Sunday Times Business. January 2005) Glasses Direct, founded by a 21-year-old entrepreneur James Murray Wells launched a website last summer to sell spectacles at prices typically around 15% below those of high-street chains. Murray Wells set up the company after facing a bill for £150 for a pair of spectacles as a student. As he investigated the cost he found only one laboratory willing to give him the ‘inside’ information he needed. To test his idea he simply sent his own prescription to the lab and ended up paying a fraction of the cost. With some IT help James set up the website and launched the company from his parents’ spare bedroom. At first, the job fitted around study time, but then after distributing some leaflets and advertising in a local directory in the nearest city Murray Wells was faced with employing eight and using three more rooms at home. Glasses Direct is now selling more than 300 pairs of glasses a day to more than 8,000 customers – sales could be around £150,000. The workforce is 11 and they have just moved to business premises.
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There has been resistance. Some high street chains suggest that Glasses Direct doesn’t fit spectacles properly. One supplier suddenly refused to work with the new company. A large US company has sounded Murray Well out about a possible takeover. The future may be their own manufacturing and the website may soon enable customers to view themselves online wearing the various styles of glasses. Not bad for an idea that was just going to provide pocket money for a hard-up student. www.glassesdirect.com 1.
How has technology enabled Glasses Direct to prosper?
2.
Evaluate the business, given what you know about direct and relationship approaches to marketing.
3.
What does the future hold for Glasses Direct. Do you see future technological developments as an opportunity or a threat?
ACTIVITY FEEDBACK 1.
How has technology enabled Glasses Direct to prosper? The original market insight had little to do with technology. Murray Wells simply wanted to investigate the possibility of competing of price. You may have referred to the discussion on pricing strategies in Unit 5. Moreover custom has been generated by traditional publicity, plus some judicious PR in local and national press. However, the web presence has given Glasses Direct access to a world audience.
2.
Evaluate the business, given what you know about direct and relationship approaches to marketing. Glasses Direct is another example of a web-based business that has not had to invest heavily in premises or stock. Glasses are made to order and despatching is done from the supplier whilst product requests and specifications can all be handled electronically. However, Glasses Direct will need to work to retain customers. Separating the supply of spectacles from the process of eye testing
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means that customers have no need to revisit the company as they might an optician. Opticians currently tend to remind customers when an appointment is necessary and, therefore, have the potential to maintain a longer term relationship. For an optician, the lifetime value of a customer paying £150 for a pair of glasses every two years, for example, is higher than a Glasses Direct customer who pays £15 – even if they return for twenty years. 3.
What does the future hold for Glasses Direct. Do you see future technological developments as an opportunity or a threat? It is highly likely that ‘copy cat’ glasses suppliers will continue to appear on the Internet. Customers shopping in this was are concentrating on value and making price-based decisions – Glasses Direct will be under pressure to contain costs. With the transparency of comparison possible on the web, customers may make decisions based on the difference of pennies. Technological changes in eyesight treatment may well threaten the whole of the prescription spectacles market. If Murray Wells wanted Glasses Direct to be a preferred provider of a wider range of products then he would have to invest in making the brand well-known and trusted, customer service would have to be consistently excellent and he would have to consider how customers can be protected from competition, perhaps by developing learning relationships with them.
Successful ecommerce strategies match an organisation’s competencies to identified market opportunities. However, these competencies are sometimes ‘geared’ by the use of internet technologies. The value chain or value net model referred to throughout Hollensen (2003) and this module applies just as much when the links between elements are virtual. In fact, value nets now more easily spread around the globe to enable companies to drive down operating costs. The danger is that, in the ‘gold rush’ mentality that prevailed in the dotcom boom, companies may see opportunities for new customers, new markets or new processes without also seeing the significant problems that may exist. This is arguably the case with the Glasses Direct example above. In every respect then, a business that seeks to take advantage of new technology – especially web and ecommerce opportunities, must approach marketing in the same, rigorous way as any other. Direct and relationship approaches lend themselves particularly well to such opportunities because they depend upon rapid and accurate interaction and information. To reiterate the principles of direct marketing (McCorkell 1997) referred to in Unit 7 –
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Targeting – who will be interested? This may be facilitated by low cost research online or access to a very much wider audience. Interaction – how did they respond before? With web technology this can be tracked and interaction built around individual requirements. Control – what was the return on our investment? Again tracking is made easier since all contacts with a customer can be registered automatically. Continuity – how can we further the relationship? This last area depends on a strategic decision to focus on longer term customer relationships.
REVIEW ACTIVITY 1.
Do you consider innovation to be a driving force in marketing or a source of threats?
2.
Why might a direct or relationship marketing strategy be suited to a rapidly changing and technologically sophisticated market?
3.
Why might a company focus its attention on satisfied customers rather than those that are dissatisfied?
4.
What is the difference between ‘true’ loyalty and spurious loyalty?
5.
What are the advantages of considering loyalty as both attitudinal and behavioural?
6.
Why does the marketing concept fit well with the Internet?
7.
List three kinds of organisation that may be able to adopt mass customisation.
8.
Describe a ‘learning relationship’.
ACTIVITY FEEDBACK 1.
Do you consider innovation to be a driving force in marketing or a source of threats? Innovation is simply a fact of a competitive environment. Whilst innovation can represent a threat to almost any organisation in any U n iversity of Su n derlan d
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market, monitoring such change can lead to insights that, in turn, may lead to competitive advantage. 2.
Why might a direct or relationship marketing strategy be suited to a rapidly changing and technologically sophisticated market? Direct and relationship approaches are those which stay close to profitable customers and respond to their needs. In a rapidly changing marketplace customers are more valuable than products.
3.
Why might a company focus its attention on satisfied customers rather than those that are dissatisfied? Totally satisfied customers (ambassadors) are considerably more value than the merely satisfied. The latter may still prove to be disloyal and efforts to totally satisfied should be rewarded. Totally dissatisfied customers may be impossible to satisfy and if kept artificially loyal, may turn out to be ‘terrorists’ who undermine the company.
4.
What is the difference between ‘true’ loyalty and spurious loyalty? True loyalty, according to Dick and Basu, is exhibited by a customer who buys regularly and has a favourable attitude towards the brand he buys. Spurious loyalty is defined as repeat behaviour without a supporting positive attitude towards the brand or product.
5.
What are the advantages of considering loyalty as both attitudinal and behavioural? Repeat purchases, as Dick and Basu point out, do not necessarily define a loyal customer. However, Simon Knox’s examination of loyalty seeks to provide a tool with which to measure and manage customers segmented by loyalty. Combining these two perspectives ensures that repeat patronage is not taken for granted and that strategies to build loyalty are based on a more accurate picture of customers’ attitudes and behaviour.
6.
Why does the marketing concept fit well with the Internet? Chaffey (2000) summarises the ‘fit’ as follows –
- It can be used to support the full range of organisational functions and processes that deliver products and services to customers and other key stakeholders.
- It is a powerful communications medium that can act as a ‘corporate glue’ that integrates the different functional parts of the organisation.
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- It facilitates information management, which is now increasingly recognised as a critical marketing support tool to strategy formulation and implementation.
- The future role of the Internet should form part of the vision of a company since its future impact will be significant to most businesses. 7.
List three kinds of organisation that may be able to adopt mass customisation. Any of the following may be listed and explained –
- Complex products or services. - Big ticket (i.e. expensive) items. - Digitisable products and services. - Online services. - Luxury and speciality products. - Retailing services. 8.
Describe a ‘learning relationship’ A learning relationship exists between a company and its customers if the company is able to capture and remember information and respond to it in a way that gives the customer improved value. The end result must be a satisfied customer who is unwilling to move away.
References Chaffey, D., R. Mayer, K. Johnston and F. EllisChadwick (2000). Internet Marketing. Strategy, Implementation and Practice. Harlow, Pearson Education Limited. Chaston, I. (2001). Emarketing Strategy. Maidenhead, McGrawHill. CIM (2004) “The Creative Dilemma” The Marketer Issue 1, April Hollensen, S. (2003). Marketing Management: a relationship approach. Harlow, Person Education.
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Jones, T. O. and W. Earl Sasser Jr. (1995). “Why Satisfied Customers Defect.” Harvard Business Review (Nov/Dec). Knox, S. (1996). “The death of brand deference.” Market Intelligence & Planning. Logan, R. (1998). Getting to know your database B. Halsey, Ed. The Direct Marketing Guide. Teddington, Institute of Direct Marketing. 1. McCorkell, G. (1997). Direct and Database Marketing. London, Kogan Page/Institute of Direct Marketing. Payne, A. (1995). Advances in Relationship Marketing. Oxford, ButterworthHeinemann. Payne, A. (2000). Relationship Marketing: Managing Multiple Markets Cranfield School of Management, Ed. Marketing Management. A Relationship Marketing Perspective. Basingstoke, Macmillan Press Ltd: 1630. Pine II, B. J., D. Peppers and M. Rogers (1995). “Do you want to keep your customers for ever?” Harvard Business Review (March/April): 103114. Reicheld, F. F. (1996). The Loyalty Effect. Boston, Mass, Harvard Business School Publishing. Smith, M. (2003). “Ocean Spray. The longerterm effects of advertising over promotions” M. Rimini, Ed. Advertising Works 12. Proving the effectiveness og marketing communications. HenleyonThames, Word Advertising Research Council. Tapp, A. (1998). Principles of Direct & Database Marketing. London, Financial Times / Pitman Publishing. Trott, P. (1998). Innovation Management & New Product Development. London, Financial Times Management. Yeshin, T. (1998). Integrated Marketing Communications. The holistic approach. Oxford, Butterworth Heinemann.
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